Final Results

Final Results

Smurfit Kappa Group PLC

10 February 2016: Smurfit Kappa Group plc (‘SKG’ or ‘the Group’) today announced results for the 3 months and 12 months ending 31 December 2015.

2015 Fourth Quarter & Full Year | Key Financial Performance Measures

€m  

FY
2015

 

FY
2014

  Change  

Q4
2015

 

Q4
2014

  Change  

Q3
2015

  Change
Revenue €8,109 €8,083 - €2,089 €2,108 (1%) €2,024 3%

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

€1,182 €1,161 2% €326 €295 11% €305 7%
EBITDA margin 14.6% 14.4% 15.6% 14.0% 15.0%
Operating Profit before Exceptional Items €780 €771 1% €229 €212 8% €202 13%
Profit before Income Tax €599 €378 58% €191 €58 230% €165 15%
Basic EPS (cent) 172.6 105.8 63% 52.9 11.6 356% 46.4 14%
Pre-exceptional Basic EPS (cent) 197.3 162.5 21% 59.3 47.3 25% 49.2 21%
Return on Capital Employed (2) 14.8% 15.0% 15.0%
Free Cash Flow (3)   €388   €362   7%   €152   €19   693%   €162   (6%)
                                 
Net Debt €3,048 €2,759 11% €2,953 3%
Net Debt to EBITDA (LTM)   2.6x   2.4x                   2.6x    
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 36.

2) LTM pre-exceptional operating profit plus share of associates’ profit/average capital employed.
3) Free cash flow is set out on page 11. The IFRS cash flow is set out on page 21.

Fourth Quarter and Full Year Key Points

  • Full year Group packaging volume growth of 6% with underlying growth of 3% excluding acquisitions
  • Full year pre-exceptional EPS growth of 21% year-on-year and fourth quarter EBITDA margin of 15.6%
  • ROCE of 15.1% and Net Debt / EBITDA at 2.4 times after adjusting for acquisitions in Brazil in December
  • Free cash flow at €388 million supporting strong financial position and strategic flexibility
  • Successful delivery on 2015 cost take-out target of €75 million with new target of €75 million in 2016
  • Completion of over €380 million of acquisitions in 2015
  • Final dividend increased by 20% to 48 cent per share

Performance Review and Outlook

Tony Smurfit, Smurfit Kappa CEO, commented: “We are pleased to report a strong 2015 outcome delivering significant improvement across all key financial and operating metrics. We will continue to drive our performance by focusing on marketing and innovation initiatives for our customers, cost efficiency and financial discipline. Our objective is to continue to deliver on our target of 15% ROCE through the cycle.

“We invested over €380 million in acquisitions in 2015 to strengthen and diversify our geographic reach and drive earnings. During the year we invested €450 million to optimise the asset quality in our system and our investments in high return capital investment projects are now also delivering incremental EBITDA growth. We are continually enhancing the breadth and depth of our service offering for customers, while consistently lowering operating costs through our supply chain.

“Our strong financial profile is reflected in our Net Debt to EBITDA ratio of 2.4 times at the end of 2015, after adjusting for the Brazilian acquisitions in December. We remain firmly committed to maintaining our Ba1 / BB+ credit rating.

"The Board’s confidence in the strength of the business is reflected in a proposed 20% increase in the final dividend to 48 cent per share. Combined with an interim dividend of 20 cent per share paid in October 2015, this will bring the total dividend to 68 cent, a 23% increase year-on-year. Our dividend is a core component of our commitment to driving value for shareholders.

“Having established a strong platform for growth over the past few years, we expect to deliver good earnings growth in 2016. While this will, to some extent, be influenced by the broader macro-economic environment, we are confident our current investment initiatives, our geographic diversity, our integrated business model and our strong free cash flow generation positions us well for 2016 and beyond.”

About Smurfit Kappa

Smurfit Kappa is one of the leading providers of paper-based packaging solutions in the world, with around 45,000 employees in approximately 370 production sites across 34 countries and with revenue of €8.1 billion in 2015. We are located in 21 countries in Europe, and 13 in the Americas. We are the only large-scale pan-regional player in Latin America.

With our pro-active team we relentlessly use our extensive experience and expertise, supported by our scale, to open up opportunities for our customers. We collaborate with forward thinking customers by sharing superior product knowledge, market understanding and insights in packaging trends to ensure business success in their markets. We have an unrivalled portfolio of paper-packaging solutions, which is constantly updated with our market-leading innovations. This is enhanced through the benefits of our integration, with optimal paper design, logistics, timeliness of service, and our packaging plants sourcing most of their raw materials from our own paper mills. Our products, which are 100% renewable and produced sustainably, improve the environmental footprint of our customers.

smurfitkappa.com

Check out our microsite: openthefuture.info Follow us on Twitter at @smurfitkappa and on LinkedIn at ‘Smurfit Kappa’.

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

 

2015 Fourth Quarter & Full Year | Performance Overview

In 2015, the Group reported its strongest ever fourth quarter earnings result with EBITDA of €326 million and an EBITDA margin of 15.6% driven by a generally good trading environment and supported by the contribution of acquisitions and the Group’s high return capital investments. The full year result also indicates solid progress across most metrics, despite the impact of the adoption of the Simadi rate for the consolidation of our Venezuelan operations in the first quarter, underscoring the strong underlying performance and the resilience of the geographically diversified and vertically integrated business model.

In Europe, SKG’s underlying corrugated volumes grew by 3% year-on-year reflecting good levels of demand across most countries and market segments. Corrugated pricing increased by 1% sequentially on the third quarter following earlier positive developments in the containerboard market. We expect some further positive impact of this in early 2016.

In the Americas, our underlying business has grown strongly as a result of solid performances in most markets and steady delivery of over €320 million of acquisitions in five countries in the region over the course of the year. The profile of our Americas business is primarily weighted to the US, Mexican and Colombian markets, which made up over 80% of the Americas’ EBITDA in 2015.

Following €160 million of acquisitions in 2014, the Group completed the acquisition of seven businesses across nine countries in 2015 for a total consideration of over €380 million. The Group was pleased to successfully complete the acquisitions of two businesses in Brazil in December which combined equate to approximately 5% market share in the largest market in Latin America. The transaction was completed at a post synergy valuation of 6.3 times EV / EBITDA. Commercially, the expansion into Brazil will now allow SKG to service its international customers across Latin America, significantly boosting its total service footprint while offering a compelling platform for further growth in a still fragmented market.

The Group has a proven track record of quality earnings delivery and strong free cash flows through the cycle, and a key pillar of this solid operational performance has been the Group’s commitment to its cost take-out programme. Having met our target of €75 million in 2015, we expect to deliver a further €75 million of cost reductions in 2016.

For the full year 2015, the Group has recorded a charge for exceptional items of €69 million within operating profit. This is primarily due to the adoption of the Simadi rate for the consolidation of the Group’s Venezuelan operations which resulted in a non-cash exceptional charge of €69 million. Further non-cash exceptional charges of €12 million relating to the disposal of the Group’s solidboard operations in Belgium, the Netherlands and the UK and European restructuring were offset by a €13 million gain on the sale of the site of the Group’s former Nanterre containerboard mill, near Paris.

The Group delivered a strong free cash flow performance in the fourth quarter resulting in a 7% increase in free cash flow year-on-year to €388 million. Lower working capital outflows and cash interest contributed a net €30 million while outflows in respect of exceptional items associated with the impact of the adoption of the Simadi rate in Venezuela, and restructuring charges relating to the Group’s European rationalisation programme completed in 2015, are not expected to reoccur in 2016.

With net debt to EBITDA at 2.4 times adjusting for the Brazilian acquisitions in December, a long dated maturity profile and EBITDA to cash interest cover of almost 10 times at the end of 2015, the Group remains a strong BB+ / Ba1 rated company. The Group will continue to balance the maintenance of a strong capital structure with its growth objectives through 2016.

2015 Fourth Quarter | Financial Performance

Revenue of €2,089 million in the fourth quarter of 2015 was €19 million down on the €2,108 million reported in 2014. Underlying revenues increased by 4% year-on-year, with a positive contribution from acquisitions mostly offset by net negative currency movements and the disposal of the Group’s solidboard operations in Belgium, the Netherlands and the UK. Revenue increased by 3% when compared to the third quarter.

At €326 million in the fourth quarter of 2015 compared to €295 million in 2014, EBITDA was €31 million higher year-on-year, an increase of 11%. Allowing for currency movements and the impact of acquisitions and disposals, comparable EBITDA was 17% higher with higher earnings in both Europe and the Americas and lower Group Centre costs. Compared to the third quarter of 2015, EBITDA in the fourth quarter increased by 7%, with solid earnings results in both Europe and the Americas and lower Group Centre costs.

An exceptional charge of €15 million within operating profit in the fourth quarter of 2015 represents the net impact of the adjustment for hyperinflation on the currency trading loss incurred in the first quarter following the adoption of the Simadi rate, offset by a €13 million exceptional gain on the sale of the site of the Group’s former Nanterre containerboard mill, near Paris.

In 2014, an exceptional charge of €86 million within operating profit in the fourth quarter primarily related to two restructuring initiatives which took place in 2015. In the first instance, a non-cash charge of €42 million in the quarter related mainly to the impairment of fixed assets and goodwill associated with the disposal of the Group’s solidboard operations in Belgium, the Netherlands and the UK, which was later completed in the second quarter of 2015. Additionally, the Group incurred €42 million in reorganisation and restructuring costs in the fourth quarter of 2014, relating to the European rationalisation programme successfully completed over the course of 2015.

Pre-exceptional earnings per share increased year-on-year by 25% to 59.3 cent for the quarter to December 2015 (2014: 47.3 cent).

2015 Full Year | Financial Performance

Revenue for the year to December increased by €26 million from €8,083 million in 2014 to €8,109 million in 2015 with higher revenue in Europe partly offset by a reduction in the Americas, reflecting the impact of our adoption of the Simadi exchange rate. Allowing for net negative currency and hyperinflationary movements, principally in respect of the Bolivar and the contribution from acquisitions net of disposals, the underlying year-on-year move in revenue was an increase of over 3%.

At €1,182 million in 2015 compared to €1,161 million in 2014, EBITDA for the year to December was €21 million (equating to 2%) higher year-on-year. Allowing again for currency movements and the impact of acquisitions and disposals, comparable EBITDA was almost 6% higher with earnings growth in both Europe and the Americas and relatively unchanged Group Centre costs year-on-year.

Exceptional items charged within operating profit in the year to December 2015 amounted to €69 million which included a number of offsetting balances. The higher cost to the Venezuelan operations of discharging their non-Bolivar denominated payables following our adoption of the Simadi rate resulted in a charge of €69 million. The remaining offsetting amounts primarily comprise a charge of €12 million relating to the solidboard operations less the gain of €13 million on the sale of the Nanterre site.

Exceptional items charged within operating profit in the year to December 2014 amounted to €110 million, comprising over €46 million in respect of the potential disposal of our solidboard operations in Belgium, the Netherlands and the UK, and €54 million as part of the Group’s rationalisation programme completed in 2015 encompassing an 80,000 tonne recycled containerboard mill and four converting plants across Europe completed in 2015. The remainder related to a currency trading loss of €10 million due to the higher cost to the Venezuelan operations of discharging their non-Bolivar denominated payables following our adoption in the first quarter of the Sicad I rate.

Operating profit after exceptional items for the year was €711 million compared to €661 million for 2014, an increase of 8% (increase of 1% before exceptional items).

The Group’s net pre-exceptional finance costs were €129 million in 2015, down €119 million compared to 2014 as a result of the benefit of re-financing activities and the significant reduction in the non-cash hyperinflationary adjustment in Venezuela.

Exceptional finance costs in the year to December 2015 amounted to €2 million relating to the accelerated amortisation of the issue costs relating to the debt within our Senior Credit Facility which was paid down with the proceeds of February’s €250 million bond issue. Exceptional finance income amounted to €16 million and represented a gain in Venezuela on US dollar denominated intra-group loans following our adoption of the Simadi rate in the first quarter of 2015.

Exceptional finance costs in the year to December 2014 amounted to €48 million comprising €42 million relating to the repayment of the 2019 bonds in July and an impairment of financial investments of €6 million. Exceptional finance income amounted to €11 million and represented a gain in Venezuela on US dollar denominated intra-group loans following our adoption of the Sicad I rate in the first quarter of 2014.

Profit before income tax of €599 million in 2015 compared to €378 million in 2014, an increase of 58% year-on-year. The increase was mainly due to higher profitability, lower finance costs and lower exceptional charges during the year.

In 2015, the tax expense of €186 million was €60 million higher than in 2014 primarily due to increased profitability year-on-year, tax legislation changes and the impact of tax credits recognised in 2014.

Pre-exceptional EPS of 197.3 cent for the full year 2015 was 21% higher than the 162.5 cent reported in 2014. Basic EPS was 172.6 cent for the full year 2015, compared to 105.8 cent for 2014.

2015 Fourth Quarter & Full Year | Free Cash Flow

The Group reported free cash flow of €388 million in 2015, €26 million higher than in 2014. The year-on-year increase resulted mainly from EBITDA growth, cash interest savings and lower working capital and other outflows offset by higher outflows for exceptional items, provisions and tax. While the 2015 free cash flow result was negatively impacted by exceptional and provision outflows primarily related to the Venezuelan rate adjustment and the European rationalisation programme respectively, it also included the proceeds of €27 million relating to the disposal of the site of our former containerboard mill at Nanterre, near Paris.

Cash interest at €123 million in 2015 was €14 million lower than in 2014, primarily reflecting the benefit of our refinancing activities in recent years, including the redemption of the 2019 bonds in July 2014.

The working capital move in the year to December 2015 was an outflow of €24 million compared to €40 million in 2014. The outflow resulted from an increase in debtors and stocks partly offset by an increase in creditors. Working capital amounted to €548 million at December 2015, representing 6.6% of annualised revenue compared to 6.7% at December 2014.

Capital expenditure amounted to €451 million in the year to December 2015 and equated to 123% of depreciation, compared to 120% in 2014. Capital expenditure is expected to remain at approximately this level in 2016 as the Group completes a number of high return investments in its mill systems in Europe and the Americas along with the final year of its programme of ‘Quick Win’ investments.

Cash tax payments of €131 million in 2015 were €24 million higher year-on-year due to increased profits, the timing of payments and lower refunds, offset by the adoption of the Simadi translation rate in Venezuela in 2015.

2015 Fourth Quarter & Full Year | Capital Structure

Following a period of significant debt pay down and debt re-financing from 2009 to 2013 the Group has established its credentials as a strong cross-over credit in the debt market. The Group’s materially enhanced financial flexibility has facilitated the completion of over €380 million in acquisitions during 2015 without any significant impact on the Group’s overall leverage position year-on-year. The Board has confirmed its commitment to maintaining its current credit rating at Ba1 / BB+, and the Group’s strong free cash flow generation will continue to comfortably support the Group’s stated leverage range.

During the first quarter, the Group undertook two transactions, which combined have further reduced our annual cash interest by €3 million and extended our average maturity profile. In February, the Group issued a €250 million ten-year bond at a coupon of 2.75%, the proceeds of which were used to prepay term debt under its Senior Credit Facility. This successful bond financing enabled the Group to amend and extend its senior credit facility in March at a reduced level of €1.1 billion, extend the maturity date to March 2020 and reduce the margin by 0.65%.

Following acquisitions of over €380 million in 2015, including the Brazilian acquisitions in December, the Group increased the Term Loan under its Senior Credit Facility from €500 million to €750 million in February 2016. The margin on the additional facility is 1.60%, similar to that on the existing Term Loan. The proceeds will be substantially applied to reduce the drawings under the revolving credit facility, thereby further improving the Group’s liquidity.

At 31 December 2015, the Group’s average debt maturity was 4.7 years. The Group’s average interest rate increased slightly from 3.8% to 4.1% at the end of the year, as a result of the Brazilian acquisitions in December 2015. This is expected to increase cash interest costs in 2016 by approximately €18 million to €141 million. At the year end, the Group held a cash balance of €275 million with further liquidity available under the revolving credit facility of €460 million.

2015 Fourth Quarter & Full Year | Dividend

The Group views its dividend as an important component of its investment thesis and a way to directly transfer value creation within the business to shareholders. As a consequence, the total dividend has been materially increased since 2012 with increases totalling approximately 100% in the two years to 2014. For the year 2015, the Board is recommending a final dividend of 48 cent, a 20% increase year-on-year. Combined with an interim dividend of 20 cent per share paid in October 2015, this will bring the total dividend to 68 cent, a 23% increase year-on-year.

It is proposed to pay the final dividend on 13 May 2016 to all ordinary shareholders on the share register at the close of business on 15 April 2016. As in previous years, the 2016 dividend will be paid in two parts, an interim dividend payable in October 2016 and a final dividend payable in May 2017.

Capital Markets Day 2016

The Group will host a Capital Markets Event in the London Stock Exchange on 3 June 2016. This event will be hosted by the Executive management team and will focus on the medium term strategic objectives for the Group, its progress in driving its differentiation agenda and the financial benefits of its integrated and geographically diversified business model. The event will also be attended by senior operational management across Europe and the Americas.

2015 Fourth Quarter & Full Year | Review of Stock Exchange Listing Arrangements & Share Trading Currency

The Board confirms it is reviewing the listing arrangements of SKG’s shares and reviewing SKG’s share trading currency. Specifically it is considering transferring the listing category of SKG’s ordinary shares on the Official List of the United Kingdom Listing Authority (‘UKLA’) from a Standard to a Premium Listing, subject to clearance from the UKLA. It is proposed to switch trading in the ordinary shares on the London Stock Exchange from euro to Sterling on 1 March 2016. The Company remains committed to retaining an Irish Stock Exchange euro denominated listing, which will continue to provide access to a wide range of international investors.

The Board believes that these changes will position the Company for potential future admission to the UK Series of FTSE Indices, subject to meeting the eligibility criteria including applicable securities trading requirements.

A further announcement will be made as appropriate.

2015 Fourth Quarter & Full Year | Operating Efficiency

Commercial Offering and Innovation

Smurfit Kappa continuously seeks to improve the packaging service offering for its customers through constant innovation and services development. In recent years, the Group has been at the forefront of the industry in developing effective and cost efficient solutions for our customers across a range of areas such as performance packaging, quality management, supply chain optimisation and strong sustainability credentials. This development has been driven by a service culture adopted throughout the business, and an unparalleled combination of depth and breadth in our offering to the customer. It is further strengthened by the company’s geographic diversity - with a presence in 34 countries across three continents, Smurfit Kappa has the largest packaging footprint of any global supplier. This allows for robust insights into most market segments and the quick transfer of knowledge and expertise across the globe, offering customers fast, credible solutions supported by a suite of bespoke tools. Such a profile ensures that the company continues to attract top talent for future development.

Throughout 2015 the Group’s differentiation initiative has progressed to a point of integration within the business, and is delivering tangible results through greater engagement with our customers on issues important to them. The Group’s ShelfSmart approach, launched in 2015, is continuing to gain traction with our customers and also attract new customers to Smurfit Kappa. A scientific approach to instore marketing, ShelfSmart delivers benefits through improved visibility, navigation and increased quality perception for brands. With a large proportion of FMCG customers, this is a value added service that will continue to drive growth for Smurfit Kappa and translate into increased sales for customers.

In support of this innovation, the Group invested over €85 million in Europe on 20 new conversion machines which entered production in 2015. In addition, a major focus is also put on maximising the efficiency of existing machinery while simultaneously measuring and improving on quality performance. This is done through strong local management, focused investment and target setting using the Group’s internal benchmarking systems, which can compare individual work teams on comparable machines in any plant throughout the Group.

New Management Structures

In September 2015, the Group announced a new European management structure which is expected to meaningfully contribute to the continued growth and development of the business through enhanced integration through the operations.

Effective 1 October, Roberto Villaquiran, previously the CEO Corrugated Europe, assumed the new role of CEO Europe with overall responsibility for the existing European Paper and Corrugated divisions. Roberto now reports directly to the Group CEO, Tony Smurfit. Reporting to the European CEO are two new Chief Operations Officers (‘COO’) in Paper Europe and Corrugated Europe. Laurent Sellier has been appointed to the new role of COO, Paper Europe; and, Saverio Mayer to the new role of COO, Corrugated Europe.

In the Americas, the senior management of the region remains unchanged, with Juan Guillermo Castaneda as CEO.

Cost Take-out Programme

The Group successfully delivered its 2015 cost take-out target of €75 million with a strong fourth quarter performance of €20 million. In an environment of creeping cost inflation SKG’s cost take-out programme has been an important part of the Group’s capacity to deliver quality earnings and strong free cash flows.

The Group expects to deliver a further cost take-out target of €75 million in 2016.

Enhanced Capital Expenditure Programme

At the end of the second year of the Group’s €150 million ‘Quick Win’ capital expenditure programme we delivered a meaningful EBITDA contribution of €17 million in 2015. The Group expects to deliver incremental EBITDA of €25 million in 2016, with the remaining €33 million of incremental EBITDA in 2017 in line with the Group’s overall target to deliver €75 million from this investment programme.

There are two key investment criteria for these investments:

1) the internal rate of return must be in excess of 20%; and

2) the payback period should be less than three years.

With €70 million of the related capital expenditure incurred to date, a further €80 million of investment in 2016 and 2017 will bring the total capital investment under this heading to €150 million.

2015 Fourth Quarter & Full Year | Regional Performance Reviews

Europe

The Group’s European packaging business performed well through 2015 supported by strong fundamentals and positive containerboard pricing. As a result of the €30 per tonne recycled containerboard price increase in July, the Group’s overall corrugated pricing increased by 1% sequentially in the fourth quarter and we expect further progress in the first quarter of 2016. The Group’s underlying corrugated volumes increased by 3% year-on-year in Europe with demand steady at a high level throughout 2015.

The Group’s recycled containerboard operations delivered a strong financial and operational performance in 2015 as a result of positive market dynamics and the impact of recent capital investment and cost efficiency initiatives. For the second consecutive year the generally tight inventory position in the European market through the second half of the year supported a drive for higher prices and a €30 per tonne increase was implemented in July. With little new capacity expected to enter the market until the latter part of 2016, the Group expects the market to remain structurally balanced through 2016.

European Old Corrugated Container (‘OCC’) prices increased significantly in the first six months of the year and tapered somewhat in November and December to end the year at approximately €125 per tonne. This seasonal softness in pricing appears to have abated in February and continued good demand for the material, both domestically and from export markets, is expected to support prices at current levels in the near term.

In 2015, the Group’s kraftliner operations delivered a strong performance as a result of good demand and aggregate price increases of €50 per tonne implemented in the twelve months to June 2015. Looking to 2016, we have seen some pressure on prices in the first quarter as the well flagged new capacity commences saleable production in Finland. However, continued good demand for the grade and some capacity closures can be expected to provide a positive counterweight to this process over the course of the year. Smurfit Kappa closed its 65,000 tonne virgin-based containerboard machine in Sanguesa, Spain in January, in order to convert the machine to a 30,000 tonne Machine Glazed (‘MG’) paper machine, which will be operational from March 2016.

The Americas

In the Americas, absolute corrugated volumes have increased by 18% year-on-year as a result of the positive impact of acquisitions across the region and good market conditions in the larger operations. Excluding these acquisitions and Venezuela (which was down 9%), underlying volumes in the region increased by 3% for the full year, accelerating to almost 5% year-on-year in the fourth quarter. This was driven by improving performances across the three major markets of the US, Colombia and Mexico, which all grew well in the fourth quarter. With currency weakness remaining an issue in the early part of 2016, the Group remains focused on implementing price increases across its existing operations and driving synergies in new acquisitions to maximise profitability in the region.

In the US, SKG’s operations delivered good earnings growth compared to 2014, with the first full year inclusion of the Bates and Brian Thomas businesses. EBITDA margins improved during the year, primarily due to the strong performance in the 350,000 tonne recycled mill in Forney, Texas which benefitted from lower OCC prices through the year. While the Californian business remains under pressure, volumes in the fourth quarter were encouragingly stronger than previous periods. The Group completed the acquisition of a corrugated packaging facility (Sound Packaging) in Arizona in January 2016 and integration of the business is now underway.

The Group’s Mexican business grew well through 2015 with good EBITDA growth, higher EBITDA margins and 5% higher volumes year-on-year. With a good geographic footprint in the country, with facilities in the south, centre and north of the country, SKG is well positioned to service most segments of the market throughout Mexico, and the Group continues to target corrugated price increases to offset recent currency headwinds. Construction of the Group’s new 100,000 tonne recycled machine in Los Reyes is expected to be completed in December 2016 at a cost of US$62 million.

In Colombia, underlying volumes strengthened in the fourth quarter to a growth rate of 6% year-on-year reflecting the good position of the economy in the country. However, currency pressures throughout 2015 resulted in EBITDA remaining relatively flat compared to 2014 in spite of historically strong EBITDA margins in local currency terms.

Venezuela remains a challenging operating environment with the level of scarcity in the country at historically high levels. Reflecting this, the Group’s corrugated volume shipments declined by 9% in 2015 compared to 2014. However, following the adoption of the Simadi rate in the first quarter of 2015, the Venezuelan operations comprised less than 2% of the Group’s EBITDA in 2015. SKG remains committed to its operations in the country and is focused on continuing to drive cost efficiencies through its operations to offset the deteriorating market conditions insofar as possible.

Following the elections in Argentina in December the Argentinian Peso depreciated by 35% following the lifting of currency controls. While the event had a negative impact on the financial results in the year, it is regarded as a positive development for the economy into 2016. Despite the currency headwinds, SKG’s operations reported a strong outcome in 2015 with both EBITDA and volume growth supported by price increases and significant cost take-out through higher paper integration, lower waste and logistics optimisation.

In recognition of the increasing importance to our customers of operating truly global supply chains, the Group established a targeted Pan American Sales (‘PAS’) division in 2015. Leveraging the Group’s expanding footprint throughout the Americas as well as its leading presence in Europe, the PAS business reported year-on-year volume growth of over 6% in 2015. A large element of this was driven by new business as the Group’s geographic scale is increasingly viewed as a key differentiator by our customers in the region.

Summary Cash Flow
 
Summary cash flows() 1for the fourth quarter and twelve months are set out in the following table.
   

3 months to
31-Dec-15
€m

  3 months to
31-Dec-14
€m		   12 months to
31-Dec-15
€m 		  12 months to
31-Dec-14
€m
Pre-exceptional EBITDA   326   295   1,182   1,161
Exceptional items (29) (4) (69) (12)
Cash interest expense (33) (29) (123) (137)
Working capital change 41 8 (24) (40)
Current provisions (8) (1) (28) (2)
Capital expenditure (164) (185) (451) (438)
Change in capital creditors 3 (2) 12 (8)
Tax paid (29) (42) (131) (107)
Sale of fixed assets 29 - 33 5
Other 16   (21)   (13)   (60)
Free cash flow 152 19 388 362
 
Share issues - - 2 2
Sale/(purchase) of own shares 2 - (13) (13)
Sale of businesses and investments - - 29 1
Purchase of businesses and investments (140) (121) (321) (151)
Dividends (48) (37) (145) (112)
Early repayment of bonds - - - (35)
Derivative termination payments -   (13)   (2)   (13)
Net cash (outflow)/inflow (34) (152) (62) 41
 
Net debt acquired (41) - (62) -
Deferred debt issue costs amortised (2) (2) (11) (16)
Currency translation adjustments (18)   (27)   (154)   (163)
Increase in net debt (95)   (181)   (289)   (138)
(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.
        12 months to
31-Dec-15
€m 		  12 months to
31-Dec-14
€m
Free cash flow   388   362
 
Add back: Cash interest 123 137
Capital expenditure (net of change in capital creditors) 439 446
Tax payments 131 107
Financing activities - 1
Less: Sale of fixed assets (33) (5)
Profit on sale of assets and businesses – non exceptional (7) (4)
Receipt of capital grants (2) (3)
Dividends received from associates (1)   (1)
Cash generated from operations 1,038   1,040

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 31 December 2015, Smurfit Kappa Treasury Funding Limited had outstanding US$292.3 million 7.50% senior debentures due 2025. The Group had outstanding €154.3 million and STG£58.5 million variable funding notes issued under the €240 million accounts receivable securitisation programme maturing in June 2019, 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, €500 million 3.25% senior notes due 2021 and €250 million 2.75% senior notes due 2025. Smurfit Kappa Acquisitions and certain subsidiaries are also party to a senior credit facility. At 31 December 2015, the Group’s senior credit facility comprised term drawings of €450.9 million and US$52.2 million under the amortising Term A facility maturing in 2020. In addition, as at 31 December 2015, the facility included a €625 million revolving credit facility of which €105 million and STG£37 million were drawn in revolver loans, with a further €10 million in operational facilities including letters of credit drawn under various ancillary facilities.

The following table provides the range of interest rates as of 31 December 2015 for each of the drawings under the various senior credit facility loans.

Borrowing Arrangement

   

Currency

   

Interest Rate

 
Term A Facility EUR 1.399% - 1.556%
USD 2.022%
 
Revolving Credit Facility EUR 1.159%
GBP 1.855%

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

In February 2015 the Group issued €250 million of ten-year euro denominated senior notes at a coupon of 2.75%, the proceeds of which were used to prepay term debt under the senior credit facility.

Following the success of the bond financing, in March 2015 the Group completed a transaction to amend and extend the reduced senior credit facility which incorporated an extension of the maturity date to March 2020, together with a significant margin reduction. Under the new terms the amortising Term A facility is repayable €83.3 million on 13 March 2018 (previously €125 million on 24 July 2016), €83.3 million on 13 March 2019 (previously €125 million on 24 July 2017) and €333.4 million on 13 March 2020 (previously €500 million on 24 July 2018). The maturity of the €625 million Revolving Credit Facility was extended to 13 March 2020 from 24 July 2018.

Effective on the date of the amendment, the margins applicable to the senior credit facility were reduced by 0.65% to the following:

 
Net debt/EBITDA ratio    

Revolving Credit
Facility

   

Term A
Facility

 
Greater than 3.00 : 1 1.85% 2.10%
3.00 : 1 or less but more than 2.50 : 1 1.35% 1.60%
2.50 : 1 or less but more than 2.00 : 1 1.10% 1.35%
2.00 : 1 or less 0.85% 1.10%

Capital Resources (continued)

Following acquisitions of over €380 million in 2015, including the Brazilian acquisitions in December, the Group increased the Term Loan under its Senior Credit Facility by €250 million, from €500 million to €750 million on 5 February 2016. The terms applicable to the increase, including margin, amortisation profile and maturity date are the same as the existing Term A loan. The proceeds will be substantially applied to reduce the drawings under the revolving credit facility, thereby further improving the Group’s liquidity.

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 31 December 2015, the Group had fixed an average of 68% 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, €250 million 2.75% senior notes due 2025 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 €12 million over the following twelve months. Interest income on the Group’s cash balances would increase by approximately €3 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 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 2015 interim report on page 13. The interim report is available on our website smurfitkappa.com. The principal risks and uncertainties for the financial year are summarised below.

  • If the current economic climate were to deteriorate and result in an increased economic slowdown which was sustained over any significant length of time, or the sovereign debt crisis (including its impact on the euro) were to intensify, it could adversely affect the Group’s financial position and results of operations.
  • The cyclical nature of the packaging industry could result in overcapacity and consequently threaten the Group’s pricing structure.
  • If operations at any of the Group’s facilities (in particular its key mills) were interrupted for any significant length of time it could adversely affect the Group’s financial position and results of operations.
  • Price fluctuations in raw materials and energy costs could adversely affect the Group’s manufacturing costs.
  • The Group is exposed to currency exchange rate fluctuations and, in addition, currency exchange controls in Venezuela and Argentina.
  • The Group may not be able to attract and retain suitably qualified employees as required for its business.
  • The Group is subject to a growing number of environmental laws and regulations, and the cost of compliance or the failure to comply with current and future laws and regulations may negatively affect the Group’s business.
  • The Group is subject to anti-trust and similar legislation in the jurisdictions in which it operates.
  • The Group, similar to other large global companies, is susceptible to cyber attacks with the threat to the confidentiality, integrity and availability of data in systems.

The Board regularly monitors all of the above risks and appropriate actions are taken to mitigate those risks or address their potential adverse consequences.

Consolidated Income Statement – Twelve Months

  12 months to 31-Dec-15
Unaudited 		  12 months to 31-Dec-14
Audited

Pre-
exceptional
2015

 

Exceptional
2015

 

Total
2015

Pre-
exceptional
2014

  

Exceptional
2014

  

Total
2014
    €m   €m   €m   €m   €m   €m
Revenue 8,109 - 8,109 8,083 - 8,083
Cost of sales (5,672)   (8)   (5,680)   (5,642)   (58)   (5,700)
Gross profit 2,437 (8) 2,429 2,441 (58) 2,383
Distribution costs (643) - (643) (630) - (630)
Administrative expenses (1,016) - (1,016) (1,042) - (1,042)
Other operating income 2 - 2 2 - 2
Other operating expenses -   (61)   (61)   -   (52)   (52)
Operating profit 780 (69) 711 771 (110) 661
Finance costs (177) (2) (179) (284) (48) (332)
Finance income 48 16 64 36 11 47
Share of associates’ profit (after tax) 3   -   3   2   -   2
Profit before income tax 654   (55)   599 525   (147)   378
Income tax expense (186) (126)
Profit for the financial year 413 252
 
Attributable to:
Owners of the parent 400 241
Non-controlling interests 13 11
Profit for the financial year 413 252
 

Earnings per share

Basic earnings per share - cent

172.6

105.8

Diluted earnings per share - cent

169.4

102.6

 

Consolidated Income Statement – Fourth Quarter

  3 months to 31-Dec-15
Unaudited 		  3 months to 31-Dec-14
Unaudited

Pre-
exceptional
2015

 

Exceptional
2015

 

Total
2015

Pre-
exceptional
2014

  

Exceptional
2014

  

Total
2014
    €m   €m   €m   €m   €m   €m
Revenue 2,089 - 2,089 2,108 - 2,108
Cost of sales (1,452)   -   (1,452)   (1,460)   (42)   (1,502)
Gross profit 637 - 637 648 (42) 606
Distribution costs (161) - (161) (161) - (161)
Administrative expenses (248) - (248) (276) - (276)
Other operating income 1 - 1 1 - 1
Other operating expenses -   (15)   (15)   -   (44)   (44)
Operating profit 229 (15) 214 212 (86) 126
Finance costs (49) - (49) (78) (7) (85)
Finance income 22 4 26 14 2 16
Share of associates’ profit (after tax) -   -   -   1   -   1
Profit before income tax 202   (11)   191 149   (91)   58
Income tax expense (60) (24)
Profit for the financial period 131 34
 
Attributable to:
Owners of the parent 123 26
Non-controlling interests 8 8
Profit for the financial period 131 34
 

Earnings per share

Basic earnings per share - cent

52.9

11.6

Diluted earnings per share - cent

51.9

11.3

 

Consolidated Statement of Comprehensive Income – Twelve Months

    12 months to
31-Dec-15
Unaudited
€m 		  12 months to
31-Dec-14
Audited
€m
   
Profit for the financial year 413   252
 
Other comprehensive income:
Items that may be subsequently reclassified to profit or loss
Foreign currency translation adjustments:
- Arising in the year (485) (265)
 
Effective portion of changes in fair value of cash flow hedges:
- Movement out of reserve 10 10
- New fair value adjustments into reserve 1 (29)
- Movement in deferred tax -   1

(474)

(283)
 
Items which will not be subsequently reclassified to profit or loss
Defined benefit pension plans:
- Actuarial gain/(loss) 37 (227)
- Movement in deferred tax (10)   49
27 (178)
     
Total other comprehensive expense (447)   (461)
 
Total comprehensive expense for the financial year (34)   (209)
 
Attributable to:
Owners of the parent 18 (188)
Non-controlling interests (52)   (21)
Total comprehensive expense for the financial year (34)   (209)
 

Consolidated Statement of Comprehensive Income – Fourth Quarter

    3 months to
31-Dec-15
Unaudited
€m 		  3 months to
31-Dec-14
Unaudited
€m
   
Profit for the financial period 131   34
 
Other comprehensive income:
Items that may be subsequently reclassified to profit or loss
Foreign currency translation adjustments:
- Arising in the period 20 (83)
 
Effective portion of changes in fair value of cash flow hedges:
- Movement out of reserve 2 -
- New fair value adjustments into reserve (1) (4)
- Movement in deferred tax -   1

21

(86)
 
Items which will not be subsequently reclassified to profit or loss
Defined benefit pension plans:
- Actuarial loss (6) (135)
- Movement in deferred tax (6)   36
(12) (99)
     
Total other comprehensive income/(expense) 9   (185)
 
Total comprehensive income/(expense) for the financial period 140   (151)
 
Attributable to:
Owners of the parent 130 (144)
Non-controlling interests 10   (7)
Total comprehensive income/(expense) for the financial period 140   (151)
 

Consolidated Balance Sheet

       
        31-Dec-15
Unaudited
€m 		  31-Dec-14
Audited
€m
ASSETS
Non-current assets
Property plant and equipment 3,103 3,033
Goodwill and intangible assets 2,508 2,407
Available-for-sale financial assets 21 21
Investment in associates 17 17
Biological assets 98 130
Trade and other receivables 34 12
Derivative financial instruments 34 2
Deferred income tax assets 200   237
6,015   5,859
Current assets
Inventories 735 701
Biological assets 8 9
Trade and other receivables 1,451 1,422
Derivative financial instruments 28 3
Restricted cash 5 12
Cash and cash equivalents 270   387
2,497 2,534
Assets classified as held for sale -   92
2,497   2,626
Total assets 8,512   8,485
 
EQUITY
Capital and reserves attributable to the owners of the parent
Equity share capital - -
Share premium 1,983 1,981
Other reserves (425) (30)
Retained earnings 619   271
Total equity attributable to the owners of the parent 2,177 2,222
Non-controlling interests 151   197
Total equity 2,328   2,419
 
LIABILITIES
Non-current liabilities
Borrowings 3,238 3,093
Employee benefits 818 893
Derivative financial instruments 15 23
Deferred income tax liabilities 179 183
Non-current income tax liabilities 25 28
Provisions for liabilities and charges 52 47
Capital grants 13 12
Other payables 13   10
4,353   4,289
Current liabilities
Borrowings 85 65
Trade and other payables 1,672 1,573
Current income tax liabilities 30 12
Derivative financial instruments 10 27
Provisions for liabilities and charges 34   57
1,831 1,734
Liabilities associated with assets classified as held for sale -   43
1,831   1,777
Total liabilities 6,184   6,066
Total equity and liabilities 8,512   8,485
 

Consolidated Statement of Changes in Equity

  Attributable to owners of the parent    
   

Equity
share
capital
€m

 

Share
premium
€m

 

Other
reserves
€m

 

Retained
earnings
€m

 

Total
€m

 

Non-
controlling

interests
€m

 

 

Total
equity
€m

Unaudited        
At 1 January 2015 - 1,981 (30) 271 2,222 197 2,419
 
Profit for the financial year - - - 400 400 13 413
Other comprehensive income

Foreign currency translation
adjustments

 - - (420) - (420) (65) (485)
Defined benefit pension plans - - - 27 27 - 27

Effective portion of changes in fair
value of cash flow hedges

 -   -   11   -   11   -   11

Total comprehensive
(expense)/income for the
financial year

-   -   (409)   427   18   (52)   (34)
 
Shares issued - 2 - - 2 - 2
Hyperinflation adjustment - - - 61 61 7 68
Dividends paid - - - (141) (141) (4) (145)
Share-based payment - - 28 - 28 - 28

Shares (acquired)/disposed by
SKG Employee Trust

 - - (14) 1 (13) - (13)
Acquired non-controlling interest -   -   -   -   -   3   3
At 31 December 2015 -   1,983   (425)   619   2,177   151   2,328
 
Audited
At 1 January 2014 - 1,979 208 121 2,308 199 2,507
 
Profit for the financial year - - - 241 241 11 252
Other comprehensive income

Foreign currency translation
adjustments

 - - (233) - (233) (32) (265)
Defined benefit pension plans - - - (178) (178) - (178)

Effective portion of changes in fair
value of cash flow hedges

 -   -   (18)   -   (18)   -   (18)

Total comprehensive
(expense)/income for the
financial year

-   -   (251)   63   (188)   (21)   (209)
 
Shares issued - 2 - - 2 - 2
Hyperinflation adjustment - - - 194 194 22 216
Dividends paid - - - (107) (107) (5) (112)
Share-based payment - - 26 - 26 - 26

Shares acquired by SKG Employee
Trust

 - - (13) - (13) - (13)
Acquired non-controlling interest -   -   -   -   -   2   2
At 31 December 2014 -   1,981   (30)   271   2,222   197   2,419
 

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

 

Consolidated Statement of Cash Flows

    12 months to
31-Dec-15
Unaudited
€m 		  12 months to
31-Dec-14
Audited
€m
Cash flows from operating activities    
Profit before income tax 599 378
 
Net finance costs 115 285
Depreciation charge 338 340
Impairment of assets 8 58
Amortisation of intangible assets 37 26
Amortisation of capital grants (2) (2)
Equity settled share-based payment expense 28 26
Profit on sale of assets and businesses (15) (4)
Share of associates’ profit (after tax) (3) (2)
Net movement in working capital (18) (37)
Change in biological assets (7) (2)
Change in employee benefits and other provisions (85) (30)
Other 43   4
Cash generated from operations 1,038 1,040
Interest paid (128) (197)
Income taxes paid:
Irish corporation tax (net of tax refunds) paid (2) (1)
Overseas corporation tax (net of tax refunds) paid (129)   (106)
Net cash inflow from operating activities 779   736
 
Cash flows from investing activities
Interest received 5 6
Business disposals 30 -
Additions to property, plant and equipment and biological assets (428) (430)
Additions to intangible assets (11) (16)
Receipt of capital grants 2 3
Disposal of available-for-sale financial assets - 1
Decrease/(increase) in restricted cash 2 (5)
Disposal of property, plant and equipment 39 9
Dividends received from associates 1 1
Purchase of subsidiaries and non-controlling interests (332) (149)
Deferred consideration paid (8)   (1)
Net cash outflow from investing activities (700)   (581)
 
Cash flows from financing activities
Proceeds from issue of new ordinary shares 2 2
Proceeds from bond issue 250 500
Purchase of own shares (net) (13) (13)
Increase in other interest-bearing borrowings 106 27
Payment of finance leases (4) (2)
Repayment of borrowings (264) (507)
Derivative termination payments (2) (13)
Deferred debt issue costs paid (10) (10)
Dividends paid to shareholders (141) (107)
Dividends paid to non-controlling interests (4)   (5)
Net cash outflow from financing activities (80)   (128)
(Decrease)/increase in cash and cash equivalents (1)   27
 
Reconciliation of opening to closing cash and cash equivalents
Cash and cash equivalents at 1 January 361 424
Currency translation adjustment (97) (90)
(Decrease)/increase in cash and cash equivalents (1)   27
Cash and cash equivalents at 31 December 263   361
 

An analysis of the Net movement in working capital is provided in Note 11.

 

Notes to the Consolidated Financial Statements

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 D04 N2R2, Ireland.

2. Basis of Preparation

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

The financial information in this report has been prepared in accordance with the Listing Rules of the Irish Stock Exchange and with the Group’s accounting policies. Full details of the accounting policies adopted by the Group are contained in the consolidated financial statements included in the Group’s annual report for the year ended 31 December 2014 which is available on the Group’s website; 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 year ended 31 December 2014. There are no new IFRSs or interpretations effective from 1 January 2015 which have had a material effect on the financial information included in this report.

The 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 the financial information may not add precisely due to rounding.

The financial information presented in this preliminary release does not constitute full statutory accounts. The preliminary release was approved by the Board of Directors. The annual report and accounts will be approved by the Board of Directors and reported on by the auditors in due course. The annual accounts reported on by the auditors will not contain quarterly information. Accordingly, the financial information is unaudited. Full statutory accounts for the year ended 31 December 2014 have been filed with the Irish Registrar of Companies. The audit report on those statutory accounts was unqualified.

3. Segmental Analyses

The Group has determined 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 United States. 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’).

  12 months to 31-Dec-15   12 months to 31-Dec-14
Europe  

The
Americas

  Total Europe  

The
Americas

   Total
    €m   €m   €m   €m   €m   €m
Revenue and results
Revenue 6,249   1,860   8,109   6,136   1,947   8,083
 
EBITDA before exceptional items 901 306 1,207 882 305 1,187
Segment exceptional items 8   (69)   (61)   (42)   (10)   (52)
EBITDA after exceptional items 909   237 1,146 840   295 1,135
 
Unallocated centre costs (25) (26)
Share-based payment expense (34) (26)
Depreciation and depletion (net) (331) (338)
Amortisation (37) (26)
Impairment of assets (8) (58)
Finance costs (179) (332)
Finance income 64 47
Share of associates’ profit (after tax) 3 2
Profit before income tax 599 378
Income tax expense (186) (126)
Profit for the financial year 413 252
 

3. Segmental Analyses (continued)

  3 months to 31-Dec-15   3 months to 31-Dec-14
Europe  

The
Americas

  Total Europe  

The
Americas

   Total
    €m   €m   €m   €m   €m   €m
Revenue and results
Revenue 1,542   547   2,089   1,521   587   2,108
 
EBITDA before exceptional items 238 89 327 217 84 301
Segment exceptional items 13   (28)   (15)   (42)   (2)   (44)
EBITDA after exceptional items 251   61 312 175   82 257
 
Unallocated centre costs (1) (6)
Share-based payment expense (2) (12)
Depreciation and depletion (net) (82) (65)
Amortisation (13) (6)
Impairment of assets - (42)
Finance costs (49) (85)
Finance income 26 16
Share of associates’ profit (after tax) - 1
Profit before income tax 191 58
Income tax expense (60) (24)
Profit for the financial period 131 34
 

4. Exceptional Items

The following items are regarded as exceptional in nature:   12 months to
31-Dec-15
€m 		  12 months to
31-Dec-14
€m
   
Impairment of assets 8 58
Loss on the disposal of the solidboard operations 4 -
Profit on the sale of the Nanterre site (13) -
Reorganisation and restructuring costs 1 42
Currency trading loss on change in Venezuelan translation rate 69   10
Exceptional items included in operating profit 69   110
 
Exceptional finance costs 2 48
Exceptional finance income (16)   (11)
Exceptional items included in net finance costs (14)   37
 

Exceptional items charged within operating profit in 2015 amounted to €69 million in total, primarily relating to a charge of €69 million which represented the higher cost to our Venezuelan operations of discharging their non-Bolivar denominated payables following our adoption of the Simadi rate. At the time, the Simadi rate was VEF 193 per US dollar compared to the Sicad rate of 12 VEF per US dollar with the large loss reflecting the very different rates. The remaining offsetting amounts comprised a charge of €12 million relating to the solidboard operations and €1 million in reorganisation and restructuring costs less the gain of €13 million on the sale of the site of our former Nanterre mill.

Exceptional finance income of €16 million in 2015 represented the gain in Venezuela on their US dollar denominated intra-group loans as a result of our adoption of the Simadi rate. This gain was partly offset by an exceptional finance cost of €2 million. This represented the accelerated amortisation of the issue costs relating to the debt within our Senior Credit Facility which was paid down with the proceeds of February’s €250 million bond issue.

Exceptional items charged within operating profit in 2014 amounted to €110 million, of which €46 million related to our solidboard operations in Belgium, the Netherlands and the UK. The charge of €46 million comprised an impairment of plant and equipment of €27 million and a goodwill impairment of €19 million. The remaining impairment charge of €12 million related to one mill and four corrugated plants in Europe which we closed during 2015. The reorganisation and restructuring costs were mainly in respect of the planned plant closures. The currency trading loss of €10 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 2014 of €48 million comprised €42 million relating to the repayment of the 2019 bonds in July and an impairment loss of €6 million in respect of one of the Group’s unlisted investments.

Exceptional finance income in 2014 amounted to €11 million and represented the gain in Venezuela on their US dollar denominated intra-group loans following our adoption of the Sicad I rate.

5. Finance Costs and Income

    12 months to
31-Dec-15
€m 		  12 months to
31-Dec-14
€m
Finance costs:    
Interest payable on bank loans and overdrafts 37 45
Interest payable on other borrowings 100 107
Exceptional finance costs associated with debt restructuring 2 42
Unwinding discount element of provision 1 1
Exceptional finance costs associated with impairment of financial investments - 6
Foreign currency translation loss on debt 16 23
Fair value loss on derivatives not designated as hedges 2 3
Net interest cost on net pension liability 21 27
Net monetary loss - hyperinflation -   78
Total finance costs 179   332
 
Finance income:
Other interest receivable (5) (6)
Gain on sale of financial asset - (1)
Foreign currency translation gain on debt (18) (11)
Exceptional foreign currency translation gain (16) (11)
Fair value gain on derivatives not designated as hedges (10) (18)
Net monetary gain - hyperinflation (15)   -
Total finance income (64)   (47)
Net finance costs 115   285
 

6. Income Tax Expense

Income tax expense recognised in the Consolidated Income Statement

 
    12 months to
31-Dec-15
€m 		  12 months to
31-Dec-14
€m
Current tax:  
Europe 86 67
The Americas 60   58
146 125
Deferred tax 40   1
Income tax expense 186   126
 
Current tax is analysed as follows:
Ireland 20 3
Foreign 126   122
146   125
 

Income tax recognised in the Consolidated Statement of Comprehensive Income

   

12 months to
31-Dec-15
€m

 

12 months to
31-Dec-14
€m

Arising on actuarial gain/loss on defined benefit plans

10

(49)

Arising on qualifying derivative cash flow hedges

-

 

(1)

10

 

(50)

 

The income tax expense in 2015 is €60 million higher than in the comparable period. In Europe, the income tax expense is higher by €54 million and reflects the impact of lower financing costs, increased profitability, as well as the effects of timing benefits recorded in 2014 and comparatively lower tax refunds in 2015. There was a further movement in deferred tax in Europe on timing items and in particular from the use of tax losses on which a deferred tax credit was recorded in prior periods. In the Americas, the tax expense is €6 million higher and includes the effects of the introduction of new taxes in Colombia, increased profitability and the recognition of deferred tax assets on prior period timing differences as well as the impact in Venezuela from the adoption of the Simadi rate. There was also a €10 million increase in deferred tax expense in Venezuela from tax law changes in December. There was a net tax expense on exceptional items in 2015 of €3 million compared to a net tax credit of €18 million in 2014.

7. Employee Benefits – Defined Benefit Plans

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

   
 
    12 months to
31-Dec-15
€m 		  12 months to
31-Dec-14
€m
 
Current service cost 43 51
Past service cost (8) (5)
Gain on curtailment (1) (3)
Gain on settlement (3) (8)
Actuarial loss arising from other long term employee benefits 1 4
Net interest cost on net pension liability 21   27
Defined benefit cost 53   66
 

Included in cost of sales, distribution costs and administrative expenses is a defined benefit cost of
€32 million (2014: €39 million). Net interest cost on net pension liability of €21 million (2014: €27 million) is
included in finance costs in the Consolidated Income Statement.

 

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

 

   

31-Dec-15
€m

 

31-Dec-14
€m

Present value of funded or partially funded obligations

(2,195)

(2, 226)

Fair value of plan assets

1,884

1,889

Deficit in funded or partially funded plans

(311)

(337)

Present value of wholly unfunded obligations

(507)

(556)

Net pension liability

(818)

(893)

 

The employee benefits provision has decreased from €893 million at 31 December 2014 to €818 million at
31 December 2015, mainly as a result of higher Eurozone and Sterling corporate bond yields which
increased the discount rates in the Eurozone and Sterling areas.

 

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 year less own shares.

    12 months to
31-Dec-15 		  12 months to
31-Dec-14
Profit attributable to owners of the parent (€ million)   400   241
 
Weighted average number of ordinary shares in issue (million) 232 228
 
Basic earnings per share (cent) 172.6   105.8

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 share incentive plan and both deferred shares held in trust and matching shares under the
Deferred Annual Bonus Plan.
    12 months to
31-Dec-15 		  12 months to
31-Dec-14
Profit attributable to owners of the parent (€ million)   400   241
 
Weighted average number of ordinary shares in issue (million) 232 228
Potential dilutive ordinary shares assumed (million) 4   7
Diluted weighted average ordinary shares (million) 236   235
 
Diluted earnings per share (cent) 169.4   102.6

Pre-exceptional

   
    12 months to
31-Dec-15 		  12 months to
31-Dec-14
Profit attributable to owners of the parent (€ million) 400 241
Exceptional items included in profit before income tax (Note 4) (€ million) 55 147
Income tax on exceptional items (€ million) 3   (18)
Pre-exceptional profit attributable to owners of the parent (€ million) 458   370
 
Weighted average number of ordinary shares in issue (million) 232 228
 
Pre-exceptional basic earnings per share (cent) 197.3   162.5
 
Diluted weighted average ordinary shares (million) 236 235
 
Pre-exceptional diluted earnings per share (cent) 193.7   157.6

9. Dividends

During the year, the final dividend for 2014 of 40 cent per share was paid to the holders of ordinary shares. In October, an interim dividend for 2015 of 20 cent per share was paid to the holders of ordinary shares.

The Board is recommending a final dividend of approximately 48 cent per share for 2015 subject to the approval of the shareholders at the AGM. It is proposed to pay the final dividend on 13 May 2016 to all ordinary shareholders on the share register at the close of business on 15 April 2016. The interim and final dividends are paid in October and May in each year.

10. Property, Plant and Equipment

   

Land and
buildings
€m

 

Plant and
equipment
€m

  Total
€m
Year ended 31 December 2015      
Opening net book amount 1,079 1,954 3,033
Reclassifications 19 (21) (2)
Additions 7 421 428
Acquisitions 46 116 162
Depreciation charge (47) (291) (338)
Retirements and disposals (18) (2) (20)
Hyperinflation adjustment 17 13 30
Foreign currency translation adjustment (115)   (75)   (190)
At 31 December 2015 988   2,115   3,103
 

Year ended 31 December 2014

Opening net book amount

1,107

1,915

3,022

Reclassifications

44

(49)

(5)

Assets classified as held for sale

(20)

(19)

(39)

Additions

9

391

400

Acquistions

1

49

50

Depreciation charge

(48)

(292)

(340)

Impairments

(5)

(34)

(39)

Retirements and disposals

(3)

(1)

(4)

Hyperinflation adjustment

45

39

84

Foreign currency translation adjustment

(51)

 

(45)

 

(96)

At 31 December 2014

1,079

 

1,954

 

3,033

 

11. Net Movement in Working Capital

    12 months to
31-Dec-15
€m 		  12 months to
31-Dec-14
€m
   
Change in inventories (75) (32)
Change in trade and other receivables (49) (113)
Change in trade and other payables 106   108
Net movement in working capital (18)   (37)
 

12. Analysis of Net Debt

    31-Dec-15
€m 		  31-Dec-14
€m
Senior credit facility:    
Revolving credit facility(1) – interest at relevant interbank rate + 1.35%(6) 149 100
Facility A term loan(2) – interest at relevant interbank rate + 1.60%(6) 494 745

US$292.3 million 7.50% senior debentures due 2025 (including accrued interest)

270 242
Bank loans and overdrafts 124 65
Cash (275) (399)
2018 receivables securitisation variable funding notes 174 173
2019 receivables securitisation variable funding notes 232 236
2018 senior notes (including accrued interest)(3) 477 446
€400 million 4.125% senior notes due 2020 (including accrued interest) 403 402
€250 million senior floating rate notes due 2020 (including accrued interest)(4) 249 248
€500 million 3.25% senior notes due 2021 (including accrued interest) 495 494
€250 million 2.75% senior notes due 2025 (including accrued interest)(5) 248   -
Net debt before finance leases 3,040 2,752
Finance leases 8   7
Net debt including leases 3,048   2,759
(1)    

Revolving credit facility ('RCF') of €625 million (available under the senior credit facility) to be repaid in 2020
(maturity dates extended from 2018 effective 13 March 2015).

(a) Revolver loans - €155 million, (b) drawn under ancillary facilities and facilities supported by letters of credit – nil
and (c) other operational facilities including letters of credit - €10 million.

 
(2)

Facility A term loan (‘Facility A’) due to be repaid in certain instalments from 2018 to 2020 (maturity dates extended
from 2016 to 2018 effective 13 March 2015).

 
(3) €200 million 5.125% senior notes due 2018 and US$300 million 4.875% senior notes due 2018.
 
(4) Interest at EURIBOR + 3.5%.
 
(5)

On 11 February 2015 the Group priced €250 million of ten-year euro denominated senior notes at a coupon of
2.75%. The proceeds of the offering were used to reduce term loan borrowings under the senior credit facility.

 
(6)

Following a reduction in the margins applicable to the senior credit facility of 0.65% as part of the amendment and
extension of that facility effective 13 March 2015, the margins are determined as follows:

 

Net debt/EBITDA ratio   RCF Facility A
 
Greater than 3.00 : 1 1.85% 2.10%
3.00 : 1 or less but more than 2.50 : 1 1.35% 1.60%
2.50 : 1 or less but more than 2.00 : 1 1.10% 1.35%
2.00 : 1 or less 0.85% 1.10%
 

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 2015 575 (33) (689) 156 (40) 1 (30)

Other comprehensive
income

Foreign currency
translation adjustments

 - - (420) - - - (420)

Effective portion of
changes in fair value of
cash flow hedges

-   11   -   -   -   -   11

Total other
comprehensive
income/(expense)

-   11   (420)   -   -   -   (409)
 
Share-based payment - - - 28 - - 28

Shares acquired by SKG
Employee Trust

 - - - - (14) - (14)

Shares distributed by SKG
Employee Trust

 -   -   -   (16)   16   -   -
At 31 December 2015 575   (22)   (1,109)   168   (38)   1   (425)
 
At 1 January 2014 575 (15) (456) 131 (28) 1 208

Other comprehensive
income

Foreign currency
translation adjustments

 - - (233) - - - (233)

Effective portion of
changes in fair value of
cash flow hedges

-   (18)   -   -   -   -   (18)

Total other
comprehensive expense

-   (18)   (233)   -   -   -   (251)
 
Share-based payment - - - 26 - - 26

Shares acquired by SKG
Employee Trust

 - - - - (13) - (13)

Shares distributed by SKG
Employee Trust

 -   -   -   (1)   1   -   -
At 31 December 2014 575   (33)   (689)   156   (40)   1   (30)

14. Venezuela

Hyperinflation

As discussed more fully in the 2014 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.

In 2014 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 and in 2015 management engaged an independent expert to determine an estimate of the annual inflation rate. The level of and movement in the estimated price index at December 2015 and 2014 are as follows:

      31-Dec-15     31-Dec-14
Index at year end     2,575.10     839.5
Movement in year     206.7%     68.5%

As a result of the entries recorded in respect of hyperinflationary accounting under IFRS, the Consolidated Income Statement is impacted as follows: Revenue €14 million decrease (2014: €88 million increase), pre-exceptional EBITDA nil impact (2014: €1 million increase) and profit after taxation €24 million decrease (2014: €117 million decrease). In 2015, a net monetary gain of €15 million (2014: €78 million loss) was recorded in the Consolidated Income Statement. The impact on our net assets and our total equity is an increase of €69 million (2014: €106 million increase).

Exchange Control and Devaluation

In quarter one of 2015, the Venezuelan government announced changes to its system of multiple exchange rates for the Venezuelan Bolivar Fuerte (‘VEF’) as follows:

  • Sicad I and Sicad II rates were unified into a single variable Sicad rate, which was 13.5 VEF per US dollar at 31 December 2015;
  • A new rate, (‘Simadi’), was created to allow individuals and businesses to buy and sell foreign currency more easily and to offset the parallel market rate. The SIMADI rate was VEF 199 per US dollar at 31 December 2015; and
  • The existing ‘official rate’ continues to be fixed at VEF 6.3 per US dollar.

The Group changed the rate at which it consolidates its Venezuelan operations from the Sicad rate to the Simadi rate as at 31 March 2015. The Group believes that Simadi is the most appropriate rate for accounting and consolidation, as it believes that this is the rate at which the Group extracts economic benefit. The change from the Sicad rate to the Simadi rate reduced the Group’s cash by approximately €96 million and its net assets by €573 million at 31 March 2015. Following this change, the Group’s operations in Venezuela now accounts for approximately 2% of its EBITDA.

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 2015, the Group’s operations in Venezuela represented approximately 2% (2014: 6%) of its total assets and 4% (2014: 18%) of its net assets. Cumulative foreign translation losses arising on its net investment in these operations amounting to €927 million (2014: €535 million) are included in the foreign exchange translation reserve.

15. Business Combinations

The acquisitions completed by the Group during the year, together with percentages acquired and completion dates were as follows:

  • Hexacomb, (100%, 1 April 2015), protective packaging business located in Europe and Mexico;
  • Inspirepac, (100%, 14 April 2015), corrugated, high quality print and display business in the UK;
  • Beacon, (75%, 15 April 2015), a large independent converter of board into corrugated boxes and fitments located in the UK;
  • Cybsa, (100%, 6 May 2015), corrugated packaging business in Costa Rica and El Salvador;
  • Nigua, (100%, 1 July 2015), certain assets of Industrias Nigua which is based in the Dominican Republic; and
  • INPA (98.5%, 30 November 2015) & Paema, (100%, 30 November 2015); integrated packaging businesses located in Brazil.

As the INPA and Paema acquisitions occurred within such close proximity to the year end, the assignment of fair values has not yet been performed. For all other acquisitions, the initial assignment of fair values to identifiable net assets acquired has been performed on a provisional basis and any amendments to these fair values will be made within the allowed measurement period permitted by IFRS 3.

Only the INPA and Paema acquisitions were deemed to be sufficiently material to warrant separate disclosure. All other acquisitions have been accumulated and are disclosed separately in the Other Acquisitions table below.

INPA & PAEMA     Book value    

Fair value
adjustments

    Fair Value
    €m     €m     €m
Non-current assets 73 - 73
Current assets 50 - 50
Non-current liabilities (42) - (42)
Current liabilities (40)     -     (40)
Net assets acquired 41 - 41
Goodwill 112
Consideration 153
 
Settled by:
Cash 144
Contingent consideration 9
153

15. Business Combinations (continued)

OTHER ACQUISITIONS

   

 

Book value

   

Fair value
adjustments

    Fair Value
    €m     €m     €m
Non-current assets 66 85 151
Current assets 90 (3) 87
Non-current liabilities (16) (18) (34)
Current liabilities (69)     (3)     (72)
Net assets acquired 71 61 132
Goodwill 48
Non-controlling interests (3)
Consideration 177
 

Settled by:

 

Cash

174

Deferred consideration

3

177

 

TOTAL ACQUISITIONS

   

 

Book value

   

Fair value
adjustments

    Fair Value
    €m     €m     €m
Non-current assets 139 85 224
Current assets 140 (3) 137
Non-current liabilities (58) (18) (76)
Current liabilities (109)     (3)     (112)
Net assets acquired 112 61 173
Goodwill 160
Non-controlling interests (3)
Consideration 330
 

Settled by:

Cash

318

Contingent/deferred consideration

12

330

 

Acquisition-related costs of €3 million were incurred and are included within administrative expenses in the
Consolidated Income Statement.

16. Contingent Liabilities

During 2013, the Spanish Competition Authority (‘CNMC’) launched an investigation into several corrugated manufacturers based in Spain including SKG and the Spanish Association of Corrugated Cardboard Containers and Packaging Manufacturers (‘AFCO’). On 23 June 2015, SKG received notification from the CNMC of a fine for alleged anticompetitive conduct.

The Group considers that the fine is unjustified and that there is no basis upon which a fine can be levied. A formal appeal was lodged in December and the Group is confident of a successful outcome. Accordingly no provision has been made in respect of this fine in the consolidated financial statements. In the event that the Group is unsuccessful in the appeal, the potential liability amounts to €8.1 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
31-Dec-15
€m 		  3 months to
31-Dec-14
€m		   12 months to
31-Dec-15
€m 		  12 months to
31-Dec-14
€m
 
Profit for the financial period 131 34 413 252
Income tax expense 60 24 186 126
Exceptional items charged in operating profit 15 86 69 110
Share of associates’ profit (after tax) - (1) (3) (2)
Net finance costs (after exceptional items) 23 69 115 285
Share-based payment expense 2 12 34 26
Depreciation, depletion (net) and amortisation 95   71   368   364
EBITDA 326   295   1,182   1,161

Supplementary Historical Financial Information

           
 
€m   FY, 2014   Q1, 2015   Q2, 2015   Q3, 2015   Q4, 2015   FY, 2015
 
Group and third party revenue 13,306 3,235 3,305 3,347 3,422 13,309
Third party revenue 8,083 1,962 2,034 2,024 2,089 8,109
EBITDA 1,161 266 285 305 326 1,182
EBITDA margin 14.4% 13.5% 14.0% 15.0% 15.6% 14.6%
Operating profit 661 127 176 195 214 711
Profit before income tax 378 98 145 165 191 599
Free cash flow 362 25 49 162 152 388
Basic earnings per share - cent 105.8 30.9 42.3 46.4 52.9 172.6

Weighted average number of shares
used in EPS calculation (million)

228 230 231 231 233 232
Net debt 2,759 2,930 3,100 2,953 3,048 3,048
Net debt to EBITDA (LTM) 2.38 2.53 2.70 2.57 2.58 2.58
 

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