Final Results

Final Results

Smurfit Kappa Group PLC

11 February 2015: Smurfit Kappa Group plc (‘SKG’ or ‘the Group’) today announced results for the 3 months and 12 months ending 31 December 2014.

2014 Fourth Quarter & Full Year | Key Financial Performance Measures

€m  

FY
2014

 

FY
2013

  Change  

Q4
2014

 

Q4
2013

  Change  

Q3
2014

  Change
Revenue €8,083 €7,957 2% €2,108 €2,033 4% €2,027 4%
EBITDA before Exceptional Items and Share-based Payment (1) €1,161 €1,107 5% €295 €291 1% €302 (2%)
EBITDA margin 14.4% 13.9% 14.0% 14.3% 14.9%
Operating Profit before Exceptional Items €771 €679 14% €212 €175 21% €197 8%
Profit before Income Tax €378 €294 29% €58 €62 (8%) €93 (38%)
Basic EPS (cent) 105.8 82.2 29% 11.6 26.0 (55%) 31.9 (64%)
Pre-exceptional Basic EPS (cent) 162.5 114.5 42% 47.3 40.0 18% 51.1 (7%)
Return on Capital Employed (2) 15.0% 13.1% 14.5%
Free Cash Flow (3)   €362   €365   (1%)   €19   €103   (81%)   €208   (91%)
                                 
Net Debt €2,759 €2,621 5% €2,578 7%
Net Debt to EBITDA (LTM)   2.4x   2.4x                   2.2x    
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 profit for the period to EBITDA before exceptional items and share-based payment expense is set out on page 35.
2) LTM pre-exceptional operating profit plus share of associates’ profit/average capital employed.
3) Free cash flow is set out on page 10. The IFRS cash flow is set out on page 21.
 

Fourth Quarter and Full Year Key Points

  • Pre-exceptional EPS growth of 42%
  • Progressively improving ROCE to 15.0%
  • Completion of over €160 million of acquisitions in 2014 in the US, Dominican Republic and Colombia
  • Resilient European corrugated volume up 2% year-on-year
  • Final dividend increased by 30% from 30.75 cent to 40.00 cent per share
  • Launch today of €250 million senior unsecured notes to reduce Senior Credit Facility

Performance Review and Outlook

Gary McGann, Smurfit Kappa CEO, commented: “The Group’s solid operating performance through 2014 is strong evidence of the resilience of our integrated and geographically diverse business model. As a result we are pleased to report higher returns and good earnings growth year-on-year in 2014, driven by new business wins, a continued focus on cost efficiencies, judicious capital investment and accretive acquisitions. Progress against these measures has increased our ROCE to 15% and supports the Group’s revised ROCE target of an average of 15% through the cycle.

“In Europe, the Group has reported 2% corrugated volume growth year-on-year for the full year. Pricing in our end corrugated market improved by 1% year-on-year and was generally stable at this level throughout the year in spite of a more volatile pricing environment for recycled containerboard. The implementation of containerboard price increases in the third quarter, in particular, provided good support to corrugated prices at their current level.

“Following the launch of our ‘Open the Future’ differentiation initiative in June, we are working with customers on the re-evaluation of the impact of Smurfit Kappa’s expertise on their business. To this end the Group released a white paper in December 2014 - Marketing on the shelf: exactly how in control are you? - demonstrating the impact of packaging in the retail environment and the powerful marketing opportunities presented by SKG to brand owners in their retail environments. As the next step in this process, we will formally launch our ‘Point of Purchase’ strategy at our Innovation and Capital Markets Day in April, which will further enunciate the tangible impact of this process on the business and our customers.

“SKG’s businesses in the Americas performed well with volume growth and good margins in most countries. The Group’s larger Latin American operations in Colombia and Mexico delivered strong earnings progression during the year and the growth of our US footprint has enhanced our exposure to the improving US market. In Venezuela, economic volatility continues to drive currency uncertainty which impacted our business in 2014. However, to put our operations there into context, our 2014 Venezuelan earnings amounted to approximately 7% of Group EBITDA. Consistent with previous periods the Group has updated its Principal Risks and Uncertainties disclosure in relation to Venezuela on page 13.

“The Group outperformed its cost take-out target in 2014 with the delivery of €117 million in cost reduction initiatives during the year. In 2015, the Group expects to continue to further reduce its cost base by €75 million.

“In recent years, the Group has fundamentally repositioned itself. SKG is now regarded as a corporate credit in the debt markets following debt paydown of over €600 million and annual cash interest savings of €150 million since 2007. The Group will preserve its solid credit metrics through the cycle while continuing to enhance the cost, sustainability and structure of its capital base where appropriate.

“As a consequence of this process of sustained deleveraging, in February 2014 the Group announced a strategy to deploy its capital towards growth opportunities through internal investment, an active M&A focus and increasing returns to shareholders. We have been steadily delivering against our objectives.

“Firstly, our targeted programme of high return capital investments will support organic earnings growth into 2015. In this context, a number of our ‘Quick Win’ projects, approved in 2014, will begin to directly boost EBITDA by €18 million in 2015.

“The Group’s refurbished 250,000 tonne recycled containerboard mill in Kent, UK, will commence production in the first quarter of 2015 with an estimated 2015 volume of 150,000 tonnes entering the market commencing in the second quarter. SKG’s 80,000 tonne testliner mill in Viersen, Germany will cease production in the first quarter as part of a previously announced rationalisation programme encompassing the mill and four converting plants across Europe and this programme will be substantially completed within the first nine months of 2015. In the fourth quarter, the Group began a process to potentially dispose of its Solidboard operations in Belgium, the Netherlands and the UK and an exceptional impairment charge of €46 million has been recognised in the quarter.

“Secondly, the Group has progressed its acquisition agenda in 2014, completing four accretive acquisitions in the higher growth Americas region totalling over €160 million. In each case the Group expects returns significantly above its cost of capital and this disciplined approach will continue to underpin our evaluation of opportunities in 2015.

“Finally, the Group remains committed to driving returns for our shareholders, and to that end SKG is increasing its ordinary dividend by 30%. Furthermore, in the absence of accretive acquisitions the Group will evaluate alternative uses of capital, including returns of surplus capital to shareholders. However, our stated preference is to build durable, long-term value through the continued delivery of accretive acquisitions in our target markets. Capital allocation decisions will be taken in the context of staying within the scope of our Ba1 / BB+ credit rating.

“Looking to 2015, assuming no material dis-improvement in European economic conditions, we expect to grow the business through continued superior operating performance, high return internal investments and targeted acquisitions. The Group expects to deliver earnings growth, stronger free cash flows, and through the judicious use of capital to continue to improve returns for our shareholders.”

About Smurfit Kappa

Smurfit Kappa is one of the leading providers of paper-based packaging solutions in the world, with around 42,000 employees in approximately 350 production sites across 32 countries and with revenue of €8.1 billion in 2014. We are located in 21 countries in Europe, and 11 in the Americas. We are the only large-scale pan-regional player in Latin America.

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

smurfitkappa.com

Check out our microsite: openthefuture.info

Forward Looking Statements

Some statements in this announcement are forward-looking. They represent expectations for the Group’s business, and involve risks and uncertainties. These forward-looking statements are based on current expectations and projections about future events. The Group believes that current expectations and assumptions with respect to these forward-looking statements are reasonable. However, because they involve known and unknown risks, uncertainties and other factors, which are in some cases beyond the Group’s control, actual results or performance may differ materially from those expressed or implied by such forward-looking statements.

Contacts

Seamus Murphy

Smurfit Kappa

T: +353 1 202 71 80

E: ir@smurfitkappa.com

       

FTI Consulting

 

T: +353 1 663 36 80

E: smurfitkappa@fticonsulting.com

 

2014 Fourth Quarter & Full Year | Performance Overview

The Group delivered a solid fourth quarter operating performance with good volume growth across the business and an EBITDA result of €295 million. On a full year basis, the Group delivered strong free cash flows at €362 million, and an improving year-on-year EBITDA margin of 14.4%. The result further underscores the relatively stable nature of our integrated business model which supported consistent earnings and free cash flow delivery in spite of short-term containerboard price volatility in 2014 in Europe and currency headwinds in our Americas business.

After a slower than expected first quarter the Group delivered solid European corrugated volumes throughout the year with a 2% year-on-year increase for the full year. The fourth quarter was particularly strong with 3% growth year-on-year on both an absolute and days adjusted basis. Following some increases in the first quarter, European corrugated prices were stable through the second and third quarter, with some weakness into the fourth quarter due to indexed movements and currency headwinds. Overall corrugated pricing was on average 1% higher in 2014 when compared to 2013.

In spite of somewhat lower exported volumes into China, European Old Corrugated Container (‘OCC’) prices have operated in a tight band since 2012. Currently announced capacity additions in China, the US and Europe are expected to underpin incremental demand for OCC, which continues to support the view that OCC prices will trend upwards.

Throughout the year demand for recycled containerboard in Europe has been robust and the supply / demand outlook for the market remains benign. In spite of this, pricing in the grade was relatively volatile in the first half of the year as higher than expected inventories weighed on market sentiment. However, positive containerboard price progression in the second half provided an important underpin to corrugated prices.

The Group has recorded a charge for exceptional items of €110 million within operating profit in the full year 2014. This included a non-cash exceptional charge of €46 million which was recorded in the fourth quarter due to the impairment of fixed assets and goodwill associated with a potential disposal of the Group’s Solidboard operations in Belgium, the Netherlands and the UK.

In spite of a 7% year-on-year increase in US kraftliner imports to Europe up to November 2014, the European kraftliner market remained good throughout 2014, achieving a €30 per tonne increase in September. Currency tailwinds are expected to support further price initiatives in the first quarter of 2015, and SKG has announced a €40 per tonne increase in kraftliner in the Mediterranean region effective from 15 March.

In the Americas, our absolute corrugated volumes have increased by almost 7% year-on-year following a number of acquisitions across the region. Adjusting for these acquisitions, underlying volumes increased by 3% year-on-year, with particularly strong performances in Colombia, Chile, and Northern Mexico. In spite of a resilient underlying performance in Venezuela, the country’s weakening currency has had a negative impact on the Americas’ results in 2014 and the economic environment will remain difficult in 2015.

The Group plans to launch a €250 million senior unsecured notes offering today in order to repay a portion of its Senior Credit Facility. The transaction will further diversify its funding structure, and improve its debt maturity profile. A further announcement will be made as appropriate.

As a result of stronger EBITDA and materially lower cash interest, offset by higher capital expenditure SKG has delivered free cash flow of €362 million in the full year as forecasted. This has enabled the Group to maintain its net debt to EBITDA at 2.4 times at the year-end whilst completing over €160 million of acquisitions and delivering progressive improvement to its dividend payments. On a pro-forma basis for acquisitions completed during the year, the net debt would be closer to 2.3 times EBITDA.

2014 Fourth Quarter | Financial Performance

At €2,108 million, revenue in the fourth quarter of 2014 was 4% higher year-on-year. With the contribution from recent acquisitions together with net negative currency movements and hyperinflationary adjustments in the Americas, the year-on-year increase was driven by underlying revenue growth in both Europe and the Americas. Compared to the third quarter revenues in the fourth quarter improved by 4%.

EBITDA increased by 1% in the fourth quarter from €291 million in 2013 to €295 million in 2014. Allowing for net currency movements, hyperinflationary adjustments and the additional contribution from acquisitions during the period, the underlying year-on-year move was an increase of €18 million, the equivalent of 6%. This was primarily due to higher earnings in Europe offset by the impact of marginally lower earnings in the Americas and higher Group centre costs. Compared to the third quarter of 2014, EBITDA in the fourth quarter decreased by 2%, mainly as a result of some adverse European pricing movements during the quarter.

An exceptional charge of €86 million within operating profit in the fourth quarter primarily related to two restructuring initiatives currently underway in 2015. In the first instance, a non-cash charge of €42 million in the quarter related mainly to the impairment of fixed assets and goodwill associated with the potential disposal of the Group’s Solidboard operations in Belgium, the Netherlands and the UK. Additionally, the Group incurred €42 million in reorganisation and restructuring costs in the quarter relating to the closure of five European plants (one mill and four corrugated plants) in 2015, as previously announced.

Pre-exceptional earnings per share increased year-on-year by 18% to 47.3 cent for the quarter to December 2014 (2013: 40.0 cent).

2014 Full Year | Financial Performance

For the year to December, revenue increased by €126 million from €7,957 million in 2013 to €8,083 million in 2014. The increase was the combination of higher revenue in Europe partly offset by lower revenue in the Americas, as a result of significant negative currency movements. However, allowing for net negative currency movements, hyperinflation and acquisitions, the underlying year-on-year move in revenue was an increase of over 4%, with higher underlying revenue in both Europe and the Americas.

The Group delivered a second year of strong EBITDA growth in 2014 with a 5% increase from €1,107 million in 2013 to €1,161 million in 2014. As in the case of the quarter, this mainly represented strong underlying growth partly offset by negative currency movements. Allowing for net negative currency movements, hyperinflation and the contribution from acquisitions, the underlying year-on-year move was an increase of almost 13%. This was mainly driven by higher earnings in both Europe and the Americas.

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

Exceptional items charged within operating profit in 2013 amounted to €36 million, approximately €15 million of which related to the temporary closure of the Townsend Hook machines in July. A further €18 million of exceptional items related to a currency trading loss as a result of the devaluation of the Venezuelan Bolivar in February 2013. The remaining €3 million was in respect of SK Orange County (‘SKOC’) reorganisation costs and the consolidation of the Group’s two operations in Juarez in Mexico.

Operating profit after exceptional items for the year was €661 million compared to €643 million for 2013, an increase of 3% (increase of 14% before exceptional items).

The Group’s net pre-exceptional finance costs were €248 million in 2014, down €60 million compared to 2013 as a result of the benefit of re-financing activities. Exceptional finance costs in the year to December 2014 amounted to €48 million comprising €42 million relating to the repayment of the 2019 bonds in July and an impairment of financial investments of €6 million. Exceptional finance income amounted to €11 million and represented a gain in Venezuela on US dollar denominated intra-group loans following our adoption of the Sicad I rate in the first quarter of 2014.

Exceptional finance costs in the year to December 2013 amounted to €51 million and resulted from the early repayment during the year of the Senior Credit Facility and the €500 million 7.25% bonds due in 2017. Exceptional finance income in 2013 amounted to €8 million which related entirely to the increased value in US dollar denominated intra-group loans, following the devaluation of the Venezuelan Bolivar in February 2013.

Profit before income tax of €378 million in 2014 compared to a profit before income tax of €294 million in 2013, an increase of 29% year-on-year. The increase was mainly due to higher profitability and lower finance costs during the year.

In 2014, the tax expense of €126 million is €28 million higher than in 2013 primarily due to increased profitability year-on-year and the impact of tax credits recognised in 2013. Adjusting for exceptional items the Group’s underlying 2014 tax rate is approximately 27% compared to 28% in 2013.

Pre-exceptional EPS of 162.5 cent for the full year 2014 was 42% higher than the 114.5 cent reported in 2013. Basic EPS was 105.8 cent for the full year 2014, compared to 82.2 cent for 2013.

2014 Fourth Quarter & Full Year | Free Cash Flow

The Group reported free cash flow of €362 million in 2014, broadly in line with the €365 million reported in 2013. The result reflects the benefits of materially higher EBITDA and lower cash interest costs year-on-year, offset by a working capital outflow and a €69 million increase in capital expenditure.

The 2014 cash interest expense of €137 million was 31% lower than the prior year, primarily due to the full year benefit of the substantial re-financing activity carried out in 2013 and the re-financing of the 7.75% bonds due 2019 in July 2014.

The Group’s working capital outflow of €40 million for the full year resulted in a working capital balance of €562 million at December 2014, €26 million higher year-on-year. However, the proportional increase in the Group’s revenues over the period resulted in a working capital to sales ratio of 6.7% at the year-end, broadly in line with the prior year level of 6.6%. This consistent result reflects the Group’s commitment to maintaining its strong financial disciplines as a means to deliver cash to support its evolving strategic agenda.

Capital expenditure of €438 million for the full year 2014 equated to 120% of depreciation. Although slightly ahead of the Group’s guidance of €420 million for the year, it is expected to return to the guided range of approximately €420 million per annum in 2015 and 2016.

Cash tax payments of €107 million in 2014 were €5 million lower year-on-year, reflecting the benefit of tax refunds received during the year. The Group continues to benefit from the availability of long-term tax losses in Europe to reduce its cash tax payments. Cash taxes as a percentage of EBITDA remain low at approximately 9% for the full year 2014.

2014 Fourth Quarter & Full Year | Capital Structure

During 2014 the Group achieved its stated credit rating target of Ba1 / BB+ / BB+ with the three major credit rating agencies following a number of years of sustained deleveraging and re-financing activities. As a result of its fundamentally strengthened capital structure, the Group has been able to firmly re-establish its growth objectives subject to the preservation of its current credit metrics and the availability of suitable and accretive acquisitions.

On 3 July, the Group completed the refinancing of its €500 million 7.75% senior notes due 2019 with a seven-year bond at a rate of 3.25%, the lowest ever bond coupon achieved by SKG. Today, the Group is launching a €250 million senior unsecured notes issue to reduce its Senior Credit Facility and extend its debt maturity profile. Further details will be announced as appropriate.

At 31 December 2014, the Group’s average interest rate was 3.8%, with an expected cash interest cost in 2015 of €124 million. The average maturity profile of the Group’s debt is 4.8 years, with approximately 90% maturing in 2018 and beyond. At the end of the year the Group held cash on its balance sheet of €399 million and had further undrawn credit facilities of approximately €502 million.

The Group’s strong free cash flow of €362 million enabled it to maintain its net debt to EBITDA at 2.4 times at the end of 2014, in spite of €69 million in incremental capital expenditure year-on-year, over €160 million in acquisitions and a €36 million increase in dividends paid in the year. Looking forward, the Group’s integrated operational model and disciplined focus on driving free cash flow will continue to support the business’s enhanced credit profile while providing the financial flexibility to pursue growth opportunities as they arise.

2014 Fourth Quarter & Full Year | Dividend Policy

The Group has displayed its commitment to dividend payments since their reinstatement in 2011 through consecutive significant increases in 2012 and 2013 of 37% and 50% respectively. Re-affirming this commitment, and in expectation of continued earnings growth and strong free cash flow generation in 2015, the Board is recommending a final dividend of 40 cent per share for 2014, a 30% increase on 2013.

It is proposed to pay the final dividend on 8 May 2015 to all ordinary shareholders on the share register at the close of business on 10 April 2015. The interim and final dividends are paid in October and May in each year in the approximate proportions of one third to two thirds respectively.

2014 Fourth Quarter & Full Year | Operating Efficiency

Commercial Offering and Innovation

In November 2014, Smurfit Kappa released its first ever white paper on the topic of Shopper Marketing. Entitled – Marketing on the shelf: exactly how in control are you? – the report identified the significant marketing opportunities available to brand owners in utilising shelf ready and point of purchase marketing to directly influence shoppers in the retail environment. Up to 76% of purchasing decisions are made by shoppers at the point of purchase, and this report has ignited a dialogue with our customers as to how Smurfit Kappa can unlock value for them, supported by the Group’s innovative technologies such as Shelf-Viewer and 3D Store Visualiser, and industry expertise.

Building on this white paper and the subsequent engagement with our customers, the Group will launch its ‘Point of Purchase’ strategy at its Innovation and Capital Markets Event in the Netherlands on 15 and 16 April. The event will also be used to showcase the Group’s most innovative designs and technologies whilst underscoring the Group’s sustainability credentials, an increasingly impactful competitive advantage with our customers.

In the fourth quarter, the Group was successful in a number of international packaging awards notably the 2014 PPI awards in October and the UK Packaging Awards in December. At the PPI Awards the Group was recognised for its unique Catcher Board technology which prevents the migration of mineral hydrocarbons from packaging into food products. Also at the PPI awards, the Group was awarded first prize in ‘Innovation in Luxury Packaging’, for its bag-in-box design. At the UK Packaging Awards, the Group won two Gold awards for the ‘Resource Efficient Pack of the Year’ and ‘Supply Chain Solution of the Year’, reflecting our continued focus on sustainability and supply chain optimisation for our customers.

In December, Smurfit Kappa opened the doors of its latest UK Experience Centre, in Mold, North Wales. The Centre is equipped with state-of-the-art technologies and tools, such as a Virtual Store, Retail Insight Centres, a Shelf Viewer and a full screen cinema room, and its opening brings to seven the number of such regional centres in operation across Europe, allowing the company to offer a localised service that supports businesses based around these regions. The Group’s major customer hub (Global Experience Centre) located in Schipol Airport in the Netherlands, will be one of the largest packaging experience centres in the world and is expected to open in early April.

Cost take-out programme

The Group is pleased to report a continuing cost take-out performance in the fourth quarter resulting in the delivery of €117 million in incremental cost take-out in 2014, a 17% outperformance against its original €100 million target for the year. The Group has now achieved €714 million in cost savings since the programme’s inception in 2008 and continues to view these projects as essential in negating inflationary pressures throughout the supply chain as well as improving its overall financial performance.

In the latter part of 2014 and into early 2015 we have experienced a somewhat lower prevailing cost environment and increasing challenges to maintain the level of a new cost take-out programme. Notwithstanding that, we are confident of our ability to achieve the 2015 target of €75 million which will maintain the integrity of our earnings and provide a continuing solid platform for absolute earnings growth.

Enhanced Capital Expenditure Programme

The Group has made good progress on its three-year programme of ‘Quick Win’ capital expenditure projects, with almost €75 million of expenditure approved at the end of 2014. The remainder will be approved over the course of 2015 and 2016 and the projects will begin to positively impact EBITDA in 2015 by approximately €18 million as they enter service. As previously announced the projects are generally insensitive to volume variations and must satisfy two key characteristics, a) that their associated internal rates of return are in excess of 20% and b) that their payback periods are two years or less.

2014 Fourth Quarter & Full Year | Performance Review

Europe

Fourth quarter EBITDA rose by €25 million year-on-year, with only a modest offsetting impact from currency movements. The primary driver of the increase year-on-year was higher earnings in Europe’s corrugated operations due to consistently high pricing and lower average input costs. For the full year the Group’s European segment recorded EBITDA growth of 14% to €882 million with net negative currency movements of €7 million partly offset by the contribution of acquisitions. EBITDA margins decreased somewhat from the third quarter to 14.3% due to higher recycled containerboard prices and slightly lower corrugated prices, but showed good progress year-on-year from 12.8% in the fourth quarter of 2013.

In volume terms, the Group’s packaging operations delivered a good performance over the course of the year with a 2% increase in corrugated shipments in the full year and a 3% increase in the fourth quarter. Box shipments for the full year increased by over 1% and sheet volumes increased by 6% as the Group began to see an improvement in the profitability of this business. In Europe, box shipments accounted for 87% of corrugated volumes.

The Group’s Pan-European business continues to perform strongly and is the current main beneficiary of the Group’s differentiation efforts. Volumes for the full year increased by 3%, a solid outperformance compared to our general volumes and compared to the market.

Average prices for corrugated packaging increased by 1% for the full year 2014 compared to 2013 primarily as a result of positive recycled containerboard momentum entering 2014 and the operation’s capacity to maintain resilient price levels in spite of input price erosion. In the fourth quarter corrugated prices decreased slightly with some negative currency movements in Sweden and Russia. However, these are relatively small parts of the overall operations.

Due to the integrated nature of the Group’s business, OCC remains its primary raw material and, more broadly, an important base driver of corrugated pricing in Europe. As a result, OCC pricing can be an important leading indicator for recycled containerboard and corrugated prices in periods of price instability. In 2014, European prices in the grade have remained within a tight range in spite of lower demand from Chinese players for the full year. This is indicative of good demand in Europe and the US and an increasing focus on higher quality materials, which is expected to support higher OCC prices over the medium-term. SKG maintains contractual agreements for approximately 75% of its recovered fibre requirements each year and is at the forefront of the industry in the area of quality control of fibre receipts at its mills.

The European recycled containerboard market continues to display a positive medium-term supply / demand balance with good demand driven by improving corrugated consumption, and an unchanged supply outlook to 2017. Assuming all announced containerboard capacity additions commence production as scheduled, the market is still expected to maintain operating rates above 90% which has historically supported a positive pricing environment. During 2014, higher than expected inventories led to some price instability in the first half. However, due to continuing strong fundamentals price stability was restored and the market’s near-term outlook remains stable.

The Group’s refurbished 250,000 tonne lightweight machine at Townsend Hook, in the UK, will commence production trials in the first quarter of 2015, with approximately 150,000 tonnes of saleable production in 2015, commencing in the second quarter. Also in the first quarter, the Group will cease production at its 80,000 tonne recycled containerboard mill in Viersen, Germany, as part of its previously announced rationalisation programme.

In kraftliner, the Group performed well in 2014 with good volume progression year-on-year and lower than expected wood costs. However, prices in the grade decreased by approximately 5% year-on-year following some weakness through the latter stages of 2013 and into early 2014, partly offset by a recovery of €30 per tonne in September 2014. Following two years of consecutive decreases in the levels of US imports to Europe in 2012 and 2013, the import levels increased by 7% year-on-year to November. This trend appears to be weakening towards the end of the year as demand in the US domestic market recovers and the US dollar strengthened.

During the year, the Group’s global Bag-in-box operations performed very well, with double digit growth year-on-year in both bags and taps. The improved performance was driven by a stronger market demand coupled with the Group’s enhanced capacity following the commencement of production at our new €28 million facility in Ibi, Spain, in July which is already performing ahead of expectations.

The Americas

The Americas segment delivered a strong underlying performance with absolute corrugated volume growth of 7% in the full year 2014 and 3% when adjusted for acquisitions. EBITDA decreased year-on-year by 15% mainly as a result of currency headwinds. The majority of these negative currency movements were due to the Group’s adoption of the SICAD I rate in the first quarter and its subsequent weakening in the third quarter. With a considerably better growth outlook than in developed markets, improving the Group’s exposure to the region remains a key strategic objective for SKG, and good progress was made in 2014 with over €160 million of acquisitions in the region. For the full year 2014, the Americas accounted for approximately 24% of the Group’s revenue and 26% of the Group’s EBITDA.

The Group’s SKOC operations grew strongly in volume terms year-on-year with a second consecutive year of double digit growth in its corrugated plants on the US/Mexican border. SKG’s Californian corrugated operations saw a negative volume impact in the year, mainly as a result of a persistent drought which particularly affected some key agricultural customers. The acquisition of four converting facilities in the fourth quarter has more than doubled the Group’s exposure to the improving US corrugated packaging market and is expected to deliver good volume, margin progression and increased integration through 2015.

In Argentina, SKG’s operations delivered good EBITDA and margin progression year-on-year in spite of a significant devaluation in the first quarter. This was achieved through extensive cost take-out through our supply chain in the country and strategic selling initiatives in our end packaging market. While the operating environment is expected to remain challenging into 2015, the Group expects further EBITDA progression supported by a continued emphasis on delivering cost efficiencies.

The Group’s Colombian operations delivered a strong volume performance with an absolute increase of 18% year-on-year. This included almost 10% of underlying volume growth as a result of a strong market growth and market share gains, with the remainder comprising the impact of acquisitions and an exceptional boost provided by election activities in the country. The weakened currency in the second half, while slightly impacting profitability in the period provides a competitive platform for economic growth in Colombia.

The Mexican central market has been slower to return to growth than expected, but the Group is well positioned to capitalise on a general improvement in the economy following targeted investments in its converting capacities in recent years. The previously announced re-build of the Group’s testliner machine in Mexico City will deliver an incremental 100,000 tonnes per annum when complete.

In Venezuela the Group’s operations continue to perform well with a resilient underlying performance in 2014. However, the country’s weakening currency throughout the year has had a negative impact on profitability while the economic outlook remains difficult for 2015.

Summary Cash Flow
 

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

 
    3 months to   3 months to   12 months to   12 months to
31-Dec-14 31-Dec-13 31-Dec-14 31-Dec-13
      €m   €m   €m   €m
Pre-exceptional EBITDA 295 291 1,161 1,107
Exceptional items (4) (2) (12) (27)
Cash interest expense (29) (39) (137) (197)
Working capital change 8 74 (40) 28
Current provisions (1) - (2) (6)
Capital expenditure (185) (151) (438) (369)
Change in capital creditors (2) 4 (8) 10
Tax paid (42) (41) (107) (112)
Sale of fixed assets - 1 5 3
Other (21)   (34)   (60)   (72)
Free cash flow 19 103 362 365
 
Share issues - 2 2 7
Purchase of own shares - - (13) (15)
Sale of businesses and investments - - 1 -
Purchase of businesses and investments (121) (21) (151) (26)
Dividends (37) (25) (112) (76)
Derivative termination payments (13) (16) (13) (16)
Early repayment of bonds -   (23)   (35)   (23)
Net cash (outflow)/inflow (152) 20 41 216
 
Net debt acquired - (7) - (8)
Deferred debt issue costs amortised (2) (9) (16) (40)
Currency translation adjustments (27)   5   (163)   3
(Increase)/decrease in net debt (181)   9   (138)   171
(1)  

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

(a)

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

(b)

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

(c)

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

 
    12 months to   12 months to
31-Dec-14 31-Dec-13
        €m   €m
Free cash flow 362 365
 
Add back: Cash interest 137 197
Capital expenditure (net of change in capital creditors) 446 359
Tax payments 107 112
Financing activities 1 3
Less: Sale of fixed assets (5) (3)
Profit on sale of assets and businesses – non exceptional (4) (5)
Receipt of capital grants (3) (2)
Dividends received from associates (1) (1)
Non-cash financing activities -   (7)
Cash generated from operations 1,040   1,018
 

Capital Resources

The Group's primary sources of liquidity are cash flow from operations and borrowings under the revolving credit facility. The Group's primary uses of cash are for funding day to day operations, capital expenditure, debt service, dividends and other investment activity including acquisitions.

At 31 December 2014, Smurfit Kappa Treasury Funding Limited had outstanding US$292.3 million 7.50% senior debentures due 2025. The Group had outstanding €149.9 million and STG£68.7 million variable funding notes issued under the €240 million accounts receivable securitisation programme maturing in June 2019 (which replaced the €250 million accounts receivable securitisation programme maturing in November 2015), together with €175 million variable funding notes issued under the €175 million accounts receivable securitisation programme maturing in April 2018.

Smurfit Kappa Acquisitions had outstanding €200 million 5.125% senior notes due 2018, US$300 million 4.875% senior notes due 2018, €400 million 4.125% senior notes due 2020, €250 million senior floating rate notes due 2020 and €500 million 3.25% senior notes due 2021. Smurfit Kappa Acquisitions and certain subsidiaries are also party to a senior credit facility. At 31 December 2014, the Group’s senior credit facility comprised term drawings of €700.9 million and US$60.8 million under the amortising Term A facility maturing in 2018. In addition, as at 31 December 2014, the facility included a €625 million revolving credit facility of which €105 million was drawn in revolver loans, with a further €18 million in operational facilities including letters of credit drawn under various ancillary facilities.

The following table provides the range of interest rates as of 31 December 2014 for each of the drawings under the various senior credit facility loans.

BORROWING ARRANGEMENT     CURRENCY     INTEREST RATE
 
Term A Facility EUR 2.022% - 2.088%
USD 2.162%
 
Revolving Credit Facility EUR 1.774%
 

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

On 24 July 2013, the Group completed a new five-year unsecured €1,375 million refinancing of its senior credit facility comprising a €750 million term loan with a current margin of 2.00% and a €625 million revolving credit facility with a current margin of 1.75%. The term loan is repayable €125 million on 24 July 2016, €125 million on 24 July 2017 with the balance of €500 million repayable on the maturity date. In connection with the refinancing, the collateral securing the obligations under the Group’s various outstanding senior notes and debentures was also released and the senior notes and debentures are therefore now unsecured. The new unsecured senior credit facility is supported by substantially the same guarantee arrangements as the old senior credit facility. The existing senior notes and debentures likewise continue to have substantially similar guarantee arrangements as supported those instruments prior to the refinancing.

On 3 July 2013, the Group put in place a new five-year trade receivables securitisation programme of up to €175 million utilising the Group’s receivables in Austria, Belgium, Italy and the Netherlands. The programme carries a margin of 1.70%.

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

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

Capital Resources (continued)

On 25 June 2014 the Group entered into a new five-year trade receivables securitisation programme of up to €240 million maturing in 2019 (which amended, restated and extended a €250 million facility maturing in 2015 which had a margin of 1.5%) utilising the Group’s receivables in France, the United Kingdom and Germany. The new programme has a margin of 1.40%.

Market Risk and Risk Management Policies

The Group is exposed to the impact of interest rate changes and foreign currency fluctuations due to its investing and funding activities and its operations in different foreign currencies. Interest rate risk exposure is managed by achieving an appropriate balance of fixed and variable rate funding. As at 31 December 2014, the Group had fixed an average of 63% of its interest cost on borrowings over the following twelve months.

The Group’s fixed rate debt comprised €200 million 5.125% senior notes due 2018, US$300 million 4.875% senior notes due 2018 (US$50 million swapped to floating), €400 million 4.125% senior notes due 2020, €500 million 3.25% senior notes due 2021 and US$292.3 million 7.50% senior debentures due 2025. In addition the Group had €349 million in interest rate swaps with maturity dates ranging from October 2018 to January 2021.

The Group’s earnings are affected by changes in short-term interest rates as a result of its floating rate borrowings. If LIBOR/EURIBOR interest rates for these borrowings increase by one percent, the Group’s interest expense would increase, and income before taxes would decrease, by approximately €13 million over the following twelve months. Interest income on the Group’s cash balances would increase by approximately €4 million assuming a one percent increase in interest rates earned on such balances over the following twelve months.

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

Principal Risks and Uncertainties

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

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

The principal risks and uncertainties faced by the Group were outlined in our 2014 interim report on page 11. The interim report is available on our website smurfitkappa.com. The principal risks and uncertainties for the financial year are summarised below:

  • If the current economic climate were to deteriorate and result in an increased economic slowdown which was sustained over any significant length of time, or the sovereign debt crisis (including its impact on the euro) were to reoccur, 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 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 is exposed to currency exchange rate fluctuations and currency exchange controls in Argentina.
  • The Group is exposed to potential risks in relation to its Venezuelan operations which are set out as follows:
    • The Group is exposed to currency exchange rate fluctuations and in addition, to exchange controls in Venezuela. In 2014 Venezuela operated a number of alternative exchange mechanisms, the official CENCOEX rate (VEF 6.3 per US dollar) (‘Official rate’), Sicad I and Sicad II. Contrary to general market expectations, in January 2014 the Government announced that it would not be devaluing the Official rate but access to the Official rate would only be available to certain priority sectors. Those not in these priority sectors would access dollars through the Sistema Complementario de Administración de Divisas (‘Sicad’). The Group is awaiting clarification on whether it will be part of the priority sector, the non-priority sector or both sectors. The most recent Sicad I rate is VEF 12.0 per US dollar and it is expected that this rate is likely to vary over time. As set out on page 33, the Group changed the rate at which it consolidates its Venezuelan operations (‘SKCV’) from the Official rate to the Sicad I rate as at 31 March 2014 (VEF 10.7 per US dollar). In March 2014 a new foreign exchange trading platform began operation (Sicad II) which permits foreign exchange barter transactions in the private sector with the most recent Sicad II rate being VEF 52.1 per US dollar and this rate is also likely to vary over time. The Group believes that Sicad I is the most appropriate rate for accounting and consolidation, as it believes that this is the rate at which the Group will extract economic benefit, and adopted it for translation from 31 March 2014. In February 2015 the government announced that they would be modifying the exchange mechanisms by unifying Sicad I and Sicad II (‘Sicad’) and bringing in a third rate to offset the parallel market rate. They further announced that the initial Sicad rate would be VEF 12.0 per US dollar.
    • In this multiple foreign exchange rate system there is a risk that the Sicad rate will devalue resulting in re-measurement of the local currency denominated net monetary assets and the local earnings and increase the cost of importing goods required to run the business. In 2014 the Group’s operations in Venezuela represented approximately 7% of the Group’s EBITDA and the Group estimates that in 2015 assuming the Sicad rate remains at its current exchange rate of VEF12.0 per US dollar it would be within a range of 5% to 7% of the Group’s EBITDA. In addition at 31 December 2014 the Group’s net assets in Venezuela were €425 million and its cash balances were €84 million. Were the Sicad rate to deteriorate during 2015 this would have an adverse effect on the Group’s results of operations and financial position. For example, had Sicad been VEF 52.1 per US dollar at 31 December 2014, the historic Sicad II rate, this would have reduced the Groups operations in Venezuela to approximately 2% of the Group’s pre-exceptional EBITDA. In addition, the effect on the Group’s balance sheet would have been to reduce its net assets by approximately €327 million and its cash balances by approximately €64 million.
    • In 2013, the Venezuelan government announced that companies could only seek price increases if they had clearance that their margins were within certain guidelines. SKCV is operating within these guidelines. There is a risk that if SKCV cannot implement price increases in a timely manner to cover the cost of its increasing raw material and labour costs as a result of inflation and the devaluing currency it would have an adverse effect on its results of operations. In this volatile environment the Group continues to closely monitor developments, assess evolving business risks and actively manage its investments.

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

Consolidated Income Statement – Twelve Months

    12 months to 31-Dec-14   12 months to 31-Dec-13
Unaudited Audited

Pre-
exceptional
2014

 

Exceptional
2014

 

Total
2014

Pre-
exceptional
2013

  

Exceptional
2013

  

Total
2013
      €m   €m   €m   €m   €m   €m
Revenue 8,083 - 8,083 7,957 - 7,957
Cost of sales (5,642)   (58)   (5,700)   (5,649)   (9)   (5,658)
Gross profit 2,441 (58) 2,383 2,308 (9) 2,299
Distribution costs (630) - (630) (619) - (619)
Administrative expenses (1,042) - (1,042) (1,012) - (1,012)
Other operating income 2 - 2 2 - 2
Other operating expenses -   (52)   (52)   -   (27)   (27)
Operating profit 771 (110) 661 679 (36) 643
Finance costs (284) (48) (332) (329) (51) (380)
Finance income 36 11 47 21 8 29
Share of associates’ profit (after tax) 2   -   2   2   -   2
Profit before income tax 525   (147) 378 373   (79) 294
Income tax expense (126) (98)
Profit for the financial year 252 196
 
Attributable to:
Owners of the parent 241 188
Non-controlling interests 11 8
Profit for the financial year 252 196
 
Earnings per share
Basic earnings per share - cent 105.8 82.2
Diluted earnings per share - cent 102.6 80.8
 

Consolidated Income Statement – Fourth Quarter

    3 months to 31-Dec-14   3 months to 31-Dec-13
Unaudited Unaudited

Pre-
exceptional
2014

 

Exceptional
2014

 

Total
2014

Pre-
exceptional
2013

  

Exceptional
2013

  

Total
2013
      €m   €m   €m   €m   €m   €m
Revenue 2,108 - 2,108 2,033 - 2,033
Cost of sales (1,460)   (42)   (1,502)   (1,453)   -   (1,453)
Gross profit 648 (42) 606 580 - 580
Distribution costs (161) - (161) (151) - (151)
Administrative expenses (276) - (276) (255) - (255)
Other operating income 1 - 1 1 - 1
Other operating expenses -   (44)   (44)   -   (2)   (2)
Operating profit 212 (86) 126 175 (2) 173
Finance costs (78) (7) (85) (88) (29) (117)
Finance income 14 2 16 5 1 6
Share of associates’ profit (after tax)

1

  -  

1

  -   -   -
Profit before income tax 149   (91) 58 92   (30) 62
Income tax expense (24) (3)
Profit for the financial period 34 59
 
Attributable to:
Owners of the parent 26 59
Non-controlling interests 8 -
Profit for the financial period 34 59
 
Earnings per share
Basic earnings per share - cent 11.6 26.0
Diluted earnings per share - cent 11.3 25.7
 

Consolidated Statement of Comprehensive Income – Twelve Months

    12 months to   12 months to
31-Dec-14 31-Dec-13
Unaudited Audited
      €m   €m
 
Profit for the financial year 252   196
 
Other comprehensive income:
Items that may be subsequently reclassified to profit or loss
Foreign currency translation adjustments:
- Arising in the year (265) (293)
 
Effective portion of changes in fair value of cash flow hedges:
- Movement out of reserve 10 17
- New fair value adjustments into reserve (29) (4)
- Movement in deferred tax 1   (2)
(283) (282)
 
Items which will not be subsequently reclassified to profit or loss
Defined benefit pension plans:
- Actuarial loss (227) (4)
- Movement in deferred tax 49   2
(178) (2)
     
Total other comprehensive expense (461)   (284)
 
Total comprehensive expense for the financial year (209)   (88)
 
Attributable to:
Owners of the parent (188) (61)
Non-controlling interests (21)   (27)
Total comprehensive expense for the financial year (209)   (88)
 

Consolidated Statement of Comprehensive Income – Fourth Quarter

    3 months to   3 months to
31-Dec-14 31-Dec-13
Unaudited Unaudited
      €m   €m
 
Profit for the financial period 34   59
 
Other comprehensive income:
Items that may be subsequently reclassified to profit or loss
Foreign currency translation adjustments:
- Arising in the period (83) (50)
 
Effective portion of changes in fair value of cash flow hedges:
- Movement out of reserve - 4
- New fair value adjustments into reserve (4) (2)
- Movement in deferred tax 1   -

(86)

(48)
 
Items which will not be subsequently reclassified to profit or loss
Defined benefit pension plans:
- Actuarial (loss)/gain (135) 18
- Movement in deferred tax 36   -
(99) 18
     
Total other comprehensive expense (185)   (30)
 
Total comprehensive (expense)/income for the financial period (151)   29
 
Attributable to:
Owners of the parent (144) 32
Non-controlling interests (7)   (3)
Total comprehensive (expense)/income for the financial period (151)   29
 

Consolidated Balance Sheet

     
31-Dec-14 31-Dec-13
Unaudited Audited
      €m   €m
ASSETS
Non-current assets
Property, plant and equipment 3,033 3,022
Goodwill and intangible assets 2,407 2,326
Available-for-sale financial assets 21 27
Investment in associates 17 16
Biological assets 130 107
Trade and other receivables 12 5
Derivative financial instruments 2 1
Deferred income tax assets 237   203
5,859   5,707
Current assets
Inventories 701 712
Biological assets 9 10
Trade and other receivables 1,422 1,344
Derivative financial instruments 3 4
Restricted cash 12 8
Cash and cash equivalents 387   447
2,534 2,525
Assets classified as held for sale 92   -
2,626   2,525
Total assets 8,485   8,232
 
EQUITY
Capital and reserves attributable to the owners of the parent
Equity share capital - -
Share premium 1,981 1,979
Other reserves (30) 208
Retained earnings 271   121
Total equity attributable to the owners of the parent 2,222 2,308
Non-controlling interests 197   199
Total equity 2,419   2,507
 
LIABILITIES
Non-current liabilities
Borrowings 3,093 3,009
Employee benefits 893 713
Derivative financial instruments 23 59
Deferred income tax liabilities 183 214
Non-current income tax liabilities 28 17
Provisions for liabilities and charges 47 42
Capital grants 12 12
Other payables 10   9
4,289   4,075
Current liabilities
Borrowings 65 67
Trade and other payables 1,573 1,525
Current income tax liabilities 12 11
Derivative financial instruments 27 33
Provisions for liabilities and charges 57   14
1,734 1,650
Liabilities associated with assets classified as held for sale 43   -
1,777   1,650
Total liabilities 6,066   5,725
Total equity and liabilities 8,485   8,232
 

Consolidated Statement of Changes in Equity

  Attributable to owners of the parent    

Equity
share
capital

 

Share
premium

 

Other
reserves

 

Retained
earnings

  Total

Non-
controlling
interests

Total
equity

    €m   €m   €m   €m   €m   €m   €m
Unaudited
At 1 January 2014 - 1,979 208 121 2,308 199 2,507
 
Profit for the financial year - - - 241 241 11 252
Other comprehensive income
Foreign currency translation adjustments - - (233) - (233) (32) (265)
Defined benefit pension plans - - - (178) (178) - (178)
Effective portion of changes in fair value of cash flow hedges -   -   (18)   -   (18)   -   (18)
Total comprehensive (expense)/income for the financial year -   -   (251)   63   (188)   (21)   (209)
 
Shares issued - 2 - - 2 - 2
Hyperinflation adjustment - - - 194 194 22 216
Dividends paid - - - (107) (107) (5) (112)
Share-based payment - - 26 - 26 - 26
Shares acquired by SKG Employee Trust - - (13) - (13) - (13)
Acquired non-controlling interest -   -   -   -   -   2   2
At 31 December 2014 -   1,981   (30)   271   2,222   197   2,419
 
Audited
At 1 January 2013 - 1,972 444 (159) 2,257 212 2,469
 
Profit for the financial year - - - 188 188 8 196
Other comprehensive income
Foreign currency translation adjustments - - (258) - (258) (35) (293)
Defined benefit pension plans - - - (2) (2) - (2)
Effective portion of changes in fair value of cash flow hedges -   -   11   -   11   -   11
Total comprehensive (expense)/income for the financial year -   -   (247)   186   (61)   (27)   (88)
 
Shares issued - 7 - - 7 - 7
Hyperinflation adjustment - - - 164 164 20 184
Dividends paid - - - (70) (70) (6) (76)
Share-based payment - - 26 - 26 - 26
Shares acquired by SKG Employee Trust -   -   (15)   -   (15)   -   (15)
At 31 December 2013 -   1,979   208   121   2,308   199   2,507
 

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

Consolidated Statement of Cash Flows

    12 months to   12 months to
31-Dec-14 31-Dec-13
Unaudited Audited
      €m   €m
Cash flows from operating activities
Profit before income tax 378 294
 
Net finance costs 285 351
Depreciation charge 340 346
Impairment of property, plant and equipment 39 9
Impairment of goodwill 19 -
Amortisation of intangible assets 26 26
Amortisation of capital grants (2) (2)
Share-based payment expense 26 26
Profit on purchase/sale of assets and businesses (4) (6)
Share of associates’ profit (after tax) (2) (2)
Net movement in working capital (37) 24
Change in biological assets (2) 30
Change in employee benefits and other provisions (30) (62)
Other 4   (16)
Cash generated from operations 1,040 1,018
Interest paid (197) (267)
Income taxes paid:
Irish corporation tax (net of tax refunds) paid (1) (2)
Overseas corporation tax (net of tax refunds) paid (106)   (110)
Net cash inflow from operating activities 736   639
 
Cash flows from investing activities
Interest received 6 5
Additions to property, plant and equipment and biological assets (430) (349)
Additions to intangible assets (16) (9)
Receipt of capital grants 3 2
Disposal of financial assets 1 -
(Increase)/decrease in restricted cash (5) 6
Disposal of property, plant and equipment 9 8
Dividends received from associates 1 1
Purchase of subsidiaries and non-controlling interests (149) (25)
Deferred consideration paid (1)   (5)
Net cash outflow from investing activities (581)   (366)
 
Cash flows from financing activities
Proceeds from issue of new ordinary shares 2 7
Proceeds from bond issue 500 400
Proceeds from other debt issues - 1,050
Purchase of own shares (13) (15)
Increase in other interest-bearing borrowings 27 16
Payment of finance leases (2) (6)
Repayment of borrowings (507) (1,577)
Derivative termination payments (13) (16)
Deferred debt issue costs (10) (28)
Dividends paid to shareholders (107) (70)
Dividends paid to non-controlling interests (5)   (6)
Net cash outflow from financing activities (128)   (245)
Increase in cash and cash equivalents 27   28
 
Reconciliation of opening to closing cash and cash equivalents
Cash and cash equivalents at 1 January 424 423
Currency translation adjustment (90) (27)
Increase in cash and cash equivalents 27   28
Cash and cash equivalents at 31 December 361   424
 

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

1. General Information

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

2. Basis of Preparation

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

The financial information in this report has been prepared in accordance with the Listing Rules of the Irish Stock Exchange and with Group accounting policies. Full details of the accounting policies adopted by the Group are contained in the consolidated financial statements included in the Group’s annual report for the year ended 31 December 2013 which is available on the Group’s website; smurfitkappa.com. The accounting policies and methods of computation and presentation adopted in the preparation of the Group financial information are consistent with those described and applied in the annual report for the year ended 31 December 2013.

There are a number of changes to IFRS issued and effective for the Group from 1 January 2014. These include IFRS 10, Consolidated Financial Statements, IFRS 11, Joint Arrangements, IFRS 12, Disclosure of Interests in Other Entities, IAS 27, Separate Financial Statements, and IAS 28, Investments in Associates and Joint Ventures. However, they do not have a material effect on the Group’s reported financial position or performance or they are not currently relevant for the Group.

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

The financial information presented in this preliminary release does not constitute ‘full group accounts’ under 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. The preliminary release was approved by the Board of Directors. The annual report and accounts will be approved by the Board of Directors and reported on by the auditors in due course. The annual accounts reported on by the auditors will not contain quarterly information. Accordingly, the financial information is unaudited. Full Group accounts for the year ended 31 December 2013 received an unqualified audit report and have been filed with the Irish Registrar of Companies.

3. Segmental Analyses

The Group has determined reportable operating segments based on the manner in which reports are reviewed by the chief operating decision maker (‘CODM’). The CODM is determined to be the executive management team responsible for assessing performance, allocating resources and making strategic decisions. The Group has identified two reportable operating segments: 1) Europe and 2) The Americas.

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

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

    12 months to 31-Dec-14   12 months to 31-Dec-13
Europe  

The
Americas

  Total Europe  

The
Americas

   Total
      €m   €m   €m   €m   €m   €m
Revenue and Results
Revenue 6,136   1,947   8,083   5,967   1,990   7,957
 
EBITDA before exceptional items 882 305 1,187 772 357 1,129
Segment exceptional items (42)   (10)   (52)   (6)   (21)   (27)
EBITDA after exceptional items 840   295 1,135 766   336 1,102
 
Unallocated centre costs (26) (22)
Share-based payment expense (26) (26)
Depreciation and depletion (net) (338) (376)
Amortisation (26) (26)
Impairment of assets (58) (9)
Finance costs (332) (380)
Finance income 47 29
Share of associates’ profit (after tax) 2 2
Profit before income tax 378 294
Income tax expense (126) (98)
Profit for the financial year 252 196
 

3. Segmental Analyses (continued)

    3 months to 31-Dec-14   3 months to 31-Dec-13
Europe  

The
Americas

  Total Europe  

The
Americas

   Total
      €m   €m   €m   €m   €m   €m
Revenue and Results
Revenue 1,521   587   2,108   1,492   541   2,033
 
EBITDA before exceptional items 217 84 301 192 98 290
Segment exceptional items (42)   (2)   (44)   -   (2)   (2)
EBITDA after exceptional items 175   82 257 192   96 288
 
Unallocated centre costs (6) 1
Share-based payment expense (12) (6)
Depreciation and depletion (net) (65) (101)
Amortisation (6) (9)
Impairment of assets (42) -
Finance costs (85) (117)
Finance income 16 6
Share of associates’ profit (after tax) 1 -
Profit before income tax 58 62
Income tax expense (24) (3)
Profit for the financial period 34 59
 

4. Exceptional Items

    12 months to   12 months to
The following items are regarded as exceptional in nature: 31-Dec-14 31-Dec-13
      €m   €m
 
Impairment of goodwill 19 -
Impairment of property, plant and equipment 39 9
Currency trading loss on change in Venezuelan translation rate 10 18
Reorganisation and restructuring costs 42   9
Exceptional items included in operating profit 110   36
 
Exceptional finance costs 48 51
Exceptional finance income (11)   (8)
Exceptional items included in net finance costs 37   43
 

Exceptional items charged within operating profit in 2014 amounted to €110 million, of which €46 million related to our Solidboard packaging operations in Belgium, the Netherlands and the UK. The charge of €46 million comprised an impairment of plant and equipment of €27 million and a goodwill impairment of €19 million. The remaining impairment charge of €12 million relates to one mill and four corrugated plants in Europe which we plan to close during the course of 2015. The reorganisation and restructuring costs were mainly in respect of the planned plant closures. The currency trading loss of €10 million related to losses on the translation of non-Bolivar denominated payables following the Group's decision to translate Venezuelan operations at the Sicad I rate. The translation loss reflected the higher cost to its Venezuelan operations of discharging these payables.

Exceptional finance costs in 2014 of €48 million comprised €42 million relating to the repayment of the 2019 bonds in July and an impairment loss of €6 million in respect of one of the Group’s unlisted investments. The total of €42 million comprised a redemption premium of €33 million and €7 million and €2 million respectively for the accelerated amortisation of the debt issue costs relating to the bonds and the accelerated unwinding of the original discount.

Exceptional finance income in 2014 amounted to €11 million and represented a gain of €7 million in Venezuela on their US dollar denominated intra-group loans following our adoption in the first quarter of the Sicad I rate and €4 million for an adjustment of the original charge for hyperinflation and re-translation at the year-end exchange rate.

Exceptional items charged within operating profit in 2013 amounted to €36 million, €15 million of which related to the temporary closure of the Townsend Hook mill in the UK (comprising an impairment charge of €9 million and reorganisation and restructuring costs of €6 million). A further €3 million of reorganisation costs related to the restructuring of SKOC and the consolidation of the Group’s two plants in Juarez, Mexico, into one plant. A currency trading loss of €18 million was recorded as a result of the devaluation of the Venezuelan Bolivar in February 2013, comprising €12 million booked in the first quarter and an adjustment of €6 million for hyperinflation and re-translation at the 31 December exchange rate. The original loss reflected the higher cost to the Venezuelan operations of discharging its non-Bolivar denominated net payables following the devaluation.

Exceptional finance costs in 2013 comprised a charge of €51 million. €22 million was in respect of the accelerated amortisation of debt issue costs relating to the senior credit facility and €29 million in respect of the €500 million 7.25% bonds due in 2017, following their early repayment. In the first quarter, a charge of €6 million was booked following the repayment of part of the senior credit facility from the proceeds of January’s €400 million bond issue with the balance being booked in the third quarter as a result of the repayment of the remainder of the facility, following its refinancing. The €29 million booked in the fourth quarter related entirely to the repayment of the 2017 bonds in November and was comprised of the redemption premium of €19 million, the accelerated unwinding of the unamortised discount of €4 million, and €6 million in respect of the accelerated amortisation of debt issue costs.

Exceptional finance income in 2013 amounted to €8 million and comprised a gain of €6 million in Venezuela on the value of US dollar denominated intra-group loans following the devaluation of the Bolivar and an additional €2 million due to its subsequent adjustment for hyperinflation and re-translation.

5. Finance Costs and Income

    12 months to   12 months to
31-Dec-14 31-Dec-13
      €m   €m
Finance costs:
Interest payable on bank loans and overdrafts 45 67
Interest payable on finance leases and hire purchase contracts - 1
Interest payable on other borrowings 107 147
Exceptional finance costs associated with debt restructuring 42 51
Unwinding discount element of provisions 1 1
Impairment of financial investments - 5
Exceptional finance costs associated with impairment of financial investments 6 -
Foreign currency translation loss on debt 23 6
Fair value loss on derivatives not designated as hedges 3 8
Net interest cost on net pension liability 27 27
Net monetary loss - hyperinflation 78   67
Total finance costs 332   380
 
Finance income:
Other interest receivable (6) (5)
Gain on sale of financial asset (1) -
Foreign currency translation gain on debt (11) (14)
Exceptional foreign currency translation gain (11) (8)
Fair value gain on derivatives not designated as hedges (18)   (2)
Total finance income (47)   (29)
Net finance costs 285   351
 

6. Income Tax Expense

Income tax expense recognised in the Consolidated Income Statement

      12 months to   12 months to
31-Dec-14 31-Dec-13
        €m   €m
Current tax:
Europe 67 50
The Americas 58   72
125 122
Deferred tax 1   (24)
Income tax expense 126   98
 
Current tax is analysed as follows:
Ireland 3 6
Foreign 122   116
125   122
 

Income tax credit recognised in the Consolidated Statement of Comprehensive Income

      12 months to   12 months to
31-Dec-14 31-Dec-13
        €m   €m
Arising on actuarial loss on defined benefit plans (49) (2)
Arising on qualifying derivative cash flow hedges (1)   2
(50)   -
 

The tax expense in 2014 is €28 million higher than in the comparable period. This is largely explained by higher earnings and the geographical mix of those earnings. The income tax expense in Europe is higher by €32 million which is offset by a €4 million reduction in the Americas.

The movement in the deferred tax expense includes the impact of non-recurring benefits on previously unrecognised losses in 2013. This is offset by positive benefits in the Americas from timing differences and planning, together with a positive effect in Europe arising from the fact that the Group has fully utilised its losses in Sweden in 2013. In 2014 the tax expense for Sweden is therefore recorded in current tax. The tax effect of exceptional items in 2014 was €18 million compared to €5 million in 2013.

7. Employee Benefits – Defined Benefit Plans

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

    12 months to   12 months to
31-Dec-14 31-Dec-13
      €m   €m
 
Current service cost 51 53
Past service cost (5) 3
Gain on curtailment (3) -
Gain on settlement (8) (2)
Actuarial loss arising from other long term employee benefits 4 1
Net interest cost on net pension liability 27   27
Defined benefit cost 66   82
 

Included in cost of sales, distribution costs and administrative expenses is a defined benefit cost of €39 million (2013: €55 million). Net interest cost on net pension liability of €27 million (2013: €27 million) is included in finance costs in the Consolidated Income Statement.

The gain on settlement of €8 million was mainly due to a release of reserves in the Irish defined benefit plan as a result of an enhanced transfer value exercise for deferred pensioners.

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

    31-Dec-14   31-Dec-13
      €m   €m
Present value of funded or partially funded obligations (2,226) (1,851)
Fair value of plan assets 1,889   1,625
Deficit in funded or partially funded plans (337) (226)
Present value of wholly unfunded obligations (556)   (487)
Net pension liability (893)   (713)
 

The employee benefits provision has increased from €713 million at 31 December 2013 to €893 million at 31 December 2014, mainly as a result of significantly lower Eurozone and Sterling corporate bond yields which fell by 1.75% in the Eurozone and 1.00% in the 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 year.

    12 months to   12 months to
      31-Dec-14   31-Dec-13
Profit attributable to owners of the parent (€ million) 241 188
 
Weighted average number of ordinary shares in issue (million) 228 229
 
Basic earnings per share (cent) 105.8   82.2
 

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 plan and both deferred shares held in trust and matching shares issued under the Deferred Annual Bonus Plan.

     
12 months to 12 months to
      31-Dec-14   31-Dec-13
Profit attributable to owners of the parent (€ million) 241 188
 
Weighted average number of ordinary shares in issue (million) 228 229
Potential dilutive ordinary shares assumed (million) 7   4
Diluted weighted average ordinary shares (million) 235   233
 
Diluted earnings per share (cent) 102.6   80.8
 

Pre-exceptional

    12 months to   12 months to
      31-Dec-14   31-Dec-13
Profit attributable to owners of the parent (€ million) 241 188
Exceptional items included in profit before income tax (Note 4) (€ million) 147 79
Income tax on exceptional items (€ million) (18)   (5)
Pre-exceptional profit attributable to owners of the parent (€ million) 370   262
 
Weighted average number of ordinary shares in issue (million) 228 229
 
Pre-exceptional basic earnings per share (cent) 162.5   114.5
 
Diluted weighted average ordinary shares (million) 235 233
 
Pre-exceptional diluted earnings per share (cent) 157.6   112.7
 

9. Dividends

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

The Board is recommending a final dividend of approximately 40 cent per share for 2014 subject to the approval of the shareholders at the AGM. It is proposed to pay the final dividend on 8 May 2015 to all ordinary shareholders on the share register at the close of business on 10 April 2015. The interim and final dividends are paid in October and May in each year in the approximate proportions of one third to two thirds respectively.

10. Property, Plant and Equipment

   

Land and
buildings

 

Plant and
equipment

  Total
      €m   €m   €m
Year ended 31 December 2014
Opening net book amount 1,107 1,915 3,022
Reclassifications 44 (49) (5)
Assets classified as held for sale (20) (19) (39)
Additions 9 391 400
Acquisitions 1 49 50
Depreciation charge for the year (48) (292) (340)
Impairments (5) (34) (39)
Retirements and disposals (3) (1) (4)
Hyperinflation adjustment 45 39 84
Foreign currency translation adjustment (51)   (45)   (96)
At 31 December 2014 1,079   1,954   3,033
 

Year ended 31 December 2013

Opening net book amount 1,125 1,979 3,104
Reclassifications 48 (55) (7)
Additions 8 330 338
Acquisitions - 7 7
Depreciation charge for the year (51) (295) (346)
Impairments (2) (7) (9)
Retirements and disposals (1) (2) (3)
Hyperinflation adjustment 41 43 84
Foreign currency translation adjustment (61)   (85)   (146)
At 31 December 2013 1,107   1,915   3,022
 

11. Net Movement in Working Capital

    12 months to   12 months to
31-Dec-14 31-Dec-13
      €m   €m
 
Change in inventories (32) (23)
Change in trade and other receivables (113) 5
Change in trade and other payables 108   42
Net movement in working capital (37)   24
 

12. Analysis of Net Debt

    31-Dec-14   31-Dec-13
      €m   €m
Unsecured senior credit facility:
Revolving credit facility(1) – interest at relevant interbank rate + 1.75%(7) 100 119
Facility A term loan(2) – interest at relevant interbank rate + 2%(7) 745 740
U US$292.3 million 7.50% senior debentures due 2025 (including accrued interest) 242 213
Bank loans and overdrafts 65 67
Cash (399) (455)
2018 receivables securitisation variable funding notes 173 173
2019 receivables securitisation variable funding notes(3) 236 203
2018 senior notes (including accrued interest)(4) 446 414
€500 million 7.75% senior notes due 2019 (including accrued interest)(5) - 495
€400 million 4.125% senior notes due 2020 (including accrued interest) 402 401
€250 million senior floating rate notes due 2020 (including accrued interest)(6) 248 247
€500 million 3.25% senior notes due 2021 (including accrued interest)(5) 494   -
Net debt before finance leases 2,752 2,617
Finance leases 7   4
Net debt including leases 2,759   2,621
 
(1)   Revolving credit facility ('RCF') of €625 million (available under the unsecured senior credit facility) to be repaid in 2018.
 
(a) Revolver loans - €105 million (b) loans and overdrafts drawn under ancillary facilities - nil and (c) other operational facilities including letters of credit drawn under ancillary facilities - €18 million.
 
(2) Facility A term loan (‘Facility A’) due to be repaid in certain instalments from 2016 to 2018.
 
(3) In June 2014, the 2015 securitisation programme was refinanced with a securitisation programme maturing in 2019.
 
(4) €200 million 5.125% senior notes due 2018 and US$300 million 4.875% senior notes due 2018.
 
(5)

On 28 May 2014 the Group priced €500 million of seven-year euro denominated senior unsecured notes at a coupon of

3.25%. Following the issue of an early redemption notice the net proceeds, together with cash balances of €37.5 million,

were used to redeem the Group’s 2019 7.75% €500 million bonds on 3 July 2014.

 
(6) Interest at EURIBOR + 3.5%.
 
(7) The margins applicable to the unsecured senior credit facility are determined as follows:
          Net debt/EBITDA ratio     RCF   Facility A
 
Greater than 3.0 : 1 2.50% 2.75%
3.0 : 1 or less but more than 2.5 : 1 2.00% 2.25%
2.5 : 1 or less but more than 2.0 : 1 1.75% 2.00%
2.0 : 1 or less 1.50% 1.75%
 

13. Other Reserves

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

 

Reverse
acquisition
reserve

 

Cash flow
hedging
reserve

 

Foreign
currency
translation
reserve

 

Share-
based
payment
reserve

 

Own
shares

 

Available-
for-sale
reserve

 

 

Total

    €m   €m   €m   €m   €m   €m   €m
 
At 1 January 2014 575 (15) (456) 131 (28) 1 208
Other comprehensive income
Foreign currency translation adjustments - - (233) - - - (233)
Effective portion of changes in fair value of cash flow hedges -   (18)   -   -   -   -   (18)
Total other comprehensive expense -   (18)   (233)   -   -   -   (251)
 
Share-based payment - - - 26 - - 26
Shares acquired by SKG Employee Trust - - - - (13) - (13)
Shares granted to participants of the SKG Employee Trust -   -   -   (1)   1   -   -
At 31 December 2014 575   (33)   (689)   156   (40)   1   (30)
 
At 1 January 2013 575 (26) (198) 105 (13) 1 444
Other comprehensive income
Foreign currency translation adjustments - - (258) - - - (258)
Effective portion of changes in fair value of cash flow hedges -   11   -   -   -   -   11
Total other comprehensive income/(expense) -   11   (258)   -   -   -   (247)
 
Share-based payment - - - 26 - - 26
Shares acquired by SKG Employee Trust -   -   -   -   (15)   -   (15)
At 31 December 2013 575   (15)   (456)   131   (28)   1   208
 

14. Venezuela

Hyperinflation

As discussed more fully in the 2013 annual report, Venezuela became hyperinflationary during 2009 when its cumulative inflation rate for the past three years exceeded 100%. As a result, the Group applied the hyperinflationary accounting requirements of IAS 29 – Financial Reporting in Hyperinflationary Economies to its Venezuelan operations at 31 December 2009 and for all subsequent accounting periods.

The index used to reflect current values is an estimate derived from the most recent published Banco Central de Venezuela’s National Consumer Price Index. The most recent index published relates to November 2014. The level of and movement in the price index in the twelve months to December 2014 is estimated as follows:

      31-Dec-14     31-Dec-13
Index at year-end     834.5     498.1
Movement in year     67.5%     56.2%
 

As a result of the entries recorded in respect of hyperinflationary accounting under IFRS, the Consolidated Income Statement is impacted as follows: Revenue €88 million increase (2013: €81 million increase), pre-exceptional EBITDA €1 million increase (2013: €19 million increase) and profit after taxation €117 million decrease (2013: €91 million decrease). In 2014, a net monetary loss of €78 million (2013: €67 million loss) was recorded in the Consolidated Income Statement. The impact on our net assets and our total equity is an increase of €106 million (2013: €104 million increase).

Exchange Control and Devaluation

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

As a result of the January 2014 announcements by the Venezuelan government that there will be no official devaluation for at least two years Sicad I is now intended to offer an alternative currency exchange mechanism to foreign firms operating in Venezuela.

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

On this basis, in accordance with IFRS, the financial statements of the Group’s operations in Venezuela were translated at 31 December 2014 using the prevailing Sicad I rate of VEF 12.0 per US dollar and the closing euro/US dollar rate of 1 euro = US$ 1.21.

In February 2015 the government announced that they would be modifying the exchange mechanisms by unifying Sicad I and Sicad II (‘Sicad’) and bringing in a third rate to offset the parallel market rate. They further announced that the initial Sicad rate would be VEF 12.0 per US dollar.

In this multiple foreign exchange rate system there is a risk that the Sicad rate will devalue resulting in re-measurement of the local currency denominated net monetary assets and the local earnings and increase the cost of importing goods required to run the business. In 2014 the Group’s operations in Venezuela represented approximately 7% of the Group’s EBITDA and the Group estimates that in 2015 assuming the Sicad rate remains at its current exchange rate of VEF12.0 per US dollar it would be within a range of 5% to 7% of the Group’s EBITDA. In addition at 31 December 2014 the Group’s net assets in Venezuela were €425 million and its cash balances were €84 million. Were the Sicad rate to deteriorate during 2015 this would have an adverse effect on the Group’s results of operations and financial position. For example, had Sicad been VEF 52.1 per US dollar at 31 December 2014, the historic Sicad II rate, this would have reduced the Groups operations in Venezuela to approximately 2% of the Group’s pre-exceptional EBITDA. In addition, the effect on the Group’s balance sheet would have been to reduce its net assets by approximately €327 million and its cash balances by approximately €64 million.

14. Venezuela (continued)

Control

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

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

In 2014, the Group’s operations in Venezuela represented approximately 6% (2013: 7%) of its total assets and 18% (2013: 16%) of its net assets. Cumulative foreign translation losses arising on its net investment in these operations amounting to €535 million (2013: €353 million) are included in the foreign exchange translation reserve.

15. Business Combinations

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

• Colombia, (66%, 1 May 2014), certain assets of Corrumed S.A.;

• Dominican Republic, (100%, 4 September 2014), certain assets of Cartonera Rierba S.A.;

• Brian Thomas, (100%, 24 October 2014), a sheet plant located in Texas, in the United States; and

• Bates Container LLC ('Bates'), (100%, 24 October 2014), four packaging plants located in Texas, in the United States.

The initial assignment of fair values to identifiable net assets acquired has been performed on a provisional basis in respect of these acquisitions and any amendments to these fair values will be made within the allowed measurement period permitted by IFRS 3.

The carrying amounts of the Bates assets and liabilities acquired determined in accordance with IFRS, together with the adjustments made to those carrying values to arrive at their fair values, were as follows:

Bates Container LLC     Book value  

Fair value
adjustments

  Fair Value
€m   €m   €m
Non-current assets 14 56 70
Current assets 20 1 21
Non-current liabilities - (2) (2)
Current liabilities (11)   -   (11)
Net assets acquired 23 55 78
Goodwill         45
Consideration         123
 
Settled by:
Cash 118
Contingent consideration 5
123
 

As part of the acquisition of Bates, acquisition-related costs of €1 million were incurred and are included within administrative expenses in the Consolidated Income Statement.

The acquisitions of Corrumed, Rierba and Brian Thomas are considered to be immaterial to the Group.

No contingent liabilities were recognised on the acquisitions completed during the year.

Supplementary Financial Information

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

Reconciliation of Profit to EBITDA          
3 months to 3 months to 12 months to 12 months to
31-Dec-14 31-Dec-13 31-Dec-14 31-Dec-13
      €m   €m   €m   €m
 
Profit for the financial period 34 59 252 196
Income tax expense 24 3 126 98
Currency trading loss on change in Venezuelan translation rate 2 2 10 18
Reorganisation and restructuring costs 42 - 42 9
Impairment of assets 42 - 58 9
Share of associates’ profit (after tax) (1) - (2) (2)
Net finance costs 69 111 285 351
Share-based payment expense 12 6 26 26
Depreciation, depletion (net) and amortisation 71   110   364   402
EBITDA 295   291   1,161   1,107
 

Supplementary Historical Financial Information

€m   FY, 2013   Q1, 2014   Q2, 2014   Q3, 2014   Q4, 2014   FY, 2014
           
Group and third party revenue 13,030 3,217 3,289 3,341 3,459 13,306
Third party revenue 7,957 1,932 2,015 2,027 2,108 8,083
EBITDA 1,107 269 295 302 295 1,161
EBITDA margin 13.9% 13.9% 14.6% 14.9% 14.0% 14.4%
Operating profit 643 160 194 182 126 661
Profit before income tax 294 104 124 93 58 378
Free cash flow 365 59 76 208 19 362
Basic earnings per share - cent 82.2 28.8 33.6 31.9 11.6 105.8
Weighted average number of shares used in EPS calculation (million) 229 227 228 228 228 228
Net debt 2,621 2,640 2,676 2,578 2,759 2,759
Net debt to EBITDA (LTM) 2.37 2.33 2.31 2.23 2.38 2.38

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