TIDMSKG
2011 Second Quarter Results
10 August 2011: Smurfit Kappa Group plc ("SKG" or the "Group")
today announced results for the 3 months and 6 months ending 30
June 2011.
2011 Second Quarter & First Half | Key Financial Performance
Measures
EUR m H1 2011 H1 2010 change Q2 2011 Q2 2010 change Q1 2011 change
Revenue EUR3,670 EUR3,226 14% EUR1,867 EUR1,696 10% EUR1,803 4%
EBITDA EUR507 EUR404 25% EUR264 EUR221 20% EUR243 9%
before
Exceptional
Items
and
Share-based
Payment(1)
EBITDA 13.8% 12.5% - 14.2% 13.0% - 13.5% -
Margin
Operating EUR315 EUR206 52% EUR167 EUR119 40% EUR148 13%
Profit
before
Exceptional
Items
Profit/(Loss) EUR136 EUR(9) - EUR58 EUR(5) - EUR78 -
before
Income Tax
Basic EPS 31.3 (17.4) - 15.7 (10.3) - 15.6 -
(cent)
Pre-exceptional 47.4 8.4 - 31.4 9.0 - 16.0 -
EPS (cent)
Return on 11.9% 7.2% - - - - - -
Capital
Employed
Free Cash EUR78 EUR(69) - EUR66 EUR(12) - EUR12 -
Flow(2)
Net Debt EUR3,003 EUR3,291 (9%) EUR3,061 (2%)
Net Debt 2.98x 4.21x - 3.18x -
to
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 31.
(2) Free cash flow is set out on page 9. The IFRS cash flow is
set out on page 17.
Highlights
-- 14% revenue growth and 25% EBITDA growth year-on-year in H1.
Pre-exceptional EPS of EUR0.47
-- Significant net debt reduction of EUR107 million in H1. Total net debt
reduction of EUR288 million in LTM
-- Net debt to EBITDA ratio reduced to below 3.0x
-- Cash generation and debt paydown will accelerate in H2. Year-end net
debt target of EUR2.85 billion
Performance Review and Outlook
Gary McGann, Smurfit Kappa Group CEO, commented: "We are pleased
to report significant net debt reduction of EUR107 million in the
first half. In the last twelve months, we have reduced net debt by
EUR288 million. This strong performance highlights continued
disciplined cash flow management, which combined with sustained
earnings growth delivered a reduction of our net debt to EBITDA
ratio to below 3.0x at the end of June 2011.
Against a backdrop of increased cost pressure in the second
quarter, our improved EBITDA margin of 14.2% primarily reflects
further progress on European corrugated pricing recovery, an
increasingly efficient operating base and a continuing strong
performance in our Latin American businesses.
Notwithstanding the positive operating performance in the first
half, with risks to the global economy increasing, it is difficult
to be definitive about the business outlook. In that context, we
are maintaining our focus on delivering enhanced packaging
solutions for our customers, while continuing our drive on cost
efficiency, corrugated pricing recovery, and debt pay down. Our
target is to reduce net debt to EUR2.85 billion by the year
end."
About Smurfit Kappa Group
Smurfit Kappa Group is a world leader in paper-based packaging
with operations in Europe and Latin America. Smurfit Kappa Group
operates in 21 countries in Europe and is the European leader in
containerboard, solidboard, corrugated and solidboard packaging and
has a key position in several other packaging and paper market
segments, including graphicboard and sack paper. Smurfit Kappa
Group also has a good base in Eastern Europe and operates in 9
countries in Latin America where it is the only pan-regional
operator.
Forward Looking Statements
Some statements in this announcement are forward-looking. They
represent expectations for the Group's business, and involve risks
and uncertainties. These forward-looking statements are based on
current expectations and projections about future events. The Group
believes that current expectations and assumptions with respect to
these forward-looking statements are reasonable. However, because
they involve known and unknown risks, uncertainties and other
factors, which are in some cases beyond the Group's control, actual
results or performance may differ materially from those expressed
or implied by such forward-looking statements.
Contacts
Bertrand Paulet FD K Capital Source
Smurfit Kappa Group
Tel: +353 1 202 71 80 Tel: +353 1 663 36 80
E-mail: ir@smurfitkappa.com E-mail: smurfitkappa@kcapitalsource.com
2011 Second Quarter & First Half | Performance Overview
As expected, rising input costs continue to be recovered through
corrugated pricing, in line with the usual time lag. During the
first half of 2011, SKG's European corrugated prices increased by
4.5%, including over 2% in the second quarter. As a result, and
despite intensified input cost pressure in quarter two, SKG
delivered an improved EBITDA margin of 14.2% in the quarter
compared to 13.5% in the first quarter.
Demand for the Group's products remains healthy, with Germany
being the key driver of growth in Europe. Against increasingly
tough comparators in quarter two SKG's European corrugated volumes
were 2% higher year-on-year. Compared to the first quarter of 2011,
corrugated volumes were 1% higher in the second quarter.
The Group's improved margin performance in quarter two also
reflects a stronger performance by its Latin American operations,
which delivered an EBITDA margin of 19.9% in the period. Compared
to a margin of 16.7% in quarter one, the second quarter outcome
reflects higher selling prices in most countries, together with the
restart of our Cali mill following the extensive maintenance
downtime that occurred in March 2011.
Through the cycle, SKG's focus is to generate superior financial
returns. This objective is underpinned by exceptional commercial
attributes providing innovative packaging solutions and leading
customer service, combined with strong operating and financial
disciplines. These disciplines include an unrelenting focus on cost
efficiency, as outlined through the EUR39 million of cost take-out
delivered in the first half of 2011, and ongoing efficient capacity
management. In that context, in June SKG announced the permanent
closure of its less efficient recycled containerboard mill in
Nanterre (France).
Having permanently closed 10 less efficient containerboard mills
since 2005, and significantly invested in its "champion" mills, the
Group is equipped with a modern and efficient integrated
containerboard system which is well positioned to successfully
compete with any other paper packaging system in Europe.
In the first half, SKG's total cost of raw material and energy
was approximately EUR300 million higher year-on-year. Compared to
quarter one 2011, the Group's recovered fibre costs were 12% higher
in quarter two, while energy costs were 3% higher. Although a EUR10
per tonne reduction in recovered fibre prices occurred in June,
prices have since remained stable near record-high levels of an
average EUR155 per tonne.
Against a backdrop of increasing working capital requirements,
the Group delivered a relatively strong free cash flow performance
which contributed to reduce net debt by EUR107 million in the first
half. Compared to June 2010 levels, SKG's net debt reduced by
EUR288 million at the end of June 2011. The Group's free cash flow
generation will accelerate in the second half of 2011, thereby
achieving further significant progress towards its targeted debt
levels.
2011 Second Quarter | Financial Performance
At EUR1,867 million for the second quarter of 2011, sales
revenue was 10% higher than in the second quarter of 2010. However,
allowing for the negative impact of currency and hyperinflation
accounting of EUR32 million, together with a net EUR10 million in
respect of acquisitions, disposals and closures, the underlying
increase in revenue was EUR213 million, the equivalent of
approximately 13%.
Compared to the first quarter of 2011, sales revenue in the
second quarter was EUR64 million higher with an underlying increase
of EUR70 million, the equivalent of 4%.
At EUR264 million, EBITDA in the second quarter of 2011 was
EUR43 million higher than the second quarter of 2010. On a
comparable basis EBITDA increased year-on-year by EUR45 million,
the equivalent of 21%. Compared to the first quarter of 2011,
EBITDA increased by EUR21 million.
The closure of our Nanterre mill in France resulted in an
exceptional charge of EUR35 million within operating profit in the
second quarter of 2011. This charge comprised EUR22 million of
restructuring costs and EUR13 million of impairment losses on
property, plant and equipment. In the second quarter of 2010,
exceptional items of EUR42 million charged within operating profit
related mainly to the asset swap with Mondi.
At EUR132 million, operating profit after exceptional items for
the second quarter of 2011 was EUR55 million higher than in 2010,
an increase of approximately 72%.
Net finance costs of EUR75 million in the second quarter of 2011
were EUR8 million lower than in the second quarter of 2010,
primarily reflecting a lower average interest cost.
Including the Group's share of associates' profit, the profit
before tax was EUR58 million in the second quarter of 2011 compared
to a loss of EUR5 million in 2010.
Earnings per share was 15.7 cent for the quarter to June 2011
(2010: loss per share 10.3 cent). Adjusting for the exceptional
charge in the quarter of EUR35 million (2010: EUR42 million),
pre-exceptional earnings per share was 31.4 cent (2010: 9
cent).
2011 First Half | Financial Performance
Revenue of EUR3,670 million in the first half of 2011 represents
a 14% increase on the first half of 2010. Allowing for a negative
impact of currency and hyperinflation accounting of EUR5 million,
and for a net EUR19 million in respect of acquisitions, disposals
and closures, revenue shows an underlying year-on-year increase of
EUR468 million (15%).
At EUR507 million, EBITDA in the first half of 2011 was EUR103
million, or 25% higher than in the comparable period in 2010. While
the impact of currency was negligible, acquisitions and the absence
of loss making operations sold or closed in 2010 increased 2011's
EBITDA by EUR4 million, giving an underlying increase of EUR99
million (24%).
Exceptional items charged within operating profit in the first
half of 2011 related almost entirely to the closure of our Nanterre
mill. In the first half of 2010, exceptional charges within
operating profit amounted to EUR56 million, of which approximately
EUR40 million related to the asset swap with Mondi, while the
balance related to the currency devaluation and associated
hyperinflationary adjustments in Venezuela, which were booked
primarily in the first quarter.
Operating profit after exceptional items for the half year was
EUR279 million, compared to EUR150 million for the same period in
2010, an increase of 86%.
Net finance costs of EUR146 million were EUR14 million lower
year-on-year, primarily reflecting a lower average interest
cost.
Including the Group's share of associates' profit of EUR1
million in 2011, total profit before tax was EUR136 million in the
first six months of 2011 compared to a loss of EUR9 million in
2010.
Income tax expense of EUR68 million for the half year included a
EUR23 million tax expense arising from the implementation of
additional temporary taxes in Colombia on 1 January, which although
payable over the next four years, was required to be expensed in
quarter one 2011, under IFRS.
Earnings per share was 31.3 cent for the six months to June 2011
(2010: loss per share 17.4 cent). Adjusting for the exceptional
charge in the six months to June of EUR36 million (2010: EUR56
million), pre-exceptional EPS was 47.4 cent (2010: 8.4 cent).
2011 Second Quarter & First Half | Free Cash Flow
Compared to a net outflow of EUR69 million reported in the first
half of 2010, the Group reported a positive free cash flow of EUR78
million in the first half of 2011. This primarily reflected the 25%
increase in EBITDA and lower working capital outflows year-on-year,
somewhat offset by higher capital expenditure. This first half free
cash flow performance was the strongest in any first half since the
creation of SKG in 2005, and highlights the Group's sharp focus on
debt paydown and de-leveraging.
The working capital move in the first half of 2011 was an
outflow of EUR119 million, primarily reflecting improved volumes
and higher raw material and end-product prices. SKG continues to
actively manage working capital, and despite the need for inventory
building in advance of the planned Piteå kraftliner mill downtime
in August 2011, the Group's working capital to annualised sales
ratio reduced to 9.3% at June 2011, compared to 9.5% at June 2010
and 9.8% at June 2009.
Capital expenditure of EUR116 million in the first half of 2011
equated to 66% of depreciation, compared to 49% in the first half
of 2010. For the full year 2011 SKG expects to increase its capital
expenditure towards its normalised levels.
Cash interest of EUR122 million in the first half of 2011 was
EUR11 million lower than in the first half of 2010, primarily
reflecting a lower average interest cost year-on-year.
Tax payments of EUR22 million in the first half of 2011 were
EUR10 million lower than in 2010.
2011 Second Quarter & First Half | Capital Structure
The Group's net debt reduced by EUR107 million to EUR3,003
million in the first half of 2011, mainly reflecting SKG's positive
free cash flow performance of EUR78 million in the period and EUR38
million of favourable currency movements, somewhat offset by a
deferred consideration payment relating to the disposal of SKG's
loss-making Rol Pin operation in 2010. The positive currency
movement in the first half primarily reflects the relative strength
of the euro against the US dollar.
Compared to June 2010, net debt at the end of June 2011 was
EUR288 million lower, the equivalent of a 9% reduction. It is worth
bearing in mind that the year-on-year reduction in net debt was
achieved despite a cumulative working capital outflow of EUR84
million over that period, reflecting higher volumes and prices.
The Group continues to benefit from its average debt maturity
profile of 4.8 years, with no material maturities before December
2013. In addition, SKG currently has EUR554 million of cash on its
balance sheet, with committed undrawn credit facilities of
approximately EUR525 million.
At the end of June 2011, the Group's net debt to EBITDA ratio
reduced to below 3.0x for the first time since the establishment of
the Group in 2005. The Group's strategic priority for 2011
continues to be one of maximising free cash flow generation for
further debt paydown and de-leveraging. A reducing leverage,
combined with a strong liquidity position, a good maturity profile
and diversified funding sources, provide SKG with improving
financial flexibility.
2011 Second Quarter & First Half | Operating Efficiency
Reorganisation of Specialties segment
With effect from 1 September, 2011 the Group has decided to
transfer its Specialties businesses into its existing European
Packaging segment. The board mills will be integrated with SKG's
containerboard business, while the converting operations will be
integrated into the relevant country corrugated network.
On the converting side, by the creation of effectively a
"one-stop-shop", the Group will be positioned to offer the most
complete and innovative range of paper-based packaging solutions
for all applications. The business will also benefit from
benchmarking and optimal operating efficiency. On the solidboard
side the application of the Group's containerboard model of grade
optimisation and supply chain management is expected to deliver
improved cost competitiveness.
The Group's successful bag-in-box business will also benefit
from this restructuring through a renewed market-led expansionary
focus under the leadership of the Group's Packaging management
team.
This reorganisation will increase the breadth of the Group's
commercial offering and enhance its overall cost efficiency, which
should contribute to improving the margins of its integrated solid,
graphic and carton board businesses.
Nanterre mill closure
In June, SKG announced the closure of its recycled
containerboard mill in Nanterre (France) which has been idled since
April 2010. This will result in a permanent capacity
rationalisation of 160,000 tonnes.
The permanent closure of the Nanterre mill resulted in an
exceptional charge of EUR35 million in the second quarter of 2011,
including EUR13 million of impairment losses. Following the
announced closure of the mill, SKG is currently reviewing its
options to monetise the 17 hectare Nanterre site, located in the
vicinity of Paris.
Including Nanterre, the Group has now permanently closed 10 less
efficient containerboard mills since 2005 (the equivalent of
920,000 tonnes of capacity). In the period, SKG has also continued
to invest significant capital in its "champion" mills. As a result
of those actions, SKG's European Packaging operations are equipped
today with a modern and efficient integrated system of 14 recycled
containerboard and 3 kraftliner mills.
The Group is confident that its mill system is at least as
competitive as any other containerboard system in Europe.
Commercial offering
In addition to its continued focus on operating excellence,
SKG's strong margin performance through the cycle also reflects its
clear commitment to provide customers with innovative, sustainable
and cost efficient paper-based packaging solutions.
The Group is uniquely equipped to provide industry leading
customer service, supported by its unrivalled geographical
footprint, its state of the art design capabilities and its
broad-based product offering. In the first half of 2011, these
attributes allowed SKG to be awarded significant incremental
volumes with key multi-national Fast Moving Consumer Goods (FMCG)
customers.
SKG is committed to continue investing to meet and exceed
customers' requirements. In that context, in the first half the
Group finalised a EUR20 million investment programme in its Italian
packaging operation, equipping it with state of the art 5-colour
printing capacity, thereby further enhancing its offering in the
local value-added packaging market.
In the first half, SKG also finalised a 3-year modernisation
programme in its Pruszkow facility in Poland. This initiative is
part of a broader EUR30 million investment programme for SKG
Poland, and demonstrates the Group's commitment to follow its
customers' development and grow its market share in the Eastern
European market.
Finally, as part of multiple efficiency and quality enhancing
investments across the company, SKG is currently installing over 10
new state of the art pieces of packaging equipment to develop
greater advantage for its customers.
Cost take-out programme
In 2011, SKG initiated a 2-year initiative, with a target to
generate EUR150 million of cost savings by the end of 2012. This
programme generated EUR39 million of cost savings benefits in the
first half of 2011 (including EUR22 million in quarter two), which
partially mitigated the impact of the significant rise in input
costs experienced in the period.
2011 Second Quarter & First Half | Performance Review
Packaging: Europe
Following the 4% underlying demand growth experienced in the
full year 2010, demand for SKG's corrugated packaging solutions
remained healthy through the first half of 2011, showing a 2%
underlying growth year-on-year. SKG's businesses in Germany, the
Benelux and Spain experienced particularly strong demand in the
period. Including Mondi's UK corrugated operations acquired in May
2010, the Group's volumes were 4% higher in the first half.
Corrugated pricing continued to recover throughout the first
half. The Group's European corrugated prices in the second quarter
were on average 2% higher compared to the first quarter of 2011.
Higher product prices, together with an ongoing strong focus on
cost efficiency allowed SKG to deliver a resilient European
Packaging EBITDA margin of 13.9% in the second quarter, despite
meaningfully higher input costs.
The Group's recovered fibre costs in the second quarter
increased by approximately 12% compared to the first quarter of
2011, reaching an all time high level of EUR165 per tonne in April
and May, primarily driven by incremental demand from Eastern
European countries. In the second quarter, SKG also experienced
sequential increases of 10% in starch costs and 3% in energy
costs.
Compared to the first half of 2010, the Group's recovered fibre
costs were 31% higher, wood was 16% higher, starch was 85% higher
and energy was 5% higher in 2011. Rising input costs, combined with
good demand levels and a continued appropriate level of inventories
provided a strong platform for pricing. Consequently, in the first
half of 2011, recycled containerboard prices increased by EUR70 per
tonne. At the end of the second quarter however, a modest fall in
recovered fibre prices has led to a EUR15 to EUR20 per tonne
decline in recycled containerboard prices in July.
With corrugated packaging demand expected to continue to rise
broadly in line with general economic growth, the underlying key
driver of pricing through the cycle should remain supply. In that
context, it is worth bearing in mind that the industry is expecting
only one new recycled containerboard machine in Europe to start-up
in quarter one 2012, with one more in 2013.
The containerboard price increases implemented in the first half
of 2011 continue to generate significant pressure on corrugated
producers' earnings. As is normal, it takes up to six months to
fully offset higher containerboard prices through corrugated price
recovery. Having achieved a 16.5% price recovery from the low point
in 2009 to the end of 2010, SKG achieved a further 4.5% corrugated
price increase in the first half of 2011.
On the kraftliner side, following a EUR250 per tonne cumulative
price increase from the low point in 2009 to the end of 2010,
cheaper US imports in the first half of 2011 generated some
downward pressure on European prices. A EUR20 per tonne price
reduction was reported in public market indices in quarter one,
with a further EUR10 per tonne decline in quarter two. Furthermore,
the absence of an expected price increase in the US market,
combined with generally stable wood costs in Europe, is
constraining further upward pricing momentum for this grade in the
near term.
The European kraftliner market remains balanced however, and the
Group expects prices to remain stable in the near term. As
previously announced, SKG will be taking 70,000 tonnes of
maintenance-related downtime at its Swedish kraftliner mill in
August 2011.
Packaging: Latin America
In the second quarter, Latin American EBITDA of EUR61 million
was 21% higher year-on-year, and 24% higher than in the first
quarter of 2011. Compared with a margin of 16.7% in the first
quarter, the improved margin of 19.9% in quarter two primarily
highlights higher prices in most countries, together with the
absence of significant maintenance downtime and poor weather
conditions that had affected our first quarter margin
performance.
In the first half, Latin America represented 22% of the Group's
overall EBITDA, with particularly strong performances in Venezuela
and Argentina.
While SKG's corrugated volumes in Colombia were 6% higher
year-on-year in the second quarter, pricing was relatively stable,
highlighting moderate inflation in the country, an increasingly
strong currency and aggressive price action from competitors.
Following the end of the maintenance downtime at our Cali mill in
March, the Group's Colombian earnings in quarter two improved
compared to quarter one, and EBITDA is expected to show further
growth in the second half.
In the challenging Venezuelan market, following a 7% demand
decline in 2010, SKG experienced positive year-on-year corrugated
volume growth of 1% in the first half of 2011. Continuing high
inflation in the country was more than offset by SKG's cost
take-out and operating efficiency actions, as well as by increased
pricing.
In July, the Venezuelan authorities have issued precautionary
measures over a further 7,253 hectares of the Group's forestry
land, with a view to acquiring it and converting its use to food
production and related activities. Management are in discussion
with the authorities.
SKG's Mexican EBITDA was higher year-on-year in the first half.
While corrugated volumes were 1% lower year-on-year largely as a
result of a poor agricultural season in quarter one (due to severe
weather), prices were higher on average, thereby contributing to
offset rising input costs. Further pricing progress in the second
half of 2011 is expected to be difficult to secure as a result of
lower US containerboard export prices.
High inflation continues to prevail in Argentina, which is
starting to affect demand. After a 14% demand growth in 2010, the
Group's corrugated volumes in the country were 1% higher in the
first half of 2011. Higher prices year-on-year supported good
EBITDA growth in the first half.
Despite some country-specific challenges from time to time, the
Group believes that the geographic diversity of its business in the
Latin American region, together with the proven ability of its
management team to drive the business and grow its earnings, will
continue to deliver a strong performance through the cycle.
Specialties: Europe
Following an unsustainably low EBITDA margin performance of 5.7%
in the first half of 2010, SKG's Specialties EBITDA margin improved
to 9.3% in the first half of 2011. The Group's decision to
integrate the Specialties assets into the Packaging Europe segment
from September 2011 is expected to further improve the margins in
the solidboard, and graphicboard parts of this business area.
The improved Specialties' margin performance year-on-year
largely reflects higher prices for solidboard packaging as a result
of board price increases of EUR100 per tonne implemented in 2010,
together with the absence of the loss-making sack converting
operations which were divested in May 2010. The Group's bag-in-box
division continued to perform strongly in the first half.
Summary Cash
Flow(1)
Summary cash flows for the second quarter and six
months are set out in the following table.
3 months to 3 months to 6 months to 6 months to
30-June-11 30-June-10 30-June-11 30-June-10
EUR m EUR m EUR m EUR m
Pre-exceptional EBITDA 264 221 507 404
Exceptional Items - (2) - (16)
Cash interest expense (61) (67) (122) (133)
Working capital change (33) (63) (119) (127)
Current provisions (3) (8) (6) (14)
Capital expenditure (62) (51) (116) (84)
Change in capital (9) (4) (15) (37)
creditors
Sale of fixed assets - - 1 1
Tax paid (12) (25) (22) (32)
Other (18) (13) (30) (31)
Free cash flow 66 (12) 78 (69)
Share issues 1 1 8 3
Sale of businesses (8) (9) (4) (9)
and investments
Purchase - (45) (1) (46)
of investments
Derivative termination (1) (1) (1) -
payments
Dividends (3) (3) (3) (3)
Net 55 (69) 77 (124)
cash inflow/(outflow)
Net - (2) - (2)
cash acquired/disposed
Deferred debt issue (4) (5) (8) (10)
costs amortised
Currency translation 7 (53) 38 (103)
adjustments
Decrease/(increase) 58 (129) 107 (239)
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 debt while the
IFRS cash flow details movement in cash and cash equivalents. In
addition, the IFRS cash flow has different sub-headings to those
used in the summary cash flow. A reconciliation of the free cash
flow to cash generated from operations in the IFRS cash flow is set
out below.
6 months to 6 months to
30-Jun-11 30-Jun-10
EURm EURm
Free cash 78 (69)
flow
Add Cash interest 122 133
back:
Capital expenditure (net of change in capital creditors) 131 121
Tax payments 22 32
Less: Sale of fixed assets (1) (1)
Profit on sale of assets and businesses - non exceptional (6) (9)
Receipt of capital grants (in "Other") (1) -
Dividends received from associates (in "Other") (1) (1)
Non-cash lease movement (4) -
Cash generated from 340 206
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 June 2011 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 EUR171.9 million variable funding notes issued under
the new EUR250 million accounts receivable securitisation programme
maturing in November 2015.
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 EUR132 million amortising Tranche A
maturing in 2012, an EUR815 million Tranche B maturing in 2013 and
an EUR813 million Tranche C maturing in 2014. In addition, as at 30
June 2011, the facility included as at 30 June a EUR525 million
revolving credit facility, none of which was drawn.
The following table provides the range of interest rates as of
30 June 2011 for each of the drawings under the various senior
credit facility term loans.
BORROWING ARRANGEMENT CURRENCY INTEREST RATE
Term Loan A EUR 3.982%
Term Loan B EUR 4.349% - 4.649%
USD 3.418%
Term Loan C EUR 4.599% - 4.869%
USD 3.668%
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 June 2011 the
Group had fixed an average of 78% of its interest cost on
borrowings over the following twelve months.
The Group's 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.
The Group's 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 EUR9 million over the following twelve
months. Interest income on our cash balances would increase by
approximately EUR5 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 2010 annual report on page 47. The annual report is
available on our website www.smurfitkappa.com.
The principal risks and uncertainties remain substantially the
same for the remaining six months of the financial year, and are
summarised below:
-- The cyclical nature of the packaging industry could result in
overcapacity and consequently threaten the Group's pricing
structure
-- If the economic recovery were to reverse or sovereign debt concerns
were to intensify and result in an economic slowdown which
was
sustained over any significant length of time it could
adversely
affect the Group's financial position and results of
operations
-- If operations at any of the Group's facilities (in particular its key
mills) were interrupted for any significant length of time it
could
adversely affect the Group's financial position and results
of
operations
-- Price fluctuations in raw materials and energy costs could adversely
affect the Group's manufacturing costs
-- The Group is exposed to currency exchange rate fluctuations
-- The Group may not be able to attract and retain suitably qualified
employees as required for its business
-- The Group is subject to a growing number of environmental laws and
regulations, and the cost of compliance or the failure to comply
with
current and future laws and regulations may negatively affect
the
Group's business
-- The Group is exposed to potential risks in relation to its Venezuelan
operations
-- The Group is subject to anti-trust and similar legislation in the
jurisdictions in which it operates
-- Substantial future sales of shares by the existing major shareholders
may depress the share price.
The Board regularly monitors all of the above risks and
appropriate actions are taken to mitigate those risks or address
their potential adverse consequences.
Group Income Statement - Six Months
Unaudited Unaudited
6 months to 6 months to
30-Jun-11 30-Jun-10
Pre-exceptional Exceptional 2011 Total 2011 Pre-exceptional Exceptional 2010 Total 2010
2011 2010
EURm EURm EURm EURm EURm EURm
Revenue 3,670 - 3,670 3,226 - 3,226
Cost of sales (2,637) (13) (2,650) (2,341) - (2,341)
Gross profit 1,033 (13) 1,020 885 - 885
Distribution (282) - (282) (275) - (275)
costs
Administrative (437) - (437) (418) (16) (434)
expenses
Other operating 1 - 1 14 - 14
income
Other operating - (23) (23) - (40) (40)
expenses
Operating 315 (36) 279 206 (56) 150
profit
Finance costs (215) - (215) (271) - (271)
Finance income 69 - 69 111 - 111
Profit on 2 - 2 - - -
disposal
of associate
Share 1 - 1 1 - 1
of associates'
profit (after
tax)
Profit/(loss) 172 (36) 136 47 (56) (9)
before
income tax
Income tax (68) (31)
expense
Profit/(loss) 68 (40)
for the
financial
period
Attributable
to:
Owners of the 69 (38)
Parent
Non-controlling (1) (2)
interests
Profit/(loss) 68 (40)
for the
financial
period
Earnings per
share:
Basic 31.3 (17.4)
earnings/(loss)
per share
- cent
Diluted 30.6 (17.4)
earnings/(loss)
per share
- cent
The notes to the condensed interim Group Financial Statements on
pages 18 to 29 form an integral part of this financial
information.
Group Income Statement - Second Quarter
Unaudited Unaudited
3 months to 3 months to
30-Jun-11 30-Jun-10
Pre-exceptional Exceptional 2011 Total 2011 Pre-exceptional Exceptional 2010 Total 2010
2011 2010
EURm EURm EURm EURm EURm EURm
Revenue 1,867 - 1,867 1,696 - 1,696
Cost of sales (1,341) (13) (1,354) (1,235) - (1,235)
Gross profit 526 (13) 513 461 - 461
Distribution (143) - (143) (140) - (140)
costs
Administrative (217) - (217) (210) (2) (212)
expenses
Other operating 1 - 1 8 - 8
income
Other operating - (22) (22) - (40) (40)
expenses
Operating 167 (35) 132 119 (42) 77
profit
Finance costs (101) - (101) (137) - (137)
Finance income 26 - 26 54 - 54
Share 1 - 1 1 - 1
of associates'
profit (after
tax)
Profit/(loss) 93 (35) 58 37 (42) (5)
before
income tax
Income tax (19) (17)
expense
Profit/(loss) 39 (22)
for the
financial
period
Attributable
to:
Owners of the 35 (22)
Parent
Non-controlling 4 -
interests
Profit/(loss) 39 (22)
for the
financial
period
Earnings per
share:
Basic 15.7 (10.3)
earnings/(loss)
per share
- cent
Diluted 15.3 (10.3)
earnings/(loss)
per share
- cent
Group Statement of Comprehensive Income
Unaudited Unaudited
6 months to 6 months to
30-Jun-11 30-Jun-10
EURm EURm
Profit/(loss) for the financial period 68 (40)
Other comprehensive income:
Foreign currency translation adjustments (54) (3)
Defined benefit pension plans:
- Actuarial loss including payroll tax (39) (23)
- Movement in deferred tax 5 6
Effective portion of changes in fair
value of cash flow hedges:
- Movement out of reserve 11 13
- New fair value adjustments into reserve 11 (28)
- Movement in deferred tax (3) 2
Total other comprehensive income (69) (33)
Comprehensive income and expense (1) (73)
for the financial period
Attributable to:
Owners of the Parent 4 (83)
Non-controlling interests (5) 10
(1) (73)
The notes to the condensed interim Group Financial Statements on
pages 18 to 29 form an integral part of this financial
information.
Group Balance Sheet
Unaudited Unaudited Audited
30-Jun-11 30-Jun-10 31-Dec-10
EURm EURm EURm
ASSETS
Non-current assets
Property, plant and equipment 2,918 3,037 3,008
Goodwill and intangible assets 2,190 2,234 2,209
Available-for-sale financial assets 32 32 32
Investment in associates 14 15 16
Biological assets 87 94 88
Trade and other receivables 6 4 5
Derivative financial instruments - 20 2
Deferred income tax assets 111 287 134
5,358 5,723 5,494
Current assets
Inventories 716 632 638
Biological assets 10 10 7
Trade and other receivables 1,463 1,344 1,292
Derivative financial instruments 5 8 8
Restricted cash 9 34 7
Cash and cash equivalents 545 423 495
2,748 2,451 2,447
Non-current assets held for sale - 3 -
Total assets 8,106 8,177 7,941
EQUITY
Capital and reserves attributable
to the owners of the Parent
Equity share capital - - -
Capital and other reserves 2,295 2,330 2,315
Retained earnings (487) (683) (552)
Total equity attributable to 1,808 1,647 1,763
the owners of the Parent
Non-controlling interests 169 180 173
Total equity 1,977 1,827 1,936
LIABILITIES
Non-current liabilities
Borrowings 3,416 3,603 3,470
Employee benefits 611 680 595
Derivative financial instruments 112 85 101
Deferred income tax liabilities 188 319 206
Non-current income tax liabilities 7 14 9
Provisions for liabilities and charges 43 44 49
Capital grants 14 13 14
Other payables 7 5 7
4,398 4,763 4,451
Current liabilities
Borrowings 141 145 142
Trade and other payables 1,490 1,335 1,351
Current income tax liabilities 47 33 5
Derivative financial instruments 21 43 27
Provisions for liabilities and charges 32 31 29
1,731 1,587 1,554
Total liabilities 6,129 6,350 6,005
Total equity and liabilities 8,106 8,177 7,941
The notes to the condensed interim Group Financial Statements on
pages 18 to 2 9 form an integral part of this financial
information.
Group Statement of Changes in Equity (Unaudited)
Capital and other reserves
Equity share capital Share premium Reverse acquisition reserve Cash flow hedging reserve Foreign currency translation reserve Reserve for share-based payment Retained earnings Total equity attributable to Non-controlling interests Total equity
the owners of the Parent
EURm EURm EURm EURm EURm EURm EURm EURm EURm EURm
At 1 January 2011 - 1,937 575 (45) (216) 64 (552) 1,763 173 1,936
Shares issued - 8 - - - - - 8 - 8
Total comprehensive - - - 19 (50) - 35 4 (5) (1)
income and expense
Hyperinflation adjustment - - - - - - 30 30 4 34
Share-based payment - - - - - 3 - 3 - 3
Dividends paid to non-controlling - - - - - - - - (3) (3)
interests
At 30 June 2011 - 1,945 575 (26) (266) 67 (487) 1,808 169 1,977
At 1 January 2010 - 1,928 575 (44) (174) 60 (669) 1,676 179 1,855
Shares issued - 3 - - - - - 3 - 3
Total comprehensive - - - (13) (15) - (55) (83) 10 (73)
income and expense
Hyperinflation adjustment - - - - - - 40 40 4 44
Share-based payment - - - - - 2 - 2 - 2
Dividends paid to non-controlling - - - - - - - - (3) (3)
interests
Purchase of non-controlling - - - - - - - - (1) (1)
interests
Other movements - - - - 8 - 1 9 (9) -
At 30 June 2010 - 1,931 575 (57) (181) 62 (683) 1,647 180 1,827
The notes to the condensed interim Group Financial Statements on
pages 18 to 29 form an integral part of this financial
information.
Group Cash Flow Statement
Unaudited Unaudited
6 months to 6 months to
30-Jun-11 30-Jun-10
EURm EURm
Cash flows from operating activities
Profit/(loss) for the financial period 68 (40)
Adjustment for
Income tax expense 68 31
(Profit)/loss on sale of assets and businesses (3) 25
Amortisation of capital grants (1) (1)
Impairment of property, plant and equipment 13 -
Equity settled share-based payment transactions 3 2
Amortisation of intangible assets 14 23
Share of associates' profit (after tax) (1) (1)
Profit on disposal of associates (2) -
Depreciation charge 166 165
Net finance costs 146 160
Change in inventories (90) (62)
Change in biological assets 9 8
Change in trade and other receivables (196) (225)
Change in trade and other payables 165 160
Change in provisions 7 (15)
Change in employee benefits (28) (27)
Other 2 3
Cash generated from operations 340 206
Interest paid (125) (134)
Income taxes paid:
Irish corporation tax paid - (1)
Overseas corporation tax (net (22) (31)
of tax refunds) paid
Net cash inflow from operating activities 193 40
Cash flows from investing activities
Interest received 3 2
Mondi asset swap - (56)
Purchase of property, plant and equipment (129) (118)
and biological assets
Purchase of intangible assets (2) (3)
Receipt of capital grants 1 -
(Increase)/decrease in restricted cash (2) 10
Disposal of property, plant and equipment 7 10
Disposal of associates 4 -
Dividends received from associates 1 1
Purchase of subsidiaries and (1) (1)
non-controlling interests
Deferred consideration (8) -
Net cash outflow from investing activities (126) (155)
Cash flow from financing activities
Proceeds from issue of new ordinary shares 8 3
Decrease in interest-bearing borrowings (12) (50)
Repayment of finance lease liabilities (6) (7)
Derivative termination payments (1) -
Deferred debt issue costs - (1)
Dividends paid to non-controlling interests (3) (3)
Net cash outflow from financing activities (14) (58)
Increase/(decrease) in cash and cash equivalents 53 (173)
Reconciliation of opening to closing
cash and cash equivalents
Cash and cash equivalents at 1 January 481 587
Currency translation adjustment (7) (7)
Increase/(decrease) in cash and cash equivalents 53 (173)
Cash and cash equivalents at 30 June 527 407
The notes to the condensed interim Group Financial Statements on
pages 18 to 2 9 form an integral part of this financial
information.
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 condensed interim Group financial information included in
this report has been prepared in accordance with the Transparency
(Directive 2004/109/EC) Regulations 2007, the related Transparency
Rules of the Irish Financial Services Regulatory Authority and with
International Accounting Standard 34, Interim Financial Reporting
("IAS 34") as adopted by the European Union. Certain quarterly
information and the balance sheet as at 30 June 2010 have been
included in this report; this information is supplementary and not
required by IAS 34. This report should be read in conjunction with
the consolidated financial statements for the year ended 31
December 2010 included in the 2010 annual report which is available
on the Group website www.smurfitkappa.com. The accounting policies
and methods of computation and presentation adopted in the
preparation of the interim Group financial information are
consistent with those applied in the annual report for the
financial year ended 31 December 2010 and are described in those
financial statements.
The following new standards, amendments and interpretations
became effective in 2011, however, they either do not have an
effect on the Group financial statements or they are not currently
relevant for the Group:
-- Classification of Rights Issues (Amendment to IAS 32)
-- IAS 24, Related Party Disclosure (Revised)
-- Amendments to IFRIC 14, Prepayments of a Minimum Funding Requirement
-- IFRIC 19, Extinguishing Financial Liabilities with Equity
Instruments
In addition, a number of annual improvements to IFRSs are
effective for 2011, however, none of these had or is expected to
have a material effect on the Group financial statements.
The Group is a highly integrated paper and paperboard
manufacturer with leading market positions, quality assets and
broad geographic reach. The financial position of the Group, its
cash generation, capital resources and liquidity provide a stable
financing platform and its key debt ratios continue to improve.
After making enquiries, the Directors have a reasonable expectation
that the Company, and the Group as a whole, have adequate resources
to continue in operational existence for the foreseeable future.
For this reason, they continue to adopt the going concern basis in
preparing the half year Financial Statements.
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 Group's auditors have not audited or reviewed the interim
Group financial information contained in this report.
The condensed interim Group 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 2010 will be filed with the Irish Registrar of Companies
in due course. 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 (EBITDA before exceptional items).
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.
As part of an internal reorganisation during 2010 our sack kraft
paper mill was transferred from the Specialties segment to the
Packaging segment. Prior year segmental information has been
restated to conform to the current year segment presentation.
6 months to 30-Jun-11 6 months to 30-Jun-10
Packaging Specialties Latin America Total Packaging Specialties Latin America Total
Europe Europe Europe Europe
EURm EURm EURm EURm EURm EURm EURm EURm
Revenue
and
Results
Revenue 2,684 380 606 3,670 2,302 378 546 3,226
EBITDA 375 35 111 521 299 22 92 413
before
exceptional
items
Segment (24) 1 - (23) (1) (39) (16) (56)
exceptional
items
EBITDA 351 36 111 498 298 (17) 76 357
after
exceptional
items
Unallocated (14) (9)
centre
costs
Share-based (3) (2)
payment
expense
Depreciation (175) (173)
and
depletion
(net)
Amortisation (14) (23)
Impairment (13) -
of
assets
Finance (215) (271)
costs
Finance 69 111
income
Profit 2 -
on
disposal
of
associate
Share 1 1
of
associates'
profit
(after
tax)
Profit/(loss) 136 (9)
before
income
tax
Income (68) (31)
tax
expense
Profit/(loss) 68 (40)
for the
financial
period
Assets
Segment 5,452 711 1,310 7,473 5,374 724 1,312 7,410
assets
Investment 1 - 13 14 2 - 13 15
in
associates
Group 619 752
centre
assets
Total 8,106 8,177
assets
3 months to 30-Jun-11 3 months to 30-Jun-10
Packaging Specialties Latin America Total Packaging Specialties Latin America Total
Europe Europe Europe Europe
EURm EURm EURm EURm EURm EURm EURm EURm
Revenue
and
Results
Revenue 1,355 202 310 1,867 1,198 196 302 1,696
EBITDA 189 20 61 270 162 13 51 226
before
exceptional
items
Segment (23) 1 - (22) (1) (39) (2) (42)
exceptional
items
EBITDA 166 21 61 248 161 (26) 49 184
after
exceptional
items
Unallocated (6) (5)
centre
costs
Share-based (2) (1)
payment
expense
Depreciation (88) (89)
and
depletion
(net)
Amortisation (7) (12)
Impairment (13) -
of
assets
Finance (101) (137)
costs
Finance 26 54
income
Share 1 1
of
associates'
profit
(after
tax)
Profit/(loss) 58 (5)
before
income
tax
Income (19) (17)
tax
expense
Profit/(loss) 39 (22)
for the
financial
period
4.Exceptional Items
6 months to 6 months to
The following items are regarded 30-Jun-11 30-Jun-10
as exceptional in nature:
EURm EURm
Impairment loss on property, plant and equipment (13) -
Reorganisation and restructuring costs (23) -
Currency trading loss on Venezuelan - (16)
Bolivar devaluation
Mondi asset swap - (40)
Total exceptional items (36) (56)
In June, SKG closed its recycled containerboard mill in
Nanterre, France. This resulted in an impairment loss on property,
plant and equipment of EUR13 million and reorganisation and
restructuring costs of EUR22 million. The remaining EUR1 million of
reorganisation and restructuring costs relates to the continuing
rationalisation of the Group's corrugated operations in
Ireland.
In the first half of 2010 a currency translation loss of EUR16
million arose from the effect of the retranslation of the U.S.
dollar denominated net payables of the Venezuelan operations
following the devaluation of the Bolivar Fuerte in January
2010.
During the second quarter of 2010 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 sacks plants (other
than the Polish plant which was sold separately in December 2010)
were disposed. The transaction generated an exceptional loss of
EUR40 million in the second quarter.
5.Finance Costs and Income
6 months to 6 months to
30-Jun-11 30-Jun-10
EURm EURm
Finance costs
Interest payable on bank loans and overdrafts 67 78
Interest payable on finance leases 1 2
and hire purchase contracts
Interest payable on other borrowings 66 66
Foreign currency translation loss on debt 3 65
Fair value loss on derivatives 24 -
not designated as hedges
Interest cost on employee 50 50
benefit plan liabilities
Net monetary loss - hyperinflation 4 10
Total finance cost 215 271
Finance income
Other interest receivable (3) (3)
Foreign currency translation gain on debt (24) (4)
Fair value gain on derivatives (4) (69)
not designated as hedges
Expected return on employee (38) (35)
benefit plan assets
Total finance income (69) (111)
Net finance cost 146 160
6.Income Tax Expense
Income tax expense recognised in the Group Income Statement
6 months to 6 months to
30-Jun-11 30-Jun-10
EURm EURm
Current taxation:
Europe 21 18
Latin America 43 21
64 39
Deferred taxation 4 (8)
Income tax expense 68 31
Current tax is analysed as follows:
Ireland 2 1
Foreign 62 38
64 39
Income tax recognised in the Group Statement of Comprehensive
Income
6 months to 6 months to
30-Jun-11 30-Jun-10
EURm EURm
Arising on actuarial gains/losses (5) (6)
on defined benefit plans
Arising on qualifying derivative 3 (2)
cash flow hedges
(2) (8)
The current taxation expense for Latin America includes a EUR23
million tax expense arising from the implementation of additional
temporary taxes in Colombia on 1 January, which although payable
over the next four years, was required to be expensed in quarter
one 2011.
7.Employee Post Retirement Schemes - Defined Benefit Expense
The table below sets out the components of the defined benefit
expense for the period:
6 months to 6 months to
30-Jun-11 30-Jun-10
EURm EURm
Current service cost 13 18
Past service cost 1 -
Gain on settlements and curtailments - (1)
14 17
Expected return on plan assets (38) (35)
Interest cost on plan liabilities 50 50
Net financial expense 12 15
Defined benefit expense 26 32
Included in cost of sales, distribution costs and administrative
expenses is a defined benefit expense of EUR14 million for the
first six months of 2011 (2010: EUR17 million). Expected Return on
Plan Assets of EUR38 million (2010: EUR35 million) is included in
Finance Income and Interest Cost on Plan Liabilities of EUR50
million (2010: EUR50 million) is included in Finance Costs in the
Group Income Statement.
The amounts recognised in the Group Balance Sheet were as
follows:
30-Jun-11 31-Dec-10
EURm EURm
Present value of funded or partially (1,534) (1,548)
funded obligations
Fair value of plan assets 1,325 1,357
Deficit in funded or partially funded plans (209) (191)
Present value of wholly unfunded obligations (402) (404)
Net employee benefit liabilities (611) (595)
The employee benefits provision has increased from EUR595
million at 31 December 2010 to EUR611 million at 30 June 2011. The
increase in the provision is mainly as a result of assets
underperforming their assumed return.
8.Earnings Per Share
Basic
Basic earnings per share is calculated by dividing the profit or
loss attributable to the owners of the Parent by the weighted
average number of ordinary shares in issue during the period.
3 Months to 3 Months to 6 Months to 6 Months to
30-Jun-11 30-Jun-10 30-Jun-11 30-Jun-10
EURm EURm EURm EURm
Profit/(loss) 35 (22) 69 (38)
attributable
to
the owners of
the Parent
Weighted average 222 218 221 218
number
of ordinary
shares in issue
(million)
Basic earnings/(loss) 15.7 (10.3) 31.3 (17.4)
per share - cent
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 6 Months to 6 Months to
30-Jun-11 30-Jun-10 30-Jun-10 30-Jun-10
EURm EURm EURm EURm
Profit/(loss) 35 (22) 69 (38)
attributable
to
the owners of
the Parent
Weighted average 222 218 221 218
number
of ordinary
shares in issue
(million)
Potential dilutive 5 - 5 -
ordinary
shares assumed
Diluted weighted 227 218 226 218
average
ordinary shares
Diluted 15.3 (10.3) 30.6 (17.4)
earnings/(loss)
per share - cent
At 30 June 2010 there were 2,939,386 potential ordinary shares
in issue which could dilute EPS in the future, but these were not
included in the computation of diluted EPS in the period because
they would have the effect of reducing the loss per share.
Accordingly there was no difference between basic and diluted loss
per share in 2010.
9.Property, Plant and Equipment
Land and buildings Plant and equipment Total
EURm EURm EURm
Six months ended
30 June 2011
Opening net book amount 1,128 1,880 3,008
Reclassification 4 (5) (1)
Additions 1 106 107
Impairments - (13) (13)
Depreciation charge (24) (142) (166)
for the period
Retirements and (1) - (1)
disposals
Hyperinflation 8 9 17
adjustment
Foreign currency (12) (21) (33)
translation
adjustment
At 30 June 2011 1,104 1,814 2,918
Year ended 31 December
2010
Opening net book amount 1,151 1,915 3,066
Reclassification 25 (25) -
Additions 5 249 254
Acquisitions 10 21 31
Depreciation charge (50) (293) (343)
for the year
Retirements and (11) (7) (18)
disposals
Hyperinflation 16 18 34
adjustment
Foreign currency (18) 2 (16)
translation
adjustment
At 31 December 2010 1,128 1,880 3,008
10.Share-based Payment
Share-based payment expense recognised in the Group Income
Statement
6 months to 6 months to
30-Jun-11 30-Jun-10
EURm EURm
Charge arising from fair value 2 2
calculated at grant date
Charge arising from deferred annual bonus plan 1 -
3 2
In March 2007 upon the IPO becoming effective, all of the then
class A, E, F and H convertible shares and 80% of the class B
convertible shares vested and were converted into D convertible
shares. The class C, class G and 20% of the class B convertible
shares did not vest and were re-designated as A1, A2 and A3
convertible shares.
The A1, A2 and A3 convertible shares vested on the first, second
and third anniversaries respectively of the IPO. The D convertible
shares resulting from these conversions are convertible on a
one-to-one basis into ordinary shares, at the instance of the
holder, upon the payment by the holder of the agreed conversion
price. The life of the D convertible shares arising from the
vesting of these new classes of convertible share ends on 20 March
2014.
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 awards made in 2007 and 2008
lapsed in March 2010 and March 2011 respectively and ceased to be
capable of conversion to D convertible shares.
The new class B and new class C convertible shares issued during
and from 2009 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 B and 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. 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.
The plans provide for equity settlement only, no cash settlement
alternative is available.
A combined summary of the activity under the 2002 Plan, as
amended, and the 2007 SIP, as amended for the period from 1 January
2011 to 30 June 2011 is presented below.
Number of convertible shares
000's
At 1 January 2011 14,947
Forfeited in the period (89)
Lapsed in the period (2,266)
Exercised in the period (1,766)
At 30 June 2011 10,826
At 30 June 2011, 5,897,303 shares were exercisable and were
convertible to ordinary shares. The weighted average exercise price
for all shares exercisable at 30 June 2011 was EUR4.59.
The weighted average exercise price for shares outstanding under
the 2002 Plan, as amended, at 30 June 2011 was EUR4.59. The
weighted average remaining contractual life of the awards issued
under the 2002 Plan, as amended, at 30 June 2011 was 1.7 years.
The weighted average exercise price for shares outstanding under
the 2007 SIP, as amended, at 30 June 2011 was EUR5.44. The weighted
average remaining contractual life of the awards issued under the
2007 SIP, as amended, at 30 June 2011 was 8.5 years.
Deferred Annual Bonus Plan
In May 2011, the SKG plc Annual General Meeting approved the
adoption of the SKG plc 2011 Deferred Annual Bonus Plan ("DABP")
which replaces the existing long-term incentive plan, the 2007
SIP.
The size of award to each participant under the DABP will be
subject to the level of annual bonus earned by a participant in any
year. As part of the revised executive compensation arrangements,
the maximum annual bonus potential for participants in the DABP has
been increased from 100% to 150% of salary. The actual bonus paid
in any financial year will be based on the achievement of clearly
defined annual financial targets for some of the Group's Key
Performance Indicators ("KPI") being EBITDA(1), Return on Capital
Employed ("ROCE") and Free Cash Flow ("FCF"), together with targets
for health and safety and a comparison of the Group's financial
performance compared to that of a peer group.
The proposed structure of the new plan is that 50% of any annual
bonus earned for a financial year will be deferred into SKG plc
shares (Deferred Shares) to be granted in the form of a Deferred
Share Award. The Deferred Shares will vest (i.e. become
unconditional) after a three year holding period based on
continuity of employment.
At the same time as the grant of a Deferred Share Award, a
Matching Share Award can be granted up to the level of the Deferred
Share Award. Following a three year performance period, the
Matching Shares may vest up to a maximum of 3 times the level of
the Matching Share Award. Matching Awards will vest provided the
Committee consider that Company's ROCE and Total Shareholder Return
("TSR") are competitive against the constituents of a comparator
group of international paper and packaging companies over that
performance period. The actual number of Matching Shares that will
vest under the Matching Awards will be dependent on the achievement
of the Company's FCF(2) and ROCE targets measured over the same
three year performance period on an inter-conditional basis.
The actual performance targets assigned to the Matching Awards
will be set by the Compensation Committee on the granting of awards
at the start of each three year cycle. The Company will lodge the
actual targets with the Company's auditors prior to the grant of
any awards under the DABP.
In June 2011, conditional Matching Share Awards totalling
654,814 SKG plc shares were awarded to eligible employees which
gives a potential maximum of 1,964,442 SKG plc shares that may vest
based on the achievement of the relevant performance targets for
the three-year period ending on 31 December 2013.
(1) Earnings before exceptional items, share-based payment
expense, net finance costs, tax, depreciation and intangible asset
amortisation.
(2) In calculating FCF, capital expenditure will be set at a
minimum of 90% of depreciation for the 3 year performance
cycle.
(3)
11.Analysis of Net Debt
30-Jun-11 31-Dec-10
EURm EURm
Senior credit facility
Revolving credit facility(1)- interest at relevant (8) (8)
interbank rate + 2.75% on RCF1 and +3% on RCF2(8)
Tranche A term loan(2a)--interest at relevant 132 164
interbank rate + 2.75%(8)
Tranche B term loan(2b)--interest at relevant 815 816
interbank rate + 3.125%(8)
Tranche C term loan(2c)--interest at relevant 813 814
interbank rate + 3.375%(8)
Yankee bonds (including accrued interest)(3) 203 219
Bank loans and overdrafts 70 75
Cash (554) (502)
2015 receivables securitisation 168 149
variable funding notes(4)
1,639 1,727
2015 cash pay subordinated notes 359 370
(including accrued interest)(5)
2017 senior secured notes (including 489 488
accrued interest)(6)
2019 senior secured notes (including 491 490
accrued interest)(7)
Net debt before finance leases 2,978 3,075
Finance leases 17 26
Net debt including leases 2,995 3,101
Balance of revolving credit facility 8 9
reclassified to debtors
Net debt after reclassification 3,003 3,110
(1) Revolving credit facility ("RCF") 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 letters of credit - nil)
(2a) Tranche A term loan due to be repaid in certain instalments
up to 2012
(2b) Tranche B term loan due to be repaid in full in 2013
(2c) Tranche C term loan due to be repaid in full in 2014
(3) US$292.3 million 7.50% senior debentures due 2025
(4) Receivables securitisation variable funding notes due
November 2015
(5) EUR217.5 million 7.75% senior subordinated notes due 2015
and US$200 million 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) The margins applicable to the senior credit facility are
determined as follows:
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%
more than 3.5 : 1
3.5 : 1 or less but 2.75% 3.125% 3.375% 3.00%
more than 3.0 : 1
3.0 : 1 or less 2.50% 3.125% 3.375% 2.75%
The Group's activities expose it to a variety of financial
risks: market risk (including currency risk, interest rate risk and
price risk), credit risk and liquidity risk.
The interim condensed consolidated financial statements do not
include all financial risk management information and disclosures
required in the annual financial statements, and should be read in
conjunction with the Group's annual financial statements as at 31
December 2010.
There have been no changes in the Group's financial risks or
financial risk management policies since year end.
12.Venezuela
Hyperinflation
As discussed more fully in the 2010 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 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 at
June 2011 and 2010 are as follows:
30 Jun 2011 30 Jun 2010
Index at period end 235.3 190.4
Movement in period 13.0% 16.3%
As a result of the entries recorded in respect of
hyperinflationary accounting under IFRS, the Group Income Statement
for the first six months of 2011 is impacted as follows: Sales EUR3
million increase (2010: EUR18 million increase), pre-exceptional
EBITDA EUR3 million decrease (2010: nil) and profit after taxation
EUR16 million decrease (2010: EUR20 million decrease). In the first
six months of 2011, a net monetary loss of EUR4 million (2010:
EUR10 million loss) was recorded in the Group Income Statement. The
impact on our net assets and our total equity is an increase of
EUR19 million (2010: EUR24 million increase).
Devaluation
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
half of 2010 a loss of EUR16 million arose 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.Related Party Transactions
Details of related party transactions in respect of the year
ended 31 December 2010 are contained in Note 31 of our 2010 annual
report. The Group continued to enter into transactions in the
normal course of business with its associates and other related
parties during the period. There were no transactions with related
parties in the first half of 2011 or changes to transactions with
related parties disclosed in the 2010 financial statements that had
a material effect on the financial position or the performance of
the Group.
14.Post Balance Sheet Events
In July, the Venezuelan authorities have issued precautionary
measures over a further 7,253 hectares of the Group's forestry
land, with a view to acquiring it and converting its use to food
production and related activities. Management are in discussion
with the authorities.
15.Board Approval
This interim management report and condensed interim financial
statements were approved by the Board of Directors on 9 August
2011.
16.Distribution of Interim Management Report
The 2011 interim management report and condensed interim
financial statements are available on the Group's website
(www.smurfitkappa.com). A printed copy will be posted to
shareholders and will be available to the public from that date at
the Company's registered office.
Responsibility Statement in Respect of the Six Months Ended 30
June 2011
The Directors are responsible for preparing this interim
management report and the condensed interim financial information
in accordance with the Transparency (Directive 2004/109/EC)
Regulations 2007, the related Transparency Rules of the Irish
Financial Services Regulatory Authority and with IAS 34, Interim
Financial Reporting as adopted by the European Union.
The Directors confirm that, to the best of their knowledge:
-- the condensed interim Group financial information for the half year
ended 30 June 2011 has been prepared in accordance with the
international accounting standard applicable to interim
financial
reporting, IAS 34, adopted pursuant to the procedure provided
for
under Article 6 of the Regulation (EC) No. 1606/2002 of the
European
Parliament and of the Council of 19 July 2002;
-- the interim management report includes a fair review of the important
events that have occurred during the first six months of the
financial
year, and their impact on the condensed interim Group
financial
information for the half year ended 30 June 2011, and a
description of
the principal risks and uncertainties for the remaining six
months;
-- the interim management report includes a fair review of related party
transactions that have occurred during the first six months of
the
current financial year and that have materially affected the
financial
position or the performance of the Group during that period, and
any
changes in the related parties' transactions described in the
last
annual report that could have a material effect on the
financial
position or performance of the Group in the first six months of
the
current financial year.
Signed on behalf of the Board
G.W. McGann, Director and Chief Executive Officer
I.J. Curley, Director and Chief Financial Officer
9 August 2011
Supplemental 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/(Loss)
to EBITDA
3 months to 3 months to 6 months to 6 months to
30-Jun-11 30-Jun-10 30-Jun-11 30-Jun-10
EUR m EUR m EUR m EUR m
Profit/(loss) for the 39 (22) 68 (40)
financial period
Income tax expense 19 17 68 31
Impairment loss 13 - 13 -
on property,
plant and equipment
Reorganisation and 22 - 23 -
restructuring
costs
Currency trading - 2 - 16
loss on
Bolivar devaluation
Mondi asset swap - 40 - 40
Profit on disposal - - (2) -
of associate
Share of associates' (1) (1) (1) (1)
operating
profit (after tax)
Net finance costs 75 83 146 160
Share-based payment 2 1 3 2
expense
Depreciation, 95 101 189 196
depletion
(net) and amortisation
EBITDA 264 221 507 404
Supplemental
Historical
Financial
Information
EURm Q2, 2010 Q3, 2010 Q4, 2010 FY, 2010 Q1, 2011 Q2, 2011
Group and 2,740 2,761 2,833 10,769 2,956 3,124
third
party
revenue
Third 1,696 1,702 1,749 6,677 1,803 1,867
party
revenue
EBITDA 221 243 257 904 243 264
EBITDA 13.0% 14.3% 14.7% 13.5% 13.5% 14.2%
margin
Operating 77 143 115 409 147 132
profit
Profit/(loss) (5) 63 49 103 78 58
before tax
Free cash (12) 128 23 82 12 66
flow
Basic (10.3) 16.9 23.3 22.9 15.6 15.7
earnings/(loss)
per share
- cent
Weighted 218 218 219 219 221 222
average
number
of shares
used
in
EPS
calculation
(million)
Net debt 3,291 3,123 3,110 3,110 3,061 3,003
Net debt 4.21 3.75 3.44 3.44 3.18 2.98
to
EBITDA
(LTM)
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