TIDMSKG
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
EUR m YTD2010 YTD2009 change Q32010 Q32009 change Q22010 change
Revenue EUR4,928 EUR4,517 9% EUR1,702 EUR1,515 12% EUR1,696 0%
EBITDA EUR647 EUR555 17% EUR243 EUR192 26% EUR221 10%
before
Exceptional
Itemsand
Share-based
Payment
(1)
EBITDA 13.1% 12.3% - 14.3% 12.7% - 13.0% -
Margin
Operating EUR349 EUR266 31% EUR143 EUR96 49% EUR119 19%
Profit
beforeExceptional
Items
Basic (0.5) (14.2) - 16.9 (20.9) - (10.3) -
(Loss)/Earnings
Per Share
(EUR cts)
Free Cash EUR59 EUR143 (59%) EUR128 EUR125 2% EUR(12) -
Flow(2)
Net Debt EUR3,123 EUR3,034 3% EUR3,291 (5%)
Net Debt to 3.7x 4.0x - 4.2x -
EBITDA
(LTM)
(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 EUR168 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 EUR243 million for the third
quarter. As expected, a strong cash flow performance contributed to
reduce net debt by EUR168 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 PauletSmurfit FD K Capital SourceTel: +353
Kappa GroupTel: +353 1 663 36 80E-mail:
1 smurfitkappa@kcapitalsource.com
202 71 80E-mail: ir@smurfitkappa.com
2010 Third Quarter & First Nine Months | Performance
Overview
The Group's strong free cash flow generation of EUR128 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 EUR168 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 EUR20 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 EUR120 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 EUR195 per tonne for recycled containerboard and
EUR250 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 EUR1,702 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 EUR197 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 EUR27 million, the equivalent of
2%.
At EUR243 million, EBITDA in the third quarter of 2010 was EUR51
million higher than the third quarter of 2009. Allowing for an EUR8
million negative impact from currency and hyperinflation
accounting, somewhat offset by a EUR3 million benefit from the
asset swap and the closure of loss making operations, the
underlying increase in EBITDA was EUR56 million, the equivalent of
29%. Compared to the second quarter of 2010, EBITDA showed an
underlying increase of EUR25 million in the third quarter, the
equivalent of 11%.
2010 First Nine Months | Financial performance
Revenue of EUR4.9 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 EUR647 million in the first nine months of 2010 was
EUR92 million, or 17% higher than in the comparable period in 2009.
Currency and hyperinflation accounting decreased comparable EBITDA
by EUR8 million, while the asset swap and closure of loss making
operations added EUR8 million. As a result, the underlying increase
in EBITDA was EUR92 million also.
Exceptional charges within operating profit in the first nine
months of 2010 amounted to EUR56 million, of which approximately
EUR40 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 EUR50
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 EUR69 million in the first
half of 2010, primarily driven by working capital outflows, the
Group's free cash flow generation of EUR128 million in the third
quarter was materially stronger. In addition to a 10% sequential
growth in EBITDA to EUR243 million in quarter three, the cash flow
performance was also supported by a working capital inflow of EUR44
million.
In the nine months to September 2010, SKG's free cash flow
generation amounted to EUR59 million, compared to EUR143 million in
the comparable period in 2009. While EBITDA was EUR92 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 EUR593 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 EUR196 million for the first nine months of
2010 was EUR35 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 EUR63 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 EUR137 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 EUR54 million in the first nine months of 2010 was
EUR25 million lower than in the prior year, primarily reflecting
the absence of approximately EUR20 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
EUR168 million to EUR3,123 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 EUR48 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 EUR71 million, primarily reflecting EUR56 million of a cash
outflow relating to the asset swap with Mondi in quarter two
(including EUR2 million of net cash disposed), and EUR55 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 EUR27 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 EUR590 million of cash
on its balance sheet at the end of September 2010, and committed
credit facilities of approximately EUR525 million, of which EUR373
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 EUR70 million of
sustainable cost savings, and a further EUR140 million was
delivered in 2009.
The Group's 2010 objective is to generate at least a further
EUR90 million of savings, bringing the three-year achievement to at
least EUR300 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 EUR20 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 EUR70 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 EUR120 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
EUR195 per tonne price increase for recycled containerboard
(including EUR40 per tonne in September), and a EUR250 per tonne
price increase for kraftliner (including EUR60 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 EUR141 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 EUR5
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 EUR48 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 EUR50 per tonne
in the first half, the Group is currently expecting to implement
another EUR50 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
EUR Million EUR Million EUR Million EUR 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 (7) 2 (44) (45)
creditors
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 - - (9) -
and investments
Purchase - - (46) -
of investments
Derivative termination (2) (2) (2) (1)
payments
Dividends (1) (1) (4) (4)
Net cash inflow 125 122 1 147
Net - - (2) -
cash acquired/disposed
Deferred debt issue (5) (8) (15) (17)
costs amortised
Currency translation 48 16 (55) 21
adjustments
(Increase)/decrease 168 130 (71) 151
in net debt
(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 debtwhile 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.A reconciliation of the
free cash flow to cash generated from operations
in the IFRS cashflow is set out below.
9 months to 9 months to
30-Sep-10 30-Sep-09
EUR Million EUR Million
Free cash 59 143
flow
Add Cash interest 196 161
back:
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 476 577
operations
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
EUR217.5 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 EUR210 million floating rate notes issued under an
accounts receivable securitisation program maturing in September
2011.
Smurfit Kappa Acquisitions had outstanding EUR500 million 7.25%
senior secured notes due 2017 and EUR500 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 EUR196 million amortising A Tranche
maturing in 2012, an EUR814 million B Tranche maturing in 2013 and
an EUR813 million C Tranche maturing in 2014. In addition, as at 30
September 2010, the facility included a EUR525 million revolving
credit facility of which there were EUR17.3 million in letters of
credit issued in support of other liabilities and EUR8.6 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 EUR500 million 7.25% senior
secured notes due 2017, EUR500 million 7.75% senior secured notes
due 2019, EUR217.5 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 EUR1,110 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 EUR11 million over the following twelve
months. Interest income on our cash balances would increase by
approximately EUR6 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-exceptional2010 Exceptional2010 Total2010 Pre-exceptional2009 Exceptional2009 Total2009
EUR million EUR million EUR million EUR million EUR million EUR million
Continuing
operations
Revenue 4,928 - 4,928 4,517 - 4,517
Cost of (3,556) - (3,556) (3,227) (33) (3,260)
sales
Gross 1,372 - 1,372 1,290 (33) 1,257
profit
Distribution (410) - (410) (384) - (384)
costs
Administrative (632) (16) (648) (642) - (642)
expenses
Other 19 - 19 2 - 2
operating
income
Other - (40) (40) - (17) (17)
operating
expenses
Operating 349 (56) 293 266 (50) 216
profit
Finance (333) - (333) (299) - (299)
costs
Finance 92 - 92 87 8 95
income
Share 2 - 2 - - -
of
associates'
profit
(after
tax)
Profit 110 (56) 54 54 (42) 12
before
income tax
Income tax (52) (30)
expense
Profit/(loss) 2 (18)
for the
financial
period
Attributable
to:
Owners (1) (31)
of the
Parent
Non-controlling 3 13
interests
Profit/(loss) 2 (18)
for the
financial
period
Earnings
per
share:
Basic loss (0.5) (14.2)
per share
(cent per
share)
Diluted (0.5) (14.2)
loss
per share
(cent per
share)
Group
Income
Statement
-
Third
Quarter
Unaudited Unaudited
3 months to 30-Sep-10 3 months to 30-Sep-09
Pre-exceptional2010 Exceptional2010 Total2010 Pre-exceptional2009 Exceptional2009 Total2009
EUR million EUR million EUR million EUR million EUR million EUR million
Continuing
operations
Revenue 1,702 - 1,702 1,515 - 1,515
Cost of (1,215) - (1,215) (1,075) (33) (1,108)
sales
Gross 487 - 487 440 (33) 407
profit
Distribution (136) - (136) (131) - (131)
costs
Administrative (213) - (213) (213) - (213)
expenses
Other 5 - 5 - - -
operating
income
Other - - - - (17) (17)
operating
expenses
Operating 143 - 143 96 (50) 46
profit
Finance (96) - (96) (109) - (109)
costs
Finance 15 - 15 35 - 35
income
Share 1 - 1 1 - 1
of
associates
profit
(after
tax)
Profit/(loss) 63 - 63 23 (50) (27)
before
income tax
Income tax (22) (13)
expense
Profit/(loss) 41 (40)
for the
financial
period
Attributable
to:
Owners 37 (46)
of the
Parent
Non-controlling 4 6
interests
Profit/(loss) 41 (40)
for the
financial
period
Earnings
per
share:
Basic 16.9 (20.9)
earnings/(loss)
per
share
(cent
per share)
Diluted 16.5 (20.9)
earnings/(loss)
per
share(cent
per share)
Group Statement of Comprehensive Income
Unaudited Unaudited
9 months to 9 months to
30-Sep-10 30-Sep-09
EUR million EUR 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 1 -
financial assets
Total other comprehensive income (153) (59)
Comprehensive income and expense (151) (77)
for the financial period
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
EUR million EUR million EUR 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 1,584 1,554 1,676
to owners of the Parent
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
Equitysharecapital Sharepremium Reverseacquisitionreserve Available-for-salereserve Cashflowhedgingreserve Foreigncurrencytranslationreserve Reserveforshare-basedpayment Retainedearnings Totalequityattributableto ownersof theParent Non-controllinginterests Totalequity
EUR million EUR million EUR million EUR million EUR million EUR million EUR million EUR million EUR million EUR million EUR 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
EUR million EUR 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 23 (5)
assets and businesses
Amortisation of capital grants (1) (2)
Impairment of property, plant and equipment - 33
Equity settled share-based 3 2
payment transactions
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 (49) (70)
of tax refunds) paid
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 (176) (199)
and biological assets
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
PackagingEurope SpecialtiesEurope LatinAmerica Total PackagingEurope SpecialtiesEurope LatinAmerica Total
EUR million EUR million EUR million EUR million EUR million EUR million EUR million EUR million
Revenue and
Results
Third party 3,531 574 823 4,928 3,180 590 747 4,517
revenue
EBITDA before 475 48 141 664 376 62 141 579
exceptional
items
Segment (1) (39) (16) (56) (17) - - (17)
exceptional
items
EBITDA after 474 9 125 608 359 62 141 562
exceptional
items
Unallocated (17) (24)
centre
costs
Share-based (3) (2)
payment
expense
Depreciation (261) (252)
and
depletion (net)
Amortisation (34) (35)
Impairment - (33)
of assets
Share 2 -
of associates'
profit after
tax
Finance costs (333) (299)
Finance income 92 95
Profit before 54 12
income tax
Income tax (52) (30)
expense
Profit/(loss) 2 (18)
for the
financial
period
Assets
Segment assets 5,355 708 1,243 7,306 5,209 761 1,038 7,008
Investment in 2 - 13 15 2 - 10 12
associates
Group centre 825 897
assets
Total assets 8,146 7,917
3 months to 30-Sep-10 3 months to 30-Sep-09
PackagingEurope SpecialtiesEurope LatinAmerica Total PackagingEurope SpecialtiesEurope LatinAmerica Total
EUR million EUR million EUR million EUR million EUR million EUR million EUR million EUR million
Revenue and
Results
Third party 1,229 196 277 1,702 1,042 207 266 1,515
revenue
EBITDA before 176 27 48 251 126 26 54 206
exceptional
items
Segment - - - - (17) - - (17)
exceptional
items
EBITDA after 176 27 48 251 109 26 54 189
exceptional
items
Unallocated (8) (14)
centre
costs
Share-based (1) -
payment
expense
Depreciation (88) (83)
and
depletion (net)
Amortisation (11) (13)
Impairment - (33)
of assets
Share 1 1
of associates'
profit after
tax
Finance costs (96) (109)
Finance income 15 35
Profit/(loss) 63 (27)
before
income tax
Income tax (22) (13)
expense
Profit/(loss) 41 (40)
for the
financial
period
4.Exceptional Items
9 months to 9 months to
The following items are regarded 30-Sep-10 30-Sep-09
as exceptional in nature:
EUR million EUR million
Currency trading loss on Venezuelan (16) -
Bolivar devaluation
Mondi asset swap (40) -
Reorganisation and restructuring costs - (17)
Impairment of property, plant and equipment - (33)
Total exceptional items included (56) (50)
in operating costs
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 EUR14 million arose in quarter one from the effect of
retranslation of the U.S. dollar denominated net payables of its
Venezuelan operations. A further EUR2 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 EUR40 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 EUR8 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 EUR100 million
of its Senior bank debt. In total, just over EUR100 million of
offers were received, of which EUR43 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
EUR million EUR million
Finance costs
Interest payable on bank loans and overdrafts 113 139
Interest payable on finance leases 2 3
and hire purchase contracts
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 - 36
not designated as hedges
Interest cost on employee 75 72
benefit plan liabilities
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 31 1
not designated as hedges
Expected return on employee 53 51
benefit plan assets
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
EUR million EUR 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
EUR million EUR million
Arising on actuarial gains/losses (15) (34)
on defined benefit plans
Arising on qualifying derivative (1) (2)
cash flow hedges
(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
EUR million EUR 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 EUR26 million for the first nine months of 2010 (2009: EUR30
million). Expected Return on Scheme Assets of EUR53 million (2009:
EUR51 million) is included in Finance Income and Interest Cost on
Scheme Liabilities of EUR75 million (2009: EUR72 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
EUR million EUR million
Present value of funded or partially (1,647) (1,447)
funded obligations
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 EUR653
million at 31 December 2009 to EUR740 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
EUR million EUR million EUR million EUR million
(Loss)/profit 37 (46) (1) (31)
attributable
to owners of
the Parent
Weighted average 218 218 218 218
number
of ordinary
shares in issue
(million)
Basic (loss)/earnings 16.9 (20.9) (0.5) (14.2)
per
share (cent
per share)
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
EUR million EUR million EUR million EUR million
(Loss)/profit 37 (46) (1) (31)
attributable
to owners of
the Parent
Weighted average 218 218 218 218
number
of ordinary
shares in issue
(million)
Potential dilutive 4 1 4 -
ordinary
shares assumed
Diluted weighted 222 219 222 218
average
ordinary shares
Diluted 16.5 (20.9) (0.5) (14.2)
(loss)/earnings
per
share (cent
per share)
9.Property, Plant and Equipment
Land andbuildings Plant andequipment Total
EUR million EUR million EUR 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 (36) (212) (248)
for the period
Retirements and (5) (1) (6)
disposals
Foreign currency (20) (1) (21)
translation
adjustment
Hyperinflation 12 14 26
adjustment
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 (57) (298) (355)
for the year
Impairment losses (13) (20) (33)
recognised in
the Group Income
Statement
Retirements and (3) (2) (5)
disposals
Foreign currency 13 28 41
translation
adjustment
Hyperinflation 83 96 179
adjustment
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
EUR million EUR million
Charge arising from fair value 3 2
calculated at grant date
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 EUR0.001 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 ofconvertible shares000'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 EUR4.59. 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 EUR6.57.
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
EUR million EUR million
Senior credit facility
Revolving credit facility(1)- interest (2) (13)
at relevant interbank
rate + 3.25% on RCF1 and +3.5% on RCF2(8)
Tranche A term loan(2a)--interest at relevant 196 219
interbank rate + 3.25%(8)
Tranche B term loan(2b)--interest at relevant 814 809
interbank rate + 3.375%(8)
Tranche C term loan(2c)--interest at relevant 813 808
interbank rate + 3.625%(8)
Yankee bonds (including accrued interest)(3) 219 203
Bank loans and overdrafts/(cash) (513) (565)
Receivables securitisation floating 209 208
rate notes 2011(4)
1,736 1,669
2015 cash pay subordinated notes 360 358
(including accrued interest)(5)
2017 senior secured notes (including 496 485
accrued interest)(6)
2019 senior secured notes (including 499 488
accrued interest)(7)
Net debt before finance leases 3,091 3,000
Finance leases 32 41
Net debt including leases - 3,123 3,041
Smurfit Kappa Funding plc
Balance of revolving credit facility 2 13
reclassified to debtors
Total debt after reclassification 3,125 3,054
- Smurfit Kappa Funding plc
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 EUR525 million split into
RCF1 and RCF2 of EUR152 million and EUR373 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 lettersof credit
- EUR8.6 million, letters of credit issued in support
of other liabilities - EUR17.3 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) EUR217.5 million 7.75% senior subordinated notes due 2015 and
$200 million of 7.75% senior subordinated notes due 2015
(6) EUR500 million 7.25% senior secured notes due 2017
(7) EUR500 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 3.00% 3.125% 3.375% 3.25%
morethan 3.5 : 1
3.5 : 1 or less but 2.75% 3.125% 3.375% 3.00%
morethan 3.0 : 1
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 EUR10
million was recorded in the Group Income Statement for the first
nine months of 2010 and total equity increased by EUR52 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
EUR16 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 EUR223 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 EUR56
million, including EUR2 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 EUR8.0 million, and a profit
before tax of EUR2.0 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.
Provisionalfair values
EUR 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 EUR4.4 million and a loss before tax of
EUR12.6 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
EUR million EUR million EUR million EUR million
Profit/(loss) 41 (40) 2 (18)
for the
financial period
Income tax 22 13 52 30
expense
Currency trading - - 16 -
loss
on Venezuelan
Bolivar
devaluation
Mondi asset swap - - 40 -
Reorganisation - 17 - 17
and
restructuring
costs
Impairment of - 33 - 33
property,
plant
and equipment
Share (1) (1) (2) -
of associates'
operating profit
Net finance costs 81 74 241 204
Share-based 1 - 3 2
payment
expense
Depreciation, 99 96 295 287
depletion
(net)
and amortisation
EBITDA before 243 192 647 555
exceptional
items and
share-based
payment
expense
Supplemental
Historical
Financial
Information
EUR Million Q3, 2009 Q4, 2009 FY, 2009 Q1, 2010 Q2, 2010 Q3, 2010
Group and 2,309 2,380 9,207 2,435 2,740 2,761
third
party
revenue
Third 1,515 1,541 6,057 1,530 1,696 1,702
party
revenue
EBITDA 192 186 741 184 221 243
before
exceptional
items and
share-based
payment
expense
EBITDA 12.7% 12.1% 12.2% 12.0% 13.0% 14.3%
margin
Operating 46 51 267 73 77 143
profit
Profit/(loss) (27) (63) (52) (3) (5) 63
before tax
Free cash 125 29 172 (58) (12) 128
flow
Basic (20.9) (41.6) (55.8) (7.0) (10.3) 16.9
earnings/(loss)
per
share
(cent
per share)
Weighted 218 218 218 218 218 218
average
number
of shares
used
in
EPS
calculation
(million)
Net debt 3,034 3,052 3,052 3,162 3,291 3,123
Net debt 4.0 4.1 4.1 4.2 4.2 3.7
to
EBITDA
(LTM)
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