3rd Quarter Results

Smurfit Kappa Group PLC Smurfit Kappa Group plc: 2007 Third Quarter Results SKG reports 20% year-on-year growth in EBITDA for 3Q 2007 25% EBITDA growth for first nine months of 2007 13 November, 2007: Smurfit Kappa Group plc ('SKG' or the 'Group'), one of the world's largest integrated manufacturers of paper-based packaging products, with operations in Europe and Latin America, today announced results for the 3 months and 9 months ending 30 September, 2007. 2007 Third Quarter | Key Financial Performance Measures -0- *T EUR m YTD 2007 YTD 2006 Change Q3 2007 Q3 2006 Change Q2 2007 Change ---------------------------------------------- --------- --------- ------- --------- --------- ------- --------- ------- Revenue EUR 5,454 EUR 5,220 4.5% EUR 1,829 EUR 1,735 5.4% EUR 1,831 - Pre-exceptional EBITDA EUR 789 EUR 629 25.5% EUR 275 EUR 229 20.3% EUR 260 6.1% EBITDA Margin 14.5% 12.0% 2.5 pts 15.1% 13.2% 1.9 pts 14.2% 0.9 pts Free Cashflow EUR 113 (EUR 64) - EUR 150 EUR 64 134% EUR 3 - ---------------------------------------------- --------- --------- ------- --------- --------- ------- --------- ------- ---------------------------------------------- --------- --------- ------- --------- --------- ------- --------- ------- Net Debt EUR 3,448 EUR 4,979 31% EUR 3,605 4.4% Net Debt to EBITDA (LTM) 3.3x n/a n/a 3.6x 0.3 pts ---------------------------------------------- --------- --------- ------- --------- --------- ------- --------- ------- *T Performance Highlights -- Continued and sequential EBITDA growth -- EBITDA of EUR 789 million to 30 September - 25 per cent year-on-year increase -- Industry leading EBITDA margin -- EBITDA margin increase to 15.1 per cent in the third quarter -- Significant increase in free cash flow -- EUR 147 million increase in free cash flow quarter on quarter -- Continued net debt reduction -- Net debt to EBITDA (LTM) of 3.3x Performance Review & Outlook Gary McGann, Smurfit Kappa Group CEO, commented: 'We are pleased to report continued, sequential EBITDA growth; increased and industry leading EBITDA margins; and a significant increase in free cash flow. At the end of 2007, SKG will report a significant year-on-year increase in EBITDA and leverage and synergy targets will be exceeded. Current and expected trading conditions continue to be characterised by cost inflation and corrugated price recovery. Assuming current market conditions prevail, SKG expects continued EBITDA growth for 2008.' About Smurfit Kappa Group Smurfit Kappa Group is a world leader in paper-based packaging with operations in Europe and Latin America. Smurfit Kappa Group operates in 22 countries in Europe and is the European leader in containerboard, solid board, corrugated and solid board packaging and has a key position in several other packaging and paper market segments, including graphic board, sack paper and paper sacks. Smurfit Kappa Group also has a growing presence in Eastern Europe. Smurfit Kappa Group operates in 9 countries in Latin America and is the only pan-regional operator. Forward Looking Statements Some statements in this announcement are forward-looking. They represent expectations for SKG's business, and involve risks and uncertainties. These forward-looking statements are based on current expectations and projections about future events. The Group believes that current expectations and assumptions with respect to these forward-looking statements are reasonable. However, because they involve known and unknown risks, uncertainties and other factors, which are in some cases beyond the Group's control, actual results or performance may differ materially from those expressed or implied by such forward-looking statements. -0- *T Contacts Information Smurfit Kappa Group +353 1 202 7000 Beech Hill, Clonskeagh Dublin 4, Ireland K Capital Source +353 1 631 5500 Ph +353 1 202 7000 smurfitkappa@kcapitalsource.com ------------------------------- *T 2007 Third Quarter and First Nine Months | Performance Overview SKG's financial outcome for the third quarter and first nine months of 2007 reflects a solid financial performance against a backdrop of significant cost inflation and lower summer volumes than expected in some European countries and in Mexico. Solid underlying revenue growth, of 7.9% in the third quarter and 7.5% in the first nine months of 2007, primarily reflects product price improvements in Europe but also a strong performance from the Group's operations in Latin America. There were a number of factors during the third quarter and first nine months of the year which have impacted EBITDA and EBITDA margin growth: -- Rapidly growing and higher than anticipated recovered paper prices in the first half of the year resulted in margin compression within SKG's containerboard system. In the third quarter, sustained strong Asian demand reversed seasonal pricing norms for recovered paper, which increased further in Europe over the period. -- In addition to recovered paper increases, other costs continued to increase in the third quarter, particularly in starch, wood and energy. SKG expects to continue to experience the impact of these increases in the fourth quarter and into 2008. -- Strong recovered paper prices and tight market conditions allowed SKG to implement two consecutive recycled paper increases in the first half of 2007, and a further increase in October. These containerboard increases generate initial margin compression within the Group's corrugated business as there is a 3 to 6 month time lag in the full implementation of paper price increases in corrugated pricing. -- In brown kraftliner, SKG had anticipated a price increase in the second quarter of 2007, which was not achieved due to the sustained relative weakness of the US dollar and increased US imports into the European market. Higher input costs, while causing short-term margin pressure within the Group's overall system, have driven product price momentum when combined with healthy market demand. The Group expects to continue to deliver corrugated price improvements in the fourth quarter and into 2008 to recover paper increases. Corrugated demand growth remained positive in most European countries in the third quarter and SKG is continuing to achieve corrugated price increases. Over the quarter, the Group has increased its corrugated pricing by a further 2.8% versus December 2005 price levels. Positive market conditions in white top kraftliner (representing 30% of SKG's total kraftliner business) and in sack kraft paper resulted in price increases for these two grades being announced in the third quarter. These increases are expected to be fully implemented in the fourth quarter of 2007 for the former, and early 2008 for the latter. Third Quarter, 2007: Year-on-year financial performance Revenue of EUR 1,829 million in the third quarter of 2007 represents a 5.4% increase on revenue of EUR 1,735 million in the third quarter of 2006. Allowing for the positive impact of currency of EUR 3 million and the negative impact of disposals and closures of EUR 46 million, revenue shows an underlying increase of EUR 137 million or 7.9% for the third quarter. EBITDA, before exceptional items, of EUR 275 million increased 20.3% compared to EBITDA of EUR 229 million in the third quarter of 2006. This represents a margin of 15.1% and 13.2% respectively. Third Quarter, 2007: Quarter-on-quarter financial performance Revenue of EUR 1,829 million in the third quarter of 2007 is flat on revenue of EUR 1,831 million in the second quarter of 2007. EBITDA, before exceptional items, of EUR 275 million increased 6.1% compared to EBITDA of EUR 260 million in the second quarter of 2007. This represents a margin of 15.1% and 14.2% respectively. First Nine Months, 2007: Year-on-year financial performance Revenue of EUR 5,454 million in the first nine months of 2007 represents a 4.5% increase on revenue of EUR 5,220 million in the first nine months of 2006. Allowing for the negative impact of currency of EUR 13 million and for the negative impact of disposals and closures of EUR 144 million, revenue shows an underlying increase of EUR 391 million or 7.5% for the first nine months of 2007. EBITDA, before exceptional items, of EUR 789 million increased 25.5% compared to EBITDA of EUR 629 million in the first nine months of 2006. This represents a margin on revenue of 14.5% and 12.0% respectively. 2007 Third Quarter and First Nine months | Capital Structure & Debt Reduction SKG successfully returned to public equity markets through the completion of an all primary IPO in March 2007. The Group raised gross proceeds of EUR 1,495 million through a global institutional offering. Proceeds were applied to reduce debt and optimise SKG's capital structure. In July 2007, the Group successfully secured approval to amend its senior credit facilities. The amendment, together with a successful cash tender offer for SKG's US dollar denominated 9.625% Senior Notes due 2012 and euro denominated 10.125% Senior Notes due 2012, has resulted in a reduction in the Group's overall cost of debt of approximately EUR 10 million per annum and gives SKG greater financial flexibility. In the third quarter, SKG's significant increase in free cash flow further reduced net debt. At 30 September, 2007, SKG's net debt was EUR 3,448 million which compares to EUR 3,605 million at 30 June, 2007 and EUR 4,882 million at 31 December, 2006. In November 2007, Smurfit Kappa Funding plc, a subsidiary of the Group, filed with the US Securities and Exchange Commission ('SEC') to terminate its duty under the Securities Exchange Act of 1934 to file reports, thereby relieving it of the requirement to file annual financial reports (Form 20-F) and other periodic reports with the SEC. The changes will have no impact on SKG's quarterly and annual financial reports and will not reduce the current level of financial disclosure provided by SKG. The Group's financial objective for 2007 remains equity accretion through debt pay down. SKG remains on track to deliver a net debt to EBITDA ratio below the bottom end of our original target range of 3.25x to 4.25x by the end of the year. Acquisitions and Disposals The Group acquired a bag-in-box operation in Spain, Plasticos, during the third quarter. This business will be merged with the Group's existing and fast growing bag-in-box division. Plasticos will provide a platform for further development of the Group's bag-in-box business in the south of Europe. The Group completed a number of asset and non-core business disposals during the first nine months to September, including a number of property sales. Total consideration for these disposals was in excess of EUR 30 million. The Group continues to actively focus on disposing of non-core and non-strategic assets and expects to make further progress in this regard in the remainder of the year. Capital Expenditure Capital expenditure during the third quarter was approximately EUR 81 million. This compares to EUR 69 million in the third quarter of 2006 and EUR 68 million in the first quarter and EUR 79 million in the second quarter of 2007. The Group's first nine months capital expenditure of EUR 228 million equates to 87% of depreciation in the period. The Group's full year capital expenditure level in 2007 is expected to be modestly over 90% of depreciation and approximately 4% of full year net revenue. Synergies The momentum behind the synergy programme continues and the run rate at the end of September 2007 was approximately EUR 151 million. SKG's current objective is to deliver the original EUR 160 million three year target by the end of 2007 - one year ahead of schedule. 2007 Third quarter and First Nine Months | Performance Review Overall trading in the first nine months of 2007 is significantly ahead of the same period in 2006. This reflects balanced market conditions in recycled containerboard in Europe, together with positive overall corrugated demand, despite a poor summer which impacted negatively our third quarter volumes in certain European countries. Two price increases in recycled containerboard were implemented during the first half of the year, and a further increase has been fully implemented in October in most countries, in part to recover the continued upward pressure on recovered paper, energy and other raw material prices. Corrugated prices are being progressively increased to recover containerboard price increases. The implementation of corrugated price increases is always a slower process than the implementation of containerboard price increases. While overall price momentum is good, there is some margin pressure within the Group's corrugated system as current box pricing does not yet fully reflect higher input costs. In Latin America, the Group's operations benefited from a combination of higher sales volumes and higher average selling prices during the first nine months of the year relative to the comparable period in 2006, which contributed to increased earnings growth for the region. In the third quarter however, SKG experienced slower volume growth than expected in Mexico due to temporary gas supply issues. Packaging: Europe On the supply side, there was an unprecedented balancing of the market for recycled paper in 2006, when it was estimated that some 1.5 million tonnes of higher cost capacity were removed from the market. Further closures in 2007 were SKG's Alaincourt mill in France and a machine in Modena, Italy - removing a combined 150,000 tonnes. With supply/demand broadly in balance since the end of 2006, and continuing demand growth in 2007, the recycled paper market was extremely tight for the first half of the year. A more balanced market has allowed producers to recover significant increases in input costs, primarily recovered paper, by implementing recycled containerboard price increases. Recovered paper prices have increased by approximately 40% in the first nine months of 2007. As a consequence, two consecutive recycled containerboard price increases, of EUR 30 per tonne each, were implemented in the first half of 2007. In the third quarter, the overall European recycled containerboard market remained positive, and the EUR 30 per tonne increase, announced for September, has been effectively fully implemented in October in most countries. The brown kraftliner market in Europe remains challenging. The significant increase of imports from US and US dollar denominated regions into Europe in the first nine months of the year did not allow SKG to achieve the kraftliner price increase planned for April 2007. The increase of imports into Europe primarily reflects the relative weakness of the US dollar and slow domestic US demand. In white-top kraftliner however, tight market conditions and high wood costs have allowed SKG to announce a EUR 40 per tonne price increase for October. This increase will be progressively implemented during the fourth quarter of the year. SKG's total European kraftliner volumes declined 5% in the first nine months of the year compared to the same period in 2006. This primarily reflects fire related downtime at the Facture mill in the first quarter, the impact of which was covered by the Group's insurance arrangements. Excluding the impact of Facture, volumes increased 3% in the first nine months of the year compared to the same period in 2006 with demand proving to be strong. SKG's European recycled containerboard volumes, excluding the impact of disposals and closures, also increased 2% in the first nine months of the year compared to the same period in 2006. As an integrated corrugated producer, containerboard price increases have resulted in increasing input costs for SKG's corrugated operations resulting in near-term margin compression. In corrugated, SKG experienced lower volume growth than the market during the first quarter, reflecting a strong and disciplined stance on pricing. However, SKG's volumes improved in the second quarter, especially in the UK, Benelux and Germany, as a result of broader market growth. Strong demand was sustained in these countries in the third quarter, but the poor summer impacted our volumes in France, Spain and Italy in the third quarter. As we move into the fourth quarter, demand shows signs of improvement. Current demand levels, together with balanced capacity in containerboard and rising input costs, underpin price momentum and are expected to deliver continued corrugated price improvement in the fourth quarter of 2007 and, if current conditions continue, into 2008. SKG's European corrugated volumes, excluding the impact of disposals and closures, increased by approximately 1% in the third quarter, and just over 1% in the first nine months of the year compared to the same period in 2006. SKG's nine months growth compares to an estimated 3% broader market growth in the same period, with the lower SKG figures reflecting the strong continued push for price recovery. The SKG priority is to continue to implement the necessary corrugated price increases required to recover input cost increases. In the third quarter, SKG implemented a further 2.8% corrugated increase versus December 2005 price level. Packaging: Latin America While market conditions vary from country to country, demand growth was generally strong across the Latin American region, with SKG's operations continuing to report strong growth in revenue and earnings year-on-year. SKG's Latin American operations reported a good performance in the first nine months of the year, with containerboard volumes 4% higher than in the same period in 2006. SKG's corrugated volumes in Latin America increased 5% in the first nine months of the year compared to the same period in 2006. In Mexico, SKG experienced slower volume growth than expected in the third quarter, following temporary gas supply issues that forced SKG to scale down some of its operations for a few days in September. However, SKG continues to capture market share in the country, and results in the first nine months of 2007 are materially ahead of the same period last year. SKG's Colombian business continues to experience high volumes and strong pricing. In Venezuela, despite a high labour cost adjustment over the quarter, SKG's operations in the country are benefiting from the vibrant economic growth. Business conditions in Argentina also remain strong, although profitability was impacted by increases in energy and labour costs - the former caused by an energy shortage in the country and the latter by new labour laws. Specialties: Europe The Group's specialties business comprises those European mills which produce grades of paper other than containerboard together with related converting operations. These principally comprise the Group's graphicboard mills, solidboard, boxboard and paper sack businesses and the Group's bag-in-box operations. In the first nine months of the year, the financial performance of SKG's specialties business slightly improved on the comparable period in 2006, reflecting primarily SKG's strong focus on restoring acceptable end product pricing. However, the performance of the specialties business is being significantly impacted by rising recovered paper costs; and while board prices have increased year-on-year, further price initiatives are required to fully recover the higher input costs. The sackpaper market remains very strong, driven by a positive supply/demand dynamic in the market. As a result, SKG recently announced a new price increase of EUR 70 per tonne which is expected to be implemented in the first quarter of 2008. As SKG is 50% integrated in sack paper, this increase should have a positive effect on the earnings of the division. On the converting side however, a fragmented oversupplied competitive market means that paper price increases are not being effectively implemented. SKG's boxboard business improved in the first nine months of the year. Product prices are trending upwards, with price increases of EUR 40-EUR 50 per tonne announced for the fourth quarter, reflecting further pressure from rising input costs, while market conditions remain competitive. SKG's bag-in-box business reported strong growth in volumes in the first nine month of the year, despite lower than expected third quarter volumes, following reduced wine consumption in the summer months. SKG has concluded the acquisition of the Plasticos business in Spain, which will provide a platform for further development of the Group's bag-in-box business in the south of Europe, and is also completing a greenfield expansion in Russia. Third Quarter, 2007: Cash Flows & Capital Structure Strong free cash flow for the third quarter of 2007, resulted in a net inflow of EUR 150 million compared to a net inflow of EUR 64 million in the same period in 2006. The improvement in free cash flow was facilitated by a positive working capital change partially offset by a higher level of capital expenditure in 2007. The improved cash flow in 2007 reflects the increased profits generated by the Group in the third quarter. SKG's reported third quarter profit reflects debt re-financing costs of EUR 5 million. These costs are added back in arriving at free cash flow but deducted within the financing and investment section of the cash flow. The non-cash interest expense of EUR 2 million represents a reduction on the same period in 2006. Capital expenditure of EUR 81 million in the third quarter of 2007 was higher than in 2006, representing 94% of depreciation compared to 76% in 2006. 2006 third quarter expenditure, while lower, reflects a different phasing of capital spend within the year. Expenditure for the full year to December 2006 represented 98% of depreciation. Working capital decreased by EUR 56 million in the third quarter of 2007 with reduced debtors and increased creditors partly offset by increased stocks. The move in debtors, which is the principal driver of the change in working capital in the period, primarily reflects seasonal factors. Working capital of EUR 692 million at September 2007 represented 9.5% of annualised revenue compared to 9.1% at September 2006. Cash flows from financing and investment activity amounted to a net outflow of EUR 13 million in the third quarter of 2007. The principal outflows were a EUR 9 million repayment of derivatives as part of debt re-financing and additional re-financing costs of EUR 5 million. In the third quarter of 2006, cash flows from financing and investment activity were modest resulting in a net outflow of EUR 2 million. The 2007 third quarter net cash inflow was EUR 137 million. This inflow was increased by EUR 26 million in respect of currency translation adjustments, reflecting a reduction in foreign currency borrowings as a result of the relative strength of the euro. The positive currency movement in the quarter was offset by EUR 6 million in respect of the amortisation of debt issue costs (including the accelerated amortisation of EUR 2 million). The overall result was a reduction of EUR 157 million in net borrowing during the third quarter of 2007. In the third quarter of 2006, a net cash inflow of EUR 62 million was reduced by the amortisation of debt issuance costs of EUR 6 million, PIK interest expense of EUR 12 million and a negative currency movement of EUR 1 million. The overall result was a decrease in net borrowing of EUR 43 million during the third quarter of 2006. Net borrowing amounted to EUR 3,448 million at September 2007 compared to EUR 3,605 million at June 2007. Reflecting the progressive strengthening of SKG's earnings, leverage (EBITDA to net debt ratio) has improved over the course of 2007 from 3.7x at March 2007 to 3.6x at June 2007 and 3.3x at September 2007. At December 2006, leverage was 5.5x. Year to September, 2007: Cash Flows & Capital Structure Free cash flow, for the first nine months of 2007 was a net inflow of EUR 113 million compared to a net outflow of EUR 64 million in the same period in 2006. The improvement in free cash flow reflects a combination of the higher profits generated in 2007 and a lower working capital outflow partly offset by higher capital expenditure (and capital creditors) and current provisions, primarily in respect of re-organisation and re-structuring charges provided for in 2006. The underlying improvement in year-on-year profitability is masked by the significant finance costs incurred in 2007 in respect of the early paydown of debt following the IPO in March. These costs comprise refinancing costs of EUR 79 million (added back in arriving at free cash flow but then deducted within the financing and investment section of the cash flow) and EUR 31 million in respect of the accelerated write-off of debt costs relating to the debt paid down. Capital expenditure at EUR 228 million in 2007 represented 87% of depreciation compared to 77% in 2006. Working capital increased by EUR 42 million in the nine months to September 2007 with increased debtors and, to a lesser extent, stocks partly offset by higher creditors. The comparative increase in 2006 was EUR 108 million. The increase in working capital over the first nine months of 2007 reflected the impact of higher average prices of recovered paper and an element of seasonality as a result of the higher level of trading activity mid-year. As a percentage of annualised revenue, working capital of EUR 692 million at September 2007 represented 9.5%, compared to 8.9% at December 2006 and 9.1% at September 2006. Primarily as a result of the IPO, cash flows from financing and investment activity amounted to a net inflow of EUR 1,335 million in the first nine months of 2007. The share issue raised EUR 1,495 million while the costs of the IPO and those relating to the subsequent refinancing of borrowing amounted to EUR 60 million and EUR 79 million respectively. The repayment of derivatives resulted in an outflow of EUR 23 million (EUR 14 million of which related to the IPO). Apart from a payment of EUR 34 million in deferred consideration to former Kappa shareholders, cash flows from financing and investment activity in the same period of 2006 were modest resulting in a net outflow of EUR 40 million. Net cash inflow for the first nine months of 2007 was EUR 1,448 million. This inflow was increased by a positive currency movement of EUR 40 million while offset by EUR 43 million in respect of the amortisation of debt issuance costs (including the accelerated amortisation of EUR 31 million) and EUR 12 million in respect of non-cash interest in relation to the PIK debt prior to its paydown in late March. The overall result was a decrease of EUR 1,434 million in net borrowing in the first nine months of 2007. In the first nine months of 2006, the negative free cash flow and the outflow from financing and investment activity resulted in a net cash outflow of EUR 104 million. This outflow was increased by EUR 15 million in respect of the amortisation of debt issuance costs and EUR 37 million in respect of non-cash interest and offset by positive currency movements of EUR 71 million. The overall result was an increase of EUR 85 million in net borrowing in the first nine months of 2006. -0- *T Summary Cash Flows - SKG plc Summary cash flows for the third quarter and nine months are set out in the following table. *T -0- *T 3 months to 3 months to 9 months to 9 months to 30-Sept-07 30-Sept-06 30-Sept-07 30-Sept-06 ------------ ------------ ------------ ------------ EUR Million EUR Million EUR Million EUR Million Profit/(loss) before tax - subsidiaries 103 (52) 97 (104) Exceptional items (11) 59 6 109 Impairment of fixed assets 1 4 6 4 Depreciation and depletion 87 91 263 271 Amortisation of intangible assets 11 11 32 32 Non-cash interest expense 2 13 47 11 Refinancing costs 5 - 79 - Share-based payments 4 2 21 6 Working capital change 56 28 (42) (108) Current provisions (8) (13) (69) (18) Capital expenditure (81) (69) (228) (209) Change in capital creditors 2 - (46) (9) Sale of fixed assets 4 4 22 13 Tax paid (20) (13) (45) (35) Dividends from associates - 1 3 4 Other (5) (2) (33) (31) ------------ ------------ ------------ ------------ Free cash flow 150 64 113 (64) Investments - - (3) (34) Sale of businesses and investments 3 2 11 6 Shares issued through IPO - - 1,495 - Costs of IPO (2) - (60) - Repayment of derivatives (9) - (23) - Dividends paid to minorities - (2) (6) (7) Acquisition costs and fees - (2) - (5) Refinancing costs (5) - (79) - ------------ ------------ ------------ ------------ Net cash inflow/(outflow) 137 62 1,448 (104) Net debt disposed - - 1 - Deferred debt issue costs amortised (6) (6) (43) (15) Non-cash interest accrued - (12) (12) (37) Currency translation adjustments 26 (1) 40 71 ------------ ------------ ------------ ------------ Decrease/(increase) in net borrowing EUR 157 EUR 43 EUR 1,434 EUR (85) ------------ ------------ ------------ ------------ *T Capital Resources The Group's primary sources of liquidity are cash flow from operations and borrowings under the revolving credit and restructuring facilities. The Group's primary uses of cash are for debt service and capital expenditure. At 30 September, 2007 Smurfit Kappa Funding plc ('SK Funding') had outstanding EUR 3.68 million 10.125% senior notes due 2012, US$0.06 million 9.625% senior notes due 2012, EUR 217.5 million 7.75% senior subordinated notes due 2015 and US$200 million 7.75% senior subordinated notes due 2015. In addition Smurfit Kappa Treasury Funding Limited had outstanding US$292.3 million 7.50% senior debentures due 2025 and the Group had outstanding EUR 210 million floating rate notes issued under an accounts receivable securitisation program maturing in 2011. On 20 March, 2007 SKG plc received gross proceeds from an initial public offering of its shares of EUR 1.495 billion. The net proceeds of the offering have been used to repay certain indebtedness of the subsidiaries of SKG plc, including SK Funding, together with costs of the initial public offering and costs associated with refinancing and debt repayment. On 21 March, 2007 SKG plc paid off its shareholder PIK obligation of EUR 99.6 million. On 14 February, 2007 Smurfit Kappa Holdings plc ('SK Holdings') launched a tender offer for its 11.5% senior PIK notes due 2015 (the 'PIK notes'). On 21 March, 2007 90% of the PIK notes were tendered in the tender offer. The settlement amount including the tender premium was EUR 380.4 million. On 21 March, 2007 SK Holdings issued a call notice on the remaining outstanding PIK notes which was finally settled on 20 April, 2007 at a settlement amount including a premium of EUR 42.7 million. On 14 February, 2007 SK Funding launched a tender offer for EUR 219 million of its 10.125% euro senior notes due in October 2012 and US$470 million of its 9.625% Dollar senior notes also due in October 2012. On 21 March, 2007 the tender offers for EUR 219 million of the 10.125% euro senior notes and US$470 million of the 9.625% Dollar senior notes were settled. The total settlements including tender premium were EUR 236.3 million and US$501.9 million respectively. On 22 March, 2007 SK Funding launched a further tender offer for EUR 98 million of its 10.125% senior euro notes due in October 2012 and US$208 million of 9.625% Dollar senior bonds due in October 2012. These tenders were settled on 24 April, 2007. The total settlements including tender premium on the second tender were EUR 105.2 million and US$221.4 million respectively. Following these tenders the remaining obligations were EUR 33 million under the 10.125% euro senior notes and US$72 million under the 9.625% Dollar senior notes. On 19 July, 2007 SK Funding launched a tender offer for all of the remaining 10.125% euro and 9.625% US Dollar senior notes. This tender closed on 16 August, 2007, resulting in the repayment of EUR 29 million of the euro senior notes and US$72 million of the Dollar senior notes. The repayment was funded by a drawdown under tranches B and C of the senior credit facility. On 2 November, 2007 the remaining EUR 3.68 million euro senior notes and US$0.06 million Dollar senior notes were redeemed in full. Smurfit Kappa Acquisitions and certain subsidiaries are party to a Senior Credit Facility. The senior credit facility comprises a EUR 443 million amortising A Tranche maturing in 2012, a EUR 1,188 million B Tranche maturing in 2013 and a EUR 1,187 C Tranche maturing in 2014. In addition, as at 30 September, 2007, the facility included EUR 875 million in committed lines including a EUR 600 million revolving credit facility of which EUR 5.7 million was drawn under ancillary facilities or facilities supported by letters of credit, and a EUR 275 million restructuring facility of which EUR 103 million was borrowed. The following table provides the range of interest rates as of 30 September, 2007 for each of the drawings under the various Senior Credit Facility term loans. -0- *T BORROWING ARRANGEMENT CURRENCY INTEREST RATE Restructuring Facility EUR 6.01% Term Loan A EUR 6.02% - 6.48% Term Loan B EUR 6.10% - 6.61% USD 7.26% Term Loan C EUR 6.35% - 6.86% USD 7.55% *T Borrowings under the revolving credit facility are available to fund the Group's working capital requirements, capital expenditures and other general corporate purposes and will terminate in December 2012. Market Risk and Risk Management Policies The Group is exposed to the impact of interest rate changes and foreign currency fluctuations due to its investing and funding activities and its operations in different foreign currencies. Interest rate risk exposure is managed by achieving an appropriate balance of fixed and variable rate funding. At 30 September, 2007, the proportion of the Group's total borrowing that was at fixed interest rates was 61%. The Group uses foreign currency borrowings, currency swaps, options and forward contracts in the management of its foreign currency exposures. As 30 September, 2007, our fixed rate debt comprises mainly EUR 217.5 million 7.75% senior subordinated notes due 2015, US$200 million 7.75% senior subordinated notes due 2015 and US$292 million 7.50% senior debentures due 2025. The Group also has EUR 1,780 million in interest rate swaps with a maturity date of more than one year. Our earnings are affected by changes in short-term interest rates as a result of our floating rate borrowings. If LIBOR interest rates for these borrowings increase by one percent, our interest expense would increase, and income before taxes would decrease, by approximately EUR 15 million on a per annum basis. Interest income on our cash balances would increase by approximately EUR 4 million assuming a one percent increase in interest rates earned on such balances on a per annum basis. Group Income Statement - Third Quarter -0- *T 3 Months to 30-Sept-07 3 Months to 30-Sept-06 -------------------------------------- --------------------------------------- Pre- Pre- Exceptional Exceptional Total Exceptional Exceptional Total 2007 2007 2007 2006 2006 2006 ------------- ------------ ----------- ------------- ------------ ------------ EUR '000 EUR '000 EUR '000 EUR '000 EUR '000 EUR '000 Continuing operations Revenue 1,829,123 - 1,829,123 1,734,934 - 1,734,934 Cost of sales (1,299,684) (1,413) (1,301,097) (1,242,286) (3,841) (1,246,127) ------------- ------------ ----------- ------------- ------------ ------------ Gross profit 529,439 (1,413) 528,026 492,648 (3,841) 488,807 Distribution costs (145,375) - (145,375) (149,977) - (149,977) Administrative expenses (222,488) - (222,488) (218,001) - (218,001) Other operating income 11,349 1,668 13,017 1,461 3,993 5,454 Other operating expenses - (2,073) (2,073) - (49,982) (49,982) ------------- ------------ ----------- ------------- ------------ ------------ Operating profit 172,925 (1,818) 171,107 126,131 (49,830) 76,301 Finance costs (123,769) (6,734) (130,503) (130,455) (28,000) (158,455) Finance income 61,690 - 61,690 29,744 - 29,744 Share of associates' profit (after tax) 3,505 - 3,505 1,500 - 1,500 ------------- ------------ ----------- ------------- ------------ ------------ Profit/(loss) before income tax 114,351 (8,552) 105,799 26,920 (77,830) (50,910) Income tax expense (16,732) 3,893 ------------- ------------ ----------- ------------- ------------ ------------ Profit/(loss) for the financial period EUR 89,067 EUR (47,017) ============= ============ =========== ============= ============ ============ Attributable to: Equity holders of the Company 84,098 (52,536) Minority interest 4,969 5,519 ------------- ------------ ----------- ------------- ------------ ------------ Profit/(loss) for the financial period EUR 89,067 EUR (47,017) ============= ============ =========== ============= ============ ============ *T Group Income Statement - Year to Date -0- *T 9 Months to 30-Sept-07 9 Months to 30-Sept-06 -------------------------------------- ---------------------------------------- Pre- Pre- Exceptional Exceptional Total Exceptional Exceptional Total 2007 2007 2007 2006 2006 2006 ------------- ------------ ----------- ------------- ------------ ------------- EUR '000 EUR '000 EUR '000 EUR '000 EUR '000 EUR '000 Continuing operations Revenue 5,453,862 - 5,453,862 5,220,436 - 5,220,436 Cost of sales (3,894,212) (6,075) (3,900,287) (3,761,243) (3,841) (3,765,084) ------------- ------------ ----------- ------------- ------------ ------------- Gross profit 1,559,650 (6,075) 1,553,575 1,459,193 (3,841) 1,455,352 Distribution costs (443,616) - (443,616) (459,168) - (459,168) Administrative expenses (690,714) - (690,714) (680,826) - (680,826) Other operating income 47,585 7,538 55,123 1,461 7,259 8,720 Other operating expenses - (38,642) (38,642) - (136,014) (136,014) ------------- ------------ ----------- ------------- ------------ ------------- Operating profit 472,905 (37,179) 435,726 320,660 (132,596) 188,064 Finance costs (377,423) (109,970) (487,393) (438,240) (28,000) (466,240) Finance income 148,192 - 148,192 173,908 - 173,908 Share of associates' profit (after tax) 9,744 - 9,744 4,346 - 4,346 ------------- ------------ ----------- ------------- ------------ ------------- Profit/(loss) before income tax 253,418 (147,149) 106,269 60,674 (160,596) (99,922) Income tax expense (49,060) (4,622) ------------- ------------ ----------- ------------- ------------ ------------- Profit/(loss) for the financial period EUR 57,209 EUR (104,544) ============= ============ =========== ============= ============ ============= Attributable to: Equity holders of the Company 45,003 (114,868) Minority interest 12,206 10,324 ------------- ------------ ----------- ------------- ------------ ------------- Profit/(loss) for the financial period EUR 57,209 EUR (104,544) ============= ============ =========== ============= ============ ============= *T Segmental Analyses - Third Quarter -0- *T 3 months to 30-Sept-07 3 months to 30-Sept-06 Packaging Specialties Total Packaging Specialties Total ----------------------------------------------------- ----------- ------------- ------------- ----------- ------------- EUR '000 EUR '000 EUR '000 EUR '000 EUR '000 EUR '000 Group and third party revenue 2,354,224 335,462 2,689,686 2,192,743 339,661 2,532,404 Inter-segment revenue (773,669) (86,894) (860,563) (720,108) (77,362) (797,470) ------------- ----------- ------------- ------------- ----------- ------------- Third party revenue (external) EUR 1,580,555 EUR 248,568 EUR 1,829,123 EUR 1,472,635 EUR 262,299 EUR 1,734,934 ============= =========== ============= ============= =========== ============= Segment results - pre-exceptionals 164,543 20,317 184,860 117,446 16,405 133,851 Exceptional items (2,643) 1,069 (1,574) (48,880) (1,186) (50,066) ------------- ----------- ------------- ------------- ----------- ------------- Segment results - post-exceptionals 161,900 21,386 183,286 68,566 15,219 83,785 Unallocated centre costs - pre- exceptionals (11,935) (7,720) Group centre exceptional items (244) 236 ------------- ------------- Operating profit 171,107 76,301 Share of associates' profit/(loss) (after tax) 2,176 1,329 3,505 1,726 (226) 1,500 Finance costs (130,503) (158,455) Finance income 61,690 29,744 ------------- ------------- Profit/(loss) before income tax EUR 105,799 EUR (50,910) ============= ============= *T Segmental Analyses - Year to Date -0- *T 9 months to 30-Sept-07 9 months to 30-Sept-06 Packaging Specialties Total Packaging Specialties Total ------------- ----------- ------------- ------------- ----------- ------------- EUR '000 EUR '000 EUR '000 EUR '000 EUR '000 EUR '000 Group and third party revenue 6,990,034 978,502 7,968,536 6,654,681 986,111 7,640,792 Inter-segment revenue (2,255,615) (259,059) (2,514,674) (2,178,593) (241,763) (2,420,356) ------------- ----------- ------------- ------------- ----------- ------------- Third party revenue (external) EUR 4,734,419 EUR 719,443 EUR 5,453,862 EUR 4,476,088 EUR 744,348 EUR 5,220,436 ============= =========== ============= ============= =========== ============= Segment results - pre-exceptionals 466,410 44,122 510,532 300,651 42,233 342,884 Exceptional items (20,642) (6,215) (26,857) (130,491) (2,248) (132,739) ------------- ----------- ------------- ------------- ----------- ------------- Segment results - post-exceptionals 445,768 37,907 483,675 170,160 39,985 210,145 Unallocated centre costs - pre- exceptionals (37,627) (22,224) Group centre exceptional items (10,322) 143 ------------- ------------- Operating profit 435,726 188,064 Share of associates' profit/(loss) (after tax) 9,744 - 9,744 5,135 (789) 4,346 Finance costs (487,393) (466,240) Finance income 148,192 173,908 ------------- ------------- Profit/(loss) before income tax EUR 106,269 EUR (99,922) ============= ============= *T Group Balance Sheet -0- *T 30-Sept-07 30-Sept-06 ----------------- ------------- EUR '000 EUR '000 Non-current assets Property, plant and equipment 3,295,493 3,394,143 Goodwill and intangible assets 2,437,528 2,481,718 Biological assets 76,150 62,637 Investment in associates 79,173 78,121 Available for sale financial assets 43,436 45,371 Trade and other receivables 4,533 15,141 Derivative financial instruments 6,953 5,978 Deferred income tax assets 301,009 322,580 ----------------- ------------- 6,244,275 6,405,689 ----------------- ------------- Current assets Inventories 696,788 645,778 Biological assets 6,813 6,195 Trade and other receivables 1,468,294 1,352,462 Derivative financial instruments 25,895 13,139 Restricted cash 14,984 18,906 Cash and cash equivalents 403,716 244,852 ----------------- ------------- 2,616,490 2,281,332 Assets held for sale 5,000 81,957 ----------------- ------------- 2,621,490 2,363,289 ----------------- ------------- Total assets EUR 8,865,765 EUR 8,768,978 ================= ============= Equity Equity share capital 229 136 Capital reserves 2,575,425 1,124,906 Retained earnings (563,867) (707,248) ----------------- ------------- Total shareholders equity 2,011,787 417,794 Minority interest 141,488 133,764 ----------------- ------------- Total equity 2,153,275 551,558 ----------------- ------------- Non-current liabilities Interest-bearing loans and borrowings 3,708,989 5,108,082 Deferred income 1,960 - Employee benefits 478,293 684,037 Deferred income tax liabilities 535,816 558,181 Non-current taxes payable 6,485 28,949 Provisions for liabilities and charges 82,931 53,391 Government grants 12,647 13,693 ----------------- ------------- Total non-current liabilities 4,827,121 6,446,333 ----------------- ------------- Current liabilities Interest-bearing loans and borrowings 157,474 134,946 Trade payables and other payables 1,477,360 1,382,371 Current income tax liabilities 65,438 6,272 Derivative financial instruments 128,869 99,849 Provisions for liabilities and charges 56,228 116,908 ----------------- ------------- 1,885,369 1,740,346 Liabilities held for sale - 30,741 ----------------- ------------- 1,885,369 1,771,087 ----------------- ------------- Total liabilities 6,712,490 8,217,420 ----------------- ------------- Total equity and liabilities EUR 8,865,765 EUR 8,768,978 ================= ============= Group Statement of Recognised Income and Expense 9 months to 9 months to 30-Sept-07 30-Sept-06 ----------------- ------------- EUR '000 EUR '000 Items of income and expense recognised directly within equity: Foreign currency translation adjustments on foreign operations (37,199) (72,068) Net change in fair value of available for sale financial assets 610 8 Net movement to cash flow hedge reserve (850) 20,843 Actuarial gain/(loss) on defined benefit plans 73,886 (25,502) Income tax on income and expense recognised directly within equity (19,079) 607 Profit/(loss) for the financial period 57,209 (104,544) ----------------- ------------- Total recognised income and expense for the financial period 74,577 (180,656) ================= ============= Attributable to: Equity holders of the company 63,230 (182,843) Minority interest 11,347 2,187 ----------------- ------------- EUR 74,577 EUR (180,656) ================= ============= *T -0- *T Reconciliation of Movements in Shareholder's Funds 9 months to 9 months to 30-Sept-07 30-Sept-06 -------------------- ---------------------- EUR '000 EUR '000 At beginning of period 631,521 729,869 Total recognised gains and losses 74,577 (180,656) Shares issued 93 - Share premium on shares issued 1,431,933 - Share-based payment expense 21,353 5,988 Purchase of minorities (1,257) (23) Dividends paid to minorities (4,945) (3,620) -------------------- ---------------------- At end of period EUR 2,153,275 EUR 551,558 ==================== ====================== *T 1. GENERAL INFORMATION Smurfit Kappa Group plc (''SKG plc'' or ''the Company'') and its subsidiaries (together, ''the Group'') manufacture, distribute and sell containerboard, corrugated containers and other paper-based packaging products such as solidboard and graphic board. On 14 March, 2007 the Company, formed in January 2007 as the ultimate holding company for the Group, completed an initial public offering, with the placing to institutional investors of 78,787,879 new ordinary shares in SKG plc (the ''Ordinary Shares''). This offering, together with the issue of an additional 11,818,181 Ordinary Shares, generated gross proceeds of EUR 1,495 million, which were used to repay certain debt obligations of the Group and to repay the shareholder PIK note issued in connection with the Group's 2005 Kappa Packaging merger. Trading in the shares on the Irish Stock Exchange and on the London Stock Exchange commenced on 20 March 2007. The additional shares were issued on admission by Deutsche Bank acting as stabilising manager under an over-allocation option representing shares up to a maximum of 15% of the total number of shares comprised in the initial public offering. 2. BASIS OF PREPARATION Following admission to the Official List of the Irish Stock Exchange and the Financial Services Authority in accordance with European Union Regulations, the Group is required to prepare statutory consolidated financial statements for the year ended 31 December 2007 and subsequent years in accordance with International Financial Reporting Standards (''IFRS'') as adopted by the EU, International Financial Reporting Interpretations Committee (''IFRIC'') interpretations adopted by the EU, and with those parts of the Companies Acts applicable to companies reporting under IFRS. In connection with the Company's application for admission, the Company was required by item 20.1 of Annex 1 to the Prospectus Regulations 2005 to prepare and present in its prospectus the last three years audited historical financial information in a form consistent with the accounting policies to be adopted in the Company's 2007 financial statements. Accordingly, the directors of the Company prepared financial information for the Group at the transition date of 1 January 2004 and for each of the years ended 31 December 2004, 2005 and 2006, on the basis expected to be applicable, in so far as was then currently known, for the financial statements to be prepared for the year ended 31 December 2007, except where otherwise required or permitted by IFRS 1 First-time adoption of International Financial Reporting Standards. On 31 January, 2007 the Group previously headed by Smurfit Kappa Investments Limited (formerly known as Smurfit Kappa Group Limited) (''SKIL'') underwent a reorganisation in advance of the Group's IPO. The shareholders of SKIL exchanged their shares of SKIL for an identical number of newly issued shares of Smurfit Kappa Group plc, a newly incorporated company. Notwithstanding the change in the legal parent of the Group, this transaction has been accounted for as a reverse acquisition and the financial information has been prepared on the basis of the new legal parent having been acquired by the existing Group. As a result, the Group did not restate the assets and liabilities of SKIL to their fair values. These assets and liabilities continue to be carried at the amounts they were recorded at prior to the above exchange transaction, and consequently no goodwill arises on the transaction. The financial information presented in this report has been prepared in accordance with the accounting policies that the Group expects to adopt for the 2007 year end. These accounting policies are consistent with the Group's accounting policies under IFRS as adopted by the EU included in the prospectus. Full details of the accounting policies adopted by the Group on implementation of IFRS were published in its prospectus in March 2007, which is available on the Group's website www.smurfitkappa.com. There is, however, a possibility that the directors may determine that some changes are necessary when preparing the full annual financial statements for the first time in accordance with IFRS. The accounting standards and IFRIC interpretations that will be applicable and adopted for use in the European Union at 31 December 2007 are not known with certainty at the time of preparing this interim financial information. 3. USE OF ESTIMATES Estimates and judgments are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, rarely equal the related actual results. The key estimates and assumptions that have a significant impact on the financial statements are as follows: -- estimation of recoverable amount of goodwill -- estimates in relation to income taxes -- fair value of derivatives and other financial instruments -- measurement of defined benefit obligations -- provisions -- share-based payments -- estimation of useful lives for fixed assets. 4. EMPLOYEE POST RETIREMENT SCHEMES - DEFINED BENEFIT COST The table below sets out the components of the defined benefit expense for the period: -0- *T 3 Months to 3 Months to 9 Months to 9 Months to 30-Sept-07 30-Sept-06 30-Sept-07 30-Sept-06 ----------- ----------- ----------- ----------- EUR '000 EUR '000 EUR '000 EUR '000 Current service cost 12,543 12,531 38,994 41,471 Past service cost 160 573 345 573 (Gain) on settlements and curtailments (2,200) (74) (4,978) (3,464) Actuarial gains and losses arising on long-term employee benefits other than defined benefit schemes (208) 519 (234) 948 ----------- ----------- ----------- ----------- 10,295 13,549 34,127 39,528 ----------- ----------- ----------- ----------- Expected return on scheme assets (21,967) (20,142) (65,988) (60,416) Interest cost on scheme liabilities 24,292 21,763 72,965 67,486 ----------- ----------- ----------- ----------- Other financial expense 2,325 1,621 6,977 7,070 ----------- ----------- ----------- ----------- Defined benefit expense EUR 12,620 EUR 15,170 EUR 41,104 EUR 46,598 ----------- ----------- ----------- ----------- *T The disclosures above reflect the requirements of IAS 19 - Employee Benefits. Included in cost of sales and distribution and administrative expenses is a total defined benefit expense of EUR 10,295,000 and EUR 34,127,000 for the third quarter and first nine months respectively (2006: EUR 13,549,000 and EUR 39,528,000 respectively). Expected Return on Scheme Assets is included in Finance Income and Interest Cost on Scheme Liabilities is included in Finance Costs in the Group Income Statement. 5. ANALYSIS OF NET DEBT -0- *T 30-Sept-07 31-Dec-06 ------------- ------------- EUR '000 EUR '000 Senior credit facility: Revolving credit facility (1) - interest at relevant interbank rate + 1.75% (5,637) (6,982) Restructuring facility (2) - interest at relevant interbank rate + 1.75% until conversion to Term loan 103,200 103,200 Tranche A Term loan (3a) - interest at relevant interbank rate + 1.75% 442,511 442,492 Tranche B Term loan (3b) - interest at relevant interbank rate + 1.875% 1,188,271 1,142,998 Tranche C Term loan (3c) - interest at relevant interbank rate + 2.125% 1,187,492 1,142,547 Yankee bonds (including accrued interest) (4) 210,111 219,764 Bank loans and overdrafts/(cash) (322,080) (246,715) 2011 Receivables securitisation floating rate notes (including accrued interest) (5) 205,469 204,656 ------------- ------------- 3,009,337 3,001,960 2012 Bonds (including accrued interest) (6) 4,251 922,218 2015 Cash pay subordinated notes (including accrued interest) (7) 351,082 368,299 ------------- ------------- Net debt before finance leases 3,364,670 4,292,477 Finance leases 77,500 91,281 ------------- ------------- Net Debt including leases - Smurfit Kappa Funding plc 3,442,170 4,383,758 Balance of revolving credit facility reclassified to debtors 5,637 6,982 Deferred debt issuance costs other - (1,994) ------------- ------------- Net Debt after reclassification - Smurfit Kappa Funding plc 3,447,807 4,388,746 2015 Senior PIK Notes - Smurfit Kappa Holdings plc (including accrued interest) (8) - 396,344 Smurfit Finance Luxembourg Sarl PIK (9) - 97,700 SKG plc, SK Investments Ltd, SK Holdings plc, SK Corporation Ltd and Smurfit Finance Luxembourg cash (44) (460) ------------- ------------- Net Debt including leases - Smurfit Kappa Group plc EUR 3,447,763 EUR 4,882,330 ============= ============= *T -0- *T (1) Revolving credit facility of EUR 600 million (available under the senior credit facility) to be repaid in full in 2012. (Revolver Loans = EUR 0 million, Drawn under Ancillary Facilities and Facilities supported by Letters of Credit = EUR 5.7 million). (2) Restructuring credit facility of EUR 275 million (available under the senior credit facility). (3a)Term loan A due to be repaid in certain instalments up to 2012. (3b)Term loan B due to be repaid in full in 2013. (3c)Term loan C due to be repaid in full in 2014. (4) 7.50% senior debentures due 2025 of $292.3 million. (5) Receivables securitisation floating rate notes due September 2011. (6) 10.125% senior notes due 2012 of EUR 3.68 million and 9.625% senior notes due 2012 of $0.06 million. (7) EUR 217.5 million 7.75% senior subordinated notes due 2015 and $200.0 million 7.75% senior subordinated notes due 2015. (8) 11.5% Senior PIK Notes due 2015. (9) 9% Shareholder PIK. *T 6. REFINANCING TRANSACTIONS On 1 December, 2005 Smurfit Kappa Group ('SKG') was formed with the merger of the operations of Jefferson Smurfit Group ('JSG') and Kappa. The completion of the merger was financed through a new senior credit facility for the combined group. The senior credit facility comprises a EUR 443 million amortising A Tranche maturing in 2012, a EUR 1,188 million B Tranche maturing in 2013 and a EUR 1,187 million C Tranche maturing in 2014. In addition, as at 30 September, 2007, the facility includes EUR 875 million in committed lines including a EUR 600 million revolving credit facility of which EUR 5.7 million was drawn under ancillary facilities or facilities supported by letters of credit, and a EUR 275 million restructuring facility of which EUR 103 million was borrowed. In the year ended 31 December, 2006, EUR 33 million was repaid on the Tranche A facility, EUR 32 million of which was funded from the net proceeds of EU regulatory disposals. In June 2007, EUR 1 million was repaid on the Tranche A facility. The proceeds of the new senior credit facility were used (a) to refinance 10.625% Senior Subordinated Notes and 12.5% Senior Subordinated Discount Notes due 2009 of Kappa Beheer B.V. ('the Kappa Bonds') (b) to refinance existing JSG and Kappa senior credit facilities (c) to fund the cash consideration payable to the Kappa shareholders and (d) to fund the costs associated with the merger. In March 2007, Smurfit Kappa Holdings plc ('SK Holdings') completed a tender offer and consent solicitation for its 11.5% senior PIK notes due 2015 (the 'PIK notes'). 90% of the PIK notes were tendered in the tender offer. SK Holdings used a portion of the net proceeds from the initial public offering proceeds it received from SKG plc to finance the repurchase of notes and to pay fees and expenses related to the tender offer. The 10% of PIK notes not tendered in the tender offer were redeemed in April 2007. In March 2007, Smurfit Kappa Funding plc ('SK Funding') completed a tender offer for up to US$470 million of its outstanding 9.625% Dollar Senior Notes due 2012 (the 'Dollar senior notes') and up to EUR 219 million of its outstanding 10.125% euro Senior Notes due 2012 (the 'euro senior notes'). In April 2007, SK Funding completed a further tender offer for up to US$208 million of its outstanding Dollar senior notes and up to EUR 98 million of its outstanding euro senior notes. Upon completion of the second tender offer, US$72 million aggregate principal amount of Dollar senior notes and EUR 33 million of euro senior notes remained outstanding. SK Funding used the net proceeds from the initial public offering proceeds it received from SKG plc to finance the repurchase of notes and to pay fees and expenses related to the tender offers. On 19 July, 2007 SK Funding launched a tender offer for all of the remaining 10.125% euro and 9.625% US Dollar senior notes. This tender closed on 16 August, 2007, resulting in the repayment of EUR 29 million of the euro senior notes and US$72 million of the Dollar senior notes. The repayment was funded by a drawdown under tranches B and C of the senior credit facility. On 2 November, 2007 the remaining EUR 3.68 million euro senior notes and US$0.60 million Dollar senior notes were redeemed in full. 7. CONVERTIBLE EQUITY In March 2007 upon the IPO becoming effective, all of the then class A, E, F and H convertible shares and 80% of the class B convertible shares vested and were converted into D convertible shares. The class C, class G and 20% of the class B convertible shares did not vest and were re-designated as A1, A2 and A3 convertible shares. The A1, A2 and A3 convertible shares will automatically convert on a one-to-one basis into D convertible shares on the first, second and third anniversaries respectively of the IPO, provided their holder remains an employee of the Group at the relevant anniversary. The D convertible shares resulting from these conversions are convertible on a one-to-one basis into ordinary shares, at the instance of the holder, upon the payment by the holder of the agreed conversion price. The life of the D convertible shares arising from the vesting of these new classes of convertible share ends on 20 March, 2014. Subject to certain conditions the convertible shares may become vested at the discretion of the board of directors of SKG plc at any time. The plans provide for equity settlement only, no cash settlement alternative is available. In March 2007, SKG plc adopted the 2007 Share Incentive Plan (the '2007 SIP'). Incentive awards under the 2007 SIP are in the form of New Class B and New Class C convertible shares issued in equal proportions to participants at a nominal value of EUR 0.001 per share. On satisfaction of specified performance criteria the New B and New C convertible shares will automatically convert on a one-to-one basis into D convertible shares. The D convertibles may be converted by the holder into ordinary shares upon payment of the agreed conversion price. The conversion price for each D convertible share is the market value of an ordinary share on the date the participant was invited to subscribe less the nominal subscription price. Each award has a life of ten years from the date of issuance of the New Class B and New Class C convertible shares. When a Participant terminates employment, SKG plc reserves the right to redeem or purchase the convertible shares issued as a result of conversion. As of 30 September, 2007, SKG plc had a total of 13,099,014 convertible shares in issue in total, 10,349,814 under the 2002 Plan, as amended and 2,749,200 under the 2007 SIP. A summary of the activity under the 2002 Plan, as amended, for the period since allotment to 30 September, 2007 is presented below. -0- *T Shares 000's Class of Convertible shares -------------------------------------------------------------------------------------------------- A B C D E F G H A1 A2 A3 Total --------------------- ------- ------- ------- ------- --------- --------- --------- --------- ----- ----- ----- -------- Balance Dec. 2006 126.6 413.2 206.6 286.6 2,923.5 2,923.5 1,461.7 2,062.9 - - - 10,404.6 --------------------- ------- ------- ------- ------- --------- --------- --------- --------- ----- ----- ----- -------- Vested into D (126.6) (330.6) - 8,367.0 (2,923.5) (2,923.5) - (2,062.9) - - - - Converted into A1, A2 & A3 - (82.6) (206.6) - - - (1,461.7) - 583.7 583.7 583.6 - Converted into Ordinary shares - - - (54.8) - - - - - - - (54.8) Balance Sept. 2007 - - - 8,598.8 - - - - 583.7 583.7 583.6 10,349.8 Exercisable Sept. 2007 - - - 8,598.8 - - - - - - - 8,598.8 --------------------- ------- ------- ------- ------- --------- --------- --------- --------- ----- ----- ----- -------- *T The exercise price for all D convertible shares other than those derived from Class H convertibles at 30 September, 2007 was EUR 4.28. The exercise price for D convertible shares derived from Class H convertibles was EUR 5.69 at 30 September, 2007. The weighted average remaining contractual life of all the awards issued under the 2002 Plan, as amended, at 30 September, 2007 was 5.22 years. A summary of the activity under the 2007 SIP, for the period ended 30 September, 2007 is presented below: -0- *T Shares 000's Class of Convertible shares ------------------------------------------------------------ New B New C Total April 2007 Allotted 424.2 424.2 848.4 May 2007 Allotted 950.4 950.4 1,900.8 Balance September 2007 1,374.6 1,374.6 2,749.2 Exercisable September 2007 - - - *T The exercise price for all New B and New C convertible shares upon vesting at 30 September, 2007 was EUR 18.28. The weighted average remaining contractual life of all the awards issued under the 2007 SIP at 30 September, 2007 was 9.57 years. 8. RECONCILIATION OF NET INCOME/(LOSSES) TO EBITDA, BEFORE EXCEPTIONAL ITEMS AND SHARE-BASED PAYMENTS -0- *T 3 months to 3 months to 9 months to 9 months to 30-Sept-07 30-Sept-06 30-Sept-07 30-Sept-06 ----------- ----------- ----------- ----------- EUR '000 EUR '000 EUR '000 EUR '000 Net income/(losses) 84,098 (52,536) 45,003 (114,868) Equity minority interests 4,969 5,519 12,206 10,324 Income tax expense/(credit) 16,732 (3,893) 49,060 4,622 Share of associates' operating income (3,505) (1,500) (9,744) (4,346) Total net interest 68,813 128,711 339,201 292,332 Depreciation, depletion and amortisation 98,006 100,767 294,822 302,333 Share-based payments 4,457 2,010 21,353 5,988 (Income) on sale of assets and operations - subsidiaries (1,668) (3,993) (7,538) (7,259) Impairment of fixed assets 1,413 3,841 6,075 3,841 Reorganisation and restructuring costs 2,073 49,982 38,642 136,014 ----------- ----------- ----------- ----------- EBITDA before exceptional items and share-based payments EUR 275,388 EUR 228,908 EUR 789,080 EUR 628,981 =========== =========== =========== =========== *T

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