3rd Quarter Results

3rd Quarter Results

Smurfit Kappa Group PLC

5 November 2014: Smurfit Kappa Group plc (‘SKG’ or ‘the Group’) today announced results for the 3 months and 9 months ending 30 September 2014.

2014 Third Quarter & First Nine Months | Key Financial Performance Measures

                               
€m YTD 2014 YTD 2013 Change Q3 2014 Q3 2013 Change Q2 2014 Change
Revenue €5,975 €5,924

 

1%

 

€2,027 €2,016

 

1%

€2,015

 

1%

EBITDA before Exceptional Items and Share-based Payment (1) €866 €815

 

6%

€302 €303

 

-

€295

 

2%

EBITDA margin

 

14.5%

 

13.8%

 

14.9%

 

15.0%

 

14.6%

Operating Profit before Exceptional Items €560 €504

 

11%

€197

€196

 

-

€194

 

2%

Profit before Income Tax €321 €231

 

39%

€93 €104

 

(11%)

€124

 

(25%)

Basic EPS (cent)

 

94.2

56.1

 

68%

31.9

 

24.0

 

33%

 

33.6

 

(5%)

Pre-exceptional Basic EPS (cent)

 

115.2

74.5

 

55%

51.1

 

30.6

 

67%

 

33.3

 

53%

Return on Capital Employed (2)

 

14.5%

 

12.6%

 

14.3%

Free Cash Flow (3)     €343     €262    

 

31%

    €208     €190    

 

9%

    €76    

 

171%

                                   

 

           
Net Debt €2,578 €2,630

 

(2%)

€2,676

 

(4%)

Net Debt to EBITDA (LTM)                       2.2x     2.5x           2.3x      
 
   

1)

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 34.

2)

LTM pre-exceptional operating profit plus share of associates’ profit/average capital employed.

3)

Free cash flow is set out on page 10. The IFRS cash flow is set out on page 20.

 

Third Quarter & First Nine Months Key Points

  • Year to date pre-exceptional EPS growth of 55% reflecting a good operational performance and lower financing costs
  • Continued growth in return on capital employed (‘ROCE’) to 14.5%
  • Strong free cash flow continues to support growth and lower leverage of 2.2 times net debt to EBITDA
  • Implementation of price increase of €30 per tonne in both testliner and kraftliner
  • Corrugated volume growth of 2% year-on-year to September 2014
  • Immediately accretive acquisition of Bates Container for US$158 million completed in October 2014
  • SKG to deliver 2014 EBITDA results in line with market expectations

Performance Review and Outlook

Gary McGann, Smurfit Kappa Group CEO, commented: “In the first nine months of 2014 Smurfit Kappa has delivered year-on-year earnings growth with EBITDA of €866 million, an increase of 6%, and pre-exceptional EPS of 115.2 cent, an increase of 55%. These results reflect the continuing benefits of the Group’s integrated business model, the strength of its international portfolio of businesses, the consistent delivery on cost reduction initiatives and a fundamentally improved capital structure. As a consequence, ROCE, which is a key performance measure for the Group, continued to improve to 14.5% in the quarter.

“In spite of a somewhat weaker macroeconomic backdrop in the third quarter the Group continued to see demand growth in Europe through the period, and delivered a strong performance in the region supported by pricing actions and continuing cost take-out initiatives. The implementation of both recycled and virgin containerboard price increases during the quarter is underpinning corrugated pricing.

“As part of its ongoing focus on controlling operating costs and improving operational efficiency, the Group has commenced a process of engagement with its Works Councils and Trade Unions regarding the rationalisation or closure of four corrugated facilities and a recycled containerboard mill in Europe. This action will incur an estimated total charge of €50 million in 2014, €15 million of which has been included in the third quarter results.

“In the Americas, SKG’s business continues to operate well with organic volume growth across most countries in the quarter. Colombia and Mexico had a strong performance, while Venezuela remains challenging due to high inflation and a weakening currency.

“Acquisitions, including Bates Container in the US, Corrumed in Colombia and Rierba in the Dominican Republic, were completed in 2014 for a total consideration of approximately €155 million, reflecting the Group’s objective of further integrating Smurfit Kappa Orange County’s (‘SKOC’) Forney mill and of pursuing acquisitions in growth regions such as Colombia and the Dominican Republic.

“Despite macroeconomic concerns, the Group expects to deliver 2014 EBITDA growth in line with market expectations.

“Following a period of debt paydown SKG is substantially better positioned today than at any other point in its recent history, with a well invested asset base and an optimal capital structure. The full year contribution of recently acquired businesses, a substantially reduced interest expense and the Group’s unrelenting focus on operating efficiency will deliver and drive value. Going forward, this presents a broad range of strategic and financial options, and the capacity to deliver an improved financial performance at all points of the industry cycle.”

About Smurfit Kappa

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 €7.9 billion in 2013.

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.

Check out our microsite: www.openthefuture.info

www.smurfitkappa.com

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

Smurfit Kappa

T: +353 1 202 71 80

E: ir@smurfitkappa.com

     

FTI Consulting

 

T: +353 1 663 36 80

E: smurfitkappa@fticonsulting.com

 

 

2014 Third Quarter & First Nine Months | Performance Overview

During the third quarter the Group delivered a good operational performance with an EBITDA margin of 14.9% and free cash flow of €208 million. The European packaging operations, in particular, have performed well with positive price and volume momentum in the quarter underpinned by the continued focus on driving incremental operational efficiencies through targeted rationalisations and effective capital investment.

The Group continues to deliver good corrugated volume progression in its European business with 2% growth on a days-adjusted basis for both the third quarter and first nine months of 2014. Although operating conditions in France remain challenging, volumes across the majority of the Group’s core markets continue to show year-on-year improvement with good gains in the larger markets of Germany, the UK, Spain, Italy and Scandinavia. Volumes have remained steady in October.

Following some increases in corrugated pricing in the first quarter, the Group has seen some marginal price decreases in the third quarter, resulting in a net corrugated price increase year-on-year at September of 1%.

In August 2014, the Group implemented a price increase of €30 per tonne in recycled containerboard, reflecting the solid supply/demand balance prevailing in the European market. Given that announced recycled capacity additions to 2017 can be offset by moderate growth, the supply/demand outlook for the sector is relatively benign. Old Corrugated Container (‘OCC’) prices have been flat through the period at €114 per tonne.

The European market for kraftliner has remained relatively tight for much of 2014, and strong demand has continued into the latter part of the year. Against this backdrop, and aided by positive pricing momentum in the recycled containerboard market, the Group has achieved €30 per tonne of its announced €50 per tonne price increase in September. As Europe’s largest producer of kraftliner, with a net long position of 500,000 tonnes, the Group will immediately benefit from the higher price environment.

A stronger US dollar compared to the euro is generally a net positive for the Group, providing a more supportive environment for the Group’s export-driven customer base in Europe. The dollar strength also negatively impacts the competitiveness of US kraftliner imports into Southern European countries.

SKG’s Americas business is continuing to deliver a good underlying performance with volume growth of 7% in the quarter and 3% in the year to date. In the Group’s major markets, Colombia and Mexico are performing strongly in volume terms with a record level of shipments in the year to date in Colombia on a like-for-like basis. The Group recently completed the acquisition of three corrugated and converting facilities in the US and one in the Dominican Republic, which follows the acquisition of a converting facility in Colombia in May.

While the Group’s Venezuelan business is operating well, the worsening economic situation and the consequent weakening of the country’s currency, have had a negative impact on the Americas’ results.

Strong free cash flow of €343 million in the year to date has facilitated a number of accretive bolt-on acquisitions, a materially higher year-on-year dividend payment and continued net debt reduction to 2.2 times EBITDA at September 2014.

In June 2014, the Group launched its ‘Open the future' brand strategy. Based on extensive research this customer-centred strategy differentiates our business from other industry players and provides a long-term platform for more effective communication and business enhancement. Initiatives emerging from this strategy include the creation of our Global Experience Centre at Schipol Airport, Amsterdam, which will showcase our customer support tools which are being developed in the context of our market insights and innovation activities. This centre will open in the first half of 2015 with smaller country versions also being progressively developed. Other initiatives include the development of key partnerships to extend our expertise in areas like supply-chain management and consumer behaviour at the point of purchase.

2014 Third Quarter | Financial Performance

Revenue in the third quarter of 2014 increased marginally year-on-year to €2,027 million. The underlying growth of over 3% was largely offset by the continuation of negative currency movements in the Americas, primarily due to the weakened Venezuelan Bolivar which closed the quarter at US$ / VEF 12.0.

EBITDA of €302 million in the quarter was broadly in line with the prior year with an underlying increase in earnings, particularly in Europe, offset by negative currency movements mainly in the Americas. Specifically, the Group recorded net negative currency and hyperinflationary movements of €32 million offset by acquisition contributions of €1 million resulting in an underlying increase of €30 million, equating to a 10% year-on-year increase.

Basic earnings per share was 31.9 cent for the third quarter of 2014 (2013: 24.0 cent), an increase of 33% year-on-year. Adjusting for exceptional items, pre-exceptional basic EPS was 51.1 cent (2013: 30.6 cent), a 67% increase year-on-year.

2014 First Nine Months | Financial Performance

For the nine months to September, revenue increased by €51 million (1%) from €5,924 million in 2013 to €5,975 million in 2014. As in the case of the quarter, the increase was the combination of higher revenue in Europe partly offset by lower revenue in the Americas, as a result of significant negative currency movements – primarily the Venezuelan Bolivar.

EBITDA for the nine months to September also increased by €51 million, from €815 million in 2013 to €866 million in 2014. Allowing for net negative currency movements, hyperinflation and the contribution from acquisitions, the underlying year-on-year move was an increase of €123 million (equating to 15%), with higher earnings in both Europe and the Americas and lower Group centre costs. The Group’s margin for the nine months benefited from the relatively strong growth in European EBITDA and increased to 14.5% from 13.8% in 2013.

Exceptional items charged within operating profit in the nine months to September 2014 amounted to €24 million. This includes a charge in the third quarter of €15 million related to the impairment of assets in the plants included in the previously mentioned consultation process. Additionally, a €9 million charge was recognised in the first quarter of 2014 relating to losses on the translation of non-Bolivar denominated payables in Venezuela following the change to the Sicad I rate.

Exceptional items of €34 million were charged in the same period of 2013, primarily comprising a €16 million trading currency loss as a result of the devaluation of the Venezuelan Bolivar in February 2013 and a €15 million charge relating to the closure of the Townsend Hook containerboard machines in July 2013. The remainder of the exceptional charges in 2013 related to additional reorganisation costs associated with the acquisition of SKOC.

Basic earnings per share was 94.2 cent for the first nine months of 2014 (2013: 56.1 cent), an increase of 68% year-on-year. Adjusting for exceptional items, pre-exceptional basic EPS was 115.2 cent (2013: 74.5 cent), an increase of 55% year-on-year.

2014 Third Quarter & First Nine Months | Free Cash Flow

Free cash flow amounted to €343 million in the first nine months of 2014 compared to €262 million in 2013. The increase of €81 million reflected higher EBITDA, lower cash interest and lower exceptional charges, partly offset by higher capital expenditure. The Group reported strong free cash flow of €208 million in the third quarter, an increase of 9% on the third quarter of 2013 and 171% on the second quarter of 2014. The variance year-on-year was due to lower cash interest and tax payments due to timing differences, offset by higher capital expenditure.

Working capital increased by €48 million in the first nine months, broadly in line with 2013 levels. This outflow, which primarily took place in Europe, resulted from an increase in debtors and, to a lesser extent, stocks partly offset by an increase in creditors. The working capital inflow in the third quarter of 2014 of €68 million was in line with that of 2013 and partly offset the outflow in the half-year to June. At September 2014 working capital amounted to €591 million, representing 7.3% of annualised revenue, compared to 7.7% at the same point in 2013.

Capital expenditure amounted to €253 million in the nine months to September 2014, approximately 86% of depreciation, compared to 79% in 2013. Capital expenditure in excess of €400 million is expected by the year-end in line with the previously advised strategy of upscaling our capital expenditure programme.

Cash interest at €108 million in the first nine months of 2014, was €50 million lower than in 2013.

The Group made tax payments of €65 million in the year to September, €6 million lower than the previous year.

2014 Third Quarter & First Nine Months | Capital Structure

The Group’s strong free cash flow of €208 million in the third quarter supported a further reduction of €98 million in net debt to €2,578 million at September 2014, the Group’s lowest level since its Initial Public Offering in 2007. Net debt to EBITDA has decreased to 2.2 times at the end of September from 2.5 times at the same point in 2013.

On 3 July, the Group completed the refinancing of its €500 million 7.75% senior notes due 2019 with a seven-year bond at a rate of 3.25%, the lowest ever bond coupon achieved by SKG. The transaction will save an annualised €23 million in cash interest costs, while resulting in associated exceptional finance charges totalling €41 million, composed of cash and non-cash costs, which have been included in the Group’s third quarter results.

SKG’s steady programme of debt paydown and refinancing activities has resulted in a fundamentally strengthened capital structure through lower financing costs, longer dated debt maturities and diversified funding sources. At 30 September 2014, the Group’s average interest rate was 3.7%, with an expected cash interest cost in 2015 of €130 million. The average maturity profile of the Group’s debt is 5.0 years, with 90% maturing in 2018 and beyond. Non-bank debt, made up of unsecured corporate bonds and securitisations, now comprise 70% of the Group’s gross debt.

At the end of the third quarter the Group held cash on its balance sheet of €566 million and had further undrawn credit facilities of approximately €481 million. SKG’s significant financial flexibility is further supported by consistent, strong free cash flows which continue to drive the Group’s strategic agenda.

2014 Third Quarter & First Nine Months | Operating Efficiency

Commercial Offering and Innovation

Smurfit Kappa has continued with its extensive customer-focused differentiation initiative. Its global brand strategy was publicly launched in June 2014, with the announcement of the Group’s commitment to ‘Open the future’ for its customers. To achieve this, the Group has continued with the development of its Global Experience Centre at Schiphol Airport, Amsterdam, due for completion in the first quarter of 2015. The initiative will be further enhanced by the opening of local Experience Centres throughout Europe and the Americas, which will act as satellites to the central hub in the Netherlands. The Group has opened six centres to date, with the most recent in Italy in September.

This strategy has strengthened the Group’s ability to communicate with current and potential customers, while providing a framework to develop strategic partnerships that will be of benefit to our customers. One such example has been the Group’s partnership with supply-chain engineers ESTL, which facilitates the development of innovative and cost-effective packaging by brand owners, using a combination of our supply-chain optimisation tools and ESTL’s rigorous transportation tests. The result ensures products arrive safely without unnecessary over-packing, reducing costs and improving efficiencies. A separate successful collaboration with eye-tracking company EyeSee gives brand owners immediate access to shopper insights, by way of focus groups, indicating how they view shelf-ready packaging in-store.

As part of our communications plan a dedicated microsite, openthefuture.info, has been launched outlining how SKG opens up opportunities with customers, with stories from around the globe. In the quarter, the Group launched its first advertising campaign around “Open the future”, which was rolled out across Europe and the Americas.

Tools to manage the global brand identity have been developed to drive greater consistency, coherence and efficiency of our communications in all markets. In addition, initiatives have also been developed to support greater employee engagement at all levels in the organisation as well as the implementation of dedicated leadership programmes. There has been increased integration between our sales and insights programmes, with training underway to build a unique customer-facing offering. Customer research, combined with our insights programme, has resulted in product and service developments with a focus on opening more opportunities for customers and potential customers in 2015.

Enhanced Capital Expenditure Programme

In February 2014 the Group announced an enhanced programme of capital expenditure which would result in total annual internal investments of approximately €420 million. Included in this programme is a €150 million basket of “Quick Win” projects to be delivered over the three-year period to 2016, which will provide incremental EBITDA of €75 million from 2017 onwards and will be phased in over the period. To date 47 individual “Quick Win” projects have commenced with a related expenditure of €61 million.

The Group is continuing to invest in its high performing asset base. In that context it is currently undertaking two significant projects in its European mill system which will be completed over the next 18 months. In the UK, the Group will commence production at its redeveloped Townsend Hook mill in the first quarter of 2015. The project, which involves a total cost of £98 million, will deliver 250,000 tonnes of containerboard to our integrated UK operations over a two-year period, greatly enhancing the profitability of the Group’s UK packaging business. In the Netherlands, the first phase of the upgrade to PM1 in SKG’s Roermond mill is currently in progress with the expected date of completion being April 2016 and with an expected total cost of €40 million. The project will further increase the level of the Group’s lightweight containerboard production and will continue the programme of efficiency improvements throughout the mill.

As previously advised, the Group will cease production of 65,000 tonnes of containerboard in its Navarra mill in Spain replacing it with 30,000 tonnes of higher value machine glazed paper – a grade in which the mill is already competing successfully on a global basis.

Rationalisation Programme

The Group has commenced a process of engagement with its Works Councils and Trade Unions regarding the rationalisation or closure of a number of plants in Europe in order to maintain the competitiveness of the business. The plants involved in the process are the 80,000 tonne Viersen recycled containerboard mill and four converting plants in France (Ponts et Marais), Sweden (Nybro) and the North of Germany (Osnabreuck and Hamburg). The closure of a converting plant in Italy has already taken place earlier in the quarter.

The process will incur an estimated total charge of €50 million, of which €15 million was incurred in the third quarter, with the balance expected in the fourth quarter.

SKG is optimising and driving its geographically diversified integrated business model through a combination of rationalisations and investments as appropriate. This series of measures will further strengthen the quality of its customer offerings, the integration of its European operations and will reinforce the Group’s value proposition to each of its stakeholder groups.

Cost Take-out Programme

The Group is progressing well with its 2014 cost take-out programme and is confident of delivering slightly ahead of its stated year-end target of €100 million. In the year to September the programme has generated cost savings of €88 million which, as in prior periods, is aimed at counteracting inflationary pressures by improving cost efficiencies in core cost areas such as raw materials usage, energy efficiency and labour costs.

Sustainability

During the quarter, the Group was included in both the FTSE4Good Global Index and the FTSE4Good Europe Index following an extensive application process. The FTSE4Good Index Series measures the performance of companies demonstrating strong Environmental, Social and Governance (‘ESG’) practices, and the successful application is further evidence of the Group’s commitment to the highest standards of sustainable production and good governance throughout its global operations.

Capital Markets Day 2015

The Group will host a joint Innovation and Capital Markets Event in the Netherlands on 15 & 16 April 2015. This event will commence on 15 April with an innovation exhibition and awards dinner attended by customers, and will provide attendees with the opportunity to assess the Group’s newest packaging designs and production processes. This will be followed by a morning with senior management in the Group’s new Global Experience Centre at Schipol Airport on 16 April.

Investor Relations App Launch

On 3 November, the Group launched its new Investor Relations App, which provides an easy to use, customisable central resource of financial and operational information for investors and analysts. The self-contained web app has been optimised for all devices using the latest HTML5 technology, and will allow users quick and easy access to a range of materials including results information, market analyses and bespoke investor analyst tools. The app is accessible at investorapp.smurfitkappa.com/.

2014 Third Quarter & First Nine Months | Regional Performance Review

Europe

European revenue in the first nine months increased by over 3% to €4,615 million with a solid performance throughout the third quarter in spite of weaker containerboard pricing earlier in the year. Furthermore, EBITDA margin progression year-on-year reflects the benefits of the integrated model employed in the region, which continues to deliver production and distribution efficiencies and high quality earnings through the cycle despite short-term containerboard pricing fluctuations.

Notwithstanding increased concern about the European business environment, the Group saw good volumes throughout the quarter with 2% overall volume growth year-on-year. In the nine months to September, the Group saw a continuation of previously reported trends, with a 1% increase in box shipments on a days-adjusted basis, and a 6% increase in sheet volumes. Volumes have remained steady in October.

Following some downward pressure in the quarter due primarily to adjustments in indexed price agreements following lower containerboard prices in the first half, the Group’s average European corrugated prices decreased by 1% in the third quarter. However, the containerboard price increases achieved in the quarter are expected to provide solid support to corrugated prices.

Following a period of inventory build in the first half of the year, European recycled containerboard inventory levels decreased to 496,000 tonnes at September 2014 as a result of good demand levels and industry downtime during the third quarter. Against this backdrop the Group implemented a €30 per tonne price increase on recycled containerboard in August.

Prices for OCC have continued to remain reasonably steady in Europe throughout the period despite a 6% reduction in the year to September in global exports of recovered fibre to most parts of China. The current price level is supported by incremental demand in the US and Europe, and some supply reductions through higher quality thresholds and newsprint capacity closures offsetting distinctly weaker Chinese import activity.

The Group successfully increased its kraftliner prices by €30 per tonne in September which will be an immediate boost to profitability due to SKG’s 500,000 tonne long position in the grade. The Group has seen 5% higher imports from the US in the year to August. However, market conditions have remained tight through 2014 and the current price level is also well supported by higher testliner price levels. The strengthening US dollar relative to the euro will negatively impact on the competitiveness of US kraftliner imports.

The Americas

The third quarter results in the Americas include particularly strong volume progression in the larger markets of Colombia and Mexico. The operating environment for the Americas business reflects structural improvements in the domestic economies as well as a generally improving business environment as the US economy strengthens. Some currency weakness in the region, particularly in Venezuela, impacted profitability in the quarter resulting in a year to date EBITDA margin of 16.3%. However, strong market growth trends, improving integration with our large international customer base and accretive acquisitions will continue to support the business’s expansion in the region.

The Group’s Colombian operations reported a record corrugated volume performance in the year to date, with an increase of 11% year-on-year adjusting for the acquisition of the Corrumed business in the second quarter. Recent relative currency weakness in the period is generally supportive of pricing and current inflation at 3% is deemed appropriate to sustain a good rate of growth.

In September, the acquisition of Rierba established SKG as the number one paper-based packaging producer in the Dominican Republic.

In Argentina, the business reported lower volumes in the third quarter against an economic backdrop that remains challenging. The focus of management is on maintaining profitability through the implementation of equitable price increases and cost reduction projects where appropriate. The business remains a relatively small part of the Group.

The Group’s Mexican business reported good EBITDA progression in the first nine months of the year due primarily to lower converting costs and higher sales prices. The market has been somewhat slower than expected in returning to good levels of growth, but economic indicators continue to suggest a continued, but gradual recovery.

In the US and Mexico, the Group’s SKOC operations continue to integrate into the existing SKG operations. The business reported strong demand growth in the US border region, in which the Group has a number of converting facilities, but bottom-slicing initiatives completed in the first half and lower than expected volumes with key customers due to timing and weather issues have negatively impacted the smaller US packaging business.

The acquisition of Bates Container completed in October for US$158 million will fundamentally strengthen the business, completing the integration of the 350,000 tonne recycled containerboard mill in Dallas and improving the Group’s operational footprint in the region. The business was acquired at a post synergy EV/EBITDA multiple of 5.25 times with total expected synergies of US$11.5 million, the majority of which will be delivered in the first year.

SKG’s Venezuelan operations have continued to deliver a robust operational performance despite a difficult operating environment. The weakening currency relative to the euro during the quarter has had a negative impact on the consolidation of the business’s earnings.

Summary Cash Flow
 
Summary cash flows() 1for the third quarter and nine months are set out in the following table.
                 
3 months to 3 months to 9 months to 9 months to
30-Sep-14 30-Sep-13 30-Sep-14 30-Sep-13
  €m       €m       €m       €m
Pre-exceptional EBITDA

 

302

 

303

 

866

 

815

Exceptional items

 

1

 

(7)

 

(8)

 

(24)

Cash interest expense

 

(29)

 

(50)

 

(108)

 

(158)

Working capital change

 

68

 

70

 

(48)

 

(46)

Current provisions

 

-

 

(1)

 

(1)

 

(6)

Capital expenditure

 

(100)

 

(81)

 

(253)

 

(218)

Change in capital creditors

 

5

 

3

 

(6)

 

6

Tax paid

 

(22)

 

(34)

 

(65)

 

(71)

Sale of fixed assets

 

1

 

1

 

4

 

2

Other

 

(18)

     

 

(14)

     

 

(38)

     

 

(38)

Free cash flow

 

208

 

190

 

343

 

262

 
Share issues

 

-

 

1

 

2

 

5

Purchase of own shares

 

-

 

-

 

(13)

 

(15)

Sale of businesses and investments

 

-

 

-

 

1

 

-

Purchase of businesses and investments

 

(11)

 

-

 

(30)

 

(5)

Dividends

 

(1)

 

(1)

 

(76)

 

(51)

Early repayment of bonds

 

(35)

     

 

-

     

 

(35)

     

 

-

Net cash inflow

 

161

 

190

 

192

 

196

 
Net debt acquired

 

-

 

-

 

-

 

(1)

Deferred debt issue costs amortised

 

(9)

 

(19)

 

(14)

 

(31)

Currency translation adjustments

 

(54)

     

 

16

     

 

(135)

     

 

(2)

Decrease in net debt

 

98

     

 

187

     

 

43

     

 

162

 

(1)

 

The summary cash flow is prepared on a different basis to the Consolidated Statement of Cash Flows under IFRS (‘IFRS cash flow’). The principal differences are as follows:

(a)

The summary cash flow details movements in net debt. The IFRS cash flow details movements in cash and cash equivalents.

(b)

Free cash flow reconciles to cash generated from operations in the IFRS cash flow as shown below.

(c)

The IFRS cash flow has different sub-headings to those used in the summary cash flow.

         
9 months to 9 months to
30-Sep-14 30-Sep-13
        €m       €m
Free cash flow

 

343

 

262

 
Add back: Cash interest

 

108

 

158

Capital expenditure (net of change in capital creditors)

 

259

 

212

Tax payments

 

65

 

71

Financing activities

 

1

 

2

Less: Sale of fixed assets

 

(4)

 

(2)

Profit on sale of assets and businesses – non exceptional

 

(4)

 

(4)

Receipt of capital grants

 

(1)

 

(1)

Dividends received from associates

 

(1)

 

(1)

Non-cash financing activities

 

-

     

 

(4)

Cash generated from operations

 

766

     

 

693

 

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 funding day to day operations, capital expenditure, debt service, dividends and other investment activity including acquisitions.

At 30 September 2014, Smurfit Kappa Treasury Funding Limited had outstanding US$292.3 million 7.50% senior debentures due 2025. The Group had outstanding €158.2 million and STG£65 variable funding notes issued under the €240 million accounts receivable securitisation programme maturing in June 2019 (which replaced the €250 million accounts receivable securitisation programme maturing in November 2015), together with €175 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, €250 million senior floating rate notes due 2020 and €500 million 3.25% senior notes due 2021. Smurfit Kappa Acquisitions and certain subsidiaries are also party to a senior credit facility. At 30 September 2014, the Group’s senior credit facility comprised term drawings of €700.9 million and US$64.4 million under the amortising Term A facility maturing in 2018. In addition, as at 30 September 2014, the facility included a €625 million revolving credit facility of which €125 million was drawn in revolver loans, with a further €19 million in operational facilities including letters of credit drawn under various ancillary facilities.

The following table provides the range of interest rates as of 30 September 2014 for each of the drawings under the various senior credit facility loans.

       

BORROWING ARRANGEMENT

CURRENCY

INTEREST RATE

 

Term A Facility

EUR

2.006% - 2.209%

USD

2.154%

 

Revolving Credit Facility

EUR

1.756%

 

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 completed a new five-year unsecured €1,375 million refinancing of its senior credit facility comprising a €750 million term loan with a current margin of 2.00% and a €625 million revolving credit facility with a current margin of 1.75%. The term loan is repayable €125 million on 24 July 2016, €125 million on 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.

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 carries a margin of 1.70%.

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.

On 28 May 2014 the Group priced €500 million of seven-year euro denominated senior unsecured notes at a coupon of 3.25%. Following the issue of an early redemption notice the net proceeds together with cash balances of €37.5 million were used to redeem the Group’s higher cost 2019 7.75% €500 million bonds on 3 July 2014.

Capital Resources (continued)

On 25 June 2014 the Group completed a new five-year trade receivables securitisation programme of up to €240 million maturing in 2019 utilising the Group’s receivables in France, the United Kingdom and Germany. The new programme, which has a margin of 1.40%, was used to refinance a similar facility maturing in 2015 which had a margin of 1.50%.

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 2014, the Group had fixed an average of 63% of its interest cost on borrowings over the following twelve months.

The Group’s fixed rate debt comprised €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, €500 million 3.25% senior notes due 2021 and US$292.3 million 7.50% senior debentures due 2025. In addition the Group had €349 million in interest rate swaps with maturity dates ranging from October 2018 to January 2021.

The Group’s earnings are affected by changes in short-term interest rates as a result of its floating rate borrowings. If LIBOR/EURIBOR interest rates for these borrowings increase by one percent, the Group’s interest expense would increase, and income before taxes would decrease, by approximately €13 million over the following twelve months. Interest income on the Group’s cash balances would increase by approximately €6 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 2014 interim report on page 11. 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 exchange controls in Venezuela. Currently, Venezuela operates a number of alternative exchange mechanisms, the official CENCOEX rate (VEF 6.3 per US dollar) (‘Official rate’), Sicad I and Sicad II. Contrary to general market expectations, in January 2014 the Government announced that it would not be devaluing the Official rate but access to the Official rate would only be available to certain priority sectors. Those not in these priority sectors would access dollars through the Sistema Complementario de Administración de Divisas (‘Sicad’). The Group is awaiting clarification on whether it will be part of the priority sector, the non-priority sector or both sectors. The most recent Sicad I rate is VEF 12.0 per US dollar and it is expected that this rate is likely to vary over time. As set out on page 32, the Group changed the rate at which it consolidates its Venezuelan operations (‘SKCV’) from the Official rate to the Sicad I rate as at 31 March 2014 (VEF 10.7 per US dollar). In March 2014 a new foreign exchange trading platform began operation (Sicad II) which permits foreign exchange barter transactions in the private sector with the most recent Sicad II rate being VEF 50.0 per US dollar and this rate is also likely to vary over time. In this multiple foreign exchange rate system there is a risk that the Sicad I rate will devalue further resulting in re-measurement of the local currency denominated net monetary assets and the local earnings and increase the cost of importing goods required to run the business.

Consolidated Income Statement – Nine Months

       
9 months to 30-Sep-14 9 months to 30-Sep-13
Unaudited Unaudited
Pre-exceptional 2014     Exceptional 2014     Total 2014 Pre-exceptional 2013     Exceptional 2013     Total 2013
      €m     €m     €m     €m     €m     €m
Revenue 5,975 - 5,975 5,924 - 5,924
Cost of sales (4,181)     (15)     (4,196)     (4,196)     (9)     (4,205)
Gross profit 1,794 (15) 1,779 1,728 (9) 1,719
Distribution costs (468) - (468) (468) - (468)
Administrative expenses (767) - (767) (758) - (758)
Other operating income 1 - 1 2 - 2
Other operating expenses -     (9)     (9)     -     (25)     (25)
Operating profit 560 (24) 536 504 (34) 470
Finance costs (206) (41) (247) (241) (22) (263)
Finance income 22 9 31 15 7 22
Share of associates’ profit (after tax) 1     -     1     2     -     2
Profit before income tax 377     (56) 321 280     (49) 231
Income tax expense (103) (95)
Profit for the financial period 218 136
 
Attributable to:
Owners of the parent 215 128
Non-controlling interests 3 8
Profit for the financial period 218 136

Earnings per share

Basic earnings per share - cent

94.2

56.1

 

Diluted earnings per share - cent

93.6

55.6

 

Consolidated Income Statement – Third Quarter

       
3 months to 30-Sep-14 3 months to 30-Sep-13
Unaudited Unaudited
Pre-exceptional 2014     Exceptional 2014     Total 2014 Pre-exceptional 2013     Exceptional 2013     Total 2013
      €m     €m     €m     €m     €m     €m
Revenue 2,027 - 2,027 2,016 - 2,016
Cost of sales (1,413)     (15)     (1,428)     (1,411)     -     (1,411)
Gross profit 614 (15) 599 605 - 605
Distribution costs (161) - (161) (157) - (157)
Administrative expenses (256) - (256) (252) - (252)
Other operating expenses -     -     -     -     (1)     (1)
Operating profit 197 (15) 182 196 (1) 195
Finance costs (66) (41) (107) (83) (16) (99)
Finance income 14 4 18 7 - 7
Share of associates’ profit (after tax)

-

    -    

-

    1     -     1
Profit before income tax 145     (52) 93 121     (17) 104
Income tax expense (18) (45)
Profit for the financial period 75 59
 
Attributable to:
Owners of the parent 73 55
Non-controlling interests 2 4
Profit for the financial period 75 59
 

Earnings per share

Basic earnings per share - cent

31.9

24.0

Diluted earnings per share - cent

31.7

23.8

 

Consolidated Statement of Comprehensive Income – Nine Months

       
9 months to 9 months to
30-Sep-14 30-Sep-13
Unaudited Unaudited
    €m       €m
 
Profit for the financial period 218       136
 
Other comprehensive income:
Items that may subsequently be reclassified to profit or loss
Foreign currency translation adjustments:
- Arising in the period (182) (243)
 
Effective portion of changes in fair value of cash flow hedges:
- Movement out of reserve 10 13
- New fair value adjustments into reserve (25) (2)
- Movement in deferred tax -       (2)
(197) (234)
 
Items which will not be subsequently reclassified to profit or loss
Defined benefit pension plans:
- Actuarial loss (92) (22)
- Movement in deferred tax 13       2
(79) (20)
         
Total other comprehensive expense (276)       (254)
 
Total comprehensive expense for the financial period (58)       (118)
 
Attributable to:
Owners of the parent (44) (94)
Non-controlling interests (14)       (24)
Total comprehensive expense for the financial period (58)       (118)
 

Consolidated Statement of Comprehensive Income – Third Quarter

       
3 months to 3 months to
30-Sep-14 30-Sep-13
Unaudited Unaudited
    €m       €m
 
Profit for the financial period 75       59
 
Other comprehensive income:
Items that may subsequently be reclassified to profit or loss
Foreign currency translation adjustments:
- Arising in the period 27 (31)
 
Effective portion of changes in fair value of cash flow hedges:
- Movement out of reserve - (1)
- New fair value adjustments into reserve (1) 2
- Movement in deferred tax -       (1)
26 (31)
 
Items which will not be subsequently reclassified to profit or loss
Defined benefit pension plans:
- Actuarial loss (45) (14)
- Movement in deferred tax 6       -
(39) (14)
         
Total other comprehensive expense (13)       (45)
 
Total comprehensive income for the financial period 62       14
 
Attributable to:
Owners of the parent 60 15
Non-controlling interests 2       (1)
Total comprehensive income for the financial period 62       14
 

Consolidated Balance Sheet

           
*Restated
30-Sep-14 30-Sep-13 31-Dec-13
Unaudited Unaudited Audited
      €m     €m     €m
ASSETS
Non-current assets
Property, plant and equipment 2,996 2,965 3,022
Goodwill and intangible assets 2,329 2,310 2,326
Available-for-sale financial assets 27 33 27
Investment in associates 17 16 16
Biological assets 95 109 107
Trade and other receivables 11 5 5
Derivative financial instruments - - 1
Deferred income tax assets 203     179     203
5,678     5,617     5,707
Current assets
Inventories 724 716 712
Biological assets 10 10 10
Trade and other receivables 1,501 1,497 1,344
Derivative financial instruments 1 7 4
Restricted cash 11 10 8
Cash and cash equivalents 555     684     447
2,802     2,924     2,525
Total assets 8,480     8,541     8,232
 
EQUITY
Capital and reserves attributable to the owners of the parent
Equity share capital - - -
Share premium 1,981 1,977 1,979
Other reserves 29 246 208
Retained earnings 310     15     121
Total equity attributable to the owners of the parent 2,320 2,238 2,308
Non-controlling interests 197     197     199
Total equity 2,517     2,435     2,507
 
LIABILITIES
Non-current liabilities
Borrowings 3,096 3,235 3,009
Employee benefits 774 736 713
Derivative financial instruments 40 68 59
Deferred income tax liabilities 188 225 214
Non-current income tax liabilities 25 15 17
Provisions for liabilities and charges 50 49 42
Capital grants 11 11 12
Other payables 9     10     9
4,193     4,349     4,075
Current liabilities
Borrowings 48 89 67
Trade and other payables 1,645 1,598 1,525
Current income tax liabilities 33 19 11
Derivative financial instruments 30 37 33
Provisions for liabilities and charges 14     14     14
1,770     1,757     1,650
Total liabilities 5,963     6,106     5,725
Total equity and liabilities 8,480     8,541     8,232
 

*Details of restatement are set out in Note 15.

 

Consolidated Statement of Changes in Equity

           
Attributable to owners of the parent
Equity share capital     Share premium     Other reserves     Retained earnings     Total Non-controlling

interests

Total equity
      €m     €m     €m     €m     €m     €m     €m
Unaudited
At 1 January 2014 - 1,979 208 121 2,308 199 2,507
 
Profit for the financial period - - - 215 215 3 218
Other comprehensive income
Foreign currency translation adjustments - - (165) - (165) (17) (182)
Defined benefit pension plans - - - (79) (79) - (79)
Effective portion of changes in fair value of cash flow hedges -     -     (15)     -     (15)     -     (15)
Total comprehensive (expense)/income for the financial period -     -     (180)     136     (44)     (14)     (58)
 
Shares issued - 2 - - 2 - 2
Hyperinflation adjustment - - - 124 124 15 139
Dividends paid - - - (71) (71) (5) (76)
Share-based payment - - 14 - 14 - 14
Shares acquired by SKG Employee Trust - - (13) - (13) - (13)
Acquired non-controlling interest -     -     -     -     -     2     2
At 30 September 2014 -     1,981     29     310     2,320     197     2,517
 
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
 

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

 

Consolidated Statement of Cash Flows

       
9 months to 9 months to
30-Sep-14 30-Sep-13
Unaudited Unaudited
      €m     €m
Cash flows from operating activities
Profit before income tax 321 231
 
Net finance costs 216 241
Depreciation charge 246 256
Impairment of property, plant and equipment 15 9
Amortisation of intangible assets 20 17
Amortisation of capital grants (1) (2)
Share-based payment expense 14 19
Profit on purchase/sale of assets and businesses (4) (5)
Share of associates’ profit (after tax) (1) (2)
Net movement in working capital (47) (47)
Change in biological assets 26 19
Change in employee benefits and other provisions (47) (39)
Other 8     (4)
Cash generated from operations 766 693
Interest paid (167) (170)
Income taxes paid:
Irish corporation tax (net of tax refunds) paid (1) (2)
Overseas corporation tax (net of tax refunds) paid (64)     (69)
Net cash inflow from operating activities 534     452
 
Cash flows from investing activities
Interest received 4 4
Additions to property, plant and equipment and biological assets (249) (207)
Additions to intangible assets (10) (5)
Receipt of capital grants 1 1
Disposal of available-for-sale financial assets 1 -
(Increase)/decrease in restricted cash (4) 5
Disposal of property, plant and equipment 8 6
Dividends received from associates 1 1
Purchase of subsidiaries and non-controlling interests (29) (2)
Deferred consideration paid (1)     (4)
Net cash outflow from investing activities (278)     (201)
 
Cash flows from financing activities
Proceeds from issue of new ordinary shares 2 5
Proceeds from bond issue 500 400
Purchase of own shares (13) (15)
Increase in other interest-bearing borrowings 25 85
Payment of finance leases (1) (4)
Repayment of borrowings (484) (382)
Deferred debt issue costs (9) (24)
Dividends paid to shareholders (71) (47)
Dividends paid to non-controlling interests (5)     (4)
Net cash (outflow)/inflow from financing activities (56)     14
Increase in cash and cash equivalents 200     265
 
Reconciliation of opening to closing cash and cash equivalents
Cash and cash equivalents at 1 January 424 423
Currency translation adjustment (83) (26)
Increase in cash and cash equivalents 200     265
Cash and cash equivalents at 30 September 541     662
 

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 and adopted by the European Union; and, in accordance with Irish law.

The condensed Group interim 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 Reporting, (‘IAS 34’). Accordingly the Group has not prepared this financial information in accordance with IAS 34.

The condensed Group interim 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 2013 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 condensed Group interim financial information are consistent with those described and applied in the Annual Report for the financial year ended 31 December 2013.

There are a number of changes to IFRS issued and effective from 1 January 2014 which include IFRS 10, Consolidated Financial Statements, IFRS 11, Joint Arrangements, IFRS 12, Disclosure of Interests in Other Entities, IAS 27, Separate Financial Statements, and IAS 28, Investments in Associates and Joint Ventures. They do not have an effect on the condensed Group interim financial information included in this report.

The condensed Group interim 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. Certain tables in this report may not add precisely due to rounding.

The condensed Group interim 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 2013 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 responsible for assessing performance, allocating resources and making strategic decisions. The Group has identified two reportable operating segments: 1) Europe and 2) The Americas.

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 Smurfit Kappa Orange County (‘SKOC’). Inter-segment revenue is not material. No operating segments have been aggregated for disclosure purposes.

Segment profit is measured based on earnings before interest, tax, depreciation, amortisation, exceptional items and share-based payment expense (‘EBITDA before exceptional items’).

       
9 months to 30-Sep-14 9 months to 30-Sep-13
Europe     The Americas     Total Europe     The Americas     Total
      €m     €m     €m     €m     €m     €m
Revenue and Results
Revenue 4,615     1,360     5,975     4,475     1,449     5,924
 
EBITDA before exceptional items 665 221 886 580 259 839
Segment exceptional items -     (9)     (9)     (6)     (19)     (25)
EBITDA after exceptional items 665     212 877 574     240 814
 
Unallocated centre costs (20) (24)
Share-based payment expense (14) (19)
Depreciation and depletion (net) (272) (275)
Amortisation (20) (17)
Impairment of assets (15) (9)
Finance costs (247) (263)
Finance income 31 22
Share of associates’ profit (after tax) 1 2
Profit before income tax 321 231
Income tax expense (103) (95)
Profit for the financial period 218 136
 

3. Segmental Analyses (continued)

         
3 months to 30-Sep-14 3 months to 30-Sep-13
Europe     The Americas     Total Europe     The Americas     Total
        €m     €m     €m     €m     €m     €m
Revenue and Results
Revenue 1,556     471     2,027     1,519     497     2,016
 
EBITDA before exceptional items 244 66 310 209 98 307
Segment exceptional items - - - - (1) (1)
EBITDA after exceptional items 244     66 310 209     97 306
 
Unallocated centre costs (8) (4)
Share-based payment expense (7) (7)
Depreciation and depletion (net) (92) (94)
Amortisation (6) (6)
Impairment of assets (15) -
Finance costs (107) (99)
Finance income 18 7
Share of associates’ profit (after tax) - 1
Profit before income tax 93 104
Income tax expense (18) (45)
Profit for the financial period 75 59
 

4. Exceptional Items

       
9 months to 9 months to
The following items are regarded as exceptional in nature: 30-Sep-14 30-Sep-13
      €m     €m
 
Currency trading loss on change in Venezuelan translation rate 9 16
Impairment loss on property, plant and equipment 15 9
Reorganisation and restructuring costs -     9
Exceptional items included in operating profit 24     34
 
Exceptional finance costs 41 22
Exceptional finance income (9)     (7)
Exceptional items included in net finance costs 32     15
 

Exceptional items charged within operating profit in the nine months to September 2014 amounted to €24 million, €15 million of which related to the impairment of the assets in five plants which may be subject to closure in the fourth quarter. The currency trading loss of €9 million related to losses on the translation of non-Bolivar denominated payables following the Group's decision to translate Venezuelan operations at the Sicad I rate. The translation loss reflected the higher cost to its Venezuelan operations of discharging these payables.

Exceptional finance costs in the nine months to September 2014 of €41 million arose as a result of the repayment of the 2019 bonds. The charge comprised a redemption premium of €33 million and over €6 million and €2 million respectively for the accelerated amortisation of the debt issue costs relating to the bonds and the accelerated unwinding of the original discount.

Exceptional finance income in the nine months to September 2014 amounted to €9 million and represented a gain of €7 million in Venezuela on the retranslation of the US dollar denominated intra-group loans to the Sicad I rate and an additional €2 million due to its subsequent adjustment for hyperinflation and re-translation.

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 €3 million of reorganisation costs related to the restructuring of SKOC and 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.

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.

5. Finance Costs and Income

       
9 months to 9 months to
30-Sep-14 30-Sep-13
      €m     €m
Finance costs:
Interest payable on bank loans and overdrafts 35 56
Interest payable on other borrowings 83 114
Exceptional finance costs associated with debt restructuring 41 22
Unwinding discount element of provision 1 1
Foreign currency translation loss on debt 17 4
Fair value loss on derivatives not designated as hedges 2 5
Net interest cost on net pension liability 20 20
Net monetary loss - hyperinflation 48     41
Total finance costs 247     263
 
Finance income:
Other interest receivable (4) (4)
Gain on sale of financial asset (1) -
Foreign currency translation gain on debt (3) (8)
Exceptional foreign currency translation gain (9) (7)
Fair value gain on derivatives not designated as hedges (14)     (3)
Total finance income (31)     (22)
Net finance costs 216     241
 

6. Income Tax Expense

Income tax expense recognised in the Consolidated Income Statement

       
9 months to 9 months to
30-Sep-14 30-Sep-13
      €m     €m
Current tax:
Europe 59 36
The Americas 41     49
100 85
Deferred tax 3     10
Income tax expense 103     95
 
Current tax is analysed as follows:
Ireland 2 4
Foreign 98     81
100     85
 

Income tax recognised in the Consolidated Statement of Comprehensive Income

       
9 months to 9 months to
30-Sep-14 30-Sep-13
      €m     €m
Arising on actuarial loss on defined benefit plans (13) (2)
Arising on qualifying derivative cash flow hedges -     2
(13)     -
 

The tax expense in the first nine months is €8 million higher than in the comparable period. This is largely explained by higher earnings and the geographical mix of those earnings. The income tax expense in Europe is higher by €21 million which is offset by a €13 million reduction in the Americas.

The movement in the deferred tax expense includes the impact of non-recurring benefits on previously unrecognised losses in 2013. This is offset by positive benefits in the Americas from timing differences and planning, together with a positive effect in Europe arising from the fact that the Group has fully utilised its losses in Sweden in 2013. In 2014 the tax expense for Sweden is therefore recorded in current tax. There also is a higher tax benefit in 2014 associated with exceptional items.

7. Employee Benefits – Defined Benefit Plans

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

         
9 months to 9 months to
30-Sep-14 30-Sep-13
        €m     €m
 
Current service cost 37 39
Past service cost (4) 1
Gain on settlement (6) -
Net interest cost on net pension liability 20     20
Defined benefit cost 47     60
 

Included in cost of sales, distribution costs and administrative expenses is a defined benefit cost of €27 million (2013: €40 million). Net interest cost on net pension liability of €20 million (2013: €20 million) is included in finance costs in the Consolidated Income Statement.

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

       
30-Sep-14 31-Dec-13
      €m     €m
Present value of funded or partially funded obligations (2,074) (1,851)
Fair value of plan assets 1,816     1,625
Deficit in funded or partially funded plans (258) (226)
Present value of wholly unfunded obligations (516)     (487)
Net pension liability (774)     (713)
 

The employee benefits provision has increased from €713 million at 31 December 2013 to €774 million at 30 September 2014, mainly as a result of lower Eurozone and Sterling corporate bond yields.

8. Earnings Per Share

Basic

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

       
9 months to 9 months to
      30-Sep-14     30-Sep-13
Profit attributable to owners of the parent (€ million) 215 128
 
Weighted average number of ordinary shares in issue (million) 228 229
 
Basic earnings per share (cent) 94.2     56.1
 

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 9 months to
      30-Sep-14     30-Sep-13
Profit attributable to owners of the parent (€ million) 215 128
 
Weighted average number of ordinary shares in issue (million) 228 229
Potential dilutive ordinary shares assumed (million) 1     2
Diluted weighted average ordinary shares (million) 229     231
 
Diluted earnings per share (cent) 93.6     55.6
 

Pre-exceptional

         
9 months to 9 months to
        30-Sep-14     30-Sep-13
Profit attributable to owners of the parent (€ million) 215 128
Exceptional items included in profit before income tax (Note 4) (€ million) 56 49
Income tax on exceptional items (€ million) (9)     (7)
Pre-exceptional profit attributable to owners of the parent (€ million) 262     170
 
Weighted average number of ordinary shares in issue (million) 228 229
 
Pre-exceptional basic earnings per share (cent) 115.2     74.5
 
Diluted weighted average ordinary shares (million) 229 231
 
Pre-exceptional diluted earnings per share (cent) 114.5     73.8
 

9. Dividends

In May, the final dividend for 2013 of 30.75 cent per share was paid to the holders of ordinary shares. In October, an interim dividend for 2014 of 15.375 cent per share was paid to the holders of ordinary shares.

10. Property, Plant and Equipment

           

Land and
buildings

Plant and
equipment

Total
      €m     €m     €m
Nine months ended 30 September 2014
Opening net book amount 1,107 1,915 3,022
Reclassifications 25 (28) (3)
Additions 2 226 228
Acquisitions - 22 22
Depreciation charge for the period (35) (211) (246)
Impairments (9) (6) (15)
Retirements and disposals (3) (1) (4)
Hyperinflation adjustment 29 24 53
Foreign currency translation adjustment (38)     (23)     (61)
At 30 September 2014 1,078     1,918     2,996
 
           
Year ended 31 December 2013
Opening net book amount 1,125 1,979 3,104
Reclassifications 48 (55) (7)
Additions 8 330 338
Acquisitions - 7 7
Depreciation charge for the year (51) (295) (346)
Impairments (2) (7) (9)
Retirements and disposals (1) (2) (3)
Hyperinflation adjustment 41 43 84
Foreign currency translation adjustment (61)     (85)     (146)
At 31 December 2013 1,107     1,915     3,022
 

11. Net Movement in Working Capital

       
9 months to 9 months to
30-Sep-14 30-Sep-13
      €m     €m
 
Change in inventories (25) (19)
Change in trade and other receivables (182) (130)
Change in trade and other payables 160     102
Net movement in working capital (47)     (47)
 

12. Analysis of Net Debt

       
30-Sep-14 31-Dec-13
€m €m
Unsecured senior credit facility:
Revolving credit facility(1) – interest at relevant interbank rate + 1.75%(7) 120 119
Facility A term loan(2) – interest at relevant interbank rate + 2%(7) 746 740
U US$292.3 million 7.50% senior debentures due 2025 (including accrued interest) 237 213
Bank loans and overdrafts 50 67
Cash (566) (455)
2018 receivables securitisation variable funding notes 173 173
2019 receivables securitisation variable funding notes(3) 239 203
2018 senior notes (including accrued interest)(4) 431 414
€500 million 7.75% senior notes due 2019 (including accrued interest)(5) - 495
€400 million 4.125% senior notes due 2020 (including accrued interest) 397 401
€250 million senior floating rate notes due 2020 (including accrued interest)(6) 248 247
€500 million 3.25% senior notes due 2021 (including accrued interest)(5) 498     -
Net debt before finance leases 2,573 2,617
Finance leases 5     4
Net debt including leases 2,578     2,621
 

(1)

     

Revolving credit facility ('RCF') of €625 million (available under the unsecured senior credit facility) to be repaid in 2018.

 

(a)

Revolver loans - €125 million (b) loans and overdrafts drawn under ancillary facilities - nil and (c) other operational facilities including letters of credit drawn under ancillary facilities - €19 million.

 

(2)

Facility A term loan (‘Facility A’) due to be repaid in certain instalments from 2016 to 2018.

 

(3)

In June 2014, the 2015 securitisation programme was refinanced with a securitisation programme maturing in 2019.

 

(4)

€200 million 5.125% senior notes due 2018 and US$300 million 4.875% senior notes due 2018.

 

(5)

On 28 May 2014 the Group priced €500 million of seven-year euro denominated senior unsecured notes at a coupon of 3.25%. Following the issue of an early redemption notice the net proceeds, together with cash balances of €37.5 million,were used to redeem the Group’s 2019 7.75% €500 million bonds on 3 July 2014.

 
 

(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   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 Cash flow

hedging reserve

Foreign

currency

translation

reserve

Share-

based

payment

reserve

Own shares

Available-

for-sale

reserve

 

Total

      €m     €m     €m     €m     €m     €m     €m
 
At 1 January 2014 575 (15) (456) 131 (28) 1 208
Other comprehensive income
Foreign currency translation adjustments - - (165) - - - (165)
Effective portion of changes in fair value of cash flow hedges -     (15)     -     -     -     -     (15)
Total other comprehensive expense -     (15)     (165)     -     -     -     (180)
 
Share-based payment - - - 14 - - 14
Shares acquired by SKG Employee Trust - - - - (13) - (13)
Shares granted to participants of the SKG Employee Trust -     -     -     (1)     1     -     -
At 30 September 2014 575     (30)     (621)     144     (40)     1     29
 
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
 

14. Venezuela

Hyperinflation

As discussed more fully in the 2013 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 an estimate derived from the most recent published Banco Central de Venezuela’s National Consumer Price Index. The most recent index published relates to August. The level of and movement in the price index at September 2014 is estimated as follows:

       
      30-Sep-14     30-Sep-13
Index at period end 719.5 442.3
Movement in period     44.4%     38.7%
 

As a result of the entries recorded in respect of hyperinflationary accounting under IFRS, the Consolidated Income Statement is impacted as follows: Revenue €6 million increase (2013: €28 million increase), pre-exceptional EBITDA €9 million decrease (2013: €5 million increase) and profit after taxation €79 million decrease (2013: €62 million decrease). In 2014, a net monetary loss of €48 million (2013: €41 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 (2013: €70 million increase).

Exchange Control and Devaluation

As a result of Venezuela operating a number of alternative currency exchange mechanisms (CENCOEX (formerly known as CADIVI), Sicad I and Sicad II) the Group continues to assess the appropriate rate at which to consolidate the results of its Venezuelan operations. With the introduction of Sicad I and Sicad II, Venezuela has now become a multiple rate foreign exchange system with three different official rates. One, the official CENCOEX rate of VEF 6.3 per US dollar (‘Official rate’) is a fixed rate for basic/essential goods. The two remaining rates are variable, Sicad I for goods excluded from CENCOEX and the Sicad II rate for SMEs and private individuals.

As a result of the January announcements by the Venezuelan government that there will be no official devaluation for at least two years Sicad I is now intended to offer an alternative currency exchange mechanism to foreign firms operating in Venezuela.

The Group believes that Sicad I is the more appropriate rate for accounting and consolidation and adopted it for translation from 31 March 2014. The change from the official rate of VEF 6.3 to VEF 10.7 (the SICAD I rate prevailing at date of adoption) reduced our cash by approximately €69 million and our net assets by €172 million at that time.

On this basis, in accordance with IFRS, the financial statements of the Group’s operations in Venezuela were translated at 30 September 2014 using the prevailing Sicad I rate of VEF 12.0 per US dollar and the closing euro/US dollar rate of 1 euro = US$ 1.26.

Control

The nationalisation of foreign owned companies or assets by the Venezuelan government remains a risk. Market value compensation is either negotiated or arbitrated under applicable laws or treaties in these cases. However, the amount and timing of such compensation is necessarily uncertain.

The Group continues to control operations in Venezuela and, as a result, continues to consolidate all of the results and net assets of these operations at the period end in accordance with the requirement of IFRS 10.

In 2014, the Group’s operations in Venezuela represented approximately 5% (2013: 6%) of its total assets and 13% (2013: 15%) of its net assets. Cumulative foreign translation losses arising on its net investment in these operations amounting to €545 million (2013: €346 million) are included in the foreign exchange translation reserve.

15. Restatement of Prior Periods

IFRS 3, Business Combinations

As required under IFRS 3, Business Combinations, the Consolidated Balance Sheet at 30 September 2013 has been restated for final adjustments to the provisional fair values of the SKOC acquisition on 30 November 2012. The effects on previously reported financial information are shown in the table below.

Impact on Financial Statements

           
Previously reported IFRS 3 Adjustments Restated
      €m     €m     €m
 
Consolidated Balance Sheet
 
At 30 September 2013
Non-current assets
Property, plant and equipment 2,937 28 2,965
Goodwill and intangible assets 2,300 10 2,310
Deferred income tax assets 177 2 179
Current assets
Inventories 728 (12) 716
Non-current liabilities
Deferred income tax liabilities 201 24 225
Other payables 9 1 10
Current liabilities
Trade and other payables 1,596 2 1,598
Provisions for liabilities and charges     13     1     14
 

Initial goodwill arising on the SKOC acquisition was €88 million. The completion of the fair value exercise at the end of 2013 resulted in a €36 million reduction of this goodwill, giving a final amount of €52 million.

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 3 months to 9 months to 9 months to
30-Sep-14 30-Sep-13 30-Sep-14 30-Sep-13
        €m     €m     €m     €m
 
Profit for the financial period 75 59 218 136
Income tax expense 18 45 103 95
Currency trading loss on change in Venezuelan translation rate - 1 9 16
Impairment loss on property, plant and equipment 15 - 15 9
Reorganisation and restructuring costs - - - 9
Share of associates’ profit (after tax) - (1) (1) (2)
Net finance costs 89 92 216 241
Share-based payment expense 7 7 14 19
Depreciation, depletion (net) and amortisation 98 100 292 292
EBITDA 302 303 866 815
 
Supplementary Historical Financial Information
                       
€m     Q3, 2013     Q4, 2013     FY, 2013     Q1, 2014     Q2, 2014     Q3, 2014
 
Group and third party revenue 3,319 3,346 13,030 3,217 3,289 3,341
Third party revenue 2,016 2,033 7,957 1,932 2,015 2,027
EBITDA 303 291 1,107 269 295 302
EBITDA margin 15.0% 14.3% 13.9% 13.9% 14.6% 14.9%
Operating profit 195 173 643 160 194 182
Profit before income tax 104 62 294 104 124 93
Free cash flow 190 103 365 59 76 208
Basic earnings per share - cent 24.0 26.0 82.2 28.8 33.6 31.9
Weighted average number of shares used in EPS calculation (million) 229 229 229 227 228 228
Net debt 2,630 2,621 2,621 2,640 2,676 2,578
Net debt to EBITDA (LTM) 2.50 2.37 2.37 2.33 2.31 2.23
 

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