3rd Quarter Results

3rd Quarter Results

Smurfit Kappa Group PLC

6 November 2013: Smurfit Kappa Group plc (‘SKG’ or the ‘Group’) today announced results for the 3 months and 9 months ending 30 September 2013.

2013 Third Quarter & First Nine Months | Key Financial Performance Measures

                                                                 
€m      

YTD
2013

     

YTD(1)
2012

      change       Q3 2013      

Q3(1)
2012

      change      

Q2
2013

      change
                                               
Revenue €5,924 €5,510 8% €2,016 €1,830 10% €2,019 -
 
EBITDA before Exceptional Items and Share-based Payment (2) €815 €777 5% €303 €279 9% €271 12%
 
EBITDA Margin 13.8% 14.1% - 15.0% 15.2% - 13.4% -
 
Operating Profit before Exceptional Items €504 €483 4% €196 €180 9% €167 17%
 
Profit before Income Tax €231 €286 (19%) €104 €102 2% €70 49%
 
Basic EPS (cent) 56.1 81.8 (31%) 24.0 32.3 (26%) 17.7 36%
 
Pre-exceptional Basic EPS (cent) 74.5 70.0 6% 30.6 32.3 (5%) 24.1 27%
 
Return on Capital Employed(3) 12.6% 12.6% - 12.0% -
 
Free Cash Flow (4) €262 €164 60% €190 €118 61% €95 99%
                                                                 
                                                                 
Net Debt €2,630 €2,640 - €2,817 (7%)
 
Net Debt to EBITDA (LTM)                               2.5x       2.6x       -       2.7x       -
(1)     Comparative figures reflect the restatement to employee benefits under the revision of IAS 19, as set out in Note 7.
(2) EBITDA before exceptional items and share-based payment expense is denoted by EBITDA throughout the remainder of the management commentary for ease of reference. A reconciliation of profit for the period to EBITDA before exceptional items and share-based payment expense is set out on page 31.
(3) LTM pre-exceptional operating profit plus share of associates’ profit/average capital employed.
(4) Free cash flow is set out on page 8. The IFRS cash flow is set out on page 18.
 

Highlights

  • Revenue growth of 10% year-on-year in the third quarter
  • EBITDA of €303 million up 9% year-on-year
  • Year to date free cash flow of €262 million and net debt to EBITDA of 2.5x at 30 September 2013
  • Acquisition of UK speciality business ‘CRP’ in October 2013 highlights increased commitment to innovation and excellence in high end packaging
  • Redemption of €500 million 7.25% Senior Notes effective 4 November will further reduce cash interest cost by €30 million per annum improving earnings by 11 cent per share
  • Reflecting good European market conditions, €30 per tonne price increase announced for recycled grades from 1 November

Performance Review and Outlook

Gary McGann, Smurfit Kappa Group CEO, commented: “The Group is pleased to report EBITDA of €303 million in the quarter. The Americas has been a strong contributor to the EBITDA performance in the third quarter. While Europe’s performance has been somewhat weaker, it is showing sequential improvement with initial indications of pricing recovery. The Americas provides us with important geographic diversity of earnings and exposure to higher growth markets in the region.

Packaging volume growth has remained solid throughout the year, and European box volumes continue to grow ahead of the general market. Our volume performance reflects continuing gains in business areas where we work as a partner to our customers across their markets: rationalising their supply chains, removing costs and consistently developing innovative packaging that is both efficient for transport and an effective retail medium at the point of sale.

The Group’s European containerboard operations are experiencing solid demand for both recycled and kraftliner grades which is underpinning recent price increases. Reflecting good market conditions, the Group announced a recycled containerboard price increase of €30 per tonne for implementation from 1 November. The benefit from recent paper increases is only achieved in SKG’s integrated system when the price increases are pushed through to the box prices with the usual time lag.

In addition to the successful acquisition of the UK business CRP in October, the Group has delivered material progress on a number of financial initiatives in the quarter. Following the refinancing of our €1.375 billion Senior Credit Facility in July, we recently completed the redemption of our €500 million 7.25% Senior Notes due 2017. This redemption was funded from a combination of cash and existing credit facilities. These two transactions have significantly enhanced the Group’s credit profile and reduce cash interest costs by over €43 million per annum.

The Group’s objective is to sustain top line growth through economic pricing, accretive acquisitions and effective capital investment. SKG will also maintain its focus on delivering cost efficiencies through the system. Operating performance and on-going capital management have driven a net debt reduction of €187 million for the third quarter with a net debt to EBITDA ratio of 2.50x. SKG is on track to deliver the expected level of EBITDA growth in 2013. The strength of our capital structure today together with our expectation of materially improved free cash flow continues to expand the available range of options to deliver and to drive value from 2014.”

About Smurfit Kappa Group

Smurfit Kappa is one of the leading producers of paper-based packaging in the world, with around 41,000 employees in approximately 350 production sites across 32 countries and with sales revenue of €7.3 billion in 2012.

Innovation, service and pro-activity towards customers, using sustainable resources, is our primary focus. This focus is enhanced through us being an integrated producer, with our packaging plants sourcing the major part of their raw materials from our own paper mills. We are the European leader in paper-based packaging, operating in 21 countries selling products including corrugated, containerboard, bag-in-box, solidboard and solidboard packaging. We have a growing base in Eastern Europe in many of these product areas. We also have a key position in other product/market segments including graphicboard, MG paper and sack paper.

We are the only large scale pan regional player in the Americas, operating in 11 countries in total in North, Central and South America.

Forward Looking Statements

Some statements in this announcement are forward-looking. They represent expectations for the Group’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.

 
Contacts
 
Seamus Murphy     FTI Consulting
Smurfit Kappa Group

 

Tel: +353 1 202 71 80

Tel: +353 1 663 36 80

E-mail: ir@smurfitkappa.com

E-mail: smurfitkappa@fticonsulting.com

 

2013 Third Quarter & First Nine Months | Performance Overview

In the nine months to September the Group reported revenue of €5,924 million, up almost 8% year-on-year. EBITDA of €815 million is €38 million or 5% ahead of the same period last year. EBITDA margins at the end of the first nine months have recovered to 13.8% partially reflecting the benefit of improved containerboard pricing in Europe but particularly due to a strong performance in the Americas.

European corrugated pricing remained broadly unchanged in the third quarter. Given the rise in input costs, corrugated price increases will be implemented with the customary lag in order to recover paper price increases. Our overall European packaging volumes continue to perform well, with box volumes up 2% in the year to September on a same day basis. This growth has been sustained throughout the year despite the continuing macroeconomic uncertainty.

Box volume growth also reflects the value added element of packaging and the extensive service support that SKG offers to our customers which is being increasingly recognised and valued in the marketplace. Creative, innovative, ‘smart’ packaging delivers tangible benefits to our customers in the form of prominence on the shelf, cost reduction through their supply chain and the provision of increasingly recognised sustainability credentials.

The successful implementation of a €40 per tonne price increase in August has gone some way to addressing the unsustainable spreads in recycled containerboard. However, further price increases are necessary to return earnings from this grade to a long-term sustainable economic level. Reflecting good market conditions, the Group has announced a price increase of €30 per tonne effective from 1 November. Recovered fibre prices have stabilised at a relatively high level in the quarter, with October flat month-on-month.

The Group continues to benefit from its net long 500,000 tonne position in kraftliner, following strong pricing in the grade over the last 18 months. Recent strength in recycled containerboard pricing is actively bolstering kraftliner pricing and substitution pressure has substantially lessened as the spread between the two grades has reverted to historically normal levels. As a result demand remains good, whilst supply continues to be moderate.

The Americas performed well in the third quarter with a strong EBITDA of €98 million and an EBITDA margin of 19.7%. The region performed better year-on-year in EBITDA terms driven by a good performance in Venezuela, underlying corrugated growth of 3% in the region and the inclusion of SK Orange County (‘SKOC’) during the period. SKOC continues to perform well with the successful implementation of the April containerboard price increase into box prices.

In Venezuela, there is increased risk that a devaluation may occur in early 2014 and, consequently, the Group has updated its Principal Risks and Uncertainties which are set out on page 11, detailing the potential impact of a devaluation on the Group’s net assets and cash balance.

As a result of a consistent programme of debt paydown over the past number of years, and the more recent refinancing of the Group’s Senior Credit Facility (‘SCF’) on an unsecured basis, SKG has fundamentally re-positioned its capital structure to that of a corporate credit. On 4 November the Group redeemed its 7.25% Senior Notes due 2017, using cash and existing credit facilities. This transaction, combined with the SCF refinancing, substantially reduces cash interest costs by €43 million per annum and further improves SKG’s credit profile.

Following a period of debt paydown, the re-positioning of the Group’s credit profile and the cash generation in the business, SKG has now got a wider range of capital allocation options. In October 2013, the Group acquired CRP, a speciality business located in the UK. CRP is a retail ready packaging, litho-laminated, display and pre-print business that serves the high end value and quality market and its acquisition will increase the Group’s packaging footprint and capability in the UK. Where value accretive acquisitions are available, the primary focus of the acquisition strategy remains on higher growth regions such as Latin America and Eastern Europe.

2013 Third Quarter | Financial Performance

At €2,016 million, revenue in the third quarter of 2013 was 10% higher year-on-year whilst broadly in line with the second quarter. Underlying revenue increased by €143 million compared to the same period of the prior year, with 2013 revenue boosted by €112 million from acquisitions whilst negatively affected by a net €69 million in relation to currency movements and hyperinflationary adjustments, reflecting the relative strengthening of the euro.

The Group’s EBITDA for the quarter was €303 million, 9% higher than the third quarter of 2012, reflecting higher underlying earnings in the Americas year-on-year partially offset by lower earnings in Europe. EBITDA increased by €32 million when compared to the second quarter of 2013.

Basic earnings per share was 24.0 cent for the quarter to September 2013 (2012: 32.3 cent). Adjusting for exceptional items relating mainly to debt cost amortisation, pre-exceptional basic EPS in the third quarter was 30.6 cent per share. Pre-exceptional basic EPS in the third quarter 2012 was 32.3 cent with no exceptional items in the quarter.

2013 First Nine Months | Financial Performance

Revenue for the nine months rose by almost 8% from €5,510 million in 2012 to €5,924 million in 2013. The underlying move was an increase of €221 million with a revenue boost of €332 million in the year to date, negatively affected by currency and hyperinflationary movements of €139 million.

At €815 million, the Group’s EBITDA for the nine months to September 2013 was 5%, or €38 million, higher than the same period in 2012. Allowing for the contribution from the newly acquired SKOC and for currency and hyperinflationary movements, the underlying increase was €4 million with higher EBITDA in the Americas offset by lower EBITDA in Europe and higher Group centre costs.

Exceptional charges within operating profit in the year to date totalled €34 million, €15 million of which related to the earlier than scheduled closure of Townsend Hook to facilitate the re-build of the planned lightweight machine, and a further €16 million related to a currency trading loss as a result of the devaluation of the Venezuelan Bolivar in February 2013. In the same period in 2012, an exceptional gain of €28 million was included within operating profit made up of €10 million from the sale of land at SKG’s former Valladolid mill in Spain and €18 million relating to the disposal of a company in Slovakia.

Basic earnings per share was 56.1 cent for the first nine months of 2013 (2012: 81.8 cent). Adjusting for exceptional items in 2013 pre-exceptional basic EPS was 74.5 cent (2012: 70.0 cent).

2013 Third Quarter & First Nine Months | Free Cash Flow

Free cash flow amounted to €190 million in the third quarter of 2013 compared to €118 million in 2012. The increase of €72 million was driven mainly by a combination of higher EBITDA and a larger working capital inflow, partly offset by higher capital outflows (capital expenditure together with the move in capital creditors). At €262 million, our free cash flow for the nine months to September was €98 million higher than in 2012 with the increase reflecting higher EBITDA, a lower working capital outflow and lower cash interest, partly offset by lower proceeds from fixed asset sales.

Overall working capital has increased by €46 million in the first nine months, with a strong inflow of €70 million in the third quarter offsetting the outflow of €116 million to the half year. The outflow was primarily due to an increase in debtors and, to a lesser extent, stocks partly offset by an increase in creditors. The increase in 2013 arose primarily in Europe and reflected corrugated volume growth and the impact of the recycled containerboard price increases. At 30 September, working capital amounted to €634 million and represented 7.9% of annualised revenue compared to 9.0% at the same point in 2012.

Capital expenditure amounted to €218 million in the first nine months to September equalling 79% of depreciation, compared to €180 million and 69% in the first nine months of 2012. The Group expects to increase capital expenditure to approximately 100% of depreciation for the full year 2013.

Cash interest at €158 million for the nine months to September 2013 was €22 million lower than in 2012, reflecting the benefit of the Group’s refinancing activities throughout 2012 and 2013.

At €71 million in the first nine months of 2013 tax payments were €11 million lower than in 2012. The reduction in tax payments were spread relatively evenly between European and Americas operations. In Europe the absence of asset sales in 2013 contributed to lower cash taxes, whilst in the Americas an increase in tax payments due to the presence of SKOC for the first time in 2013 was largely offset by lower taxes elsewhere in the region primarily due to timing.

2013 Third Quarter & First Nine Months | Capital Structure

As a result of strong free cash flow in the quarter the Group has reduced net debt by €187 million to €2,630 million at September 2013, with a net debt to EBITDA ratio of 2.50 times. Consistently strong earnings from operations and proactive cash flow management have enabled the Group to reduce net debt by almost €500 million over the last three years, and fundamentally re-position its capital structure to that of an unsecured corporate profile.

Over the course of 2013 SKG has actively addressed aspects of its capital structure. In January 2013, the Group issued a €400 million seven-year bond at 4.125% which was used to re-pay existing term loans and facilitated the successful €1.375 billion SCF refinancing in July. The new five-year facility comprised a €750 million amortising term loan with a margin of 2.25% and a €625 million revolving credit facility with a margin of 2.00%, reduced from 3.75% and 3.25% respectively. Additionally, the Group put in place a five-year trade receivables securitisation programme of up to €175 million carrying a margin of 1.70%. Finally, on 4 November the Group completed the redemption of its €500 million 7.25% Senior Notes due 2017 utilising cash and existing credit facilities arranged as part of the SCF and trade receivables securitisation transactions.

As a result of the significant steps taken throughout 2013 the Group has substantially lowered its cost of capital and reduced its average interest rate from 6.2% at December 2012 to 5.0% at 30 September (pro forma for the November bond redemption), resulting in a reduction in cash interest costs of over €43 million per annum. At the same time, SKG’s average maturity profile has been maintained at a satisfactorily high level of 5.4 years at September 2013 on the same adjusted basis, and the Group’s improved credit profile will provide satisfactory access to capital markets throughout the cycle.

At the end of the third quarter, SKG had €694 million of cash on its balance sheet, available lines of €605 million under its revolving credit facility and €150 million under its new €175 million securitisation facility. On 4 November 2013, the Group utilised €220 million of its cash resources, €125 million of its revolver and €175 million of its securitisation facility (€25 million of which was drawn at the end of September) to fund the redemption of its 7.25% Senior Notes due 2017. Following the application of these funds the Group continues to maintain a very strong liquidity position.

SKG continues to view debt paydown as a value creating use of cash in the absence of more accretive investment opportunities. The Group has benefited significantly from capital structure refinancing since September 2012 and will continue to actively manage its debt portfolio. Supported by its strong capital structure and the continuing robust performance of its operations in driving strong free cash flows, the Group continues to target an upgrade to BB+ / Ba1 credit ratings.

2013 Third Quarter & First Nine Months | Operating efficiency

Commercial offering, innovation and sustainability

As the European market leader and the largest pan regional supplier in the Americas, SKG is uniquely placed to provide our customers with first class packaging solutions tailored to their increasingly demanding needs. Reflective of this, the Group’s pan European packaging business continues to experience significant progress with 4% volume growth in the first nine months of the year. The Group’s service culture supports consistent product innovation and the provision of tangible added value for our 64,000 customers worldwide, and SKG’s ability to drive cost reduction and retailing impact are increasingly regarded as defining key differentiators in the marketplace.

In October the Group was recognised as Sweden’s best packaging supplier at the Packaging Industry Awards, winning the top prize in the Packaging Converter category, and took first prize at the Scanstar awards. Scanstar is arranged by the Scandinavian Packaging Association, a coordinating body for the five Nordic countries' national packaging organisations. The Group has also been nominated for nine awards at the 2013 PPI Awards, many of which have an environmental and sustainability dimension, demonstrating our commitment to sustainability and social responsibility to each of our stakeholders.

In 2013, the Group increased the proportion of capital expenditure attributed to growth targeted customer facing investments, in the expectation of improving prospects across our markets. Positioning itself ahead of the market, the Group is investing throughout its packaging system with a focus on increasing colour and executing complex designs, whilst reducing costs. SKG’s €28 million greenfield bag-in-box plant in Ibi, Spain, is currently on schedule for completion in the third quarter of 2014 and will significantly enhance the Group’s delivery capabilities in this high growth, profitable market.

The Group is progressing well with its mill renovations in Townsend Hook (UK) and Roermond (the Netherlands) having completed the re-build of its Hoya recycled containerboard mill (Germany) in June. These two remaining projects with costs of €114 million and €39 million respectively and completion dates of fourth quarter of 2014 and first quarter of 2016, will greatly enhance the Group’s lightweight capabilities whilst materially reducing on-going operating costs.

Innovation Day 2013 and launch of the 3D Store Visualiser

On 26 September the Group hosted 175 customers at its fourth European Innovations Day in the Netherlands. The event is an important opportunity for SKG to showcase its premier designs and innovative packaging solutions from around the Group with Innovation and Sustainability awards adjudicated by our customers and sustainability experts. A similar event was held in Mexico City on 3 October which was attended by 60 customers from throughout the Americas region.

The European event was also used to formally launch SKG’s new 3D Store Visualiser which allows access to thousands of interchangeable optimisation scenarios, pictures, movies and live demos of customer specific packaging challenges on the shelf. The ability to study consumer behaviour in this controlled environment is a step further in Smurfit Kappa´s leadership in researching the optimisation of packaging design for our customers.

Cost Take-out Programme

The Group is progressing well against its 2013 cost take-out targets and confirms its expectations to deliver €100 million of cost take-out for the full year. Incremental cost take-out of €27 million was reported in the third quarter, bringing the year to date balance to €73 million.

Widely recognised as the only solution in combating inflation in input costs, the cost reduction programme has been a constant feature of SKG’s operational strategy since 2005. In the area of raw materials specifically, the Group has launched a series of projects targeting waste reduction throughout the corrugated plant network, whilst progressing with a flour based starch substitution project in its Roermond recycled containerboard mill in the Netherlands, which will substantially reduce Group starch costs.

2013 Third Quarter & First Nine Months | Regional Performance Review

Europe

European revenue in the third quarter rose by €45 million year-on-year as a result of higher containerboard pricing and in spite of negative currency movements and somewhat weaker corrugated pricing year-on-year. Containerboard price increases, against the backdrop of stable OCC prices, provided a basis for some EBITDA margin improvement in Europe with margins increasing quarter on quarter to 13.8%, but still lower than the prior year. Compression in corrugated margins in the quarter was due to the usual time lag in passing through price increases.

Shipments for Europe benefited from an additional working day in the third quarter. On a same day basis total corrugated volumes still increased by almost 2% in the quarter. Within this, the Group’s Polish, UK and Benelux corrugated operations performed strongly with adjusted volume growth of 10%, 7% and 4% respectively. In the year to September like-for-like box volumes have increased by 2% as a result of a mix of market share gains across the region and continued pan European business growth of 4% year-on-year. Sheet volumes, which account for less than 13% of total corrugated volumes, decreased by approximately 2% compared to the same period last year.

The industry successfully implemented a €40 per tonne recycled containerboard price increase in August following a sustained period of low margins and unacceptable returns. However, the market remained tight with European testliner inventories at the start of October at 473,000 tonnes, operating rates persisting at a high level and improved demand and a second round of price increases currently underway. SKG has announced a €30 per tonne increase effective from 1 November and is confident of a successful result given the supportive fundamentals in the grade.

Recovered fibre prices remained stable in the quarter and at a consistently high level throughout 2013. Industry commentators continue to believe that prices will trend upwards in coming years as global demand exceeds collection. This has been supported by events in 2013 to date, with a one million short ton addition to US recycled containerboard capacity, steady demand in Europe and a net increase in recycled containerboard capacity of approximately 600,000 tonnes in China outpacing growth in collection rates.

In kraftliner, the market has been performing well since the start of 2012 as a result of the closure of 7% of European production capacity and a decline in US imports year-on-year. Following price increases of €90 per tonne over the period, the grade came under some substitution pressure as a result of the increased spread to recycled containerboard. However, rising prices for testliner have reduced this spread to a more typical historical level of approximately €150 per tonne, at which level demand for the grade is robust. SKG is the European market leading producer of kraftliner with a net long 500,000 tonne position.

The Americas

In the Americas, revenue increased by €141 million and EBITDA by €35 million as a result of strong underlying volume and revenue growth throughout the region, in particular Venezuela, and the inclusion of the additional contribution from SKOC. An EBITDA margin of 19.7% is reported in the third quarter and 17.9% reported in the first nine months, within the historic range of margins for the region.

Colombian demand continues to show signs of recovery and corrugated volumes have grown by 2% within the market year to date, with strong growth in the country’s flower market. Pricing was slightly lower year-on-year due to short term competitive pressures. However, the successful resolution of the farmers strike in August and second quarter GDP figures which were 4% higher on the prior year indicate an improving business environment for the remainder of the year.

Mexico’s operations have performed well in the first nine months with 2% higher corrugated volumes in the year to date, improved pricing on 2012 levels and the delivery of synergy benefits between SK Mexico and SKOC operations. Within the country’s containerboard operations specifically, performance is ahead of the prior year as a result of improved volumes and the benefit of improving Mexican containerboard pricing.

In spite of Venezuela continuing to experience significant inflationary pressures, and shortages of basic goods, the business is performing well in the year to date, due to its strong position in this market, and a lack of one off issues which affected the corrugated operations in 2012.

In Argentina the domestic market continues to experience low growth levels and challenging economic conditions. However, SKG’s operations are performing satisfactorily, with year-on-year corrugated volume growth of 10% in the first nine months and progress in corrugated pricing despite relatively static containerboard pricing over the same period.

SKOC has performed very well over the course of the year and synergies are progressing in line with the Group’s increased expectations. In packaging the business is focused on gaining share in the higher value added box market at the expense of sheet volumes in order to add more value and enhance margins. Further initiatives underway include labour cost reduction, process automation, distribution optimisation and constant fibre usage reduction. The Forney recycled mill continues to run well and containerboard volumes year to date have increased by 4% on 2012 levels. Containerboard pricing has benefited from the improved conditions in the US containerboard market.

The region continues to provide access to higher growth markets in spite of some economic headwinds in recent months, and the Group has stated its intention to seek to grow its operations in the region to at least 30% of revenue by 2015. This fundamental re-alignment of the Group will be carried out through measured acquisitions in targeted geographies, and consistent organic growth. This is made possible by SKG’s unique position as the only large scale pan regional supplier in the region and its ability to leverage its global resources to drive future growth in the region.

Summary Cash Flow

Summary cash flows(1) for the third quarter and nine months are set out in the following table.

       

3 months to
30-Sep-13
€m

     

Restated
3 months to
30-Sep-12
€m

      

9 months to
30-Sep-13
€m

     

Restated
9 months to
30-Sep-12
€m
Pre-exceptional EBITDA       303       279       815       777
Exceptional items (7) - (24) -
Cash interest expense (50) (60) (158) (180)
Working capital change 70 6 (46) (91)
Current provisions (1) (2) (6) (8)
Capital expenditure (81) (54) (218) (180)
Change in capital creditors 3 (8) 6 (37)
Tax paid (34) (35) (71) (82)
Sale of fixed assets 1 2 2 13
Other (14)       (10)       (38)       (48)
Free cash flow 190 118 262 164
 
Share issues 1 8 5 13
Purchase of own shares - - (15) (13)
Sale of businesses and investments - - - 1
Purchase of investments - - (5) (7)
Dividends (1) (1) (51) (38)
Derivative termination payments -       -       -       (1)
Net cash inflow 190 125 196 119
 
Net debt/cash acquired/disposed - 1 (1) 1
Deferred debt issue costs amortised (19) (4) (31) (14)
Currency translation adjustments 16       23       (2)       6
Decrease in net debt 187       145       162       112

 

(1) The summary cash flow is prepared on a different basis to the Consolidated Statement of Cash Flows under IFRS. The principal difference is that the summary cash flow details movements in net debt while the IFRS cash flow details movements in cash and cash equivalents. In addition, the IFRS cash flow has different sub-headings to those used in the summary cash flow. A reconciliation of the free cash flow to cash generated from operations in the IFRS cash low is set out below.
           

 

     

 

               

9 months to
30-Sep-13
€m

     

9 months to
30-Sep-12
€m
Free cash flow 262 164
 
Add back: Cash interest 158 180
Capital expenditure (net of change in capital creditors) 212 217
Tax payments 71 82
Financing activities 2 -
Less: Sale of fixed assets (2) (13)
Profit on sale of assets and businesses – non exceptional (4) (4)
Dividends received from associates (1) (1)
Receipt of capital grants (1) -
Non-cash financing activities (4)       (12)
Cash generated from operations 693       613
 

Capital Resources

The Group's primary sources of liquidity are cash flow from operations and borrowings under the revolving credit facility. The Group's primary uses of cash are for debt service and capital expenditure.

At 30 September 2013, Smurfit Kappa Treasury Funding Limited had outstanding US$292.3 million 7.50% senior debentures due 2025. The Group had outstanding €200 million variable funding notes issued under the €250 million accounts receivable securitisation programme maturing in November 2015, together with €25 million variable funding notes issued under the €175 million accounts receivable securitisation programme maturing in April 2018.

Smurfit Kappa Acquisitions had outstanding €200 million 5.125% senior notes due 2018, US$300 million 4.875% senior notes due 2018, €400 million 4.125% senior notes due 2020 and €250 million senior floating rate notes due 2020. In addition, Smurfit Kappa Acquisitions had outstanding €500 million 7.25% senior notes due 2017 and €500 million 7.75% senior notes due 2019. Smurfit Kappa Acquisitions and certain subsidiaries are also party to a senior credit facility. At 30 September 2013, the Group’s senior credit facility comprised a €741 million amortising Term A facility maturing in 2018. In addition, as at 30 September 2013, the facility included a €625 million revolving credit facility which was substantially undrawn apart from €19.9 million under various ancillary facilities and letters of credit.

The following table provides the range of interest rates as of 30 September 2013 for each of the drawings under the various senior credit facility term loans.

BORROWING ARRANGEMENT       CURRENCY       INTEREST RATE
Term A Facility EUR 2.378% - 2.475%
USD 2.496%
 

Borrowings under the revolving credit facility are available to fund the Group's working capital requirements, capital expenditures and other general corporate purposes.

On 24 July 2013, the Group successfully completed a new five-year unsecured €1,375 million refinancing of its senior credit facility comprising a €750 million term loan with a margin of 2.25% and a €625 million revolving credit facility with a margin of 2.00%. The term loan is repayable €125 million on 24 July 2016, €125 million 24 July 2017 with the balance of €500 million repayable on the maturity date. In connection with the refinancing, the collateral securing the obligations under the Group’s various outstanding senior notes and debentures was also released and the senior notes and debentures are therefore now unsecured. The new unsecured senior credit facility is supported by substantially the same guarantee arrangements as the old senior credit facility. The existing senior notes and debentures likewise continue to have substantially similar guarantee arrangements as supported those instruments prior to the refinancing.

In addition, on 3 July 2013, the Group put in place a new five-year trade receivables securitisation programme of up to €175 million utilising the Group’s receivables in Austria, Belgium, Italy and the Netherlands. The programme, which has been arranged by Rabobank and carries a margin of 1.70%, complements the Group’s existing €250 million securitisation programme.

On 4 November 2013, the Group completed the redemption of its €500 million 7.25% senior notes due 2017, utilising cash and existing credit facilities arranged as part of the senior credit facility and trade receivables securitisation transactions.

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. As at 30 September 2013, the Group had fixed an average of 76% of its interest cost on borrowings over the following twelve months. This reduces to 64% pro forma for the redemption of the €500 million 7.25% senior notes due 2017.

The Group’s fixed rate debt comprised mainly €500 million 7.25% senior notes due 2017, €500 million 7.75% senior notes due 2019, €200 million 5.125% senior notes due 2018, US$300 million 4.875% senior notes due 2018 (US$50 million swapped to floating), €400 million 4.125% senior notes due 2020 and US$292.3 million 7.50% senior debentures due 2025. In addition the Group also has €610 million in interest rate swaps with maturity dates ranging from January 2014 to July 2014.

Market Risk and Risk Management Policies (continued)

The Group’s earnings are affected by changes in short-term interest rates as a result of its floating rate borrowings. If LIBOR interest rates for these borrowings increase by one percent, the Group’s interest expense would increase, and income before taxes would decrease, by approximately €10 million over the following twelve months. Interest income on the Group’s cash balances would increase by approximately €7 million assuming a one percent increase in interest rates earned on such balances over the following twelve months.

The Group uses foreign currency borrowings, currency swaps, options and forward contracts in the management of its foreign currency exposures.

Principal Risks and Uncertainties

Risk assessment and evaluation is an integral part of the management process throughout the Group. Risks are identified, evaluated and appropriate risk management strategies are implemented at each level.

The key business risks are identified by the senior management team. The Board in conjunction with senior management identifies major business risks faced by the Group and determines the appropriate course of action to manage these risks.

The principal risks and uncertainties faced by the Group were outlined in our 2013 interim report on page 17. The interim report is available on our website www.smurfitkappa.com.

The principal risks and uncertainties remain substantially the same for the near term except for the following:

  • The Group is exposed to currency exchange rate fluctuations and in addition, to currency exchange controls in Venezuela and Argentina. In February 2013, the Venezuelan government announced the devaluation of its currency, the Bolivar Fuerte, from VEF 4.3 per US dollar to VEF 6.3 per US dollar. As a result of the continuing political and economic environment in Venezuela, most economic commentators believe that there is a risk that a further devaluation to approximately VEF 10.0 per US dollar may occur in the early months of 2014. If the Venezuelan Bolivar were to be devalued to an exchange rate of VEF 10.0 per US dollar, the estimated effect on the Group‘s balance sheet as at 30 September 2013 would be to record a reduction in its net assets of approximately €133 million in relation to these operations and to record a reduction in its cash balances of €55 million.

Consolidated Income Statement – Nine Months

            Restated
9 months to 30-Sep-13 9 months to 30-Sep-12
Unaudited Unaudited
       

Pre-
exceptional
2013
€m

     

Exceptional
2013
€m

     

Total
2013
€m

     

Pre-
exceptional
2012
€m

      

Exceptional
2012
€m

      

Total
2012
€m
Revenue 5,924       -       5,924 5,510       -       5,510
Cost of sales (4,196)       (9)       (4,205)       (3,919)       -       (3,919)
Gross profit 1,728 (9) 1,719 1,591 - 1,591
Distribution costs (468) - (468) (434) - (434)
Administrative expenses (758) - (758) (699) - (699)
Other operating income 2 - 2 25 28 53
Other operating expenses -       (25)       (25)       -       -       -
Operating profit 504 (34) 470 483 28 511
Finance costs (241) (22) (263) (238) - (238)
Finance income 15 7 22 11 - 11
Share of associates’ profit (after tax) 2       -       2       2       -       2
Profit before income tax 280       (49) 231 258       28 286
Income tax expense (95) (96)
Profit for the financial period 136 190
 
Attributable to:
Owners of the parent 128 182
Non-controlling interests 8 8
Profit for the financial period 136 190
 

Earnings per share

Basic earnings per share - cent

56.1

81.8

Diluted earnings per share - cent

55.6

80.0

 

Consolidated Income Statement – Third Quarter

            Restated
3 months to 30-Sep-13 3 months to 30-Sep-12
Unaudited Unaudited
       

Pre-
exceptional 2013
€m

     

Exceptional
2013
€m

     

Total
2013
€m

     

Pre-
exceptional 2012
€m

      

Exceptional
2012
€m

      

Total
2012
€m
Revenue 2,016       -       2,016 1,830       -       1,830
Cost of sales (1,411)       -       (1,411)       (1,295)       -       (1,295)
Gross profit 605 - 605 535 - 535
Distribution costs (157) - (157) (144) - (144)
Administrative expenses (252) - (252) (235) - (235)
Other operating income - - - 24 - 24
Other operating expenses -       (1)       (1)       -       -       -
Operating profit 196 (1) 195 180 - 180
Finance costs (83) (16) (99) (80) - (80)
Finance income 7 - 7 2 - 2
Share of associates’ profit (after tax) 1       -       1       -       -       -
Profit before income tax 121       (17) 104 102       - 102
Income tax expense (45) (24)
Profit for the financial period 59 78
 
Attributable to:
Owners of the parent 55 73
Non-controlling interests 4 5
Profit for the financial period 59 78
 

Earnings per share

Basic earnings per share - cent

24.0

32.3

Diluted earnings per share - cent

23.8

31.6

 

Consolidated Statement of Comprehensive Income – Nine Months

       

9 months to
30-Sep-13
Unaudited
€m

     

9 months to
30-Sep-12
Unaudited
€m
           
Profit for the financial period 136       190
 
Other comprehensive income:
Items that may subsequently be reclassified to profit or loss
Foreign currency translation adjustments:
- Arising in the period (243) 91
- Recycled to Consolidated Income Statement on disposal of subsidiary - (17)
 
Effective portion of changes in fair value of cash flow hedges:
- Movement out of reserve 13 17
- New fair value adjustments into reserve (2) (6)
- Movement in deferred tax (2)       (1)
(234) 84
 
Items which will not be subsequently reclassified to profit or loss
Defined benefit pension plans:
- Actuarial loss (22) (136)
- Movement in deferred tax 2       22
(20) (114)
         
Total other comprehensive expense (254)       (30)
 
Total comprehensive (expense)/income for the financial period (118)       160
 
Attributable to:
Owners of the parent (94) 142
Non-controlling interests (24)       18
Total comprehensive (expense)/income for the financial period (118)       160

Consolidated Statement of Comprehensive Income – Third Quarter

     

3 months to
30-Sep-13
Unaudited
€m

     

Restated
3 months to
30-Sep-12
Unaudited
€m
             
 
Profit for the financial period 59       78
 
Other comprehensive income:
Items that may subsequently be reclassified to profit or loss
Foreign currency translation adjustments:
- Arising in the period (31) 4
 
Effective portion of changes in fair value of cash flow hedges:
- Movement out of reserve (1) 6
- New fair value adjustments into reserve 2 (1)
- Movement in deferred tax (1)       -
(31) 9
 
Items which will not be subsequently reclassified to profit or loss
Defined benefit pension plans:
- Actuarial loss (14) (68)
- Movement in deferred tax -       13
(14) (55)
         
Total other comprehensive expense (45)       (46)
 
Total comprehensive income for the financial period 14       32
 
Attributable to:
Owners of the parent 15 33
Non-controlling interests (1)       (1)
Total comprehensive income for the financial period 14       32
 

Consolidated Balance Sheet

     

30-Sep-13
Unaudited
€m

     

Restated
30-Sep-12
Unaudited
€m

      

Restated
31-Dec-12
Unaudited
€m
                   
ASSETS
Non-current assets
Property, plant and equipment 2,937 2,958 3,076
Goodwill and intangible assets 2,300 2,253 2,336
Available-for-sale financial assets 33 32 33
Investment in associates 16 16 16
Biological assets 109 123 127
Trade and other receivables 5 4 4
Derivative financial instruments - 7 1
Deferred income tax assets 177       162       191
5,577       5,555       5,784
Current assets
Inventories 728 698 745
Biological assets 10 11 6
Trade and other receivables 1,497 1,472 1,422
Derivative financial instruments 7 9 10
Restricted cash 10 11 15
Cash and cash equivalents 684       1,219       447
2,936       3,420       2,645
Total assets 8,513       8,975       8,429
 
EQUITY
Capital and reserves attributable to the owners of the parent
Equity share capital - - -
Share premium 1,977 1,958 1,972
Other reserves 246 472 444
Retained earnings 15       (263)       (159)
Total equity attributable to the owners of the parent 2,238 2,167 2,257
Non-controlling interests 197       209       212
Total equity 2,435       2,376       2,469
 
LIABILITIES
Non-current liabilities
Borrowings 3,235 3,193 3,188
Employee benefits 736 776 738
Derivative financial instruments 68 70 65
Deferred income tax liabilities 201 208 211
Non-current income tax liabilities 15 12 15
Provisions for liabilities and charges 49 57 57
Capital grants 11 12 12
Other payables 9       8       9
4,324       4,336       4,295
Current liabilities
Borrowings 89 677 66
Trade and other payables 1,596 1,518 1,534
Current income tax liabilities 19 21 4
Derivative financial instruments 37 35 43
Provisions for liabilities and charges 13       12       18
1,754       2,263       1,665
Total liabilities 6,078       6,599       5,960
Total equity and liabilities 8,513       8,975       8,429
 

Consolidated Statement of Changes in Equity

      Restated
Attributable to the owners of the parent      

Non-
controlling
interests

€m

     

Total
equity
€m

       

Equity
share
capital
€m

     

Share
premium
€m

     

Other
reserves
€m

     

Retained
earnings
€m

     

Total
€m

           
Unaudited                        
At 1 January 2013 - 1,972 444 (159) 2,257 212 2,469
 
Profit for the financial period - - - 128 128 8 136
Other comprehensive income
Foreign currency translation adjustments - - (211) - (211) (32) (243)
Defined benefit pension plans - - - (20) (20) - (20)
Effective portion of changes in fair value of cash flow hedges -       -       9       -       9       -       9
Total comprehensive (expense)/income for the financial period -       -       (202)       108       (94)       (24)       (118)
 
Shares issued - 5 - - 5 - 5
Hyperinflation adjustment - - - 113 113 13 126
Dividends paid - - - (47) (47) (4) (51)
Share-based payment - - 19 - 19 - 19
Shares acquired by SKG Employee Trust -       -       (15)       -       (15)       -       (15)
At 30 September 2013 -       1,977       246       15       2,238       197       2,435
 
At 1 January 2012 - 1,945 391 (340) 1,996 191 2,187
 
Profit for the financial period - - - 182 182 8 190
Other comprehensive income
Foreign currency translation adjustments - - 64 - 64 10 74
Defined benefit pension plans - - - (114) (114) - (114)
Effective portion of changes in fair value of cash flow hedges -       -       10       -       10       -       10
Total comprehensive income for the financial period -       -       74       68       142       18       160
 
Shares issued - 13 - - 13 - 13
Hyperinflation adjustment - - - 42 42 5 47
Dividends paid - - - (33) (33) (5) (38)
Share-based payment - - 20 - 20 - 20
Shares acquired by SKG Employee Trust -       -       (13)       -       (13)       -       (13)
At 30 September 2012 -       1,958       472       (263)       2,167       209       2,376
 

An analysis of the movements in Other Reserves is provided in Note 13.

 

Consolidated Statement of Cash Flows

           

 

9 months to
30-Sep-13
Unaudited
€m

Restated
9 months to

30-Sep-12
Unaudited
€m
             
Cash flows from operating activities
Profit before income tax 231 286
 
Net finance costs 241 227
Depreciation charge 256 243
Impairment of assets 9 -
Amortisation of intangible assets 17 15
Amortisation of capital grants (2) (1)
Share-based payment expense 19 20
Profit on purchase/sale of assets and businesses (5) (29)
Share of associates’ profit (after tax) (2) (2)
Net movement in working capital (47) (105)
Change in biological assets 19 16
Change in employee benefits and other provisions (39) (61)
Other (4)       4
Cash generated from operations 693 613
Interest paid (143) (169)
Income taxes paid:
Irish corporation tax paid (2) -
Overseas corporation tax (net of tax refunds) paid (69)       (82)
Net cash inflow from operating activities 479       362
 
Cash flows from investing activities
Interest received 4 5
Additions to property, plant and equipment and biological assets (207) (211)
Additions to intangible assets (5) (5)
Receipt of capital grants 1 -
Decrease in restricted cash 5 1
Disposal of property, plant and equipment 6 17
Dividends received from associates 1 1
Purchase of subsidiaries and non-controlling interests (3) (5)
Deferred consideration paid (3)       (1)
Net cash outflow from investing activities (201)       (198)
 
Cash flows from financing activities
Proceeds from issue of new ordinary shares 5 13
Proceeds from bond issuance 400 688
Purchase of own shares (15) (13)
Increase in interest-bearing borrowings 67 -
Payment of finance leases (4) (6)
Repayment of borrowings (391) (416)
Derivative termination payments - (1)
Deferred debt issue costs (24) (23)
Dividends paid to shareholders (47) (33)
Dividends paid to non-controlling interests (4)       (5)
Net cash (outflow)/inflow from financing activities (13)       204
Increase in cash and cash equivalents 265       368
 
Reconciliation of opening to closing cash and cash equivalents
Cash and cash equivalents at 1 January 423 825
Currency translation adjustment (26) 9
Increase in cash and cash equivalents 265       368
Cash and cash equivalents at 30 September 662       1,202
 

An analysis of the Net Movement in Working Capital is provided in Note 11.

1. General Information

Smurfit Kappa Group plc (‘SKG plc’ or ‘the Company’) and its subsidiaries (together ‘SKG’ or ‘the Group’) manufacture, distribute and sell containerboard, corrugated containers and other paper-based packaging products such as solidboard and graphicboard. The Company is a public limited company whose shares are publicly traded. It is incorporated and tax resident in Ireland. The address of its registered office is Beech Hill, Clonskeagh, Dublin 4, Ireland.

2. Basis of Preparation

The annual consolidated financial statements of SKG plc are prepared in accordance with International Financial Reporting Standards (‘IFRS’) issued by the International Accounting Standards Board (‘IASB’) and adopted by the European Union (‘EU’); and, in accordance with Irish law.

The financial information presented in this report has been prepared in accordance with the Transparency Regulations requirement to publish an interim management statement during the second six months of the financial year. The Transparency Regulations do not require interim management statements to be prepared in accordance with International Accounting Standard 34, Interim Financial Information, (‘IAS 34’). Accordingly the Group has not prepared this financial information in accordance with IAS 34.

The financial information has been prepared in accordance with the Group’s accounting policies. Full details of the accounting policies adopted by the Group are contained in the financial statements included in the Group’s Annual Report for the year ended 31 December 2012 which is available on the Group’s website www.smurfitkappa.com. The accounting policies and methods of computation and presentation adopted in the preparation of the Group financial information are consistent with those described and applied in the Annual Report for the financial year ended 31 December 2012 with the exception of the standards described below.

IAS 19 Revised

The IASB has issued a number of amendments to IAS 19, Employee Benefits, which became effective for the Group from 1 January 2013. The main effect on the Group financial statements stems from the removal of the concept of expected return on plan assets. As a result the expected return on plan assets is now calculated using the same discount rate as that used to determine the present value of plan liabilities. The difference between the implied return and the actual return on assets is recognised in other comprehensive income. As required, the amendments have been applied retrospectively in accordance with IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors. The effects of the restatement of prior period financial information are detailed in Note 7.

Amendments to IAS 1

The amended IAS 1, Presentation of Financial Statements, requires the grouping of items of other comprehensive income that may be reclassified to profit or loss at a future point in time separately from those items which will never be reclassified. The revised standard, which has been adopted by the Group with effect from 1 January 2013, affects presentation only and does not impact the Group’s financial position or performance.

There are a number of other changes to IFRS issued and effective from 1 January 2013 which include IFRS 10, Consolidated Financial Statements, IFRS 11, Joint Arrangements, IFRS 12, Disclosure of Interests in Other Entities, IFRS 13, Fair Value Measurement, IAS 27, Separate Financial Statements, and IAS 28, Investments in Associates and Joint Ventures. They either do not have an effect on the consolidated financial statements or they are not currently relevant for the Group.

The condensed interim Group financial information includes all adjustments that management considers necessary for a fair presentation of such financial information. All such adjustments are of a normal recurring nature. Some tables in this report may not add precisely due to rounding.

2. Basis of Preparation (continued)

The condensed interim Group financial information presented does not constitute full group accounts within the meaning of Regulation 40(1) of the European Communities (Companies: Group Accounts) Regulations, 1992 of Ireland insofar as such group accounts would have to comply with all of the disclosure and other requirements of those Regulations. Full Group accounts for the year ended 31 December 2012 have been filed with the Irish Registrar of Companies. The audit report on those Group accounts was unqualified.

3. Segmental Analyses

The Group has determined reportable operating segments based on the manner in which reports are reviewed by the chief operating decision maker (‘CODM’). The CODM is determined to be the executive management team in assessing performance, allocating resources and making strategic decisions. Prior to the acquisition of Orange County Container Group (‘OCCG’), the two business segments identified were Europe and Latin America. Because of the high level of integration between OCCG and our existing operations in Mexico, OCCG was included with our existing Latin American operations which were renamed as the Americas. OCCG has been renamed as Smurfit Kappa Orange County (‘SKOC’).

The Europe segment is highly integrated. It includes a system of mills and plants that primarily produces a full line of containerboard that is converted into corrugated containers. The Americas segment comprises all forestry, paper, corrugated and folding carton activities in a number of Latin American countries and the operations of SKOC. Inter-segment revenue is not material. No operating segments have been aggregated for disclosure purposes.

Segment disclosures are based on operating segments identified under IFRS 8. Segment profit is measured based on earnings before interest, tax, depreciation, amortisation, exceptional items and share-based payment expense (‘EBITDA before exceptional items’). Segment assets consist primarily of property, plant and equipment, biological assets, goodwill and intangible assets, inventories, trade and other receivables, deferred income tax assets and cash and cash equivalents. Group centre assets are comprised primarily of available-for-sale financial assets, derivative financial assets, deferred income tax assets, cash and cash equivalents and restricted cash.

           

 

9 months to 30-Sep-13

Restated
9 months to 30-Sep-12
       

Europe
€m

     

The
Americas
€m

     

Total
€m

     

Europe
€m

      

The
Americas
€m

      

Total
€m
Revenue and Results                        
Revenue 4,475       1,449       5,924       4,478       1,032       5,510
 
EBITDA before exceptional items 580 259 839 641 160 801
Segment exceptional items (6)       (19)       (25)       28       -       28
EBITDA after exceptional items 574       240 814 669       160 829
 
Unallocated centre costs (24) (24)
Share-based payment expense (19) (20)
Depreciation and depletion (net) (275) (259)
Amortisation (17) (15)
Impairment of assets (9) -
Finance costs (263) (238)
Finance income 22 11
Share of associates’ profit (after tax) 2 2
Profit before income tax 231 286
Income tax expense (95) (96)
Profit for the financial period 136 190
 
Assets
Segment assets 6,091 1,845 7,936 6,199 1,626 7,825
Investments in associates 2       14 16 2       14 16
Group centre assets 561 1,134
Total assets 8,513 8,975
 

3. Segmental Analyses (continued)

           

 

3 months to 30-Sep-13

Restated
3 months to 30-Sep-12
       

Europe
€m

     

The
Americas
€m

     

Total
€m

     

Europe
€m

      

The
Americas
€m

      

Total
€m
Revenue and Results                        
Revenue 1,519       497       2,016       1,474       356       1,830
 
EBITDA before exceptional items 209 98 307 225 63 288
Segment exceptional items -       (1)       (1)       -       -       -
EBITDA after exceptional items 209       97 306 225       63 288
 
Unallocated centre costs (4) (9)
Share-based payment expense (7) (6)
Depreciation and depletion (net) (94) (88)
Amortisation (6) (5)
Finance costs (99) (80)
Finance income 7 2
Share of associates’ profit (after tax) 1 -
Profit before income tax 104 102
Income tax expense (45) (24)
Profit for the financial period 59 78
 

4. Exceptional Items

The following items are regarded as exceptional in nature:

     

9 months to
30-Sep-13
€m

     

9 months to
30-Sep-12
€m
           
 
Gain on disposal of assets and operations - 28
Currency trading loss on Venezuelan Bolivar devaluation (16) -
Impairment loss on property, plant and equipment (9) -
Reorganisation and restructuring costs (7) -
Business acquisition costs (2)       -
Exceptional items included in operating profit (34)       28
 
Exceptional finance cost (22) -
Exceptional finance income 7       -
Exceptional items included in net finance costs (15)       -
 

Exceptional items charged within operating profit in the nine months to 30 September 2013 amounted to €34 million, €15 million of which related to the temporary closure of the Townsend Hook mill in the UK (comprising an impairment charge of €9 million and reorganisation and restructuring costs of €6 million). A further €1 million of reorganisation costs related to the consolidation of the Group’s two plants in Juarez, Mexico, into one plant. A currency trading loss of €16 million was recorded as a result of the devaluation of the Venezuelan Bolivar in February 2013, comprising €12 million booked in the first quarter and an adjustment of €4 million for hyperinflation and re-translation at the 30 September exchange rate. The original loss reflected the higher cost to the Venezuelan operations of discharging its non-Bolivar denominated net payables following the devaluation. Business acquisition costs of €2 million related to the acquisition of SKOC.

4. Exceptional Items (continued)

Exceptional finance costs in the nine months to 30 September 2013 comprised a charge of €22 million in respect of the accelerated amortisation of debt issue costs relating to the senior credit facility, following its early repayment. In the first quarter, a charge of €6 million was booked following the repayment of part of the facility from the proceeds of January’s €400 million bond issue. A further charge of €16 million was booked in the third quarter as a result of the repayment of the remainder of the facility, following its refinancing.

Exceptional finance income in the nine months to 30 September 2013 amounted to €7 million and comprised a gain of €6 million in Venezuela on the value of US dollar denominated intra-group loans following the devaluation of the Bolivar and an additional €1 million due to its subsequent adjustment for hyperinflation and re-translation.

In 2012, the Group reported an exceptional gain of €28 million in relation to the disposal of assets and operations. This comprised €10 million in respect of the sale of land at SKG’s former Valladolid mill in Spain (operation closed in 2008), together with €18 million relating to the disposal of a company in Slovakia. This gain primarily related to the reclassification (under IFRS) of the cumulative translation differences from the Consolidated Statement of Comprehensive Income to the Consolidated Income Statement.

5. Finance Cost and Income

           

9 months to
30-Sep-13
€m

Restated
9 months to
30-Sep-12
€m
             
Finance cost:
Interest payable on bank loans and overdrafts 56 97
Interest payable on finance leases and hire purchase contracts - 1
Interest payable on other borrowings 114 102
Exceptional finance costs associated with debt restructuring 22 -
Unwinding discount element of provision 1 1
Foreign currency translation loss on debt 4 5
Fair value loss on derivatives not designated as hedges 5 1
Net interest cost on net pension liability 20 22
Net monetary loss - hyperinflation 41       9
Total finance cost 263       238
 
Finance income:
Other interest receivable (4) (5)
Foreign currency translation gain on debt (8) (4)
Exceptional foreign currency translation gain (7) -
Fair value gain on derivatives not designated as hedges (3)       (2)
Total finance income (22)       (11)
Net finance cost 241       227
 

6. Income Tax Expense

Income tax expense recognised in the Consolidated Income Statement

           

9 months to
30-Sep-13
€m

Restated
9 months to
30-Sep-12
€m
             
Current tax:
Europe 36 40
The Americas 49       28
85 68
Deferred tax 10       28
Income tax expense 95       96
 
Current tax is analysed as follows:
Ireland 4 3
Foreign 81       65
85       68
 

Income tax recognised in the Consolidated Statement of Comprehensive Income

     

9 months to
30-Sep-13
€m

     

Restated
9 months to
30-Sep-12
€m
             
Arising on actuarial loss on defined benefit plans (2) (22)
Arising on qualifying derivative cash flow hedges 2       1
-       (21)
 

While the income tax expense is broadly unchanged in total year-on-year, there are a number of underlying offsetting items including a change in the geographical mix of earnings and the presence of SKOC in 2013 only. In 2013 there have been lower asset sales and increased exceptional expense which have contributed to lower taxable profits compared to 2012. The deferred tax expense also includes a net credit from the additional recognition of accumulated tax losses.

There is a tax credit associated with exceptional items in 2013 of €7 million compared to a €2 million tax expense in 2012.

7. Employee Benefits – Defined Benefit Plans

The table below sets out the components of the defined benefit cost for the period:

     

9 months to
30-Sep-13
€m

     

Restated
9 months to
30-Sep-12
€m
             
 
Current service cost 39 25
Past service cost 1 -
Gain on curtailment - (12)
Net interest cost on net pension liability 20       22
Defined benefit cost 60       35
 

Included in cost of sales, distribution costs and administrative expenses is a defined benefit cost of €40 million (2012: €13 million). Net interest cost on net pension liability of €20 million (2012: €22 million) is included in finance costs in the Consolidated Income Statement.

The amounts recognised in the Consolidated Balance Sheet were as follows:

           

30-Sep-13
€m

Restated
31-Dec-12
€m
             
Present value of funded or partially funded obligations (1,835) (1,832)
Fair value of plan assets 1,597       1,598
Deficit in funded or partially funded plans (238) (234)
Present value of wholly unfunded obligations (498)       (504)
Net pension liability (736)       (738)

The employee benefits provision has decreased from €738 million at 31 December 2012 to €736 million at 30 September 2013.

Restatement of prior periods in accordance with IAS 19

The Group adopted IAS 19 (as revised) from 1 January 2013. In accordance with the previous version of IAS 19, the Consolidated Income Statement included an interest cost based on present value calculations of projected pension payments and finance income based on the expected rates of income generated by plan assets. Generally the rate of expected income on plan assets exceeded the discount rate used in calculating the interest cost. Under the revised standard the interest cost and expected return on plan assets have been replaced with a net interest amount and the rate of return on plan assets is calculated using the same discount rate as that used to determine the present value of plan liabilities. The difference between the lower rate of return on plan assets and the actual return on assets is recognised in other comprehensive income, largely offsetting the higher net interest cost in the income statement. There are other minor changes which the Group have allowed for but they do not have a material effect on the financial statements.

The revised standard has been applied retrospectively in accordance with the transitional provisions of the standard, resulting in the adjustment of prior year financial information. The effects of adoption on previously reported financial information are shown in the following table.

7. Employee Benefits – Defined Benefit Plans (continued)

     

 

     

 

     

 

       

Previously
reported
€m

     

Adjustments
€m

     

Restated
€m

 
As at 1 January 2012
Employee benefits - non-current liabilities 655 1 656
Provisions for liabilities and charges - non-current
liabilities 55 (2) 53
Deferred income tax assets 177 - 177
Retained earnings       (341)       1       (340)
 
As at and for the year ended 31 December 2012
Employee benefits - non-current liabilities 737 1 738
Provisions for liabilities and charges - non-current liabilities 59 (2) 57
Deferred income tax assets 191 - 191
Retained earnings       (160)       1       (159)
Cost of sales (5,238) (2) (5,240)
Administrative expenses (938) (2) (940)
Finance costs (399) 71 (328)
Finance income 93 (79) 14
Profit before income tax 331 (12) 319
Income tax expense (71) 3 (68)
Profit for the financial year 260 (9) 251
 
Attributable to owners of the parent 249 (9) 240
 
Basic earnings per share - cent 111.2 (4.3) 106.9
Diluted earnings per share - cent       108.3       (4.1)       104.2
Other comprehensive income
Defined benefit pension plans:
- Actuarial loss (108) 12 (96)
- Movement in deferred tax       19       (3)       16
 
As at and for the nine months ended 30 September 2012
Employee benefits - non-current liabilities 775 1 776
Provisions for liabilities and charges - non-current liabilities 59 (2) 57
Deferred income tax assets 162 - 162
Retained earnings       (264)       1       (263)
Cost of sales (3,917) (2) (3,919)
Administrative expenses (698) (1) (699)
Finance costs (292) 54 (238)
Finance income 71 (60) 11
Profit before income tax 295 (9) 286
Income tax expense (98) 2 (96)
Profit for the financial period 197 (7) 190
 
Attributable to owners of the parent 189 (7) 182
 
Basic earnings per share - cent 84.9 (3.1) 81.8
Diluted earnings per share - cent       83.1       (3.1)       80.0
Other comprehensive income
Defined benefit pension plans:
- Actuarial loss (145) 9 (136)
- Movement in deferred tax       24       (2)       22
 

8. Earnings Per Share

Basic

Basic earnings per share is calculated by dividing the profit attributable to the owners of the parent by the weighted average number of ordinary shares in issue during the period.

     

9 months to
30-Sep-13

     

Restated
9 months to
30-Sep-12
             
Profit attributable to the owners of the parent (€ million) 128 182
 
Weighted average number of ordinary shares in issue (million) 229 223
 
Basic earnings per share (cent) 56.1       81.8
 

Diluted

Diluted earnings per share is calculated by adjusting the weighted average number of ordinary shares outstanding to assume conversion of all dilutive potential ordinary shares which comprise convertible shares issued under the management equity plans.

     

9 months to
30-Sep-13

     

Restated
9 months to
30-Sep-12
             
Profit attributable to the owners of the parent (€ million) 128 182
 
Weighted average number of ordinary shares in issue (million) 229 223
Potential dilutive ordinary shares assumed (million) 2       5
Diluted weighted average ordinary shares (million) 231       228
 
Diluted earnings per share (cent) 55.6       80.0
 

Pre-exceptional

     

9 months to
30-Sep-13

     

Restated
9 months to
30-Sep-12
             
Profit attributable to the owners of the parent (€ million) 128 182
Exceptional items included in profit before income tax (Note 4) (€ million) 49 (28)
Income tax on exceptional items (€ million) (7)       2
Pre-exceptional profit attributable to the owners of the parent (€ million) 170       156
 
Weighted average number of ordinary shares in issue (million) 229 223
 
Pre-exceptional basic earnings per share (cent) 74.5       70.0
 
Diluted weighted average ordinary shares (million) 231 228
 
Pre-exceptional diluted earnings per share (cent) 73.8       68.5
 

9. Dividends

In May, the final dividend for 2012 of 20.5 cent per share was paid to the holders of ordinary shares. In October, an interim dividend for 2013 of 10.25 cent per share was paid to the holders of ordinary shares.

10. Property, Plant and Equipment

     

 

     

 

     

 

       

Land and
buildings
€m

     

Plant and
equipment
€m

     

Total
€m

Nine months ended 30 September 2013
Opening net book amount 1,119 1,957 3,076
Reclassifications 29 (37) (8)
Additions 5 193 198
Acquisitions - 1 1
Depreciation charge for the period (37) (219) (256)
Impairments (2) (7) (9)
Retirements and disposals (1) (1) (2)
Hyperinflation adjustment 28 28 56
Foreign currency translation adjustment (52)       (67)       (119)
At 30 September 2013 1,089       1,848       2,937
Year ended 31 December 2012
Opening net book amount 1,115 1,858 2,973
Reclassifications 10 (15) (5)
Additions 13 247 260
Acquisitions 1 118 119
Depreciation charge for the year (44) (288) (332)
Retirements and disposals (5) (2) (7)
Hyperinflation adjustment 17 19 36
Foreign currency translation adjustment 12       20       32
At 31 December 2012 1,119       1,957       3,076
 

11. Net Movement in Working Capital

     

9 months to
30-Sep-13
€m

     

9 months to
30-Sep-12
€m
             
 
Change in inventories (19) 5
Change in trade and other receivables (130) (123)
Change in trade and other payables 102       13
Net movement in working capital (47)       (105)
 

12. Analysis of Net Debt

       

30-Sep-13
€m

     

31-Dec-12
€m

Senior credit facility:            
Revolving credit facility(1) – interest at relevant interbank rate + 3.25% - (7)
Tranche B term loan(2a) – interest at relevant interbank rate + 3.625% - 550
Tranche C term loan(2b) – interest at relevant interbank rate + 3.875% - 556
Unsecured senior credit facility:
Revolving credit facility B (3) – interest at relevant interbank rate + 2%(7) (7) -
Term facility A(4) – interest at relevant interbank rate + 2.25%(7) 741 -
US$292.3 million 7.50% senior debentures due 2025 (including accrued interest) 221 222
Bank loans and overdrafts 74 65
Cash (694) (462)
2015 receivables securitisation variable funding notes 198 197
2018 receivables securitisation variable funding notes 23 -
€500 million 7.25% senior notes due 2017 (including accrued interest) 503 492
2018 senior notes (including accrued interest) (5) 413 423
€500 million 7.75% senior notes due 2019 (including accrued interest) 504 494
€400 million 4.125% senior notes due 2020 (including accrued interest) 396 -
€250 million senior floating rate notes due 2020 (including accrued interest)(6) 247       247
Net debt before finance leases 2,619 2,777
Finance leases 4       8
Net debt including leases 2,623 2,785
Balance of revolving credit facility reclassified to debtors 7       7
Net debt after reclassification 2,630       2,792
 
(1)     Revolving credit facility (‘RCF’) of €525 million (available under the senior credit facility) to be repaid in 2016.    
This was repaid on 24 July 2013.
(2a) Tranche B term loan due to be repaid in 2016.
€193.9 million prepaid January - April 2013. The remaining loans were fully repaid on 24 July 2013 from the proceeds of the unsecured senior credit facility.
(2b) Tranche C term loan due to be repaid in full in 2017.
€197.1 million prepaid January - April 2013. The remaining loans were fully repaid on 24 July 2013 from the proceeds of the unsecured senior credit facility.
(3) Revolving credit facility B ('RCF B') of €625 million (available under the unsecured senior credit facility) to be repaid in 2018.
(a) Revolver loans - nil, (b) drawn under ancillary facilities and facilities supported by letters of credit - nil and (c) other operational facilities including letters of credit €19.9 million.
(4) Facility A term loan (‘Facility A’) due to be repaid in certain instalments from 2016 to 2018.
(5) €200 million 5.125% senior notes due 2018 and US$300 million 4.875% senior notes due 2018.
(6) Interest at EURIBOR + 3.5%.
(7) The margins applicable to the unsecured senior credit facility are determined as follows:
          Net debt/EBITDA ratio               RCF B       Facility A
 
Greater than 3.0 : 1 2.50% 2.75%
3.0 : 1 or less but more than 2.5 : 1 2.00% 2.25%
2.5 : 1 or less but more than 2.0 : 1 1.75% 2.00%
2.0 : 1 or less 1.50% 1.75%
 

13. Other Reserves

Other reserves included in the Consolidated Statement of Changes in Equity are comprised of the following:

     

 

     

 

     

 

     

 

     

 

     

 

     

 

       

Reverse
acquisition
reserve
€m

     

Cash
flow
hedging
reserve
€m

     

Foreign
currency
translation
reserve
€m

     

Share-
based
payment
reserve
€m

     

Own
shares
€m

     

Available-
for-sale
reserve
€m

     

Total
€m

 
At 1 January 2013 575 (26) (198) 105 (13) 1 444
Other comprehensive income
Foreign currency translation adjustments - - (211) - - - (211)
Effective portion of changes in fair value of cash flow hedges -       9       -       -       -       -       9
Total other comprehensive income/(expense) -       9       (211)       -       -       -       (202)
 
Share-based payment - - - 19 - - 19
Shares acquired by SKG Employee Trust -       -       -       -       (15)       -       (15)
At 30 September 2013 575       (17)       (409)       124       (28)       1       246
 
 
At 1 January 2012 575 (35) (228) 79 - - 391
Other comprehensive income
Foreign currency translation adjustments - - 64 - - - 64
Effective portion of changes in fair value of cash flow hedges -       10       -       -       -       -       10
Total other comprehensive income -       10       64       -       -       -       74
 
Share-based payment - - - 20 - - 20
Shares acquired by SKG Employee Trust -       -       -       -       (13)       -       (13)
At 30 September 2012 575       (25)       (164)       99       (13)       -       472
 

14. Venezuela

Hyperinflation

As discussed more fully in the Group’s 2012 annual report, Venezuela became hyperinflationary during 2009 when its cumulative inflation rate for the past three years exceeded 100%. As a result, the Group applied the hyperinflationary accounting requirements of IAS 29 – Financial Reporting in Hyperinflationary Economies to its Venezuelan operations at 31 December 2009 and for all subsequent accounting periods.

The index used to reflect current values is derived from a combination of Banco Central de Venezuela’s National Consumer Price Index from its initial publication in December 2007 and the Consumer Price Index for the metropolitan area of Caracas for earlier periods. The level of and movement in the price index at September 2013 and 2012 are as follows:

        30-Sep-13       30-Sep-12
Index at period end       442.3       296.1
Movement in period       38.7%       11.5%

14. Venezuela (continued)

As a result of the entries recorded in respect of hyperinflationary accounting under IFRS, the Consolidated Income Statement is impacted as follows: Revenue €28 million increase (2012: €10 million increase), pre-exceptional EBITDA €5 million increase (2012: €4 million decrease) and profit after taxation €62 million decrease (2012: €31 million decrease). In 2013, a net monetary loss of €41 million (2012: €9 million loss) was recorded in the Consolidated Income Statement. The impact on our net assets and our total equity is an increase of €70 million (2012: €17 million increase).

Devaluation

On 8 February 2013, the Venezuelan government announced the devaluation of its currency, the Bolivar Fuerte and the termination of the SITME transaction system. The official exchange rate was changed from VEF 4.3 per US dollar to VEF 6.3 per US dollar. As a result of the devaluation the Group recorded a reduction in net assets of approximately €142 million in relation to these operations and a reduction in the euro value of the Group’s cash balances of €28 million.

As a result of the continuing political and economic environment in Venezuela, most economic commentators believe that there is a risk that a further devaluation to approximately VEF 10.0 per US dollar may occur in the early months of 2014. If the Venezuelan Bolivar were to be devalued to an exchange rate of VEF 10.0 per US dollar, the estimated effect on the Group‘s balance sheet as at 30 September 2013 would be to record a reduction in its net assets of approximately €133 million in relation to these operations and to record a reduction in its cash balances of €55 million.

15. Post Balance Sheet Events

On 4 November 2013, the Group completed the redemption of its €500 million 7.25% senior notes due 2017, utilising cash and existing credit facilities arranged as part of the senior credit facility and trade receivables securitisation transactions.

Supplementary Financial Information

EBITDA before exceptional items and share-based payment expense is denoted by EBITDA in the following schedules for ease of reference.

Reconciliation of Profit to EBITDA

     

3 months to
30-Sep-13
€m

     

Restated
3 months to
30-Sep-12
€m

      

9 months to
30-Sep-13
€m

     

Restated
9 months to
30-Sep-12
€m
                         
 
Profit for the financial period 59 78 136 190
Income tax expense 45 24 95 96
Gain on disposal of assets and operations - - - (28)
Currency trading loss on Venezuelan Bolivar devaluation 1 - 16 -
Impairment loss on property, plant and equipment - - 9 -
Reorganisation and restructuring costs - - 7 -
Business acquisition costs - - 2 -
Share of associates’ profit (after tax) (1) - (2) (2)
Net finance costs 92 78 241 227
Share-based payment expense 7 6 19 20
Depreciation, depletion (net) and amortisation 100       93       292       274
EBITDA 303       279       815       777
 

Supplementary Historical Financial Information

      Restated                  
€m       Q3, 2012       Q4, 2012       FY, 2012       Q1, 2013       Q2, 2013       Q3, 2013
           
Group and third party revenue 2,944 2,951 11,896 3,080 3,285 3,319
Third party revenue 1,830 1,824 7,335 1,889 2,019 2,016
EBITDA 279 239 1,016 241 271 303
EBITDA margin 15.2% 13.1% 13.8% 12.7% 13.4% 15.0%
Operating profit 180 119 630 126 148 195
Profit before income tax 102 33 319 57 70 104
Free cash flow 118 118 282 (23) 95 190
Basic earnings per share - cent 32.3 25.2 106.9 14.4 17.7 24.0
Weighted average number of shares used in EPS calculation (million) 223 226 224 228 229 229
Net debt 2,640 2,792 2,792 2,871 2,817 2,630
Net debt to EBITDA (LTM) 2.59 2.75 2.75 2.84 2.74 2.50

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