TIDMSKG
Smurfit Kappa Group plc
2011 Third Quarter Results
9 November 2011: Smurfit Kappa Group plc ('SKG' or the 'Group')
today announced results for the 3 months and 9 months ending 30
September 2011.
2011 Third Quarter & First Nine Months | Key Financial
Performance Measures
EUR m YTD2011 YTD2010 change Q32011 Q32010 change Q22011 change
Revenue EUR5,538 EUR4,928 12% EUR1,868 EUR1,702 10% EUR1,867 0%
EBITDA EUR771 EUR647 19% EUR264 EUR243 9% EUR264 0%
before
Exceptional
Items
and
Share-based
Payment(1)
EBITDA 13.9% 13.1% - 14.1% 14.3% - 14.2% -
Margin
Operating EUR477 EUR349 36% EUR162 EUR143 13% EUR167 (3%)
Profit
before
Exceptional
Items
Basic EPS 53.5 (0.5) - 22.2 16.9 31% 15.7 41%
(cent)
Pre-exceptional 69.7 25.1 178% 22.2 16.9 31% 31.4 (29%)
EPS (cent)
Free Cash EUR195 EUR59 - EUR117 EUR128 - EUR66 -
Flow(2)
Net Debt EUR2,921 EUR3,123 (6%) EUR3,003 (3%)
Net Debt 2.8x 3.7x - 3.0x -
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 profit
for the period to EBITDA before
exceptional items and share-based payment
expense is set out on page 27.
(2) Free cash flow is set out on page 8. The
IFRS cash flow is set out on page 15.
Highlights
-- Strong EBITDA of EUR264 million in Q3. Pre-exceptional EPS of 22 cent
-- Net debt reduction of EUR82 million in Q3. Total net debt reduction of
EUR189 million in year-to-date
-- Net debt to EBITDA ratio reduced to 2.8x
-- Re-affirming 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 a strong EBITDA of EUR264 million for the third quarter.
As expected, our free cash flow generation accelerated in the
quarter, delivering further net debt reduction of EUR82 million in
the period, or EUR189 million in the year-to-date. Lower net debt,
combined with continued earnings progress, reduced our net debt to
EBITDA ratio to 2.8x at the end of September 2011.
In the third quarter, box demand continued to grow, albeit at a
slower pace than in the first half, and higher inventory levels
generated some downward pressure on paper prices in Europe. Against
that backdrop, our EBITDA margin of 14.1% primarily highlights the
increasing efficiency of our integrated model, continued box price
recovery, and a sustained strong performance in our Latin American
business. Return on capital employed was 12.5% for the third
quarter, compared to 8.5% in the prior year.
Over the past four years, we have strengthened our business
platform through significant debt paydown and unrelenting cost
reduction actions, which will sustain the delivery of strong cash
flows and improving returns through the cycle. We are committed to
continue building our strong market credentials in the areas of
packaging innovation, customer service and sustainability.
In that context, despite softening demand, we expect to deliver
a full-year 2011 EBITDA performance in line with current market
expectations, and re-affirm our target 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 FTI Consulting
Smurfit Kappa Group
Tel: +353 1 202 71 80 Tel: +353 1 663 36 80
E-mail: ir@smurfitkappa.com E-mail:
smurfitkappa@fticonsulting.com
2011 Third Quarter & First Nine Months | Performance
Overview
Following EUR107 million of net debt reduction in the first half
of the year, free cash flow generation accelerated in the third
quarter as anticipated, allowing the Group to deliver a further
EUR82 million of debt paydown in the period. This strong
performance was achieved despite EUR30 million of adverse currency
movements, which primarily resulted from the strengthening of the
US dollar against the euro in the quarter.
Since the Group's IPO in 2007, SKG's net debt has reduced by
approximately EUR630 million, thereby materially improving its
capital structure and financial flexibility. This debt paydown
demonstrates SKG's ability to generate strong cash flows at all
points in the cycle.
Compared to the 2% underlying demand growth experienced in the
first half, SKG's European box shipments increased by 1% in the
third quarter. The somewhat weaker demand environment, combined
with high operating rates through the summer, led to a rise in
recycled containerboard inventories in Europe. At the end of
August, recycled containerboard inventories in the market were
approximately 20% higher than prior year levels. Inventories have
remained generally stable since then, primarily due to a number of
open-market containerboard players taking commercial downtime.
The higher level of inventory generated downward pressure on
European recycled containerboard prices, with indices reporting a
decline of approximately EUR55 per tonne between June and October
2011 (the equivalent of just over 10%). A EUR30 per tonne reduction
in OCC costs in the period was not sufficient to fully offset the
paper price decline, thereby leading to margin compression for
recycled containerboard producers.
In comparison, SKG's EBITDA margin of 14.1% in the third quarter
highlights the earnings stability of the integrated model, and
benefits from the Group's own actions, with a further 2% rise in
box prices, as well as EUR36 million of cost take-out delivered in
the period. SKG's third quarter earnings were negatively impacted
by extended maintenance downtime at the Group's kraftliner mill in
Piteå, Sweden, which reduced its output by approximately 90,000
tonnes.
The Group's margin in the third quarter also reflects a
sustained strong performance in Latin America, resulting in an
EBITDA margin of 19.6% in the period. This outcome primarily
highlights a good performance from SKG's operations in Colombia and
Venezuela, while earnings in Mexico and Argentina eased compared to
the first half run-rate due to weaker local economic
conditions.
Through the cycle, SKG's focus is to generate consistently
strong financial returns. This objective is underpinned by the
Group's integrated business model and disciplined capital
allocation decisions, which together with a unique broad geographic
coverage and superior design capabilities, provides SKG with a
particular ability to support its customers in promoting their
products through innovative and sustainable packaging
solutions.
2011 Third Quarter | Financial Performance
At EUR1,868 million for the third quarter of 2011, revenue was
10% higher than in the third quarter of 2010. However, allowing for
the impact of currency and hyperinflation accounting, as well as
acquisitions, disposals and closures, the underlying increase in
revenue was EUR154 million, the equivalent of approximately 9%.
At EUR264 million, EBITDA in the third quarter of 2011 was EUR21
million higher than the third quarter of 2010. Allowing for
currency and hyperinflation accounting, and for a modest impact
from acquisitions, disposals and closures, underlying EBITDA
increased year-on-year by EUR13 million, the equivalent of 5%.
Revenue and EBITDA in the third quarter were stable compared to
the second quarter of 2011. However, allowing for the impact of
currency and hyperinflation accounting, underlying revenue and
EBITDA in the third quarter were EUR27 million and EUR7 million
lower respectively.
Earnings per share was 22.2 cent for the quarter to September
2011 (2010: 16.9 cent).
2011 First Nine Months | Financial Performance
Revenue of EUR5,538 million in the first nine months of 2011
represented a 12% increase on the first nine months of 2010.
Allowing for the impact of currency and hyperinflation accounting,
as well as acquisitions, disposals and closures, revenue shows an
underlying year-on-year increase of EUR619 million (13%).
At EUR771 million, EBITDA in the first nine months of 2011 was
EUR124 million, or 19% higher than in the comparable period in
2010. Allowing for the impact of currency and hyperinflation
accounting, as well as acquisitions, disposals and closures,
underlying EBITDA increased by EUR112 million (17%).
Exceptional items in the first nine months of 2011 amounted to
EUR36 million and almost entirely related to the permanent closure
of SKG's Nanterre mill in France in the second quarter. In the
first nine months of 2010, exceptional charges amounted to EUR56
million, approximately EUR40 million of which related to the asset
swap with Mondi in the second quarter, while the balance related to
the currency devaluation and associated hyperinflationary
adjustments in Venezuela, which were booked primarily in quarter
one.
Adjusting for exceptional charges, pre-exceptional EPS was 69.7
cent in the nine months to September 2011 (2010: 25.1 cent).
2011 Third Quarter & First Nine Months | Free Cash Flow
Compared to the EUR59 million reported in the first nine months
of 2010, the Group's free cash flow of EUR195 million in 2011
highlights SKG's continued focus on maximising cash flow generation
for debt paydown. The year-on-year increase in free cash flow
primarily reflected a 19% increase in EBITDA as well as lower cash
interest expense, somewhat offset by higher capital
expenditure.
The working capital move in the first nine months of 2011 was an
outflow of EUR91 million, mainly reflecting improved volumes and
higher raw material and end-product prices. In the third quarter
the Group generated a EUR28 million working capital inflow, as
reflected in the reduction in its working capital to sales ratio
from 9.3% at the half year to 8.9% at the end of September 2011.
Additional working capital inflows are expected in the fourth
quarter.
Capital expenditure of EUR196 million in the first nine months
of 2011 equated to 75% of depreciation, compared to 53% in the
first nine months of 2010. For the full year 2011, SKG's capital
expenditure is expected to increase to approximately 90%.
Cash interest of EUR183 million in the first nine months of 2011
was EUR13 million lower than in the first nine months of 2010,
primarily reflecting a lower average interest cost
year-on-year.
Tax payments of EUR47 million in the first nine months of 2011
were EUR7 million lower than in 2010.
2011 Third Quarter & First Nine Months | Capital
Structure
The Group's net debt reduced by EUR189 million to EUR2,921
million in the first nine months of 2011, mainly reflecting SKG's
positive free cash flow performance of EUR195 million, somewhat
offset by a deferred payment relating to the disposal of SKG's
loss-making Rol Pin operation in 2010. While currency had a
relatively modest impact in the first nine months of the year, in
the third quarter the relative strengthening of the US dollar
against the euro negatively impacted net debt by EUR30 million.
Compared to September 2010, net debt at the end of September
2011 was EUR202 million lower, the equivalent of a 6% reduction. It
is worth bearing in mind that this year-on-year reduction in net
debt was achieved despite a cumulative working capital outflow of
EUR100 million over the period, generally reflecting higher volumes
and prices year-on-year.
The Group's average debt maturity profile is 4.6 years, with no
material maturities before December 2013. In addition, at the end
of September 2011 SKG has EUR692 million of cash on its balance
sheet, as well as committed undrawn credit facilities of
approximately EUR525 million.
At the end of September 2011, the Group's net debt to EBITDA
ratio reduced to 2.8x, its lowest level since the Smurfit Kappa
merger in 2005. The Group's main priority for 2011 continues to be
one of maximising free cash flow generation for further debt
paydown. Reducing net debt levels, combined with strong liquidity,
a good maturity profile and diversified funding sources, provide
SKG with continuously improving financial flexibility.
2011 Third Quarter & First Nine Months | Operating
Efficiency
Commercial offering
In addition to its continued focus on cost efficiency and
operating excellence, SKG's margin performance through the cycle is
strongly linked to its commitment to provide customers with
innovative, sustainable and cost efficient paper-based packaging
solutions. SKG will continue to invest to meet and exceed
customers' requirements.
To support customers and retailers increasing demands for
high-quality printed packaging, in 2011 the Group finalised
investment programmes of over EUR25 million in new printing
equipment. Projects included the installation of state of the art
5-colour printing capacity in the Group's Italian packaging
operations, a new 6-colour flexo folder gluer in its German
operation, as well as offset printing capacity in Belgium and the
Czech Republic. Those investments significantly enhance SKG's
offering to the local value-added packaging markets.
In 2011, SKG also finalised a 3-year modernisation programme in
its corrugated plant in Pruszkow, Poland. This initiative is part
of a broader EUR30 million investment programme for Poland, and
demonstrates the Group's commitment to follow its customers'
developments and grow its market share in Eastern Europe.
The Group's efforts to enhance its innovation and service
capabilities are being recognised by the market. For example, in
September 2011 SKG won two awards from the German print
association, in a competition that included over 300 packaging
designs from 90 different companies. In addition, six SKG companies
across Europe and Latin America have been short-listed for the
annual Pulp & Paper Industry ('PPI') Awards, to be decided in
November, including three in the area of environment and
sustainability.
Overall, the Group is particularly well equipped to provide
industry leading customer service, supported by its unique
geographical footprint, its superior design capabilities and its
broad-based product offering. In 2011, these attributes resulted in
SKG winning significant incremental business from key multinational
Fast Moving Consumer Goods ('FMCG') customers.
Corporate Social Responsibility ('CSR')
In its fourth annual sustainability report, released during the
third quarter of 2011, SKG highlighted its continued progress and
commitment to social and environmental best practices and cited
tangible evidence of this. A number of sustainability awards were
received this year from major customers and institutions.
SKG considers the drive for sustainability to be a key
differentiator in the marketplace.
Cost take-out programme
In 2011, SKG commenced a 2-year initiative, with a target to
generate EUR150 million of cost savings by the end of 2012. This
programme generated EUR75 million of cost savings benefits in the
first nine months of 2011 (including EUR36 million in quarter
three), which partially mitigated the impact of materially higher
input costs year-on-year. The Group is confident of exceeding the
target number by the end of 2012.
Reorganisation of Specialties segment
With effect from 1 September, 2011 the Group transferred its
Specialties businesses into its existing European Packaging
segment. This reorganisation will increase the focus of the Group's
commercial offering, and will create a platform for SKG to become a
"one stop shop" for paper-based packaging solutions.
This initiative will also enhance the Group's overall cost
efficiency, and should contribute to improving the margins of its
solid, graphic and carton board businesses.
From quarter three 2011 onwards, the segmental reporting for the
Group reflects the new organisational structure. Comparative
periods have been re-stated to reflect the new structure.
2011 Third Quarter & First Nine Months | Performance
Review
Europe
Following the 2% underlying demand growth experienced in the
first half of 2011, demand for SKG's corrugated packaging solutions
grew by 1% year-on-year in the third quarter. While demand growth
in July and August was broadly in line with the first half average,
September volumes were flat compared to September 2010. Overall for
the first nine months of 2011, SKG's underlying corrugated volumes
were 1.6% higher year-on-year.
As is usual within the Group's business, it takes three to six
months to fully pass through higher containerboard prices to box
prices. As a result, box prices continued to recover throughout the
first nine months of 2011. The Group's European box prices in the
third quarter were on average 2% higher compared with the second
quarter, leading to a cumulative 6.5% corrugated price increase
during the first nine months of the year.
Higher box prices, together with the Group's strong focus on
cost efficiency contributed to deliver a European EBITDA margin of
13.6% in the third quarter, despite a generally tougher operating
environment, and the extended downtime relating to the recovery
boiler rebuild at its Piteå kraftliner mill in Sweden.
At industry level, recycled containerboard inventories rose in
August, as most paper producers ran at full capacity during a
seasonally weaker month for box demand. The inventory build did not
reverse in September as a result of somewhat softer demand, in both
domestic and export markets. Higher inventory levels led to a EUR55
per tonne reduction in European recycled containerboard prices, to
an absolute level of EUR440 per tonne in October.
On the cost side, pressure from European buyers combined with
somewhat lower Chinese demand, has led to a EUR30 per tonne
reduction in European OCC prices from June to October. Other
variable costs, however, have remained generally stable throughout
the third quarter.
Although somewhat mitigating the impact of lower paper prices,
the reduction in OCC costs was not sufficient to avoid margin
reduction for recycled containerboard producers in the quarter.
Sustained margin pressure should inevitably lead less-efficient
producers into financial difficulties. In comparison, following the
permanent closure of 10 less efficient containerboard mills since
2005, together with significant investments in its "champion"
mills, SKG is equipped today with an efficient and fully integrated
recycled containerboard system. Its system should allow the Group
to outperform in any operating environment.
On the kraftliner side, in the first eight months of 2011, US
imports into Europe were 33% higher than in the prior year,
although this was somewhat offset by a 7% reduction in imports from
other regions. This led to an increase in net imports of
approximately 170,000 tonnes in the period. Kraftliner inventories
remained relatively stable through the nine months however,
reflecting good demand levels in Europe together with material
maintenance downtime in the summer, mainly at SKG's Piteå mill.
However, lower priced US imports have created downward pressure
on domestic kraftliner prices, which have declined by approximately
EUR50 per tonne since the beginning of 2011, to a level of
approximately EUR590 per tonne in October.
Latin America
In the third quarter, Latin American EBITDA of EUR66 million
represented a 19.6% margin on revenue, slightly below the second
quarter of 19.9%, but higher than the 17.6% reported in the third
quarter of 2010. In the first nine months of 2011, Latin American
EBITDA of EUR177 million represented 23% of the Group's total.
SKG's corrugated volumes in Colombia experienced strong
year-on-year growth of 6% in the first nine months of 2011, a trend
that was sustained through the third quarter. Pricing in the
quarter was relatively stable year-on-year however, highlighting
moderate inflation in the country, a strong currency and aggressive
price action from both domestic and external competitors. Following
extensive maintenance downtime at its Cali mill in March, SKG's
earnings grew sequentially in the second and third quarters.
In the Venezuelan market, SKG's corrugated volumes were 2% lower
year-on-year in the first nine months. 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 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. Discussions are continuing at local level in an
effort to find an optimal solution.
In the first nine months of 2011, SKG's Mexican EBITDA in US
dollar terms was higher than in 2010. Third quarter EBITDA was
lower year-on-year however, reflecting a 4% reduction in volumes
due to a slower economy, and with lower US containerboard export
prices constraining paper and box price initiatives in the Mexican
market.
High inflation continues to prevail in Argentina, which is
increasingly affecting demand. Due to lower consumer spending
power, after a 1% demand growth in the first half, the Group's
corrugated volumes in the country were 8% lower year-on-year in the
third quarter. Increased average prices in 2011 compared to 2010
supported good EBITDA growth in the first nine months in US dollar
terms.
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
local management to drive the business, will continue to deliver a
strong performance through the cycle.
Summary Cash
Flow(1)
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-11 30-Sep-10 30-Sep-11 30-Sep-10
EURm EURm EURm EURm
Pre-exceptional 264 243 771 647
EBITDA
Exceptional Items (5) - (5) (16)
Cash interest (61) (63) (183) (196)
expense
Working capital 28 44 (91) (83)
change
Current (1) (7) (7) (21)
provisions
Capital (80) (53) (196) (137)
expenditure
Change in capital 9 (7) (6) (44)
creditors
Sale of fixed 1 1 2 2
assets
Tax paid (25) (22) (47) (54)
Other (13) (8) (43) (39)
Free cash flow 117 128 195 59
Share issues - - 8 3
Sale - - (4) (9)
of businesses
and investments
Purchase - - (1) (46)
of investments
Derivative - (2) (1) (2)
termination
payments
Dividends (1) (1) (4) (4)
Net cash inflow 116 125 193 1
Net - - - (2)
cash
acquired/disposed
Deferred debt (4) (5) (12) (15)
issue
costs amortised
Currency (30) 48 8 (55)
translation
adjustments
Decrease/(increase) 82 168 189 (71)
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.
9 months to 9 months to
30-Sep-11 30-Sep-10
EURm EURm
Free cash 195 59
flow
Add Cash interest 183 196
back:
Capital expenditure (net of change in capital creditors) 202 181
Tax payments 47 54
Less: Sale of fixed assets (2) (2)
Profit on sale of assets and businesses - non exceptional (7) (11)
Receipt of capital grants (in 'Other') (1) -
Dividends received from associates (in 'Other') (1) (1)
Non-cash lease movement (4) -
Cash generated from 612 476
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 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 EUR177 million variable funding notes issued under the
new EUR250 million accounts receivable securitisation program
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 EUR819 million Tranche B maturing in 2013 and
an EUR817 million Tranche C maturing in 2014. In addition, as at 30
September 2011, the facility includes a EUR525 million revolving
credit facility, none of which was drawn.
The following table provides the range of interest rates as of
30 September 2011 for each of the drawings under the various senior
credit facility term loans.
BORROWING ARRANGEMENT CURRENCY INTEREST RATE
Term Loan A EUR 4.100%
Term Loan B EUR 4.729% - 4.468%
USD 3.371%
Term Loan C EUR 4.979% - 4.715%
USD 3.621%
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 2011
the Group had fixed an average of 77% 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 EUR10 million over the following twelve
months. Interest income on our cash balances would increase by
approximately EUR7 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-11 9 months to 30-Sep-10
Pre-exceptional2011 Exceptional2011 Total2011 Pre-exceptional2010 Exceptional2010 Total2010
EURm EURm EURm EURm EURm EURm
Revenue 5,538 - 5,538 4,928 - 4,928
Cost of sales (3,979) (13) (3,992) (3,556) - (3,556)
Gross profit 1,559 (13) 1,546 1,372 - 1,372
Distribution (416) - (416) (410) - (410)
costs
Administrative (668) - (668) (632) (16) (648)
expenses
Other operating 2 - 2 19 - 19
income
Other operating - (23) (23) - (40) (40)
expenses
Operating 477 (36) 441 349 (56) 293
profit
Finance costs (296) - (296) (333) - (333)
Finance income 72 - 72 92 - 92
Profit on disposal 2 - 2 - - -
of associate
Share 2 - 2 2 - 2
of associates'
profit (after tax)
Profit before 257 (36) 221 110 (56) 54
income tax
Income tax (98) (52)
expense
Profit for the 123 2
financial
period
Attributable
to:
Owners of the 119 (1)
Parent
Non-controlling 4 3
interests
Profit for the 123 2
financial
period
Earnings per
share:
Basic 53.5 (0.5)
earnings/(loss)
per share - cent
Diluted 52.6 (0.5)
earnings/(loss)
per share - cent
Group Income Statement - Third Quarter
Unaudited Unaudited
3 months to 30-Sep-11 3 months to 30-Sep-10
Pre-exceptional2011 Exceptional2011 Total2011 Pre-exceptional2010 Exceptional2010 Total2010
EURm EURm EURm EURm EURm EURm
Revenue 1,868 - 1,868 1,702 - 1,702
Cost of sales (1,342) - (1,342) (1,215) - (1,215)
Gross profit 526 - 526 487 - 487
Distribution (134) - (134) (136) - (136)
costs
Administrative (231) - (231) (213) - (213)
expenses
Other operating 1 - 1 5 - 5
income
Operating 162 - 162 143 - 143
profit
Finance costs (100) - (100) (96) - (96)
Finance income 22 - 22 15 - 15
Share 1 - 1 1 - 1
of associates'
profit (after tax)
Profit before 85 - 85 63 - 63
income tax
Income tax (30) (22)
expense
Profit for the 55 41
financial
period
Attributable
to:
Owners of the 50 37
Parent
Non-controlling 5 4
interests
Profit for the 55 41
financial
period
Earnings per
share:
Basic earnings per 22.2 16.9
share - cent
Diluted earnings 22.0 16.5
per share - cent
Group Statement of Comprehensive Income
Unaudited Unaudited
9 months to 9 months to
30-Sep-11 30-Sep-10
EURm EURm
Profit for the financial period 123 2
Other comprehensive income:
Foreign currency translation adjustments (53) (62)
Defined benefit pension plans:
- Actuarial loss including payroll tax (13) (98)
- Movement in deferred tax 1 15
Effective portion of changes in fair
value of cash flow hedges:
- Movement out of reserve 16 17
- New fair value adjustments into reserve (10) (27)
- Movement in deferred tax (1) 1
Net change in fair value of available-for-sale - 1
financial assets
Total other comprehensive income (60) (153)
Comprehensive income and expense 63 (151)
for the financial period
Attributable to:
Owners of the Parent 61 (154)
Non-controlling interests 2 3
63 (151)
Group Balance Sheet
Unaudited Unaudited Audited
30-Sep-11 30-Sep-10 31-Dec-10
EURm EURm EURm
ASSETS
Non-current assets
Property, plant and equipment 2,922 2,971 3,008
Goodwill and intangible assets 2,192 2,208 2,209
Available-for-sale financial assets 32 32 32
Investment in associates 14 15 16
Biological assets 90 88 88
Trade and other receivables 6 4 5
Derivative financial instruments - - 2
Deferred income tax assets 91 272 134
5,347 5,590 5,494
Current assets
Inventories 720 631 638
Biological assets 10 10 7
Trade and other receivables 1,406 1,311 1,292
Derivative financial instruments 7 11 8
Restricted cash 11 25 7
Cash and cash equivalents 681 565 495
2,835 2,553 2,447
Non-current assets held for sale - 3 -
Total assets 8,182 8,146 7,941
EQUITY
Capital and reserves attributable
to the owners of the Parent
Equity share capital - - -
Capital and other reserves 2,288 2,289 2,315
Retained earnings (392) (705) (552)
Total equity attributable to 1,896 1,584 1,763
the owners of the Parent
Non-controlling interests 177 173 173
Total equity 2,073 1,757 1,936
LIABILITIES
Non-current liabilities
Borrowings 3,450 3,544 3,470
Employee benefits 584 740 595
Derivative financial instruments 92 118 101
Deferred income tax liabilities 179 309 206
Non-current income tax liabilities 8 15 9
Provisions for liabilities and charges 45 45 49
Capital grants 13 12 14
Other payables 7 5 7
4,378 4,788 4,451
Current liabilities
Borrowings 163 169 142
Trade and other payables 1,466 1,353 1,351
Current income tax liabilities 42 20 5
Derivative financial instruments 33 32 27
Provisions for liabilities and charges 27 27 29
1,731 1,601 1,554
Total liabilities 6,109 6,389 6,005
Total equity and liabilities 8,182 8,146 7,941
Group Statement of Changes in Equity (Unaudited)
Capital and other reserves
Equity share capital Share premium Reverse acquisition reserve Available-for-salereserve Cash flow hedging reserve Foreign currency translation reserve Reserve for share-based payment Retained earnings Totalequityattributableto Non-controllinginterests Total equity
theowners ofthe Parent
EURm 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 - - - - 5 (51) - 107 61 2 63
income and expense
Hyperinflation adjustment - - - - - - - 53 53 6 59
Share-based payment - - - - - - 11 - 11 - 11
Dividends paid to non-controlling - - - - - - - - - (4) (4)
interests
At 30 September 2011 - 1,945 575 - (40) (267) 75 (392) 1,896 177 2,073
At 1 January 2010 - 1,928 575 - (44) (174) 60 (669) 1,676 179 1,855
Shares issued - 3 - - - - - - 3 - 3
Total comprehensive - - - 1 (9) (62) - (84) (154) 3 (151)
income and expense
Hyperinflation adjustment - - - - - - - 47 47 5 52
Share-based payment - - - - - - 3 - 3 - 3
Dividends paid to non-controlling - - - - - - - - - (4) (4)
interests
Purchase of non-controlling - - - - - - - - - (1) (1)
interests
Other movements - - - - - 8 - 1 9 (9) -
At 30 September 2010 - 1,931 575 1 (53) (228) 63 (705) 1,584 173 1,757
Group Cash Flow Statement
Unaudited Unaudited
9 months to 9 months to
30-Sep-11 30-Sep-10
EURm EURm
Cash flows from operating activities
Profit for the financial period 123 2
Adjustment for
Income tax expense 98 52
(Profit)/loss on sale of (5) 23
assets and businesses
Amortisation of capital grants (2) (1)
Impairment of property, plant and equipment 13 -
Equity settled share-based 11 3
payment transactions
Amortisation of intangible assets 22 34
Share of associates' profit (after tax) (2) (2)
Profit on disposal of associates (2) -
Depreciation charge 248 248
Net finance costs 224 241
Change in inventories (91) (71)
Change in biological assets 13 13
Change in trade and other receivables (137) (207)
Change in trade and other payables 135 195
Change in provisions 2 (19)
Change in employee benefits (40) (40)
Foreign currency translation adjustment 1 1
Other 1 4
Cash generated from operations 612 476
Interest paid (172) (181)
Income taxes paid:
Irish corporation tax paid - (5)
Overseas corporation tax (net (47) (49)
of tax refunds) paid
Net cash inflow from operating activities 393 241
Cash flows from investing activities
Interest received 5 3
Mondi asset swap - (56)
Purchase of property, plant and equipment (198) (176)
and biological assets
Purchase of intangible assets (3) (5)
Receipt of capital grants 1 -
(Increase)/decrease in restricted cash (4) 18
Disposal of property, plant and equipment 9 13
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 (194) (203)
Cash flow from financing activities
Proceeds from issue of new ordinary shares 8 3
Decrease in interest-bearing borrowings (11) (57)
Repayment of finance lease liabilities (7) (10)
Derivative termination payments (1) (2)
Deferred debt issue costs - (1)
Dividends paid to non-controlling interests (4) (4)
Net cash outflow from financing activities (15) (71)
Increase/(decrease) in cash 184 (33)
and cash equivalents
Reconciliation of opening to closing
cash and cash equivalents
Cash and cash equivalents at 1 January 481 587
Currency translation adjustment (3) (13)
Increase/(decrease) in cash 184 (33)
and cash equivalents
Cash and cash equivalents at 30 September 662 541
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' during the second six months of the financial
year, in accordance with the Transparency Regulations. 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 2010 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 2010.
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 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 have been filed with the Irish Registrar of
Companies. The audit report on those Group accounts was
unqualified.
3.Segmental Analyses
With effect from 1 September, 2011 the Group reorganised the way
in which its European businesses are managed. As part of this
reorganisation for commercial reasons, the businesses which
previously formed part of the Specialties segment were
operationally merged with the Europe segment (formally known as
Packaging Europe) and are now managed on a combined basis to make
decisions about the allocation of resources and in assessing
performance. After this date, the Group ceased to produce financial
information for Specialties as the financial information of all of
its plants is now combined with the other Europe segment
plants.
As a result, the Group has now two segments on the basis of
which performance is assessed and resources are allocated: 1)
Europe and 2) Latin America and segmental information is presented
below on this basis. Prior year segmental information has been
restated to conform to the current year segment presentation.
The Europe 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. It also includes the
bag-in-box and solidboard businesses. 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.
9 months to 30-Sep-11 9 months to 30-Sep-10
Europe LatinAmerica Total Europe LatinAmerica Total
EURm EURm EURm EURm EURm EURm
Revenue
and
Results
Revenue 4,594 944 5,538 4,105 823 4,928
EBITDA 618 177 795 523 141 664
before
exceptional
items
Segment (23) - (23) (40) (16) (56)
exceptional
items
EBITDA 595 177 772 483 125 608
after
exceptional
items
Unallocated (24) (17)
centre
costs
Share-based (11) (3)
payment
expense
Depreciation (261) (261)
and
depletion
(net)
Amortisation (22) (34)
Impairment (13) -
of assets
Finance (296) (333)
costs
Finance 72 92
income
Profit on 2 -
disposal
of
associate
Share 2 2
of
associates'
profit
(after
tax)
Profit 221 54
before
income tax
Income tax (98) (52)
expense
Profit for 123 2
the
financial
period
Assets
Segment 6,071 1,377 7,448 6,063 1,243 7,306
assets
Investment 1 13 14 2 13 15
in
associates
Group 720 825
centre
assets
Total 8,182 8,146
assets
3 months to 30-Sep-11 3 months to 30-Sep-10
Europe LatinAmerica Total Europe LatinAmerica Total
EURm EURm EURm EURm EURm EURm
Revenue
and
Results
Revenue 1,530 338 1,868 1,425 277 1,702
EBITDA 208 66 274 203 48 251
before
exceptional
items
Segment - - - - - -
exceptional
items
EBITDA 208 66 274 203 48 251
after
exceptional
items
Unallocated (10) (8)
centre
costs
Share-based (7) (1)
payment
expense
Depreciation (87) (88)
and
depletion
(net)
Amortisation (8) (11)
Finance (100) (96)
costs
Finance 22 15
income
Share 1 1
of
associates'
profit
(after
tax)
Profit 85 63
before
income tax
Income tax (30) (22)
expense
Profit for 55 41
the
financial
period
4.Exceptional Items
9 months to 9 months to
The following items are regarded 30-Sep-11 30-Sep-10
as exceptional in nature:
EURm EURm
Impairment loss on property, (13) -
plant and equipment
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 2010 a currency translation loss of EUR16 million arose from
the effect of the retranslation of the US 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.
5.Finance Costs and Income
9 months to 9 months to
30-Sep-11 30-Sep-10
EURm EURm
Finance costs
Interest payable on bank loans and overdrafts 101 113
Interest payable on finance leases 1 2
and hire purchase contracts
Interest payable on other borrowings 98 99
Unwinding discount element of provisions 1 -
Foreign currency translation loss on debt 6 34
Fair value loss on derivatives 5 -
not designated as hedges
Interest cost on employee 75 75
benefit plan liabilities
Net monetary loss - hyperinflation 9 10
Total finance cost 296 333
Finance income
Other interest receivable (5) (3)
Foreign currency translation gain on debt (8) (5)
Fair value gain on derivatives (2) (31)
not designated as hedges
Expected return on employee (57) (53)
benefit plan assets
Total finance income (72) (92)
Net finance cost 224 241
6.Income Tax Expense
Income tax expense recognised in the Group Income Statement
9 months to 9 months to
30-Sep-11 30-Sep-10
EURm EURm
Current taxation:
Europe 31 30
Latin America 56 27
87 57
Deferred taxation 11 (5)
Income tax expense 98 52
Current tax is analysed as follows:
Ireland 3 3
Foreign 84 54
87 57
Income tax recognised in the Group
Statement of Comprehensive Income
9 months to 9 months to
30-Sep-11 30-Sep-10
EURm EURm
Arising on actuarial gains/losses (1) (15)
on defined benefit plans
Arising on qualifying derivative 1 (1)
cash flow hedges
- (16)
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:
9 months to 9 months to
30-Sep-11 30-Sep-10
EURm EURm
Current service cost 20 27
Past service cost 2 -
Gain on settlements and curtailments - (1)
22 26
Expected return on plan assets (57) (53)
Interest cost on plan liabilities 75 75
Net financial expense 18 22
Defined benefit expense 40 48
Included in cost of sales, distribution costs and administrative
expenses is a defined benefit expense of EUR22 million for the
first nine months of 2011 (2010: EUR26 million). Expected Return on
Plan Assets of EUR57 million (2010: EUR53 million) is included in
Finance Income and Interest Cost on Plan Liabilities of EUR75
million (2010: EUR75 million) is included in Finance Costs in the
Group Income Statement.
The amounts recognised in the Group Balance Sheet were as
follows:
30-Sep-11 31-Dec-10
EURm EURm
Present value of funded or partially (1,571) (1,548)
funded obligations
Fair value of plan assets 1,390 1,357
Deficit in funded or partially funded plans (181) (191)
Present value of wholly unfunded obligations (403) (404)
Net employee benefit liabilities (584) (595)
The employee benefits provision has decreased from EUR595
million at 31 December 2010 to EUR584 million at 30 September
2011.
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 9 months to 9 months to
30-Sep-11 30-Sep-10 30-Sep-11 30-Sep-10
EURm EURm EURm EURm
Profit/(loss) 50 37 119 (1)
attributable
to
the owners of
the Parent
Weighted average 222 218 221 218
number
of ordinary
shares in issue
(million)
Basic earnings/(loss) 22.2 16.9 53.5 (0.5)
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 9 months to 9 months to
30-Sep-11 30-Sep-10 30-Sep-11 30-Sep-10
EURm EURm EURm EURm
Profit/(loss) 50 37 119 (1)
attributable
to
the owners of
the Parent
Weighted average 222 218 221 218
number
of ordinary
shares in issue
(million)
Potential dilutive 2 4 4 4
ordinary
shares assumed
Diluted weighted 224 222 225 222
average
ordinary shares
Diluted 22.0 16.5 52.6 (0.5)
earnings/(loss)
per share - cent
9.Property, Plant and Equipment
Land andbuildings Plant andequipment Total
EURm EURm EURm
Nine months ended 30
September 2011
Opening net book amount 1,128 1,880 3,008
Reclassification 6 (9) (3)
Additions 2 178 180
Impairment losses - (13) (13)
recognised in
the Group Income
Statement
Depreciation charge (36) (212) (248)
for the period
Retirements and (1) (1) (2)
disposals
Hyperinflation 15 17 32
adjustment
Foreign currency (11) (21) (32)
translation
adjustment
At 30 September 2011 1,103 1,819 2,922
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
9 months to 9 months to
30-Sep-11 30-Sep-10
EURm EURm
Charge arising from fair value 3 3
calculated at grant date
Charge arising from deferred annual bonus plan 8 -
11 3
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 September 2011 is presented below.
Number ofconvertible shares000's
At 1 January 2011 14,947
Forfeited in the period (89)
Lapsed in the period (2,266)
Exercised in the period (1,796)
At 30 September 2011 10,796
At 30 September 2011, 5,867,163 shares were exercisable and were
convertible to ordinary shares. The weighted average exercise price
for all shares exercisable at 30 September 2011 was EUR4.60.
The weighted average exercise price for shares outstanding under
the 2002 Plan, as amended, at 30 September 2011 was EUR4.60. The
weighted average remaining contractual life of the awards issued
under the 2002 Plan, as amended, at 30 September 2011 was 1.4
years.
The weighted average exercise price for shares outstanding under
the 2007 SIP, as amended, at 30 September 2011 was EUR5.44. The
weighted average remaining contractual life of the awards issued
under the 2007 SIP, as amended, at 30 September 2011 was 8.2
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.
11.Analysis of Net Debt
30-Sep-11 31-Dec-10
EURm EURm
Senior credit facility
Revolving credit facility(1)- interest at relevant (7) (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 819 816
interbank rate + 3.125%(8)
Tranche C term loan(2c)--interest at relevant 817 814
interbank rate + 3.375%(8)
Yankee bonds (including accrued interest)(3) 221 219
Bank loans and overdrafts 74 75
Cash (692) (502)
2015 receivables securitisation 174 149
variable funding notes(4)
2015 cash pay subordinated notes 362 370
(including accrued interest)(5)
2017 senior secured notes (including 498 488
accrued interest)(6)
2019 senior secured notes (including 501 490
accrued interest)(7)
Net debt before finance leases 2,899 3,075
Finance leases 15 26
Net debt including leases 2,914 3,101
Balance of revolving credit facility 7 9
reclassified to debtors
Net debt after reclassification 2,921 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%
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 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 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
September 2011 and 2010 are as follows:
30-Sep-11 30-Sep-10
Index at period end 250.9 198.4
Movement in period 20.5% 21.2%
As a result of the entries recorded in respect of
hyperinflationary accounting under IFRS, the Group Income Statement
for the first nine months of 2011 is impacted as follows: Revenue
EUR34 million increase (2010: EUR6 million increase),
pre-exceptional EBITDA EUR3 million increase (2010: EUR4 million
decrease) and profit after taxation EUR24 million decrease (2010:
EUR25 million decrease). In the first nine months of 2011, a net
monetary loss of EUR9 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 EUR32 million (2010:
EUR28 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 US dollar to VEF 4.3 per US dollar. For the first nine
months of 2010 a loss of EUR16 million arose from the effect of
retranslation of the US 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 part of foreign currency translation
adjustments.
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 to EBITDA
3 months to 3 months to 9 months to 9 months to
30-Sep-11 30-Sep-10 30-Sep-11 30-Sep-10
EURm EURm EURm EURm
Profit for the 55 41 123 2
financial
period
Income tax 30 22 98 52
expense
Impairment loss - - 13 -
on property,
plant
and equipment
Reorganisation - - 23 -
and
restructuring
costs
Currency trading - - - 16
loss on
Bolivar
devaluation
Mondi asset swap - - - 40
Profit on - - (2) -
disposal
of associate
Share (1) (1) (2) (2)
of associates'
operating
profit (after
tax)
Net finance costs 78 81 224 241
Share-based 7 1 11 3
payment
expense
Depreciation, 95 99 283 295
depletion
(net)
and amortisation
EBITDA 264 243 771 647
Supplemental Historical Financial Information
EURm Q3, 2010 Q4, 2010 FY, 2010 Q1, 2011 Q2, 2011 Q3, 2011
Group and 2,761 2,833 10,769 2,956 3,124 3,109
third
party
revenue
Third 1,702 1,749 6,677 1,803 1,867 1,868
party
revenue
EBITDA 243 257 904 243 264 264
EBITDA 14.3% 14.7% 13.5% 13.5% 14.2% 14.1%
margin
Operating 143 115 409 147 132 162
profit
Profit 63 49 103 78 58 85
before
tax
Free cash 128 23 82 12 66 117
flow
Basic 16.9 23.3 22.9 15.6 15.7 22.2
earnings
per
share -
cent
Weighted 218 219 219 221 222 222
average
number
of
sharesused
in
EPS
calculation
(million)
Net debt 3,123 3,110 3,110 3,061 3,003 2,921
Net debt 3.75 3.44 3.44 3.18 2.98 2.84
to
EBITDA
(LTM)
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