3rd Quarter Results

3rd Quarter Results

Smurfit Kappa Group PLC

2010 Third Quarter Results

Smurfit Kappa Group plc (“SKG” or the “Group”), one of the world’s largest integrated manufacturers of paper-based packaging products, with operations in Europe and Latin America, today announced results for the 3 months and 9 months ending 30 September 2010.

2010 Third Quarter & First Nine Months | Key Financial Performance Measures

€ m  

YTD
2010

 

YTD
2009

  change  

Q3
2010

 

Q3
2009

  change  

Q2
2010

  change
         
Revenue €4,928 €4,517 9% €1,702 €1,515 12% €1,696 0%
 

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

€647 €555 17% €243 €192 26% €221 10%
 
EBITDA Margin 13.1% 12.3% - 14.3% 12.7% - 13.0% -
 

Operating Profit before
Exceptional ItemsExceptional Items

 €349 €266 31% €143 €96 49% €119 19%
 
Basic (Loss)/Earnings Per Share (€ cts) (0.5) (14.2) - 16.9 (20.9) - (10.3) -
 
Free Cash Flow (2) €59 €143 (59%) €128 €125 2% €(12) -
                             
                             
Net Debt €3,123 €3,034 3% €3,291 (5%)
 
Net Debt to EBITDA (LTM)             3.7x   4.0x   - 4.2x   -
(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 net income for the period to EBITDA before exceptional items and share-based payment expense is set out on page 28.
(2) Free cash flow is set out on page 8. The IFRS cash flow is set out on page 15.

Highlights | Quarter Three

  • Strong cash flow generation contributes to €168 million of net debt reduction in the quarter
  • Net debt to EBITDA ratio reduces from 4.2x at the end of June to 3.7x at the end of September
  • EBITDA margin of 14.3% demonstrates SKG’s continuing focus on operating efficiency
  • Healthy demand levels and high input costs underpin continued corrugated pricing recovery

Performance Review & Outlook

Gary McGann, Smurfit Kappa Group CEO commented: “The Group is pleased to report increased EBITDA of €243 million for the third quarter. As expected, a strong cash flow performance contributed to reduce net debt by €168 million.

Lower net debt, combined with the progressive improvement in profitability, delivered a substantial reduction in the Group’s net debt to EBITDA ratio from 4.2x at the end of June to 3.7x at the end of September. This outcome confirms SKG’s continuing focus on de-leveraging.

Despite significant input cost pressure, SKG’s improved EBITDA margin of 14.3% in the quarter demonstrates an unrelenting focus on cost and operating efficiency, and further meaningful progress in corrugated price recovery. The Group’s performance also reflects the benefits of sustained demand growth across all its major markets.

Entering the fourth quarter, good market conditions combined with higher input costs underpin continued corrugated price recovery. Consequently, and subject to normal business risk, SKG re-affirms its expectation of EBITDA growth in the region of 20% for the full year 2010, which combined with ongoing cash flow generation will lead to further reduction in its net debt to EBITDA ratio.”

About Smurfit Kappa Group

Smurfit Kappa Group is a world leader in paper-based packaging with operations in Europe and Latin America. Smurfit Kappa Group operates in 21 countries in Europe and is the European leader in containerboard, solidboard, corrugated and solidboard packaging and has a key position in several other packaging and paper market segments, including graphicboard and sack paper. Smurfit Kappa Group also has a good base in Eastern Europe and operates in 9 countries in Latin America where it is the only pan-regional operator.

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

 

Bertrand Paulet
Smurfit Kappa GroupSmurfit Kappa Group

Tel: +353 1 202 71 80Tel: +353 1 202 71 80
E-mail:E-mail:ir@smurfitkappa.com


FD K Capital SourceFD K Capital Source


Tel: +353 1 663 36 80Tel: +353 1 663 36 80
E-mail:E-mail:smurfitkappa@kcapitalsource.com

2010 Third Quarter & First Nine Months | Performance Overview

The Group’s strong free cash flow generation of €128 million in the third quarter primarily reflects higher EBITDA, together with the benefit of the anticipated working capital inflow. The resulting cash inflow combined with favourable currency movements allowed for the Group’s net debt to be lowered by €168 million in the period, the equivalent of a 5% decline.

Combined with the progressive recovery in earnings since the beginning of 2010, this resulted in a reduction of SKG’s net debt to EBITDA ratio to 3.7x at the end of September. In the remainder of the year, the Group’s EBITDA and cash flow performance are expected to deliver further de-leveraging.

The Group’s improved EBITDA margin of 14.3% in the third quarter primarily reflects the progress in its European packaging business performance, supported by healthy demand levels and further advances in corrugated price recovery. An incremental €20 million of cost take-out benefits in the quarter also contributed to the Group’s enhanced performance.

SKG’s performance also reflects the positive contribution of its Latin American operations, as underlined by the higher EBITDA margin of 17.1% in the region for the first nine months of 2010 (17.6% in quarter three). Corrugated demand in Latin America grew at a solid 8% year-on-year in the third quarter, broadly continuing the trend experienced in the first half of the year.

European underlying corrugated volumes were 1% lower than in the second quarter reflecting typical trends within our business, but 3% higher than in the third quarter of 2009. For the first nine months of 2010, the Group’s European underlying corrugated volumes were on average 4% higher than in the comparable period of 2009. Mondi’s UK corrugated operations were acquired in May 2010, and when included, SKG’s actual corrugated volumes were up 7% and 6% year-on-year in the third quarter and first nine months respectively.

Recovered fibre costs were generally stable in quarter three compared to quarter two, albeit at a very high average level of around €120 per tonne. However, as anticipated, the Group’s energy and wood costs increased further. This continued input cost pressure combined with the ongoing satisfactory market balance, allowed SKG to successfully implement further price increases for both kraftliner and recycled containerboard in September.

Overall, from the uneconomic price levels that prevailed in the industry in 2009, public market indices have reported price increases of €195 per tonne for recycled containerboard and €250 per tonne for kraftliner to the end of September 2010 (the equivalent of an 85% and 65% increase respectively). When looking at the medium-term outlook for supply demand balance in the European containerboard market, it is worth bearing in mind that no new recycled containerboard machine is expected in Europe before 2012.

The higher containerboard pricing environment is generating major pressure on the Group’s corrugated margins, which has resulted in continuing corrugated price increases year to date in 2010, including further good progress in the third quarter. Additional corrugated price increases are still required in quarter four and into quarter one 2011 to compensate for the higher input costs, and in order to restore acceptable levels of returns in SKG’s business.

2010 Third Quarter | Financial Performance

At €1,702 million for the third quarter of 2010, sales revenue was 12% higher than in the same period last year. Allowing for the impact of currency and for the negative impact of hyperinflation accounting, revenue increased year-on-year by €197 million, the equivalent of approximately 13%. The net impact of acquisitions and disposals, primarily the asset swap with Mondi, was modest.

Compared to the second quarter of 2010, sales revenue in the third quarter was broadly stable. When allowing for the impact of currency, hyperinflation accounting and net acquisitions, the underlying move was an increase of €27 million, the equivalent of 2%.

At €243 million, EBITDA in the third quarter of 2010 was €51 million higher than the third quarter of 2009. Allowing for an €8 million negative impact from currency and hyperinflation accounting, somewhat offset by a €3 million benefit from the asset swap and the closure of loss making operations, the underlying increase in EBITDA was €56 million, the equivalent of 29%. Compared to the second quarter of 2010, EBITDA showed an underlying increase of €25 million in the third quarter, the equivalent of 11%.

2010 First Nine Months | Financial performance

Revenue of €4.9 billion in the first nine months of 2010 represents a 9% increase on the comparable period in 2009. The net impact of currency, hyperinflation accounting and acquisitions net of disposals and closures was negligible.

EBITDA of €647 million in the first nine months of 2010 was €92 million, or 17% higher than in the comparable period in 2009. Currency and hyperinflation accounting decreased comparable EBITDA by €8 million, while the asset swap and closure of loss making operations added €8 million. As a result, the underlying increase in EBITDA was €92 million also.

Exceptional charges within operating profit in the first nine months of 2010 amounted to €56 million, of which approximately €40 million related to the Mondi asset swap completed in May. The balance related to the loss on US dollar denominated net trading balances in our Venezuelan operations as a result of the devaluation of the Venezuelan currency in January and associated hyperinflationary adjustments. The exceptional items of €50 million charged in the nine months to September 2009 arose entirely in the third quarter and related to the closure of the Group’s Sturovo mill in Slovakia and to the rationalisation of the Cork corrugated plant in Ireland.

2010 Third Quarter & First Nine Months | Free Cash Flow

Following a net free cash outflow of €69 million in the first half of 2010, primarily driven by working capital outflows, the Group’s free cash flow generation of €128 million in the third quarter was materially stronger. In addition to a 10% sequential growth in EBITDA to €243 million in quarter three, the cash flow performance was also supported by a working capital inflow of €44 million.

In the nine months to September 2010, SKG’s free cash flow generation amounted to €59 million, compared to €143 million in the comparable period in 2009. While EBITDA was €92 million higher in 2010, the Group’s lower cash generation primarily resulted from increased absolute working capital levels, reflecting the impact of higher raw materials and end-product prices year-on-year.

At €593 million at the end of September 2010, working capital represented 8.7% of annualised net revenue, compared to 9.5% at June 2010. Through the cycle, the Group is expecting to maintain a year-end working capital to sales ratio between 8% and 9%.

Cash interest of €196 million for the first nine months of 2010 was €35 million higher year-on-year, reflecting an increased average interest cost as a result of the changes in the Group’s capital structure in 2009. In the third quarter however, cash interest of €63 million was slightly lower than the first half run rate, reflecting a lower average net debt level and interest cost.

SKG’s annual cash interest is expected to reduce into 2011 reflecting the reduction in bank debt margin being triggered as a result of the Group’s progressive leverage reduction.

To maximise its debt paydown capability through the downturn, SKG reduced its capital expenditure to 63% of depreciation in 2009. In the first nine months of 2010, the Group’s capital expenditure was €137 million, representing 53% of depreciation. This relatively low level in the first nine months is due to the phasing of projects. As markets continue to recover in 2010, SKG is increasing its capital expenditure back towards its normal levels of approximately 90% of depreciation and expects to be close to that number by the year-end, with higher expenditure levels in quarter four.

Cash tax of €54 million in the first nine months of 2010 was €25 million lower than in the prior year, primarily reflecting the absence of approximately €20 million of non recurring items that arose in 2009.

The Group expects to deliver a positive free cash flow performance in the fourth quarter of 2010, primarily supported by continued recovery in earnings and further seasonal working capital inflows, offset by higher capital expenditure. Cash flow proceeds will be applied to achieve further net debt reduction.

2010 Third Quarter & First Nine Months | Capital Structure

In the third quarter of 2010, the Group’s net debt reduced by €168 million to €3,123 million, the equivalent of a 5% decline. This positive performance reflects the benefits of the Group’s strong cash generation in the quarter, together with €48 million of favourable currency movements, largely as a result of the relative weakening of the dollar.

In the first nine months of 2010, the Group’s net debt increased by €71 million, primarily reflecting €56 million of a cash outflow relating to the asset swap with Mondi in quarter two (including €2 million of net cash disposed), and €55 million of adverse currency movements, somewhat offset by SKG’s positive free cash flow generation in the year to date.

The negative currency movement in the first nine months of the year resulted from the relative weakening of the euro versus the US dollar during the first half of the year, together with approximately €27 million of a reduction in the value of the Group’s cash balances in Venezuela following the devaluation of the Bolivar in January 2010.

From a leverage perspective, the reduction in net debt combined with the progressive earnings recovery since the beginning of 2010, allowed for the Group’s net debt to EBITDA ratio to reduce to 3.7x at the end of September, compared to 4.2x at the end of June 2010 and 4.0x at the end of September 2009. Further de-leveraging is expected by year-end.

Overall, the Group continues to benefit from its attractive financing package, with an average debt maturity of 5.2 years, and no material maturities before December 2013. In addition, SKG maintains good liquidity, with approximately €590 million of cash on its balance sheet at the end of September 2010, and committed credit facilities of approximately €525 million, of which €373 million matures in December 2013, with the remainder maturing a year earlier.

2010 Third Quarter & First Nine Months | Cost Take-Out Programme

Early in 2008, the Group initiated a cost take-out programme to further strengthen the competitiveness of its operations. In the full year 2008, the programme delivered just over €70 million of sustainable cost savings, and a further €140 million was delivered in 2009.

The Group’s 2010 objective is to generate at least a further €90 million of savings, bringing the three-year achievement to at least €300 million over the 2008-2010 period. SKG’s efficient cost base is a significant contributor to its strong and sustained relative margin performance, and should allow the Group to deliver superior returns compared to its industry peers in its grades through the cycle.

In the third quarter, the Group delivered €20 million of additional cost take-out, thereby offsetting some of the anticipated margin squeeze from the significant input cost increases. In total for the first nine months of 2010, the Group has delivered €70 million of cost take-out benefits.

2010 Third Quarter & First Nine Months | Performance Review

Packaging: Europe

Excluding the acquisition of Mondi’s operations in the UK in May 2010, and despite tougher year-on-year comparators, SKG’s underlying corrugated volumes in the third quarter of 2010 were 3% higher than in the third quarter of 2009, broadly in line with the 4% average underlying growth experienced in the first half of the year. This outcome reflects the continued steady recovery of underlying demand across the Group’s markets in the third quarter, including particularly strong growth in Germany, the UK, Italy and Scandinavia.

On the cost side, pressure within SKG’s business intensified further in the third quarter, with a 16% increase in wood costs and a 9% increase in energy costs year-on-year. Furthermore, although recovered fibre prices were broadly stable in quarter three compared to quarter two, they remained at a 15-year high level of around €120 per tonne. On average for the first nine months of 2010, SKG’s recovered fibre prices more than doubled compared to last year’s level.

Despite a significant increase in input costs since the beginning of 2010, the progressive improvement in the European Packaging EBITDA margin from 12.4% in quarter one to 14.3% in quarter three highlights the ongoing benefits of SKG’s efficient cost structure, its strong asset base, price improvements, and its focus on customer service and product innovation. In general, the Group’s financial performance in the first nine months of 2010 demonstrates the significant operational exposure of its business to the economic recovery.

On the supply side, following significant permanent closures and commercial downtime in 2009, market intelligence suggests that most European recycled containerboard producers ran at close to full capacity through the first nine months of 2010. In that context, inventory levels in the market have remained at two year lows to the end of September, reflecting positive demand trends, both from Europe and overseas.

Following an increase in overall kraftliner imports into Europe in the first quarter, imports in the second quarter were 2% lower year-on-year, as higher US imports were more than offset by reduced inflows from South America and Canada. In July and August, imports remained lower than in 2009, which combined with positive demand trends provided for a continued tight kraftliner market in Europe. The tightness in quarter three was further underpinned by SKG removing approximately 9% of its kraftliner capacity by way of downtime for mandatory maintenance purposes in the period.

A good market balance, combined with sustained input cost pressure, supported strong containerboard pricing recovery from the totally uneconomic price levels that prevailed in 2009. In the 12 months to September 2010, public market indices have reported a €195 per tonne price increase for recycled containerboard (including €40 per tonne in September), and a €250 per tonne price increase for kraftliner (including €60 per tonne in September).

In turn, higher containerboard prices have generated significant pressure on the earnings of corrugated producers, which has led to a necessary material pick-up in corrugated prices through the first nine months of 2010. As is normal, it takes up to six months to fully offset higher containerboard prices through corrugated price recovery.

In that context, SKG’s corrugated pricing has increased by over 13% from the low point in 2009 to the end of September 2010. The Group remains on track to achieve its 15% price recovery target by the end of 2010, and will be seeking further corrugated increases in the first quarter of 2011, in order to compensate for the containerboard price hikes implemented to date, and to restore acceptable levels of returns in its main business segment.

Latin America

Current Developments – Venezuela

The nationalisation of foreign owned companies by the Venezuelan government has intensified lately and would suggest that the risk of similar such action against SKG's business in Venezuela has heightened. Market value compensation is either negotiated or arbitrated under applicable treaties in these cases.

Our intention is to continue to operate a viable and sustainable business in Venezuela. SKG is fully committed to maintaining its operations in order to ensure the ongoing supply of products and services to its customers, to protect the interests and wellbeing of its employees and to safeguard the company’s investments.

In the first nine months of 2010 SKG' s business in Venezuela represented approximately 4% of the Group's revenue, 6% of its EBITDA and 4% of its total assets.

Performance Review

The Group’s performance continues to highlight the ongoing strong contribution of its Latin American business. In the first nine months of 2010, SKG’s Latin American division delivered an EBITDA performance of €141 million, representing 22% of the Group’s total, and a superior margin on revenue of 17.1%.

In the third quarter of 2010, the Group’s Latin American EBITDA was 10% lower than the very strong third quarter in 2009. While earnings in Mexico, Colombia and Argentina were higher year-on-year, this was more than offset by lower earnings in Venezuela, primarily reflecting the country’s currency devaluation in January 2010. Compared to the second quarter of 2010, Latin American EBITDA in quarter three was 4% lower, primarily reflecting a negative hyperinflationary accounting adjustment of €5 million.

Latin America remains one of the world’s highest growth markets, as demonstrated through the 8% year-on-year volume increase experienced within the Group’s business in the third quarter. This trend was in line with the 9% experienced in the first half of 2010, and reflects particularly positive demand in Mexico and Argentina.

In quarter three in Mexico, the Group’s corrugated volumes continued to recover at the double-digit levels experienced since the beginning of the year. While raw material and electricity costs continued to rise significantly, this was somewhat offset by the successful implementation of a second corrugated price increase in the third quarter, following the first increase in quarter two.

After a relatively slow first quarter, the recovery in the Colombian economy accelerated in the second and third quarters, allowing the Group’s volumes to increase by 10% year-on-year in the first nine months. While the Group’s corrugated prices are significantly higher year-on-year, SKG’s profitability in US dollar denominated markets such as sacks, boxboard and white paper, is being impacted by the current relative strength of the Colombian peso.

In the challenging Venezuelan market, the Group’s corrugated deliveries in the third quarter declined by 9%. Continuing high inflation in the country was partly offset by SKG’s ongoing efforts to enhance its operating efficiency.

In Argentina, the recovered fibre market remains under significant pressure. The consequent cost increase together with 17% end-market demand growth in the first nine months of the year has underpinned substantial containerboard and corrugated price increases in the period, which allowed the Group to deliver materially higher EBITDA year-on-year.

Despite some country-specific challenges from time to time, the Group believes that the geographic diversity of its business in the region, together with the proven ability of its management team to drive the business and grow earnings, will continue to deliver a strong performance through the cycle.

Specialties: Europe

The Group’s Specialties EBITDA of €48 million for the first nine months of 2010 was 21% lower than in the comparable period in 2009, primarily reflecting the significant impact of higher recovered fibre costs on SKG’s fibre-intense solidboard business profitability. In the third quarter, the sequential improvement in Specialties’ EBITDA margin over quarter two partly reflects the divestment of the Group’s loss making sack converting operations in May 2010.

Following a successful board price increase of €50 per tonne in the first half, the Group is currently expecting to implement another €50 per tonne increase before the year-end. Consequently, solidboard packaging prices are expected to rise meaningfully in 2011, which will go some way to supporting an earnings recovery in that business.

The lower performance of the solidboard division was somewhat offset by a double-digit EBITDA growth reported by SKG’s bag-in-box operations in the first nine months.

Summary Cash Flows
 
Summary cash flows for the third quarter and nine months are set out in the following table.
  3 months to   3 months to   9 months to   9 months to
30-Sep-10 30-Sep-09 30-Sep-10 30-Sep-09
€ Million   € Million   € Million   € Million
Pre-exceptional EBITDA 243 192 647 555
Exceptional Items - (3) (16) (3)
Cash interest expense (63) (61) (196) (161)
Working capital change 44 95 (83) 86
Current provisions (7) (3) (21) (14)
Capital expenditure (53) (48) (137) (161)
Change in capital creditors (7) 2 (44) (45)
Sale of fixed assets 1 1 2 4
Tax paid (22) (42) (54) (79)
Other (8) (8) (39) (39)
             
Free cash flow 128 125 59 143
 
Share issues - - 3 -
Gain on debt buy-back - - - 9
Sale of businesses and investments - - (9) -
Purchase of investments - - (46) -
Derivative termination payments (2) (2) (2) (1)
Dividends (1) (1) (4) (4)
             
Net cash inflow 125 122 1 147
 
Net cash acquired/disposed - - (2) -
Deferred debt issue costs amortised (5) (8) (15) (17)
Currency translation adjustments 48 16 (55) 21
             
(Increase)/decrease in net debt 168   130   (71)   151
(1)   The summary cash flow is prepared on a different basis to the cash flow statement under IFRS.
 

 

The principal difference is that the summary cash flow details movements in net debt
while the IFRS cash flow details movement in cash and cash equivalents. In addition,while the IFRS cash flow details movement in cash and cash equivalents. In addition,
the IFRS cash flow has different sub-headings to those used in the summary cash flow.the IFRS cash flow has different sub-headings to those used in the summary cash flow.
A reconciliation of the free cash flow to cash generated from operations in the IFRS cashA reconciliation of the free cash flow to cash generated from operations in the IFRS cash
flow is set out below. flow is set out below.

      9 months to   9 months to
30-Sep-10 30-Sep-09
          € Million   € Million
Free cash flow 59 143
 
Add back: Cash interest 196 161
Capital expenditure 137 161
Change in capital creditors 44 45
Tax payments 54 79
Less: Sale of fixed assets (2) (4)
Profit on sale of assets and business – non exceptional (11) (5)
Receipt of capital grants (in “Other”) - (2)
Dividends received from associates (in “Other”) (1)   (1)
Cash generated from operations 476   577

Capital Resources

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

At 30 September 2010 Smurfit Kappa Funding plc had outstanding €217.5 million 7.75% senior subordinated notes due 2015 and US$200 million 7.75% senior subordinated notes due 2015. In addition Smurfit Kappa Treasury Funding Limited had outstanding US$292.3 million 7.50% senior debentures due 2025 and the Group had outstanding €210 million floating rate notes issued under an accounts receivable securitisation program maturing in September 2011.

Smurfit Kappa Acquisitions had outstanding €500 million 7.25% senior secured notes due 2017 and €500 million 7.75% senior secured notes due 2019. Smurfit Kappa Acquisitions and certain subsidiaries are also party to a Senior Credit Facility. The senior credit facility comprises a €196 million amortising A Tranche maturing in 2012, an €814 million B Tranche maturing in 2013 and an €813 million C Tranche maturing in 2014. In addition, as at 30 September 2010, the facility included a €525 million revolving credit facility of which there were €17.3 million in letters of credit issued in support of other liabilities and €8.6 million drawn under facilities supported by letters of credit.

The following table provides the range of interest rates as of 30 September 2010 for each of the drawings under the various Senior Credit Facility term loans.

BORROWING ARRANGEMENT  

 

 

CURRENCY

   

INTEREST RATE

 
Term Loan A EUR 3.868% - 3.871%
Term Loan B EUR 3.993% - 4.265%

USD

3.906%

Term Loan C EUR 4.241% - 4.504%
USD 4.156%

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

Market Risk and Risk Management Policies

The Group is exposed to the impact of interest rate changes and foreign currency fluctuations due to its investing and funding activities and its operations in different foreign currencies. Interest rate risk exposure is managed by achieving an appropriate balance of fixed and variable rate funding. At 30 September 2010 the Group had fixed an average of 76% of its interest cost on borrowings over the following twelve months.

Our fixed rate debt comprised mainly €500 million 7.25% senior secured notes due 2017, €500 million 7.75% senior secured notes due 2019, €217.5 million 7.75% senior subordinated notes due 2015, US$200 million 7.75% senior subordinated notes due 2015 and US$292.3 million 7.50% senior debentures due 2025. In addition the Group also has €1,110 million in interest rate swaps with maturity dates ranging from April 2012 to July 2014.

Our earnings are affected by changes in short-term interest rates as a result of our floating rate borrowings. If LIBOR interest rates for these borrowings increase by one percent, our interest expense would increase, and income before taxes would decrease, by approximately €11 million over the following twelve months. Interest income on our cash balances would increase by approximately €6 million assuming a one percent increase in interest rates earned on such balances over the following twelve months.

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

Group Income Statement – Nine Months

               

Unaudited

Unaudited

9 months to 30-Sep-10 9 months to 30-Sep-09
 

Pre-
exceptional
2010

Exceptional
2010

Total
2010

Pre-
exceptionalexceptional
20092009

Exceptional
20092009

Total
20092009
      € million   € million   € million     € million   € million   € million
Continuing operations
Revenue 4,928 - 4,928 4,517 - 4,517
Cost of sales (3,556)   -   (3,556) (3,227)   (33)   (3,260)
Gross profit 1,372 - 1,372 1,290 (33) 1,257
Distribution costs (410) - (410) (384) - (384)
Administrative expenses (632) (16) (648) (642) - (642)
Other operating income 19 - 19 2 - 2
Other operating expenses -   (40)   (40) -   (17)   (17)
Operating profit 349 (56) 293 266 (50) 216
Finance costs (333) - (333) (299) - (299)
Finance income 92 - 92 87 8 95
Share of associates’ profit (after tax) 2   -   2 -   -   -
Profit before income tax 110   (56) 54 54   (42) 12
Income tax expense (52) (30)
Profit/(loss) for the financial period 2 (18)
 
Attributable to:
Owners of the Parent (1) (31)
Non-controlling interests 3 13
Profit/(loss) for the financial period 2 (18)
 

Earnings per share:

Basic loss per share (cent per share)

(0.5)

(14.2)

Diluted loss per share (cent per share)

(0.5)

(14.2)

 
 

Group Income Statement – Third Quarter

               

Unaudited

Unaudited

3 months to 30-Sep-10 3 months to 30-Sep-09
 

Pre-
exceptional
2010

Exceptional
2010

Total
2010

Pre-
exceptionalexceptional
20092009

Exceptional
20092009

Total
20092009
      € million   € million   € million     € million   € million   € million
Continuing operations
Revenue 1,702 - 1,702 1,515 - 1,515
Cost of sales (1,215)   -   (1,215)   (1,075)   (33)   (1,108)
Gross profit 487 - 487 440 (33) 407
Distribution costs (136) - (136) (131) - (131)
Administrative expenses (213) - (213) (213) - (213)
Other operating income 5 - 5 - - -
Other operating expenses -   -   -   -   (17)   (17)
Operating profit 143 - 143 96 (50) 46
Finance costs (96) - (96) (109) - (109)
Finance income 15 - 15 35 - 35
Share of associates profit (after tax) 1   -   1   1   -   1
Profit/(loss) before income tax 63   - 63 23   (50) (27)
Income tax expense (22) (13)
Profit/(loss) for the financial period 41 (40)
 
Attributable to:
Owners of the Parent 37 (46)
Non-controlling interests 4 6
Profit/(loss) for the financial period 41 (40)
 
 
Earnings per share:
Basic earnings/(loss) per share (cent per share) 16.9 (20.9)
Diluted earnings/(loss) per share (cent per share) 16.5 (20.9)
 
 

Group Statement of Comprehensive Income

       

Unaudited

Unaudited

9 months to 9 months to
30-Sep-10 30-Sep-09
      € million     € million
 
Profit/(loss) for the financial period 2 (18)
 
Other comprehensive income:
Foreign currency translation adjustments (62) 58
Defined benefit pension schemes:
- Actuarial loss (98) (132)
- Movement in deferred tax 15 34
Effective portion of changes in fair value of cash flow hedges:
- Movement out of reserve 17 6
- New fair value adjustments into reserve (27) (27)
- Movement in deferred tax 1 2
Net change in fair value of available-for-sale financial assets 1     -
Total other comprehensive income (153)     (59)
       
Comprehensive income and expense for the financial period (151)     (77)
 
Attributable to:
Owners of the Parent (154) (99)
Non-controlling interests 3     22
(151)     (77)
       
 

Group Balance Sheet

 

Unaudited

Unaudited

Audited

30-Sep-10 30-Sep-09 31-Dec-09
      € million   € million   € million
Assets
 
Non-current assets
Property, plant and equipment 2,971 2,938 3,066
Goodwill and intangible assets 2,208 2,153 2,222
Available-for-sale financial assets 32 31 32
Investment in associates 15 12 13
Biological assets 88 85 91
Trade and other receivables 4 4 4
Deferred income tax assets 272   283   280
5,590   5,506   5,708
Current assets
Inventories 631 565 586
Biological assets 10 9 8
Trade and other receivables 1,311 1,154 1,105
Derivative financial instruments 11 5 3
Restricted cash 25 45 43
Cash and cash equivalents 565   623   601
2,553 2,401 2,346
Non-current assets held for sale 3   10   4
Total assets 8,146   7,917   8,058
 
Equity
Capital and reserves attributable to owners of the Parent
Equity share capital - - -
Capital and other reserves 2,289 2,362 2,345
Retained earnings (705)   (808)   (669)
Total equity attributable to owners of the Parent 1,584 1,554 1,676
Non-controlling interests 173   163   179
Total equity 1,757   1,717   1,855
 
Liabilities
Non-current liabilities
Borrowings 3,544 3,570 3,563
Employee benefits 740 635 653
Derivative financial instruments 118 127 80
Deferred income tax liabilities 309 313 325
Non-current income tax liabilities 15 16 15
Provisions for liabilities and charges 45 43 44
Capital grants 12 13 13
Other payables 5   3   3
4,788   4,720   4,696
Current liabilities
Borrowings 169 132 133
Trade and other payables 1,353 1,235 1,211
Current income tax liabilities 20 12 28
Derivative financial instruments 32 48 90
Provisions for liabilities and charges 27   53   45
1,601   1,480   1,507
Total liabilities 6,389   6,200   6,203
Total equity and liabilities 8,146   7,917   8,058
 
 

 

Group Statement of Changes in Equity (Unaudited)

             
Capital and other reserves

Equity
share
capital

Share
premium

 

Reverse
acquisition
reserve

 

Available-
for-sale
reserve

 

Cash
flow
hedging
reserve

 

Foreign
currency
translation
reserve

 

Reserve
for
share-
based
payment

Retained
earnings

Total
equity
attributable
to owners
of the
Parent

Non-
controlling
interests

Total
equity

      € million   € million   € million   € million   € million   € million   € million   € million   € million   € million   € million
At 1 January 2010 - 1,928 575 - (44) (174) 60 (669) 1,676 179 1,855
Shares issued - 3 - - - - - - 3 - 3
Total comprehensive income and expense - - - 1 (9) (62) - (84) (154) 3 (151)
Hyperinflation adjustment - - - - - - - 47 47 5 52
Share-based payment - - - - - - 3 - 3 - 3
Dividends paid to non-controlling interests - - - - - - - - - (4) (4)
Purchase of non-controlling interests - - - - - - - - - (1) (1)
Other movements -   -   -   -   -   8   -   1   9   (9)   -
At 30 September 2010 -   1,931   575   1   (53)   (228)   63   (705)   1,584   173   1,757
 
 
At 1 January 2009 - 1,928 575 - (27) (203) 57 (679) 1,651 145 1,796
Total comprehensive income and expense - - - - (19) 49 - (129) (99) 22 (77)
Dividends paid to non-controlling interests - - - - - - - - - (4) (4)
Share-based payment -   -   -   -   -   -   2   -   2   -   2
At 30 September 2009 -   1,928   575   -   (46)   (154)   59   (808)   1,554   163   1,717
       
 

Group Cash Flow Statement

 

Unaudited

Unaudited

9 months to 9 months to
30-Sep-10 30-Sep-09
      € million     € million
Cash flows from operating activities
Profit/(loss) for the financial period 2 (18)
Adjustment for
Income tax expense 52 30
Loss/(profit) on sale of assets and businesses 23 (5)
Amortisation of capital grants (1) (2)
Impairment of property, plant and equipment - 33
Equity settled share-based payment transactions 3 2
Amortisation of intangible assets 34 35
Share of profit of associates (2) -
Depreciation charge 248 243
Net finance costs 241 204
Change in inventories (71) 64
Change in biological assets 13 9
Change in trade and other receivables (207) 65
Change in trade and other payables 195 (43)
Change in provisions (19) (1)
Change in employee benefits (40) (38)
Foreign currency translation adjustments 1 (1)
Other 4     -
Cash generated from operations 476 577
Interest paid (181) (168)
Income taxes paid:
Irish corporation tax paid (5) (9)
Overseas corporation tax (net of tax refunds) paid (49)     (70)
Net cash inflow from operating activities 241     330
 
Cash flows from investing activities
Interest received 3 8
Mondi asset swap (56) -
Purchase of property, plant and equipment and biological assets (176) (199)
Purchase of intangible assets (5) (6)
Receipt of capital grants - 2
Decrease/(increase) in restricted cash 18 (25)
Disposal of property, plant and equipment 13 8
Dividends received from associates 1 1
Purchase of non-controlling interests (1)     -
Net cash outflow from investing activities (203)     (211)
 
Cash flow from financing activities
Proceeds from issue of new ordinary shares 3 -
Decrease in interest-bearing borrowings (57) (151)
Repayment of finance lease liabilities (10) (11)
Derivative termination payments (2) (1)
Deferred debt issue costs (1) (34)
Dividends paid to non-controlling interests (4)     (4)
Net cash outflow from financing activities (71)     (201)
Decrease in cash and cash equivalents (33)     (82)
 
Reconciliation of opening to closing cash and cash equivalents
Cash and cash equivalents at 1 January 587 683
Currency translation adjustment (13) 7
Decrease in cash and cash equivalents (33)     (82)
Cash and cash equivalents at 30 September 541     608

1. General Information

Smurfit Kappa Group plc (“SKG plc”) (“the Company”) (“the Parent”) and its subsidiaries (together “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 incorporated and tax resident in Ireland. The address of its registered office is Beech Hill, Clonskeagh, Dublin 4, Ireland.

2. Basis of Preparation

The annual consolidated financial statements of SKG plc are prepared in accordance with International Financial Reporting Standards (“IFRS”) as adopted by the European Union (“EU”), International Financial Reporting Interpretations Committee (“IFRIC”) interpretations as adopted by the EU, and with those parts of the Companies Acts applicable to companies reporting under IFRS. IFRS is comprised of standards and interpretations approved by the International Accounting Standards Board (“IASB”) and International Accounting Standards and interpretations approved by the predecessor International Accounting Standards Committee that have been subsequently approved by the IASB and remain in effect.

The financial information presented in this report has been prepared to comply with the requirement to publish an ‘Interim management statement’ for the third quarter, in accordance with the Transparency Regulations which were signed into Irish law on 13 June 2007. The Transparency Regulations do not require Interim management statements to be prepared in accordance with International Accounting Standard 34 – “Interim Financial Information” (“IAS 34”). Accordingly the Group has not prepared this financial information in accordance with IAS 34.

The financial information has been prepared in accordance with the Group’s accounting policies. Full details of the accounting policies adopted by the Group are contained in the financial statements included in the Group’s Annual Report for the year ended 31 December 2009 which is available on the Group’s website www.smurfitkappa.com. The accounting policies and methods of computation and presentation adopted in the preparation of the Group financial information are consistent with those described and applied in the Annual Report for the financial year ended 31 December 2009 with the exception of the standards described below.

IAS 27, Consolidated and Separate Financial Statements, as revised requires the effects of all transactions with non-controlling interests to be recorded in equity if there is no change in control. These transactions will no longer result in goodwill or gains and losses. The revised standard also specifies the accounting when control is lost with any remaining interest in the entity remeasured to fair value, and a gain or loss recognised in profit or loss. The Group has applied IAS 27 as revised prospectively to transactions with non-controlling interests from 1 January 2010. Adoption of IAS 27 did not have a material effect on the Group Financial Statements.

IFRS 3, Business Combinations, as revised continues to apply the acquisition method in accounting for business combinations but with some significant changes. For example, all payments to purchase a business must be recorded at fair value at the acquisition date with contingent payments classified as debt and subsequently remeasured in profit or loss. There is a choice, on an acquisition by acquisition basis, to measure any non-controlling interest in the acquiree either at fair value or at the non-controlling interest’s proportionate share of the acquiree’s net assets. All acquisition related expenses are expensed. The Group has adopted revised IFRS 3 with effect from 1 January 2010. It applies to business combinations after that date. Adoption of IFRS 3 did not have a material effect on the Group Financial Statements.

In addition, the following new standards, amendments and interpretations became effective in 2010, however, they either do not have an effect on the Group financial statements or they are not currently relevant for the Group:

  • IFRS 2 (Amendment) – Group Cash-settled Share-based Payment Transactions
  • IAS 39 (Amendment) – Eligible Hedged Items, Financial Instruments: Recognition and Measurement
  • IFRIC 17 – Distributions of Non-cash Assets to Owners

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

The condensed financial information presented does not constitute full group accounts within the meaning of Regulation 40(1) of the European Communities (Companies: Group Accounts) Regulations, 1992 of Ireland insofar as such group accounts would have to comply with all of the disclosure and other requirements of those Regulations. Full Group accounts for the year ended 31 December 2009 have been filed with the Irish Registrar of Companies. The audit report on those Group accounts was unqualified.

3. Segmental Analyses

The Group has identified three operating segments on the basis of which performance is assessed and resources are allocated: 1) Packaging Europe, 2) Specialties Europe and 3) Latin America.

The Packaging segment is highly integrated. It includes a system of mills and plants that produces a full line of containerboard that is converted into corrugated containers. The Specialties segment comprises activities dedicated to the needs of specific and sometimes niche markets. These include bag-in-box and solidboard. The Latin America segment comprises all forestry, paper, corrugated and folding carton activities in a number of Latin American countries. Inter segment revenue is not material. No operating segments have been aggregated for disclosure purposes.

Segment disclosures are based on operating segments identified under IFRS 8. Segment profit is measured based on earnings before interest, tax, depreciation, amortisation, exceptional items and share-based payment expense (pre-exceptional EBITDA). Segmental assets consist primarily of property, plant and equipment, biological assets, goodwill and intangible assets, inventories, trade and other receivables, deferred income tax assets and cash and cash equivalents.

       
 
9 months to 30-Sep-10 9 months to 30-Sep-09
 

Packaging
Europe

 

Specialties
Europe

 

Latin
America

  Total

Packaging
EuropeEurope

  

Specialties
EuropeEurope

  

Latin
AmericaAmerica

  

Total

      € million   € million   € million   € million     € million   € million   € million   € million
Revenue and Results
Third party revenue 3,531   574   823   4,928 3,180   590   747   4,517
 
EBITDA before exceptional items 475 48 141 664 376 62 141 579
Segment exceptional items (1)   (39)   (16)   (56) (17)   -   -   (17)
EBITDA after exceptional items 474   9   125 608 359   62   141 562
 
Unallocated centre costs (17) (24)
Share-based payment expense (3) (2)
Depreciation and depletion (net) (261) (252)
Amortisation (34) (35)
Impairment of assets - (33)
Share of associates’ profit after tax 2 -
Finance costs (333) (299)
Finance income 92 95
Profit before income tax 54 12
Income tax expense (52) (30)
Profit/(loss) for the financial period 2 (18)
 
Assets
Segment assets 5,355 708 1,243 7,306 5,209 761 1,038 7,008
Investment in associates 2   -   13 15 2   -   10 12
Group centre assets 825 897
Total assets 8,146 7,917
 
 
3 months to 30-Sep-10 3 months to 30-Sep-09
 

Packaging
Europe

Specialties
Europe

Latin
America

Total

Packaging
EuropeEurope

Specialties
EuropeEurope

Latin
AmericaAmerica

 Total
      € million   € million   € million   € million     € million   € million   € million   € million
Revenue and Results
Third party revenue 1,229   196   277   1,702 1,042   207   266   1,515
 
EBITDA before exceptional items 176 27 48 251 126 26 54 206
Segment exceptional items -   -   -   - (17)   -   -   (17)
EBITDA after exceptional items 176   27   48 251 109   26   54 189
 
Unallocated centre costs (8) (14)
Share-based payment expense (1) -
Depreciation and depletion (net) (88) (83)
Amortisation (11) (13)
Impairment of assets - (33)
Share of associates’ profit after tax 1 1
Finance costs (96) (109)
Finance income 15 35
Profit/(loss) before income tax 63 (27)
Income tax expense (22) (13)
Profit/(loss) for the financial period 41 (40)

4. Exceptional Items

    9 months to     9 months to
The following items are regarded as exceptional in nature: 30-Sep-10 30-Sep-09
      € million     € million
 
Currency trading loss on Venezuelan Bolivar devaluation (16) -
Mondi asset swap (40) -
Reorganisation and restructuring costs - (17)
Impairment of property, plant and equipment -     (33)
Total exceptional items included in operating costs (56)     (50)
Exceptional items included in finance income -     8

As noted in the Group’s financial statements for 2009, the Venezuelan government announced the devaluation of its currency, the Bolivar Fuerte (“VEF”), on 8 January 2010. The official exchange rate generally applicable to SKG was changed from VEF 2.15 per U.S. dollar to VEF 4.3 per U.S. dollar. A currency translation loss of €14 million arose in quarter one from the effect of retranslation of the U.S. dollar denominated net payables of its Venezuelan operations. A further €2 million of hyperinflationary adjustments in relation to this, are included within operating profit in the second and third quarter.

During the second quarter an asset swap agreement was completed with Mondi. As a result of this, three corrugated plants in the UK were acquired and the Group’s paper sack plants (other than the Polish plant which is being sold separately) were disposed. The transaction generated an exceptional loss of €40 million in the second quarter.

The reorganisation and restructuring costs for 2009 related to the rationalisation of our corrugated plant in Cork, Ireland and the planned closure of the semi-chemical fluting mill in Sturovo, Slovakia.

The impairment of property, plant and equipment in 2009 related entirely to the Sturovo mill in Slovakia.

For 2009 the exceptional finance income of €8 million related to the gain on the Group’s debt buy-back. In February 2009, the Group launched an auction process to buy-back up to €100 million of its Senior bank debt. In total, just over €100 million of offers were received, of which €43 million were accepted at an average discount of 24% to par.

5. Finance Costs and Income

    9 months to     9 months to
30-Sep-10 30-Sep-09
      € million     € million
Finance costs
Interest payable on bank loans and overdrafts 113 139
Interest payable on finance leases and hire purchase contracts 2 3
Interest payable on other borrowings 99 42
Unwinding discount element of provisions - 1
Foreign currency translation loss on debt 34 6
Fair value loss on derivatives not designated as hedges - 36
Interest cost on employee benefit plan liabilities 75 72
Net monetary loss – hyperinflation 10     -
Total finance cost 333     299
 
Finance income
Other interest receivable 3 8
Foreign currency translation gain on debt 5 27
Gain on debt buy-back - 8
Fair value gain on derivatives not designated as hedges 31 1
Expected return on employee benefit plan assets 53     51
Total finance income 92     95
 
Net finance cost 241     204
 
 

6. Income Tax Expense

 

Income tax expense recognised in the Group Income Statement

       
9 months to 9 months to
30-Sep-10 30-Sep-09
      € million     € million
Current taxation:
Europe 30 7
Latin America 27     32
57 39
Deferred taxation (5)     (9)
Income tax expense 52     30
 
Current tax is analysed as follows:
Ireland 3 6
Foreign 54     33
57     39
 

Income tax recognised in the Group Statement of Comprehensive Income

 

9 months to 9 months to
30-Sep-10 30-Sep-09
      € million     € million
Arising on actuarial gains/losses on defined benefit plans (15) (34)
Arising on qualifying derivative cash flow hedges (1)     (2)
(16)     (36)

7. Employee Post Retirement Schemes – Defined Benefit Expense

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

    9 months to     9 months to
30-Sep-10 30-Sep-09
      € million     € million
 
Current service cost 27 28
Past service cost - 4
(Gain) on settlements and curtailments (1)     (2)
26     30
 
Expected return on plan assets (53) (51)
Interest cost on plan liabilities 75     72
Net financial expense 22     21
Defined benefit expense 48     51

Included in cost of sales, distribution costs, administrative expenses and other operating expenses is a defined benefit expense of €26 million for the first nine months of 2010 (2009: €30 million). Expected Return on Scheme Assets of €53 million (2009: €51 million) is included in Finance Income and Interest Cost on Scheme Liabilities of €75 million (2009: €72 million) is included in Finance Costs in the Group Income Statement.

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

      30-Sep-10     31-Dec-09
        € million     € million
Present value of funded or partially funded obligations (1,647) (1,447)
Fair value of plan assets 1,358     1,208
Deficit in funded or partially funded plans (289) (239)
Present value of wholly unfunded obligations (451)     (414)
Net employee benefit liabilities (740)     (653)

The employee benefits provision has increased from €653 million at 31 December 2009 to €740 million at 30 September 2010. The rise in the provision was mainly as a result of the fall in euro and Sterling AA Corporate bond yields in that period.

8. Earnings Per Share

Basic

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

   

3 Months to

  3 Months to   9 months to   9 months to
30-Sep-10 30-Sep-09 30-Sep-10 30-Sep-09
      € million   € million   € million   € million
(Loss)/profit attributable to owners of the Parent 37 (46) (1) (31)
 
Weighted average number of ordinary shares in issue (million) 218 218 218 218
 
Basic (loss)/earnings per share (cent per share) 16.9   (20.9)   (0.5)   (14.2)

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 Management Equity Plans.

  3 Months to   3 Months to   9 months to   9 months to
30-Sep-10 30-Sep-09 30-Sep-10 30-Sep-09
    € million   € million   € million   € million
(Loss)/profit attributable to owners of the Parent 37 (46) (1) (31)
 
Weighted average number of ordinary shares in issue (million) 218 218 218 218
Potential dilutive ordinary shares assumed 4   1   4   -
Diluted weighted average ordinary shares 222   219   222   218
 
Diluted (loss)/earnings per share (cent per share) 16.5   (20.9)   (0.5)   (14.2)

9. Property, Plant and Equipment

   

Land and
buildings

 

Plant and
equipment

  Total
      € million   € million   € million
Nine months ended 30 September 2010
Opening net book amount 1,151 1,915 3,066
Reclassification 16 (18) (2)
Additions 2 120 122
Acquisitions 12 22 34
Depreciation charge for the period (36) (212) (248)
Retirements and disposals (5) (1) (6)
Foreign currency translation adjustment (20) (1) (21)
Hyperinflation adjustment 12   14   26
At 30 September 2010 1,132   1,839   2,971
 
Year ended 31 December 2009
Opening net book amount 1,108 1,930 3,038
Reclassification 16 (18) (2)
Additions 4 199 203
Depreciation charge for the year (57) (298) (355)
Impairment losses recognised in the Group Income Statement (13) (20) (33)
Retirements and disposals (3) (2) (5)
Foreign currency translation adjustment 13 28 41
Hyperinflation adjustment 83   96   179
At 31 December 2009 1,151   1,915   3,066

10. Share-based Payment

Share-based payment expense recognised in the Group Income Statement

    9 months to   9 months to
30-Sep-10 30-Sep-09
      € million   € million
 
Charge arising from fair value calculated at grant date 3   2

In March 2007 upon the IPO becoming effective, all of the then class A, E, F and H convertible shares and 80% of the class B convertible shares vested and were converted into D convertible shares. The class C, class G and 20% of the class B convertible shares did not vest and were re-designated as A1, A2 and A3 convertible shares.

The A1, A2 and A3 convertible shares vested on the first, second and third anniversaries respectively of the IPO. The D convertible shares resulting from these conversions are convertible on a one-to-one basis into ordinary shares, at the instance of the holder, upon the payment by the holder of the agreed conversion price. The life of the D convertible shares arising from the vesting of these new classes of convertible share ends on 20 March 2014.

The plans provide for equity settlement only, no cash settlement alternative is available.

In March 2007, SKG plc adopted the 2007 Share Incentive Plan (the “2007 SIP”). The 2007 SIP was amended in May 2009. Incentive awards under the 2007 SIP are in the form of new class B and new class C convertible shares issued in equal proportions to participants at a nominal value of €0.001 per share. On satisfaction of specified performance criteria the new class B and new class C convertible shares will automatically convert on a one-to-one basis into D convertible shares. The D convertibles may be converted by the holder into ordinary shares upon payment of the agreed conversion price. The conversion price for each D convertible share is the average market value of an ordinary share for the three dealing days immediately prior to the date that the participant was invited to subscribe less the nominal subscription price. Each award has a life of ten years from the date of issuance of the new class B and new class C convertible shares. The performance period for the new class B and new class C convertible shares is three financial years.

The performance conditions for the new class B and new class C convertible shares awarded under the 2007 SIP prior to 2009 are as follows. The new class B convertible shares will automatically convert into D convertible shares if the growth in the Company’s earnings per share over the performance period is a percentage equal to at least five per cent per annum plus the annual percentage increase in the Consumer Price Index of Ireland, compounded. The new class C convertible shares are subject to that same performance condition. In addition, the new class C convertible shares are subject to a performance condition based on the Company’s total shareholder return over the three-year period relative to the total shareholder return of a peer group of companies (“TSR Condition”). Under that condition, 30% of the new class C convertible shares will convert into D convertible shares if the Company’s total shareholder return is at the median performance level and 100% will convert if the Company’s total shareholder return is at or greater than the upper quartile of the peer group. A sliding scale will apply for performance between the median and upper quartiles. Current market conditions will make it extremely difficult for the Company to satisfy the performance conditions applicable to the awards made in 2008. The awards made in 2007 lapsed in 2010 and ceased to be capable of conversion to D convertible shares.

For new class B and new class C convertible shares awarded from 2009, the new class B and new class C convertible shares will convert into D convertible shares if the TSR condition is satisfied. However, notwithstanding that the TSR condition applicable to any such award may have been satisfied, the Compensation Committee retains an overriding discretion to disallow the vesting of the award, in full or in part, if, in its opinion the Company's underlying financial performance or total shareholder return (or both) has been unsatisfactory during the performance period.

A combined summary of the activity under the 2002 Plan, as amended, and the 2007 SIP, as amended for the period from 31 December 2009 to 30 September 2010 is presented below.

   

Number of
convertible shares
000’s

 
At 31 December 2009 16,954
Forfeited in the period (211)
Lapsed in the period (2,347)
Granted in the period 2,604
Exercised in the period (655)
At 30 September 2010 16,345

At 30 September 2010, 9,012,303 shares were exercisable under the 2002 Plan, as amended. The weighted average exercise price for these shares at 30 September 2010 was €4.59. The weighted average remaining contractual life of the awards issued under the 2002 Plan, as amended, at 30 September 2010 was 2.4 years.

The weighted average exercise price for the new B and new C convertible shares upon vesting at 30 September 2010 was €6.57. The weighted average remaining contractual life of the awards issued under the 2007 SIP, as amended, at 30 September 2010 was 8.7 years. No shares were exercisable at September 2010 or December 2009.

11. Analysis of Net Debt

    30-Sep-10   31-Dec-09
      € million   € million
Senior credit facility
Revolving credit facility (1) – interest at relevant interbank rate + 3.25% on RCF1 and +3.5% on RCF2 (8) (2) (13)
Tranche A term loan(2a)—interest at relevant interbank rate + 3.25%(8) 196 219
Tranche B term loan(2b)—interest at relevant interbank rate + 3.375%(8) 814 809
Tranche C term loan(2c)—interest at relevant interbank rate + 3.625%(8) 813 808
Yankee bonds (including accrued interest)(3) 219 203
Bank loans and overdrafts/(cash) (513) (565)
Receivables securitisation floating rate notes 2011 (4) 209   208
1,736 1,669
2015 cash pay subordinated notes (including accrued interest)(5) 360 358
2017 senior secured notes (including accrued interest) (6) 496 485
2019 senior secured notes (including accrued interest) (7) 499   488
Net debt before finance leases 3,091 3,000
Finance leases 32   41
Net debt including leases – Smurfit Kappa Funding plc 3,123 3,041
Balance of revolving credit facility reclassified to debtors 2   13
Total debt after reclassification – Smurfit Kappa Funding plc 3,125 3,054
Net (cash) in parents of Smurfit Kappa Funding plc (2)   (2)
Net Debt including leases – Smurfit Kappa Group plc 3,123   3,052
(1)  

Revolving credit facility of €525 million split into RCF1 and RCF2 of €152 million and €373 million (available under the senior credit facility)
to be repaid in full in 2012 and 2013 respectively. (Revolver loans - Nil, drawn under ancillary facilities and facilities supported by lettersto be repaid in full in 2012 and 2013 respectively. (Revolver loans - Nil, drawn under ancillary facilities and facilities supported by letters
of credit - €8.6 million, letters of credit issued in support of other liabilities - €17.3 million) of credit - €8.6 million, letters of credit issued in support of other liabilities - €17.3 million)

(2a) Term loan A due to be repaid in certain instalments up to 2012
(2b) Term loan B due to be repaid in full in 2013
(2c) Term loan C due to be repaid in full in 2014
(3) 7.50% senior debentures due 2025 of $292.3 million
(4) Receivables securitisation floating rate notes mature September 2011
(5) €217.5 million 7.75% senior subordinated notes due 2015 and $200 million of 7.75% senior subordinated notes due 2015
(6) €500 million 7.25% senior secured notes due 2017
(7) €500 million 7.75% senior secured notes due 2019
(8) Effective 2 July 2009 the margins applicable to the Senior Credit Facility have been amended to the following:
Debt/EBITDA ratio   Tranche A and RCF1   Tranche B   Tranche C   RCF2
 
Greater than 4.0 : 1 3.25% 3.375% 3.625% 3.50%
 

4.0 : 1 or less but more
than 3.5 : 1than 3.5 : 1

 3.00% 3.125% 3.375% 3.25%
 

3.5 : 1 or less but more
than 3.0 : 1than 3.0 : 1

 2.75% 3.125% 3.375% 3.00%
 
3.0 : 1 or less 2.50% 3.125% 3.375% 2.75%

12. Venezuela

Hyperinflation

As discussed more fully in the 2009 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 to its Venezuelan operations at 31 December 2009 and for the first nine months of 2010. The hyperinflationary adjustments for the year ended 31 December 2009 were recorded in the fourth quarter of 2009 and in accordance with IAS 21, comparative amounts are not adjusted. Therefore, the results of the third quarter and first nine months of 2009 have not been adjusted for hyperinflation.

The index used to reflect current values is derived from a combination of Banco Central de Venezuela’s National Consumer Price Index from its initial publication in December 2007 and the Consumer Price Index for the metropolitan area of Caracas for earlier periods. The level of and movement in the price index for the first nine months of 2010 and the full year 2009 are as follows:

    30-Sep-10   31-Dec-09
Index at period end   198.4   163.7
Movement in period   21.2%   25.1%

As a result of hyperinflation, a net monetary loss of €10 million was recorded in the Group Income Statement for the first nine months of 2010 and total equity increased by €52 million in the same period.

Devaluation

As noted in the 2009 annual report, the Venezuelan government announced the devaluation of its currency, the Bolivar Fuerte (“VEF”), on 8 January 2010. The official exchange rate generally applicable to SKG was changed from VEF 2.15 per U.S. dollar to VEF 4.3 per U.S. dollar. For the first nine months of 2010 a loss of €16 million arises from the effect of retranslation of the U.S. dollar denominated net payables of its Venezuelan operations and associated hyperinflationary adjustments, which is included within operating profit. In addition, the Group recorded a reduction in net assets of €223 million in relation to these operations, which is reflected in the Group Statement of Comprehensive Income as a part of foreign currency translation adjustments.

13. Acquisitions and Disposals

On 4 May 2010, the Group completed an asset swap agreement with Mondi Group (“Mondi”). This agreement resulted in the Group acquiring Mondi’s corrugated operations in the UK while Mondi acquired the Group’s Western European sack converting operations. The total cash cost of the asset swap for the Group was €56 million, including €2 million of net cash disposed.

Acquisition of Mondi’s UK Corrugated Assets

The acquisition of Mondi’s UK corrugated operations, comprised three corrugated box plants. The three facilities reported a combined 2009 full year EBITDA of €8.0 million, and a profit before tax of €2.0 million.

Provisional fair value amounts equate to net book values acquired. While the fair value exercise has not been completed, no significant adjustments are expected.

   

Provisional
fair values

€ million
 
Total non current assets 34
Inventories 4
Trade and other receivables 20
Cash and cash equivalents 2
Total non current liabilities (1)
Trade and other payables (17)
Provisions for liabilities and charges (2)
Net assets acquired 40
Goodwill 4
Consideration 44

Disposal of SKG’s Western European Sack Converting Assets

The disposal of the Western European sack converting operations, comprised four plants in France, three in Spain, and one in Italy, as well as a number of sales offices. In 2009, these operations reported an EBITDA loss of €4.4 million and a loss before tax of €12.6 million.

Supplemental Financial Information

 
Reconciliation of net income to EBITDA, before exceptional items & share-based payment expense
         
3 months to 3 months to 9 months to 9 months to
30-Sep-10 30-Sep-09 30-Sep-10 30-Sep-09
      € million   € million   € million   € million
 
Profit/(loss) for the financial period 41 (40) 2 (18)
Income tax expense 22 13 52 30
Currency trading loss on Venezuelan Bolivar devaluation - - 16 -
Mondi asset swap - - 40 -
Reorganisation and restructuring costs - 17 - 17
Impairment of property, plant and equipment - 33 - 33
Share of associates' operating profit (1) (1) (2) -
Net finance costs 81 74 241 204
Share-based payment expense 1 - 3 2
Depreciation, depletion (net) and amortisation 99   96   295   287
EBITDA before exceptional items and share-based payment expense 243   192   647   555

Supplemental Historical Financial Information

 
€ Million     Q3, 2009   Q4, 2009   FY, 2009   Q1, 2010   Q2, 2010   Q3, 2010
             
Group and third party revenue 2,309 2,380 9,207 2,435 2,740 2,761
Third party revenue 1,515 1,541 6,057 1,530 1,696 1,702
EBITDA before exceptional items and share-based payment expense 192 186 741 184 221 243
EBITDA margin 12.7% 12.1% 12.2% 12.0% 13.0% 14.3%
Operating profit 46 51 267 73 77 143
Profit/(loss) before tax (27) (63) (52) (3) (5) 63
Free cash flow 125 29 172 (58) (12) 128
 
Basic earnings/(loss) per share (cent per share) (20.9) (41.6) (55.8) (7.0) (10.3) 16.9
Weighted average number of shares used in EPS calculation (million) 218 218 218 218 218 218
Net debt 3,034 3,052 3,052 3,162 3,291 3,123
Net debt to EBITDA (LTM) 4.0 4.1 4.1 4.2 4.2 3.7

Companies

Smurfit Kappa Group (CDI) (SKG)
UK 100
FTSE quotes by TradingView

Latest directors dealings

All directors dealings today