Half-year Report

Half-year Report

Smurfit Kappa Group PLC

27 July 2016: Smurfit Kappa Group plc (‘SKG’ or ‘the Group’) today announced results for the 3 months and 6 months ending 30 June 2016.

2016 Second Quarter & First Half | Key Financial Performance Measures

                                 
€m  

H1
2016

 

H1
2015

  Change  

Q2
2016

 

Q2
2015

  Change  

Q1
2016

  Change
Revenue €4,049 €3,996 1% €2,049 €2,034 1% €2,001 2%

EBITDA before Exceptional Items and
Share-based Payment(1) (2)

€593 €551 8% €312 €285 10% €281 11%
EBITDA Margin (1) 14.6% 13.8% 15.3% 14.0% 14.0%
Operating Profit before Exceptional Items (1) €390 €348 12% €211 €183 15% €179 18%
Profit before Income Tax €312 €243 28% €184 €145 27% €128 43%
Basic EPS (cent) 90.8 73.2 24% 52.0 42.3 23% 38.8 34%
Pre-exceptional Basic EPS (cent) (1) 85.6 88.7 (3%) 46.9 44.6 5% 38.8 21%
Return on Capital Employed (1) 15.4% 14.6% 15.3%
Free Cash Flow (1)   €35   €74   (53%)   €28   €49   (43%)   €7   300%
                                 
Net Debt (1) €3,121 €3,100 1% €3,029 3%
Net Debt to EBITDA (LTM) (1)               2.5x   2.7x       2.5x    
 

1) Additional information in relation to these Alternative Performance Measures (‘APMs’) is set out in Supplementary Financial Information on page 36.

2) EBITDA before exceptional items and share-based payment expense is denoted by EBITDA throughout the remainder of the management commentary for ease of reference.

Second Quarter & Half Year Key Points

  • Group corrugated packaging growth of 5% in the first half - solid organic volume growth
  • EBITDA growth of 8% in the first half of the year - improved EBITDA margin of 14.6%
  • Improved ROCE of 15.4%
  • Interim dividend increased by 10% to 22 cent per share
  • Kraftliner price increases implemented in July in European markets

Performance Review and Outlook

Tony Smurfit, Group CEO, commented: “We are pleased to deliver a strong first half result with EBITDA growth of 8% to €593 million. This result reflects the strength of our team; our portfolio of geographically diverse operations; and, our integrated business model delivering a strong ROCE of 15.4%.

“In Europe, we have delivered an improved earnings performance in the first half, with organic box volume growth of 2% and a relatively stable pricing environment in local currency terms. This result has been achieved despite higher than expected OCC costs, while negatively impacting our margin in the short-term, should provide a solid underpin to containerboard pricing and, in turn, box prices.

“In the Americas we have sustained our strong volume growth. Pricing initiatives across the region have helped offset some of the negative currency impact in the first half and we expect to implement price increases through the second half of the year.

“The Group’s proven ability to drive strong free cash flows supports our strategic agenda. We continue to focus on operational efficiency and expanding our geographic reach. Our leverage multiple has reduced to 2.5 times net debt to EBITDA in advance of our more cash generative second half of the year. The Board’s confidence in the strength of, and prospects for our business, is reflected in a 10 per cent increase in our interim dividend.

“Against a backdrop of higher than expected input costs, more pronounced currency volatility and a greater degree of macroeconomic risk, we expect to have a good year with earnings growth for 2016.

“SKG is well positioned for growth and business development. We are a clear market leader, in a growth industry, with a continuously improving business model. SKG continues to build balance sheet strength which increases the range of strategic and financial options open to us.”

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.

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

Garrett Quinn

Smurfit Kappa

T: +353 1 202 71 80

E: ir@smurfitkappa.com

     

FTI Consulting

 

T: +353 1 663 36 80

E: smurfitkappa@fticonsulting.com

2016 Second Quarter & First Half | Performance Overview

The Group’s strong earnings performance in the first half reflects the strength of our portfolio of geographically diverse operations and our integrated business model which continues to deliver strong return on capital employed (‘ROCE’) performance. SKG is a market leader in corrugated packaging in Europe and across the Americas, operating in a growth industry, within which the Group is well positioned to drive continued earnings growth. An effective capital structure with strong free cash flow characteristics will continue to build balance sheet strength and, in turn, our opportunity set.

In the first half the Group delivered an 8% increase in EBITDA year-on-year, and for the second quarter delivered a 10% increase in EBITDA year-on-year. SKG also reported ROCE of 15.4% and positive free cash flow in the first half reflecting our consistent focus on capital management and the benefit of incremental earnings from our programme of capital investment.

In Europe, the Group’s corrugated packaging operations reported a solid first half with a 2% year-on-year increase in organic box volumes, and sequentially flat corrugated pricing. Good demand growth and increased pricing for Old Corrugated Containers (‘OCC’), which will have a negative impact on margin in the near-term, are expected to continue to provide a solid underpin to containerboard and corrugated pricing for the remainder of the year.

In the first half of 2016, OCC prices were 13% higher year-on-year and are expected to remain at a high level through the remainder of the year. SKG consumes approximately 4.3 million tonnes of OCC per annum in Europe.

In recycled containerboard, after some weakness in the early part of the year pricing has now stabilised. Margins in this grade have diminished as a result of the OCC price increases. However stock levels have reduced due to improved demand for corrugated across Europe. The Group remains a significant buyer of over 600,000 tonnes per annum of recycled containerboard while also being the largest producer in Europe with close to 3 million tonnes of production. We continue to invest in our containerboard system to ensure we have the most effective, low cost operations in this grade.

Demand for kraftliner remains robust and we have achieved a €20 per tonne increase in kraftliner pricing in the North-West European market in July and have announced an additional increase of £40 per tonne in kraftliner pricing in the UK for implementation in August. SKG’s 1.6 million tonnes of kraftliner production per annum is a distinct competitive advantage for the Group in providing corrugated customers with a complete product offering, while maintaining a net long position of 500,000 tonnes per annum in the grade.

In the Americas, the Group’s operations delivered a strong result in the first half with corrugated volume growth of 23% and an EBITDA margin of over 16%. Organic volume growth in the first half was over 3% year-on-year (excluding Venezuela). Our North American business performed well although our Californian business remains somewhat challenging. Mexico had a very strong first half with volume growth of 6% offsetting a weak currency. Colombia and our Central American and Caribbean operations performed in line with expectations with currency affecting translated earnings. Our businesses in Brazil operated well in volume terms with an above market growth of 4%. However, we were impacted by significantly higher recovered fibre costs. In Argentina there was a slowdown in the first half of 2016 as the new President implemented market reforms which are likely to benefit the country and demand longer term. The Venezuelan business remains very challenging. Volumes have contracted considerably although local management continue to perform well within a difficult environment. The country represents less than 1% of Group EBITDA.

The delivery of a positive free cash flow result despite a working capital outflow and increased capital expenditure, illustrates the significantly strengthened position of the Group today. The Group’s leverage multiple, at 2.5 times net debt to EBITDA, is expected to continue to reduce as EBITDA from acquisitions incrementally contribute over the course of the year and the Group continues to generate strong free cash flows in the generally more cash generative second half of the year.

2016 Second Quarter & First Half | Financial Performance

Revenue was 1% higher year-on-year for both the second quarter and the first half of 2016. Revenue in the first half was €4,049 million compared to €3,996 million reported in the first half of 2015. However, with the contribution from acquisitions offsetting some of the negative currency movements and the absence of the solidboard operations in the first half, the underlying1 increase in revenue was €109 million or 3%.

Driven by quarter-on-quarter growth in 2016, EBITDA increased by 8% in the first half, to €593 million from €551 million in 2015, with an underlying move of 9% as the negative impact of currencies was offset in part by the positive impact of net acquisitions.

Operating profit before exceptional items in the first half of 2016 was €390 million compared to €348 million for the same period in 2015, an increase of 12%.

In the first half of 2016 there were no exceptional items charged within operating profit. In the first half of 2015, exceptional items charged within operating profit amounted to €46 million. The majority of the 2015 charge was represented by the further impairment of the solidboard operations held for sale of €6 million reported within cost of sales, and €36 million, reported within other operating expenses, relating to the higher cost to the Venezuelan operations of discharging their non-Bolivar denominated payables following the adoption of the Simadi rate in March 2015.

Net finance costs before exceptional items for the first half 2016 amounted to €91 million compared to €70 million in the same period 2015, with increases in both cash and non-cash interest. Cash interest costs were €13 million higher reflecting the higher level of net debt following our acquisition activity in 2015 and early 2016. The acquisitions in Brazil, which were partly funded in local currency, resulted in a slight increase in our average rate of interest.

In the first half of 2016 the Group reported exceptional finance income of €12 million, which was recorded in the second quarter, in relation to the profit on the sale of our shareholding in the Swedish company IL Recycling. In the first half of 2015 exceptional finance income of €11 million 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 the €250 million bond issue in February 2015.

Including the Group’s share of associates’ profit of €1 million, profit before income tax was €312 million for the half year 2016 compared to €243 million in 2015.

The Group reported an income tax expense of €97 million for the first half of 2016 compared to €73 million for the same period in 2015.

Basic EPS for the first half was 90.8 cent which is 24% higher than the 73.2 cent earned in the same period of 2015. The second quarter basic EPS was 52.0 cent against 42.3 cent in the second quarter of 2015, a 23% improvement. On a pre-exceptional basis, EPS for the second quarter was 5% higher at 46.9 cent compared to 44.6 cent in the second quarter of 2015, while EPS for the first half was 3% lower year-on-year at 85.6 cent compared to 88.7 cent in 2015.

2016 Second Quarter & First Half | Free Cash Flow

In the first half of 2016, the Group reported a free cash inflow of €35 million, compared to an inflow of €74 million in the first half of 2015. Although the Group reported higher EBITDA year-on-year, the reduction in free cash flow was primarily a result of an €83 million increase in outflows for working capital and capital expenditure. Exceptional items of €35 million in the first half of 2015, predominantly associated with the Venezuelan exchange rate change, did not reoccur in 2016.

Capital expenditure of €211 million in the first half of 2016 equated to 109% of depreciation, compared to 95% in the first half of 2015. On a full year basis and as part of the final year of our three-year ‘Quick-Win’ programme capital expenditure is expected to be broadly in line with 2015 levels.

The working capital outflow in the first half was €161 million, compared to €120 million in 2015. At the end of June, working capital amounted to €697 million and represented 8.5% of sales, compared to 6.6% at the end of December and 8.0% at June 2015. Working capital levels remain a key focus for the Group and have been substantially reduced in recent years through consistent monitoring and review. We would expect working capital as a percentage of sales to return to its usual level by year-end.

Cash interest in the six months to June 2016 was €72 million, €13 million higher than in the same period of 2015. This increase was due to the cost of financing our Brazilian acquisitions in December 2015, part of which was funded in local currency where interest rates are relatively high. On a full year basis, cash interest is expected to increase by approximately €20 million to €143 million.

Tax payments in the first half of 2016 of €71 million were €7 million higher than in the same period of 2015, mainly due to higher profitability and acquisitions. The Americas was €7 million higher and Europe was neutral on a net basis.

1 Underlying move throughout this interim report excludes acquisitions, disposals, currency and hyperinflation movements where applicable.

2016 Second Quarter & First Half | Capital Structure

The Group’s net debt increased by €73 million to €3,121 million at the end of the second quarter of 2016 against a 2015 year end net debt of €3,048 million. This is primarily due to dividend payments in the second quarter of 2016 which totalled €115 million. Net debt to EBITDA at 2.5 times at the end of the quarter remained well within the stated guidance of 2.0 to 3.0 times. Strong cash generation in the second half of the year is expected to reduce the leverage position. The Group remains committed to the preservation of its Ba1/BB+/BB+ credit rating.

At 30 June 2016 the Group’s average interest rate was 4.2%, slightly higher year-on-year as a result of the local currency Brazilian debt associated with the acquisitions of INPA and Paema in December 2015. The Group’s diversified funding base and long dated maturity profile (4.1 years) provide a stable funding outlook. In terms of liquidity, the Group held cash on the balance sheet of €299 million at the end of the quarter which was further supplemented by available commitments under its revolving credit facility of approximately €613 million.

The Group has a stable financing base with a long-term and well spread maturity profile. The Group’s credit rating of Ba1/BB+/BB+ contributes to a lower cost of capital and access to the widest range of financing options available. These positions were achieved as a result of the Group’s consistent ability to generate strong free cash flows together with active management of its debt portfolio. The strength of the Group’s capital base together with consistent delivery of strong free cash flows provides a solid and cost effective support to the Group’s growth agenda over the medium-term.

Listing Arrangements and Admission to FTSE Indices

Following the Group's transfer of its primary listing to the London Stock Exchange, during the second quarter SKG was admitted as a constituent of the FTSE250 and FTSE All Share Indices.

Dividends

The Board will increase the 2016 interim dividend by 10% to 22 cent per share. It is proposed to pay the interim dividend on 28 October 2016 to shareholders registered at the close of business on 30 September 2016.

2016 Second Quarter & First Half | Operating Efficiency

Commercial Offering and Innovation

During the quarter the Group continued to lead the way with industry awards across Europe and recognition by major customers. As further proof of the success of our industry leading innovation, Nestlé has recognised the Group with their European “Out of the Box” supplier of the year award for the second year running.

In July, the Group received two awards at the PART awards in Moscow winning first and second prizes in the ‘Alcoholic Beverage’ category. Smurfit Kappa in Norway and Denmark have both recently won a Scanstar 2016 Packaging Award – awards which are organised by the Scandinavian Packaging Association, a body incorporating the national packaging organisations of Denmark, Finland, Iceland, Norway and Sweden.

As part of its ongoing differentiation initiative, Smurfit Kappa has continued to advance its communication and reputation among new audiences across multiple channels. The Group recently embarked on a number of targeted marketing campaigns showcasing Smurfit Kappa’s industry-leading sustainability credentials and building awareness of its unique ShelfSmart process, particularly within the fast moving consumer goods (‘FMCG’) sector. The Group’s marketing and communications activity has developed on a number of fronts, resulting in a strong brand presence highlighting expertise, and some firsts in the area of marketing within the sector. This has been underpinned by ongoing recognition of the Group’s innovation, expertise and leadership by customers and trade groups.

Sustainability

The Group published its ninth Sustainable Development Report in June 2016, outlining the progress made by the Group against the five strategic key sustainability priorities.

1.

     

99.9% of paper produced and sourced for our packaging solutions is now FSC®, PEFC™ or SFI™ Chain of Custody certified

2.

Climate Change: 22.6% reduction in carbon emissions per tonne of paper produced since 2005

3.

Water: 29% reduction in organic content of water (‘COD’) returned to the environment from paper and board mills since 2005

4.

Waste: 13.8% reduction in waste sent to landfill from paper and board mills since 2013

5.

People: The dynamic follow-up of our MyVoice employee engagement survey with 1,000+ practical actions and over €4 million of social investments in local community projects in 2015

 

The full 2015 Sustainability Report is available at smurfitkappa.com

Cost Take-out Programme

In recognition of the requirement to continuously drive cost efficiencies to partially offset inflationary pressures, the Group has had a formal cost take-out programme in place each year since 2008. The programme has consistently provided a solid support to maintaining operating efficiency despite steady increases in both direct and indirect costs.

The Group announced a cost take-out target of €75 million for the full year 2016 and expects to deliver on this commitment with €31 million achieved in the first half.

Enhanced Capital Expenditure Programme

The Group is in the third and final year of its three-year programme of ‘Quick Win’ capital expenditure. As previously guided, EBITDA benefits are expected to lag expenditure with a €25 million EBITDA uplift in 2016 and a further €33 million benefit in 2017 to complete the €75 million of incremental EBITDA derived from the programme. As part of its full year 2015 results the Group confirmed €17 million of the Group’s 2015 EBITDA was associated with the programme to date.

2016 Second Quarter & First Half | Regional Performance Reviews

Europe

The Group’s European operations delivered an improved EBITDA margin in the second quarter of 2016 of 15.9% against 14.1% in the same period in 2015. EBITDA increased by €28 million in the second quarter of 2016 against the same period in 2015. Allowing for currency movements, the underlying increase in European earnings was €30 million. For the first half of 2016 the EBITDA margin was 14.8% against 13.6% in the first half of 2015, with strong volume growth and solid pricing supporting the result.

Total corrugated volumes increased by 2% in the second quarter of 2016 against the second quarter of 2015 with organic box volume growth of 2%. In the six months to June 2016 total corrugated volumes were up over 1%. This was made up of solid 2% organic box volume growth which was offset by the reduction in the more commodity-like sheet volume of 7%.

Corrugated pricing has remained sequentially flat in the second quarter of 2016 versus the first quarter of 2016, with pricing for the first half of 2016 marginally up on the same period in 2015. Good demand growth and increased pricing for OCC, which will have a negative impact on margin in the near-term, are expected to continue to provide a solid underpin to containerboard and corrugated pricing for the remainder of the year.

Recovered paper prices have continued to move upwards throughout the second quarter, with prices up 10% in the second quarter of 2016 against the same period in 2015. Market indices have reported a €9 per tonne increase in OCC year to date 2016. This increase, from an already high level, has been driven by strong domestic demand levels in Europe and good overseas demand. Chinese imports of OCC are up 9% in the five months to May 2016.

Demand for kraftliner remains strong with internal demand in the second quarter of 2016 up 6% against the same period of 2015. Following the successful implementation of the first step of the kraftliner price increase in North-Western Europe and the sharp movement in the value of Sterling versus the euro, the Group announced a price increase of £40 per tonne for brown and white kraftliner in the UK effective for all deliveries from mid-August. The increase is supported by continued strong demand for these grades in Europe and recovers some of the recent softening of price in the grade. The Group remains approximately 500,000 tonnes long on kraftliner in a European market that is a net importer of the grade.

The Americas

The Group’s Americas segment has reported EBITDA in the second quarter of 2016 of €73 million compared to €72 million in the second quarter of 2015. For the first half of 2016 the result was an EBITDA of €154 million, an 11% increase year-on-year despite significant currency headwinds. This was achieved as a result of our acquisitions in 2015, a generally good operational performance across the region and continuing price increases.

EBITDA margins in the second quarter of 2016 were 15.6% against 15.9% in the second quarter of 2015 and 17.0% in the first quarter of 2016. The EBITDA margin contraction in the second quarter of 2016 compared to the first quarter of 2016 is attributable to a number of factors. These include the annual shut in our Cali Mill which impacted the second quarter by approximately US$3 million. OCC pricing in Brazil also contributed to the margin reduction with a 23% increase in OCC in local currency in the second quarter against the first quarter and a year to date increase of close to 50%.

Organic corrugated volumes excluding Venezuela were up 3% for both the second quarter and the half year position against the same periods in 2015. The Americas continues to provide a geographically diversified source of resilient earnings growth. The delivery of organic and acquisitive growth in this region remains a key strategic objective of the Group. Continued diversification in the Americas will further strengthen the Group’s overall risk profile whilst providing attractive growth opportunities in emerging markets.

With the exception of Mexico, currencies stabilised during the second quarter, whilst still providing a headwind year-on-year. Currencies had a negative impact in the region of approximately €10 million for the second quarter against the same period 2015. The currency impact was offset in part by the positive contributions of acquisitions in the region and robust pricing initiatives in most markets.

The Group’s Pan American sales volumes continue to grow, up 4% for the first half of the year and up 7% when excluding Venezuela. This increase in volumes further amplifies the effectiveness of SKG’s pan-regional offering to large blue-chip companies, looking for a packaging partner who understands their business and can offer industry leading market insights, delivered with industry leading operational excellence.

The Mexican business continues to grow well with corrugated volumes up 6% for the second quarter of 2016 against the second quarter of 2015 and continuing the country’s solid start to the year. Volume growth was principally derived from the produce and food sectors. Corrugated pricing in the region was up in local currency due to the implementation of price increases which will continue into the second half of the year. The previously announced project to increase capacity at the Los Reyes mill near Mexico City by 100,000 tonnes per annum is expected to be completed in February 2017.

In Colombia corrugated volumes increased by 6% in the second quarter of 2016 against the same period in 2015. Currency challenges have been offset in part by extensive cost take-out programmes and price increases. OCC prices continue to rise with reduced availability of imported OCC which has been impacted by the devaluation of the Colombian peso. After a successful box price increase in the fourth quarter of 2015, continued price increases are being implemented in the second half of 2016.

The North American business expanded through the acquisition of three corrugated businesses in the first quarter of 2016 with the region remaining a key growth market for the Group. Operational challenges in the Group’s Californian operations continued in the second quarter of 2016. However, most other operations in this region performed well.

The Group’s operations in Argentina are continuing to perform well in a challenging environment. The new government in Argentina has introduced some reforms in the local economy which has caused some reduced activity in the second quarter with higher inflation. Economic recovery is expected from the third quarter of 2016 which should in turn drive volume growth into 2017. In Chile, the Group’s operations have improved margins and in turn improved EBITDA year-on-year for the second quarter and first half of 2016.

The integration of the Group’s recent acquisitions in Brazil continues to progress well. The Group’s volumes increased 4% in a corrugated market that is contracting as the government implements some national reforms to re-balance the economy. Price increases have been implemented in the first half with further increases being implemented in the second half to offset significantly higher raw material costs and currency headwinds.

The political and macroeconomic environment in Venezuela continues to deteriorate in 2016. Venezuela represented less than 1% of group EBITDA in the first half of 2016. Driven by resilient local management and locally sourced raw materials the Group’s operations continue to operate well within a very difficult environment.

Brexit

The UK recently voted to leave the European Union. SKG operates a UK based business that is broadly self-sufficient with UK mills and UK corrugated plants servicing the local economy. Any effect on SKG will principally be as a result of the withdrawal having a knock-on impact on UK/European GDP and confidence.

       

Summary Cash Flow

 

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

 
3 months to 3 months to 6 months to 6 months to
30-Jun-16 30-Jun-15 30-Jun-16 30-Jun-15
    €m   €m   €m   €m
EBITDA 312 285 593 551
Exceptional items - (3) - (35)
Cash interest expense (36) (29) (72) (59)
Working capital change (63) (68) (161) (120)
Current provisions (3) (4) (7) (10)
Capital expenditure (104) (96) (211) (169)
Change in capital creditors (16) (8) (8) (6)
Tax paid (43) (27) (71) (64)
Sale of fixed assets 1 3 1 5
Other (20)   (4)   (29)   (19)
Free cash flow 28 49 35 74
 
Share issues - - - 1
Purchase of own shares (net) - (1) (10) (15)
Sale of businesses and investments 13 30 13 30
Purchase of businesses and investments (10) (163) (41) (163)
Dividends (115) (96) (115) (96)
Derivative termination benefits -   (2)   -   (2)
Net cash outflow (84) (183) (118) (171)
 
Net debt acquired - (13) - (13)
Deferred debt issue costs amortised (3) (2) (5) (6)
Currency translation adjustment (5)   28   50   (151)
Increase in net debt (92)   (170)   (73)   (341)
 

(1) The summary cash flow is prepared on a different basis to the Condensed Consolidated Statement of Cash Flows under IFRS (‘IFRS cash flow’) and as such the reconciling items between EBITDA and decrease/increase in net debt may differ to amounts presented in the 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 in the table on the next page. The main adjustments are in respect of cash interest, capital expenditure, tax payments and the sale of fixed assets and businesses.

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

  • Current provisions in the summary cash flow are included within change in employee benefits and other provisions in the IFRS cash flow.
  • Capital expenditure (net of change in capital creditors) in the summary cash flow includes additions to intangible assets which is shown separately in the IFRS cash flow.
  • Other in the summary cash flow includes changes in employee benefits and other provisions (excluding current provisions), amortisation of capital grants, receipt of capital grants and dividends received from associates which are shown separately in the IFRS cash flow.
 

Reconciliation of Free Cash Flow to Cash Generated from Operations

       
6 months to 6 months to
30-Jun-16 30-Jun-15
        €m     €m
Free cash flow 35 74
 
Add back: Cash interest 72 59
Capital expenditure (net of change in capital creditors) 219 175
Tax payments 71 64
 
Less: Sale of fixed assets (1) (5)
Profit on sale of assets and businesses – non exceptional (4) (2)
Receipt of capital grants (in ‘Other’ in summary cash flow) (1) (1)
Dividends received from associates (1) (1)
Non-cash financing activities (1)     (2)
Cash generated from operations 389     361
 

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 June 2016, Smurfit Kappa Treasury Funding Limited had outstanding US$292.3 million 7.50% senior debentures due 2025. The Group had outstanding €162.2 million and STG£63.9 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 30 June 2016, the Group’s senior credit facility comprised term drawings of €572.6 million, US$55.2 million and STG£100 million under the amortising Term A facility maturing in 2020. In addition, as at 30 June 2016, the facility included a €625 million revolving credit facility of which €6 million was drawn in revolver loans, with a further €6 million in operational facilities including letters of credit drawn under various ancillary facilities.

The following table provides the range of interest rates as at 30 June 2016 for each of the drawings under the various senior credit facility loans.

       

Borrowing arrangement

Currency

Interest rate

 

Term A Facility

EUR

1.239% - 1.354%

USD

2.060%

GBP

2.105%

 

Revolving Credit Facility

EUR

0.997%

 

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

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 were substantially applied to reduce 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 30 June 2016, the Group had fixed an average of 66% 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 €13 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 annual report on pages 16-17. The annual report is available on our website smurfitkappa.com. The principal risks and uncertainties for the remaining six months of the financial year are summarised below.

  • If the current economic climate were to deteriorate, especially following Brexit, 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 re-emerge or exacerbate following Brexit, 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.
  • 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 Group is exposed to potential risks in relation to the current political situation in Venezuela.

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

 

 

Condensed Consolidated Income Statement – Six Months

   
6 months to 30-Jun-16 6 months to 30-Jun-15
Unaudited Unaudited

Pre-
exceptional
2016

 

Exceptional
2016

  Total 2016

Pre-
exceptional
2015

  

Exceptional
2015

   Total 2015
    €m   €m   €m   €m   €m   €m
Revenue 4,049 - 4,049 3,996 - 3,996
Cost of sales (2,829)   -   (2,829)   (2,803)   (6)   (2,809)
Gross profit 1,220 - 1,220 1,193 (6) 1,187
Distribution costs (314) - (314) (321) - (321)
Administrative expenses (517) - (517) (525) - (525)
Other operating income 1 - 1 1 - 1
Other operating expenses -   -   -   -   (40)   (40)
Operating profit 390 - 390 348 (46) 302
Finance costs (117) - (117) (86) (2) (88)
Finance income 26 12 38 16 11 27
Share of associates’ profit (after tax) 1   -   1   2   -   2
Profit before income tax 300   12 312 280   (37) 243
Income tax expense (97) (73)
Profit for the financial period 215 170
 
Attributable to:
Owners of the parent 212 169
Non-controlling interests 3 1
Profit for the financial period 215 170
 

Earnings per share

Basic earnings per share - cent

90.8

73.2

Diluted earnings per share - cent

90.0

72.4

 
 

Condensed Consolidated Income Statement – Second Quarter

   
3 months to 30-Jun-16 3 months to 30-Jun-15
Unaudited Unaudited

Pre-
exceptional
2016

 

Exceptional
2016

 

Total
2016

Pre-
exceptional
2015

  

Exceptional
2015

  

Total
2015
    €m   €m   €m   €m   €m   €m
Revenue 2,049 - 2,049 2,034 - 2,034
Cost of sales (1,419)   -   (1,419)   (1,421)   -   (1,421)
Gross profit 630 - 630 613 - 613
Distribution costs (160) - (160) (162) - (162)
Administrative expenses (259) - (259) (268) - (268)
Other operating expenses -   -   -   -   (7)   (7)
Operating profit 211 - 211 183 (7) 176
Finance costs (56) - (56) (34) - (34)
Finance income 16 12 28 1 1 2
Share of associates’ profit (after tax) 1   -   1   1   -   1
Profit before income tax 172   12   184 151   (6) 145
Income tax expense (59) (44)
Profit for the financial period 125 101
 
Attributable to:
Owners of the parent 122 98
Non-controlling interests 3 3
Profit for the financial period 125 101
 

Earnings per share

Basic earnings per share - cent

52.0

42.3

Diluted earnings per share - cent

51.6

41.8

 
     

Condensed Consolidated Statement of Comprehensive Income – Six Months

 
6 months to 6 months to
30-Jun-16 30-Jun-15
Unaudited Unaudited
    €m     €m
 
Profit for the financial period 215     170
 
Other comprehensive income:
Items that may be subsequently reclassified to profit or loss
Foreign currency translation adjustments:
- Arising in the period (98) (388)
 
Effective portion of changes in fair value of cash flow hedges:
- Movement out of reserve 3 5
- New fair value adjustments into reserve (4)     5
(99) (378)
 
Items which will not be subsequently reclassified to profit or loss
Defined benefit pension plans:
- Actuarial (loss)/gain (129) 90
- Movement in deferred tax 21     (14)
(108) 76
       
Total other comprehensive expense (207)     (302)
 
Total comprehensive income/(expense) for the financial period 8     (132)
 
Attributable to:
Owners of the parent 5 (88)
Non-controlling interests 3     (44)
Total comprehensive income/(expense) for the financial period 8     (132)
 
     

Condensed Consolidated Statement of Comprehensive Income – Second Quarter

 
3 months to 3 months to
30-Jun-16 30-Jun-15
Unaudited Unaudited
    €m     €m
 
Profit for the financial period 125     101
 
Other comprehensive income:
Items that may be subsequently reclassified to profit or loss
Foreign currency translation adjustments:
- Arising in the period (34) (46)
 
Effective portion of changes in fair value of cash flow hedges:
- Movement out of reserve 1 1
- New fair value adjustments into reserve (2) 2
 
Net change in fair value of available-for-sale financial assets -     (1)
(35) (44)
 
Items which will not be subsequently reclassified to profit or loss
Defined benefit pension plans:
- Actuarial (loss)/gain (72) 122
- Movement in deferred tax 14     (18)
(58) 104
       
Total other comprehensive (expense)/income (93)     60
 
Total comprehensive income for the financial period 32     161
 
Attributable to:
Owners of the parent 25 164
Non-controlling interests 7     (3)
Total comprehensive income for the financial period 32     161
 
 

Condensed Consolidated Balance Sheet

       
30-Jun-16 30-Jun-15 31-Dec-15
Unaudited Unaudited Audited
      €m   €m   €m
ASSETS
Non-current assets
Property, plant and equipment 3,086 2,954 3,103
Goodwill and intangible assets 2,488 2,428 2,508
Available-for-sale financial assets 21 21 21
Investment in associates 16 18 17
Biological assets 95 97 98
Trade and other receivables 32 26 34
Derivative financial instruments 30 34 34
Deferred income tax assets 193   220   200
5,961   5,798   6,015
Current assets
Inventories 740 716 735
Biological assets 9 8 8
Trade and other receivables 1,604 1,598 1,451
Derivative financial instruments 13 2 28
Restricted cash 10 8 5
Cash and cash equivalents 289   158   270
2,665   2,490   2,497
Total assets 8,626   8,288   8,512
 
EQUITY
Capital and reserves attributable to owners of the parent
Equity share capital - - -
Share premium 1,983 1,982 1,983
Other reserves (524) (357) (425)
Retained earnings 638   432   619
Total equity attributable to owners of the parent 2,097 2,057 2,177
Non-controlling interests 155   153   151
Total equity 2,252   2,210   2,328
 
LIABILITIES
Non-current liabilities
Borrowings 3,314 3,173 3,238
Employee benefits 906 794 818
Derivative financial instruments 30 16 15
Deferred income tax liabilities 157 145 179
Non-current income tax liabilities 31 18 25
Provisions for liabilities and charges 52 46 52
Capital grants 13 13 13
Other payables 13   6   13
4,516   4,211   4,353
Current liabilities
Borrowings 106 93 85
Trade and other payables 1,679 1,685 1,672
Current income tax liabilities 40 29 30
Derivative financial instruments 14 11 10
Provisions for liabilities and charges 19   49   34
1,858   1,867   1,831
Total liabilities 6,374   6,078   6,184
Total equity and liabilities 8,626   8,288   8,512
 
 

Condensed 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 2016 - 1,983 (425) 619 2,177 151 2,328
 
Profit for the financial period - - - 212 212 3 215
Other comprehensive income
Foreign currency translation adjustments - - (98) - (98) - (98)
Defined benefit pension plans - - - (108) (108) - (108)
Effective portion of changes in fair value of cash flow hedges -   -   (1)   -   (1)   -   (1)

Total comprehensive
(expense)/income for the
financial period

-   -   (99)   104   5   3   8
 
Hyperinflation adjustment - - - 28 28 3 31
Dividends paid - - - (113) (113) (2) (115)
Share-based payment - - 10 - 10 - 10
Shares acquired by SKG Employee Trust -   -   (10)   -   (10)   -   (10)
At 30 June 2016 -   1,983   (524)   638   2,097   155   2,252
 
Unaudited
At 1 January 2015 - 1,981 (30) 271 2,222 197 2,419
 
Profit for the financial period - - - 169 169 1 170
Other comprehensive income
Foreign currency translation adjustments - - (343) - (343) (45) (388)
Defined benefit pension plans - - - 76 76 - 76
Effective portion of changes in fair value of cash flow hedges -   -   10   -   10   -   10

Total comprehensive
(expense)/income for the
financial period

-   -   (333)   245   (88)   (44)   (132)
 
Shares issued - 1 - - 1 - 1
Hyperinflation adjustment - - - 10 10 1 11
Dividends paid - - - (94) (94) (2) (96)
Share-based payment - - 21 - 21 - 21
Shares acquired by SKG Employee Trust - - (15) - (15) - (15)
Acquired non-controlling interest -   -   -   -   -   1   1
At 30 June 2015 -   1,982   (357)   432   2,057   153   2,210
 

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

     

Condensed Consolidated Statement of Cash Flows

 

 

6 months to 6 months to
30-Jun-16 30-Jun-15
Unaudited Unaudited
    €m     €m
Cash flows from operating activities
Profit before income tax 312 243
 
Net finance costs 79 61
Depreciation charge 172 162
Impairment of assets - 6
Amortisation of intangible assets 16 16
Amortisation of capital grants (1) (1)
Equity settled share-based payment expense 10 21
(Profit)/loss on sale of assets and businesses (4) 2
Share of associates’ profit (after tax) (1) (2)
Net movement in working capital (161) (117)
Change in biological assets 5 -
Change in employee benefits and other provisions (44) (36)
Other 6     6
Cash generated from operations 389 361
Interest paid (74) (62)
Income taxes paid:
Irish corporation tax paid (9) -
Overseas corporation tax (net of tax refunds) paid (62)     (64)
Net cash inflow from operating activities 244     235
 
Cash flows from investing activities
Interest received 2 3
Business disposals - 31
Additions to property, plant and equipment and biological assets (213) (171)
Additions to intangible assets (6) (4)
Receipt of capital grants 1 1
Disposal of available-for-sale financial assets 13 -
Increase in restricted cash (5) (1)
Disposal of property, plant and equipment 5 6
Dividends received from associates 1 1
Purchase of subsidiaries and non-controlling interests (32) (155)
Deferred consideration paid (9)     (8)
Net cash outflow from investing activities (243)     (297)
 
Cash flows from financing activities
Proceeds from issue of new ordinary shares - 1
Proceeds from bond issue - 250
Proceeds from other debt issues 250 -
Purchase of own shares (net) (10) (15)
Increase in other interest-bearing borrowings 35 55
Payment of finance leases (1) (2)
Repayment of borrowings (169) (256)
Derivative termination payments - (2)
Deferred debt issue costs paid (2) (7)
Dividends paid to shareholders (113) (94)
Dividends paid to non-controlling interests (2)     (2)
Net cash outflow from financing activities (12)     (72)
Decrease in cash and cash equivalents (11)     (134)
 
Reconciliation of opening to closing cash and cash equivalents
Cash and cash equivalents at 1 January 263 361
Currency translation adjustment 22 (91)
Decrease in cash and cash equivalents (11)     (134)
Cash and cash equivalents at 30 June 274     136
 

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

Notes to the Condensed Consolidated Interim 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, graphicboard and bag-in-box. 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, D04 N2R2, Ireland.

2. Basis of Preparation and Accounting Policies

The condensed consolidated interim financial statements included in this report have been prepared in accordance with the Transparency (Directive 2004/109/EC) Regulations 2007, the related Transparency Rules of the Central Bank of Ireland and with International Accounting Standard 34, Interim Financial Reporting (‘IAS 34’) as adopted by the European Union. Certain quarterly information and the balance sheet as at 30 June 2015 have been included in this report; this information is supplementary and not required by IAS 34. This report should be read in conjunction with the consolidated financial statements for the year ended 31 December 2015 included in the Group’s 2015 annual report 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 condensed consolidated interim financial statements are consistent with those described and applied in the annual report for the financial year ended 31 December 2015. There are no new IFRS standards effective from 1 January 2016 which have a material effect on the condensed consolidated interim financial information included in this report.

The Group is a highly integrated manufacturer of paper-based packaging products with leading market positions, quality assets and broad geographic reach. The financial position of the Group, its cash generation, capital resources and liquidity continue to provide a stable financing platform. Having made enquiries, the Directors have a reasonable expectation that the Company, and the Group as a whole, have adequate resources to continue in operational existence for the foreseeable future. For this reason, they continue to adopt the going concern basis in preparing the condensed consolidated interim financial statements.

The condensed consolidated interim financial statements include 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 interim statement may not add precisely due to rounding.

The Group’s auditors have not audited or reviewed the condensed consolidated interim financial statements contained in this report.

The condensed consolidated interim financial statements presented do not constitute full statutory accounts. Full statutory accounts for the year ended 31 December 2015 will be filed with the Irish Registrar of Companies in due course. 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 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’).

   
6 months to 30-Jun-16 6 months to 30-Jun-15
Europe  

The
Americas

  Total Europe  

The
Americas

   Total
    €m   €m   €m   €m   €m   €m
Revenue and results
Revenue 3,102   947   4,049   3,129   867   3,996
 
EBITDA before exceptional items 460 154 614 425 139 564
Segment exceptional items -   -   -   (4)   (35)   (39)
EBITDA after exceptional items 460   154 614 421   104 525
 
Unallocated centre costs (21) (13)
Share-based payment expense (10) (26)
Depreciation and depletion (net) (177) (162)
Amortisation (16) (16)
Impairment of assets - (6)
Finance costs (117) (88)
Finance income 38 27
Share of associates’ profit (after tax) 1 2
Profit before income tax 312 243
Income tax expense (97) (73)
Profit for the financial period 215 170
 

3. Segmental Analyses (continued)

   
3 months to 30-Jun-16 3 months to 30-Jun-15
Europe  

The
Americas

  Total Europe  

The
Americas

   Total
    €m   €m   €m   €m   €m   €m
Revenue and results
Revenue 1,583   466   2,049   1,584   450   2,034
 
EBITDA before exceptional items 251 73 324 223 72 295
Segment exceptional items -   -   -   (4)   (2)   (6)
EBITDA after exceptional items 251   73 324 219   70 289
 
Unallocated centre costs (12) (10)
Share-based payment expense (5) (15)
Depreciation and depletion (net) (88) (80)
Amortisation (8) (8)
Finance costs (56) (34)
Finance income 28 2
Share of associates’ profit (after tax) 1 1
Profit before income tax 184 145
Income tax expense (59) (44)
Profit for the financial period 125 101
 

4. Exceptional Items

  6 months to     6 months to
The following items are regarded as exceptional in nature: 30-Jun-16 30-Jun-15
    €m     €m
 
Impairment of assets - 6
Loss on the disposal of the solidboard operations - 4
Currency trading loss on change in Venezuelan translation rate -     36
Exceptional items included in operating profit -     46
 
Exceptional finance costs - 2
Exceptional finance income (12)     (11)
Exceptional items included in net finance costs (12)     (9)
 

The exceptional finance income in 2016 related to the gain of €12 million on the sale of our shareholding in the Swedish company, IL Recycling, in the second quarter.

Exceptional items charged within operating profit in the first six months of 2015 amounted to €46 million, €36 million of which represented the higher cost to the Venezuelan operations of discharging their non-Bolivar denominated payables following our adoption of the Simadi rate. The remaining €10 million related to the solidboard operations in Europe.

Exceptional finance income of €11 million in the first six months of 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 the €250 million bond issue in February 2015.

5. Finance Costs and Income

     
6 months to 6 months to
30-Jun-16 30-Jun-15
    €m     €m
Finance costs:
Interest payable on bank loans and overdrafts 26 17
Interest payable on other borrowings 53 49
Exceptional finance costs associated with debt restructuring - 2
Foreign currency translation loss on debt 11 9
Fair value loss on derivatives not designated as hedges 16 1
Net interest cost on net pension liability 11     10
Total finance costs 117     88
 
Finance income:
Other interest receivable (2) (3)
Foreign currency translation gain on debt (23) (4)
Exceptional foreign currency translation gain - (11)
Exceptional gain on sale of investment (12) -
Fair value gain on derivatives not designated as hedges (1)     (9)
Total finance income (38)     (27)
Net finance costs 79     61
 

6. Income Tax Expense

Income tax expense recognised in the Condensed Consolidated Income Statement

   
6 months to 6 months to
30-Jun-16 30-Jun-15
    €m   €m
Current tax:
Europe 55 41
The Americas 31   26
86 67
Deferred tax 11   6
Income tax expense 97   73
 
Current tax is analysed as follows:
Ireland 7 7
Foreign 79   60
86   67
 
   

Income tax recognised in the Condensed Consolidated Statement of Comprehensive Income

 
6 months to 6 months to
30-Jun-16 30-Jun-15
    €m   €m
Arising on actuarial (loss)/gain on defined benefit plans (21)   14

The tax expense in 2016 is €24 million higher than in the comparable period in 2015 primarily due to an increase in earnings. The tax expense is higher in Europe by approximately €17 million and higher in the Americas by €7 million. The movement in deferred tax arises from the reversal of timing differences including the use of tax losses. The tax expense includes a €1 million tax credit on exceptional items in 2015. There is a nil tax effect on exceptional items in 2016.

7. Employee Benefits – Defined Benefit Plans

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

   
6 months to 6 months to
30-Jun-16 30-Jun-15
    €m   €m
 
Current service cost 17 22
Gain on curtailment (12) (1)
Gain on settlement (2) (1)
Actuarial loss arising on other long-term employee benefits 1 -
Net interest cost on net pension liability 11   10
Defined benefit cost 15   30
 

Included in cost of sales, distribution costs and administrative expenses is a defined benefit cost of €4 million (2015: €20 million). Net interest cost on net pension liability of €11 million (2015: €10 million) is included in finance costs in the Condensed Consolidated Income Statement.

The gain on curtailment of €12 million in 2016 relates to a change to the top-up compensation plan in the Netherlands from defined benefit to defined contribution.

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

     
30-Jun-16 31-Dec-15
    €m     €m
Present value of funded or partially funded obligations (2,315) (2,195)
Fair value of plan assets 1,956     1,884
Deficit in funded or partially funded plans (359) (311)
Present value of wholly unfunded obligations (547)     (507)
Net pension liability (906)     (818)
 

The employee benefits provision has increased from €818 million at 31 December 2015 to €906 million at 30 June 2016, mainly as a result of lower Eurozone and Sterling corporate bond yields which have decreased the discount rates in the Eurozone and Sterling area.

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 less own shares.

     
6 months to 6 months to
    30-Jun-16     30-Jun-15
Profit attributable to owners of the parent (€ million) 212 169
 
Weighted average number of ordinary shares in issue (million) 234 231
 
Basic earnings per share (cent) 90.8     73.2
 

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 2007 Share Incentive Plan and deferred shares held in trust under the Deferred Annual Bonus Plan.

   
6 months to 6 months to
    30-Jun-16   30-Jun-15
Profit attributable to owners of the parent (€ million) 212 169
 
Weighted average number of ordinary shares in issue (million) 234 231
Potential dilutive ordinary shares assumed (million) 2   3
Diluted weighted average ordinary shares (million) 236   234
 
Diluted earnings per share (cent) 90.0   72.4
 

Pre-exceptional

     
6 months to 6 months to
    30-Jun-16     30-Jun-15
Profit attributable to owners of the parent (€ million) 212 169
Exceptional items included in profit before income tax (Note 4) (€ million) (12) 37
Income tax on exceptional items (€ million) -     (1)
Pre-exceptional profit attributable to owners of the parent (€ million) 200     205
 
Weighted average number of ordinary shares in issue (million) 234 231
 
Pre-exceptional basic earnings per share (cent) 85.6     88.7
 
Diluted weighted average ordinary shares (million) 236 234
 
Pre-exceptional diluted earnings per share (cent) 84.9     87.7
 

9. Dividends

During the period, the final dividend for 2015 of 48 cent per share was paid to the holders of ordinary shares. The Board has decided to pay an interim dividend of 22 cent per share for 2016 and it is proposed to pay this dividend on 28 October 2016 to all ordinary shareholders on the share register at the close of business on 30 September 2016.

10. Property, Plant and Equipment

 

Land and
buildings

 

Plant and
equipment

  Total
    €m   €m   €m
Six months ended 30 June 2016
Opening net book amount 988 2,115 3,103
Reclassifications 13 (13) -
Additions 1 200 201
Acquisitions - 21 21
Depreciation charge (23) (149) (172)
Retirements and disposals (1) (10) (11)
Hyperinflation adjustment 9 7 16
Foreign currency translation adjustment (26)   (46)   (72)
At 30 June 2016 961   2,125   3,086
 
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
 

11. Net Movement in Working Capital

     
6 months to 6 months to
30-Jun-16 30-Jun-15
    €m     €m
 
Change in inventories (24) (47)
Change in trade and other receivables (171) (180)
Change in trade and other payables 34     110
Net movement in working capital (161)     (117)
 

12. Analysis of Net Debt

     
30-Jun-16 31-Dec-15
    €m     €m
Senior credit facility:
Revolving credit facility(1) – interest at relevant interbank rate + 1.35%(5) 1 149
Facility A term loan(2) – interest at relevant interbank rate + 1.60%(5) 737 494
U US$292.3 million 7.50% senior debentures due 2025 (including accrued interest) 264 270
Bank loans and overdrafts 130 124
Cash (299) (275)
2018 receivables securitisation variable funding notes 174 174
2019 receivables securitisation variable funding notes 238 232
2018 senior notes (including accrued interest)(3) 473 477
€400 million 4.125% senior notes due 2020 (including accrued interest) 403 403
€250 million senior floating rate notes due 2020 (including accrued interest)(4) 249 249
€500 million 3.25% senior notes due 2021 (including accrued interest) 496 495
€250 million 2.75% senior notes due 2025 (including accrued interest) 249     248
Net debt before finance leases 3,115 3,040
Finance leases 6     8
Net debt including leases 3,121     3,048
 
     

(1)

Revolving credit facility ('RCF') of €625 million (available under the senior credit facility) to be repaid in 2020.

(a) Revolver loans - €6 million, (b) drawn under ancillary facilities and facilities supported by letters of credit – nil and
(c) other operational facilities including letters of credit - €6 million.

 

(2)

Facility A term loan (‘Facility A’) due to be repaid in certain instalments from 2018 to 2020. In February 2016, the Group increased
Facility A by €250 million. The proceeds were substantially applied to reduce the Group’s drawings under the RCF.

 

(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)

The margins applicable under the senior credit facility 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 Condensed 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 2016 575 (22) (1,109) 168 (38) 1 (425)
Other comprehensive income
Foreign currency translation adjustments - - (98) - - - (98)
Effective portion of changes in fair value of cash flow hedges -       (1)       -       -       -       -       (1)
Total other comprehensive expense -       (1)       (98)       -       -       -       (99)
 
Share-based payment - - - 10 - - 10
Shares acquired by SKG Employee Trust - - - - (10) - (10)
Shares distributed by SKG Employee Trust -       -       -       (15)       15       -       -
At 30 June 2016 575       (23)       (1,207)       163       (33)       1       (524)
 
At 1 January 2015 575 (33) (689) 156 (40) 1 (30)
Other comprehensive income
Foreign currency translation adjustments - - (343) - - - (343)
Effective portion of changes in fair value of cash flow hedges -       10       -       -       -       -       10
Total other comprehensive income/(expense) -       10       (343)       -       -       -       (333)
 
Share-based payment - - - 21 - - 21
Shares acquired by SKG Employee Trust - - - - (15) - (15)
Shares distributed by SKG Employee Trust -       -       -       (14)       14       -       -
At 30 June 2015 575       (23)       (1,032)       163       (41)       1       (357)
 

14. Fair Value Hierarchy

The following table presents the Group’s financial assets and liabilities that are measured at fair value at 30 June 2016:

       
Level 1 Level 2 Level 3 Total
    €m   €m   €m   €m
Available-for-sale financial assets:
Listed 2 - - 2
Unlisted - 7 12 19
Derivative financial instruments:
Assets at fair value through Condensed Consolidated Income Statement - 6 - 6
Derivatives used for hedging - 37 - 37
Derivative financial instruments:
Liabilities at fair value through Condensed Consolidated Income Statement - (23) - (23)
Derivatives used for hedging -   (21)   -   (21)
2   6   12   20
 

The following table presents the Group’s financial assets and liabilities that are measured at fair value at 31 December 2015:

       
Level 1 Level 2 Level 3 Total
    €m   €m   €m   €m
Available-for-sale financial assets:
Listed 1 - - 1
Unlisted - 7 13 20
Derivative financial instruments:
Assets at fair value through Condensed Consolidated Income Statement - 19 - 19
Derivatives used for hedging - 43 - 43
Derivative financial instruments:
Liabilities at fair value through Condensed Consolidated Income Statement - (5) - (5)
Derivatives used for hedging -   (20)   -   (20)
1   44   13   58
 

The fair value of the level 2 derivative financial instruments set out above has been measured using observable market inputs as defined under IFRS 13, Fair Value Measurement. All are plain derivative instruments, valued with reference to observable foreign exchange rates, interest rates or broker prices. There have been no transfers between level 1 and level 2 during the period. The Group uses discounted cash flow analysis for various available-for-sale financial assets that are not traded in active markets.

The following table presents the changes in the level 3 instruments for the period:

                             
                              €m
At 1 January 2016 13
Sale of investment (1)
At 30 June 2016

12

 

15. Fair Value

The following table sets out the fair value of the Group's principal financial assets and liabilities. The determination of these fair values is based on the descriptions set out within Note 2 to the consolidated financial statements of the Group’s 2015 annual report.

   
30-Jun-16 31-Dec-15
Carrying value   Fair value Carrying value   Fair value
    €m   €m   €m   €m
 
Trade and other receivables (1) 1,529 1,529 1,384 1,384
Available-for-sale financial assets (2) 21 21 21 21
Cash and cash equivalents (3) 289 289 270 270
Derivative assets (4) 43 43 62 62
Restricted cash 10   10   5   5
1,892   1,892   1,742   1,742
 
Trade and other payables(1) 1,367 1,367 1,365 1,365
Senior credit facility(5) 738 738 643 643
2018 receivables securitisation(3) 174 174 174 174
2019 receivables securitisation(3) 238 238 232 232
Bank overdrafts(3) 130 130 124 124
2025 debentures(6) 264 314 270 324
2018 notes(6) 473 503 477 506
2020 fixed rate notes(6) 403 443 403 442
2020 floating rate notes(6) 249 265 249 268
2021 notes(6) 496 533 495 522
2025 notes(6) 249   252   248   241
4,781 4,957 4,680 4,841
Finance leases 6   6   8   8
4,787 4,963 4,688 4,849
Derivative liabilities(4) 44   44   25   25
4,831   5,007   4,713   4,874
 
Total net position (2,939)   (3,115)   (2,971)   (3,132)
 
(1)     The fair value of trade and other receivables and payables is estimated as the present value of future cash flows, discounted at the market rate of interest at the reporting date.
 
(2) The fair value of listed available-for-sale financial assets is determined by reference to their bid price at the reporting date. Unlisted available-for-sale financial assets are valued using recognised valuation techniques for the underlying security including discounted cash flows and similar unlisted equity valuation models.
 
(3) The carrying amount reported in the Condensed Consolidated Balance Sheet is estimated to approximate to fair value because of the short-term maturity of these instruments and, in the case of the receivables securitisation, the variable nature of the facility and repricing dates.
 
(4) The fair value of forward foreign currency and energy contracts is based on their listed market price if available. If a listed market price is not available, then fair value is estimated by discounting the difference between the contractual forward price and the current forward price for the residual maturity of the contract using a risk-free interest rate (based on government bonds). The fair value of interest rate swaps is based on discounting estimated future cash flows based on the terms and maturity of each contract and using market interest rates for a similar instrument at the measurement date.
 
(5) The fair value of the senior credit facility is based on the present value of its estimated future cash flows discounted at an appropriate market discount rate at the balance sheet date.
 
(6) Fair value is based on broker prices at the balance sheet date.
 

16. Related Party Transactions

Details of related party transactions in respect of the year ended 31 December 2015 are contained in Note 32 to the consolidated financial statements of the Group’s 2015 annual report. The Group continued to enter into transactions in the normal course of business with its associates and other related parties during the period. There were no transactions with related parties in the first half of 2016 or changes to transactions with related parties disclosed in the 2015 consolidated financial statements that had a material effect on the financial position or the performance of the Group.

17. Board Approval

This interim report was approved by the Board of Directors on 26 July 2016.

18. Distribution of the Interim Report

This 2016 interim report is available on the Group’s website smurfitkappa.com.

Responsibility Statement in Respect of the Six Months Ended 30 June 2016

The Directors, whose names and functions are listed on pages 36 and 37 in the Group’s 2015 annual report, are responsible for preparing this interim management report and the condensed consolidated interim financial statements in accordance with the Transparency (Directive 2004/109/EC) Regulations 2007, the related Transparency Rules of the Central Bank of Ireland and with IAS 34, Interim Financial Reporting as adopted by the European Union.

The Directors confirm that, to the best of their knowledge:

  • the condensed consolidated interim financial statements for the half year ended 30 June 2016 have been prepared in accordance with the international accounting standard applicable to interim financial reporting, IAS 34, adopted pursuant to the procedure provided for under Article 6 of the Regulation (EC) No. 1606/2002 of the European Parliament and of the Council of 19 July 2002;
  • the interim management report includes a fair review of the important events that have occurred during the first six months of the financial year, and their impact on the condensed consolidated interim financial statements for the half year ended 30 June 2016, and a description of the principal risks and uncertainties for the remaining six months;
  • the interim management report includes a fair review of related party transactions that have occurred during the first six months of the current financial year and that have materially affected the financial position or the performance of the Group during that period, and any changes in the related party transactions described in the last annual report that could have a material effect on the financial position or performance of the Group in the first six months of the current financial year.

Signed on behalf of the Board

A. Smurfit, Director and Chief Executive Officer

26 July 2016

Supplementary Financial Information

Alternative Performance Measures

Certain financial measures set out in this interim report are not defined under International Financial Reporting Standards (‘IFRS’). An explanation for the use of these Alternative Performance Measures (‘APMs’) is set out within Financial Performance Indicators on pages 26-28 of the Group’s 2015 annual report. The key APMs of the Group are set out below.

APM     Description
 
EBITDA Earnings before exceptional items, share-based payment expense, net finance costs, income tax expense, depreciation and depletion (net) and intangible assets amortisation

EBITDA Margin

EBITDA

Revenue

x 100

Operating Profit before Exceptional Items

Profit before exceptional items, net finance costs, share of associates’ profit (after tax) and income tax expense

Pre-exceptional Basic EPS (cent)

Profit attributable to owners of the parent, adjusted for exceptional items included in profit before tax and income tax on exceptional items

Weighted average number of ordinary shares in issue

x 100

Return on Capital Employed

LTM pre-exceptional operating profit plus share of

associates’ profit (after tax)

Average capital employed (where capital employed is the sum of total equity and net debt at each period end)

x 100

Free Cash Flow

Free cash flow is the result of the cash inflows and outflows from our operating activities, and is before those arising from acquisition and disposal activities.

 

Free cash flow (APM) and a reconciliation of free cash flow to cash generated from operations (IFRS measure) are included in the management commentary. The IFRS cash flow is included in the Condensed Consolidated Interim Financial Statements.

Net Debt

Net debt is comprised of borrowings net of cash and cash equivalents and restricted cash

Net Debt to EBITDA (LTM)

Net debt

EBITDA (LTM)

 
       
Reconciliation of Profit to EBITDA
3 months to 3 months to 6 months to 6 months to
30-Jun-16 30-Jun-15 30-Jun-16 30-Jun-15
    €m   €m   €m   €m
 
Profit for the financial period 125 101 215 170
Income tax expense 59 44 97 73
Exceptional items charged in operating profit - 7 - 46
Share of associates’ profit (after tax) (1) (1) (1) (2)
Net finance costs (after exceptional items) 28 32 79 61
Share-based payment expense 5 14 10 25
Depreciation, depletion (net) and amortisation 96   88   193   178
EBITDA 312   285   593   551
 

Return on Capital Employed

     
Q2, 2016 Q2, 2015 Q1, 2016
    €m   €m   €m
Pre-exceptional operating profit plus share of associates’ profit (after tax) (LTM) 823 760 796
Total equity – current period end 2,252 2,210 2,310
Net debt – current period end 3,121   3,100   3,029
Capital employed – current period end 5,373   5,310   5,339
 
Total equity – prior period end 2,210 2,403 2,128
Net debt – prior period end 3,100   2,676   2,930
Capital employed – prior period end 5,310   5,079   5,058
 
Average capital employed 5,342   5,195   5,198
 
Return on capital employed 15.4%   14.6%   15.3%
 
Supplementary Historical Financial Information
           
€m   Q2, 2015   Q3, 2015   Q4, 2015   FY, 2015   Q1, 2016   Q2, 2016
 
Group and third party revenue 3,305 3,347 3,422 13,309 3,280 3,375
Third party revenue 2,034 2,024 2,089 8,109 2,001 2,049
EBITDA 285 305 326 1,182 281 312
EBITDA margin 14.0% 15.0% 15.6% 14.6% 14.0% 15.3%
Operating profit 176 195 214 711 179 211
Profit before income tax 145 165 191 599 128 184
Free cash flow 49 162 152 388 7 28
Basic earnings per share - cent 42.3 46.4 52.9 172.6 38.8 52.0
Weighted average number of shares used in EPS calculation (million) 231 231 233 232 234 234
Net debt 3,100 2,953 3,048 3,048 3,029 3,121
EBITDA (LTM) 1,148 1,150 1,182 1,182 1,197 1,224
Net debt to EBITDA (LTM) 2.70 2.57 2.58 2.58 2.53 2.55
 

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