Smurfit Kappa Group PLC
Smurfit Kappa Group plc
2008 Q2 and H1 Results
Interim Management Report
11 August, 2008: Smurfit Kappa Group plc ("SKG" or the "Group"), one of the
world's largest integrated manufacturers of paper-based packaging products, with
operations in Europe and Latin America, today announced results for the 3 months
and 6 months ending 30 June, 2008.
2008 Second Quarter & First Half | Key Financial Performance Measures
EUR m Q2 2008 Q2 2007 Change H1 2008 H1 2007 Change
----------------------------------------- ----------- ----------- ----------- ----------- ----------- -----------
Revenue EUR 1,846 EUR 1,831 1% EUR 3,678 EUR 3,625 1%
EBITDA before Exceptional Items EUR 257 EUR 260 EUR 514 EUR 514
and Share-based Payments (1) (1%) -
EBITDA Margin 13.9% 14.2% - 14.0% 14.2% -
Operating Profit before Exceptional Items EUR 156 EUR 159 (2%) EUR 312 EUR 300 4%
Profit Before Income Tax EUR 83 EUR 43 95% EUR 145 - n/a
Basic Earnings Per Share (cent per share) 38.3 14.4 166% 56.7 (21.9) n/a
Return on Capital Employed 11.3% 10.5% 8%
Free Cash Flow (2) EUR 76 EUR 3 - EUR 77 EUR (37) -
----------------------------------------- ----------- ----------- ----------- ----------- ----------- -----------
----------------------------------------- ----------- ----------- ----------- ----------- ----------- -----------
Net Debt EUR 3,285 EUR 3,605 (9%)
Net Debt to EBITDA (LTM) 3.09x 3.62x -
----------------------------------------- ----------- ----------- ----------- ----------- ----------- -----------
(1) EBITDA before exceptional items and share-based payments is denoted by
EBITDA throughout the remainder of the management commentary for ease of
reference. A reconciliation of net profit/ (loss) for the period to EBITDA
before exceptional items and share-based payments is set out on page 28.
(2) Free cash flow is set out on page 9. The IFRS cash flow is set out on page
16.
Performance Review & Outlook
Gary McGann, Smurfit Kappa Group CEO, commented: "The Group is pleased to report
EBITDA of EUR 514 million for the six month period to 30 June, 2008. A strong
cash flow performance has delivered further net debt reduction for the period.
As anticipated early this year, the Group expects conditions to remain
challenging for the remainder of 2008, characterised by a slow down in
corrugated demand growth and broad-based cost inflation.
Notwithstanding that, we believe that the Group's strong customer focus,
geographic spread, increasingly efficient operating platform, strengthened
financial capacity and continued capital restraint will deliver current market
expectations for 2008.
As can be seen from our first half results, the Group is well positioned to
outperform its peers and deliver strong returns across all metrics through the
cycle."
Dividend
The Board intends to pay an interim dividend of 16.05c per share in October
2008.
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 22 countries in Europe and is the European
leader in containerboard, solid board, corrugated and solid board packaging and
has a key position in several other packaging and paper market segments,
including graphic board, sack paper and paper sacks. Smurfit Kappa Group also
has a growing presence in Eastern Europe. Smurfit Kappa Group operates in 9
countries in Latin America and 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 Information
Smurfit Kappa Group +353 1 202 7000 Beech Hill, Clonskeagh
Dublin 4, Ireland
K Capital Source +353 1 631 5500 smurfitkappa@kcapitalsource.com
----------------------------------
2008 Second Quarter & First Half | Performance Overview
The Group's financial outcome in the first half of 2008 reflects a good
performance within our European corrugated business. It involves a combination
of continued price recovery in corrugated during the first quarter, and stable
pricing during the second. The Group's corrugated volumes decreased year-on-year
however, reflecting slowing demand in Europe and the Group's continuous focus on
pricing.
This positive achievement was substantially offset by weakening conditions
within our paper system, where higher inventory levels and lower demand combined
to generate a sharp fall in recycled containerboard prices. Together with
increases in input costs, primarily for energy, this generated margin
compression.
Despite the challenging operating environment, the Group's tight cost management
and increasingly efficient asset base has allowed the Group to continue
delivering a strong performance in the period. To further maximise the
efficiency of the Group's containerboard system, in the first quarter the Group
announced the permanent closure of 130,000 tonnes of less efficient capacity in
Spain. The Valladolid mill ceased production in June.
In addition to the mill closure, the Group took 50,000 tons of market-related
downtime in the first half of 2008, to balance the inventory levels in our own
integrated system and to maintain our working capital at the lowest level in the
industry. The Group is planning to take up to 30,000 tons of additional downtime
in the second half of the year.
In our kraftliner business, profitability continued to be impacted by pricing
pressure from US imports, which benefited from the weak US$. However, the
geographical positioning of the Group's assets allowed for lower wood cost
inflation, which contributed to maintaining good kraftliner margins over the
period. Moreover, there have been some kraftliner price increase announcements
for Europe in the second half of 2008.
The Group's Latin American business continued to perform relatively well in the
first half, although volumes in some markets were affected by general economic
conditions. However, the overall financial contribution of Latin America to the
Group's earnings was adversely affected by the relative strength of the euro.
Second Quarter, 2008 | Financial performance
Revenue of EUR 1,846 million in the second quarter of 2008 represents a 1%
increase on revenue of EUR 1,831 million in the second quarter of 2007. Allowing
for the negative impact of currency of EUR 37 million and net disposals and
closures of EUR 4 million, revenue shows an underlying increase of EUR 56
million, the equivalent of 3%. This reflects the Group's continued emphasis on
margins.
At EUR 257 million for the second quarter, EBITDA was EUR 3 million lower than
in the same period last year. This reflected the negative impact of currency. On
a comparable basis, EBITDA increased by over EUR 1 million year-on-year.
At EUR 156 million, pre-exceptional operating profit for the second quarter of
2008 was EUR 3 million lower than in 2007 when other operating income reflected
a consequential loss insurance credit in respect of a fire in our kraftliner
mill in France. While our pre-exceptional net finance costs were EUR 2 million
lower year-on-year, the share of associates' profit was EUR 4 million lower
following the sale of our shareholding in Duropack. As a result, our
pre-exceptional profit before tax decreased from EUR 96 million in the second
quarter of 2007 to EUR 90 million in 2008.
Total operating profit amounted to EUR 156 million in the second quarter of 2008
compared to 2007's EUR 134 million, after net exceptional costs of EUR 25
million. While our pre-exceptional net finance costs were slightly lower in
2008, our finance costs in 2007 were increased by EUR 28 million which related
to debt settlement costs. Our total profit before tax in the second quarter of
2008 was EUR 83 million compared to EUR 43 million in 2007.
First Half, 2008 | Financial performance
Revenue of EUR 3,678 million in the first half of 2008 represents an increase of
over 1% on revenue of EUR 3,625 million in the first half of 2007. Allowing for
the negative impact of currency of EUR 60 million and net disposals and closures
of EUR 18 million, revenue shows an underlying increase of EUR 131 million, the
equivalent of almost 4%.
Although EBITDA was flat year-on-year at EUR 514 million, allowing for the
impact of currency, net disposals and closures, the underlying increase was over
1%. EBITDA in the first half of 2008 represented a margin of 14.0% on revenue
compared to 14.2% in the first half of 2007, as a result of the previously
mentioned margin pressure, offset by synergies and cost take-out.
Pre-exceptional operating profit for the first half of the year increased by
approximately 4% to EUR 312 million compared to EUR 300 million in 2007. The
major part of the increase reflects a reduction of EUR 11 million in the level
of share-based payments in 2008.
Exceptional items within operating profit of EUR 28 million in the first half of
2008 arose in the first quarter and were related entirely to the announced
closure of our Valladolid recycled containerboard mill in Spain. The costs
provided include EUR 11 million in respect of the impairment of fixed asset
values. In the first half of 2007, exceptional items within operating profit
amounted to EUR 35 million and primarily related to reorganization and
restructuring costs.
In total, operating profit amounted to EUR 283 million in the first half of 2008
compared to EUR 265 million in 2007, representing an increase of over EUR 18
million. In addition to this 7% year-on-year increase in operating profit,
results were boosted by a decrease of EUR 33 million in our pre-exceptional net
interest cost, reflecting our lower average level of indebtedness following the
IPO in March 2007. Total finance costs in 2007 included an exceptional element
of EUR 103 million in respect of debt settlement costs following the paydown of
debt from the IPO proceeds.
Our share of associates' profit was lower in 2008 as a result of the sale during
the second quarter of our investment in Duropack. Our total profit before tax
was EUR 145 million in the first six months of 2008 compared to less than EUR 1
million in 2007.
2008 Second Quarter & First Half | Capital Structure & Debt Reduction
The main financial focus of the Group in 2008 is further net debt reduction. At
the end of June 2008, the Group's net debt was below EUR 3.3 billion, down from
over EUR 3.6 billion at the end of June 2007, a 9% decrease year-on-year.
In the second quarter, the Group's net debt decreased by EUR 88 million, or 3%,
reflecting the strong free cash flow generated in the period, the proceeds from
the sale of the Group's 40% associate shareholding in Duropack AG Group in May
and after payment of EUR 35 million in respect of our final dividend for 2007.
In April, the Group was upgraded by both Standard & Poor's and Fitch to 'BB'
from 'BB-' (BB minus), with a 'Stable' outlook. In addition, in June Moody's
upgraded its outlook for SKG to 'Positive' from 'Stable'. These upgrades reflect
the Group's sustained focus on operating efficiency, cash flow generation, debt
reduction and a strong overall debt profile.
Efficient Capacity Management & Capital Expenditure
As announced on 27 March, 2008, the Group has permanently closed 130,000 tonnes
of less efficient containerboard capacity in Valladolid, Spain. The mill ceased
production in June and closed early in July 2008. This closure will reduce the
Group's recycled containerboard output by approximately 70,000 tonnes in 2008,
with the full year impact being felt in 2009, and maximizes the continuing
efficiency of its Spanish mill system.
The Group estimates that the closure of its Valladolid mill will have a P&L cost
of EUR 28 million, and provision has been made for this in the first quarter of
2008. The cash out in 2008 is expected to be EUR 13 million, and overall to be
cash neutral to positive on completion.
This closure further illustrates the Group's relentless focus on operating
efficiency. Since the merger in 2005, the Group has continued to close higher
cost capacity, now totalling 20% of its then total capacity. As a result of
these actions, it should be noted that the Group's recycled mills comprise an
increasingly efficient, high quality system, which is no longer likely to be a
source of material capacity rationalisation.
In the context of the proposed significant capacity additions to the market for
2009 and 2010, it is worth noting that European paper producers that own
converting and corrugated plants (integrated players) comprise over 50% of the
market. These companies supply their plants from their own paper resources
leaving a market in the region of 10 million tonnes for the existing
non-integrated players and the newly introduced capacity.
In addition to the Valladolid closure, the Group previously announced that it
would take up to 80,000 tonnes of market-related downtime in 2008, to address an
increase in its recycled containerboard inventory levels, and maintain its
working capital at the lowest level in the industry. At the end of June 2008,
the Group has taken 50,000 tonnes of that downtime, which had a negative EBITDA
impact of approximately EUR 6 million. The remainder of the announced downtime
will be taken in the second half of 2008.
Capital expenditure during the first half of 2008 was approximately EUR 128
million, which equates to 74% of depreciation, and compares with EUR 147 million
in the first half of 2007. The lower expenditure is a function of timing of
projects.
Synergies & Cost Take-Out programme
The Group is on schedule to finalise the achievement of its increased target of
EUR 180 million of synergy benefits by the end of 2008. In addition, the Group
has initiated a three year cost take out programme, targeted to deliver at least
EUR 60 million in 2008, with further delivery of up to EUR 100 million by 2010.
2008 Second Quarter & First Half | Performance Review
Packaging: Europe
The Group's first half financial outcome reflects a good performance within its
corrugated business. In the first quarter, further corrugated price increases
brought the total of the price increases since the 'trough' of December 2005 to
above 18%. In the second quarter, the Group corrugated pricing remained stable.
This price increase has allowed the Group to broadly achieve its target for
recovery of the 2006 and 2007 input cost increases.
As anticipated in our first quarter release, after experiencing positive demand
growth in the first four months of the year, the Group's corrugated volumes were
weaker in May and June. This reflects the overall slowing economic environment
in Europe, together with the Group's continuous focus on margins. In the first
half year of the year, the Group's corrugated volumes decreased by almost 2%
compared to the first six months of 2007.
This corrugated performance was offset by materially weakening conditions within
recycled containerboard. The lower level of demand led to a continued inventory
overhang, which generated downward pricing momentum. As a result, recycled
containerboard prices, which had enjoyed continuous upward momentum since the
end of 2005, started to fall progressively from March. A EUR 60 per tonne price
slippage was reported in the indices to June in most markets.
As recycled containerboard prices were decreasing, the Group faced higher
average input costs in the first half of the year. Compared with 2007, these
primarily included higher energy and raw material costs. During the second
quarter, however, recovered fibre prices dropped, reflecting lower buying demand
from Asia. After peaking in March, recovered fibre prices have reduced by
approximately EUR 20 per tonne between May and June. While this decrease
somewhat lowered the magnitude of the margin compression, recovered fibre
prices, on average, were around 12% above 2007 levels during the first half.
The Group's capacity rationalisation of its containerboard system in 2008 has
further contributed to its efficient asset base. This together with the Group's
unrelenting pressure on cost reduction and strong focus on energy management
contributed to delivering strong performance in the first half of the year.
In the Group's kraftliner business, overall demand remained reasonable during
the first half, but continuing imports of US kraftliner contributed to downward
price pressure. However, a $55 per tonne price increase was implemented in the
US in July, which if implemented for exports will reduce the price gap between
imported and domestic Kraftliner in Europe. It would create the opportunity for
Kraftliner pricing momentum in Europe in the second half of 2008. In that
context, the Group has already implemented a $50 per tonne price increase for
Kraftliner in the UK in July, and has as well announced a EUR 40 per tonne price
increase in Italy for September.
The increase in wood costs was somewhat lower than expected in the first half,
as capacity closures from Finnish fine paper producers positively impacted
conditions for wood supply in Scandinavia. Furthermore, the Group's wood needs
are well spread between Sweden, France, Austria, Spain and Slovakia, with the
latter four regions benefiting from more competitive wood prices, which
contributes to the continued strong profitability of the Group's Kraftliner
business.
Packaging: Latin America
While market conditions vary from country to country, our operations in Latin
America continued to perform well overall in the first half, although the
regional EBITDA in euro terms was negatively impacted as a result of the
relative strength of the euro.
In the first half of 2008, the Group's corrugated volumes in Latin America were
2% lower than in the previous year, primarily reflecting the slowing overall
demand environment in Mexico and Colombia and the farmers strike in Argentina.
Trading conditions in Mexico remain challenging, characterised by higher input
costs, especially for energy, and slower demand. The Group implemented further
price increases in the first half of the year, which contributed somewhat to
contain the margin compression.
The Group's Colombian operations continued to benefit from positive pricing
momentum as well, which compensated for higher input costs. Our sack business in
the region performed strongly in the first half, supported by further volume
growth and healthy pricing, while our boxboard business suffered at the expense
of lower cost imports.
The Group profitability in Argentina and Venezuela was well ahead of last year,
reflecting price improvements across all grades despite the challenging local
conditions.
Specialties: Europe
The Group's specialties business comprises those European mills which produce
grades of paper other than containerboard, together with the related converting
operations. These principally include the Group's solidboard mills, boxboard,
paper sack businesses and the bag-in-box operations.
In the first half of 2008, the financial performance of the Group's specialties
business improved compared to the same period in 2007, with a 17% increase in
EBITDA year-on-year.
This positive outcome primarily reflects positive performance from the Group's
sack paper mill, together with our strong focus on price recovery in the
solidboard division. The Group also benefited from a material volume increase
for solidboard-packaging in the Benelux, following the bankruptcy of a local
competitor.
However, the Group's solidboard mills continue to be negatively impacted by
higher recovered paper prices year-on-year and the relatively higher fibre
content than in containerboard. While board prices have increased year-on-year,
further price initiatives are required to fully recover the higher input costs.
Demand for sack paper remained positive in the first half of the year. The
catalyst for this improvement was led by overseas volumes, which are expected to
be weaker in the second half. However, volumes in the sack converting business
in Western Europe declined by over 10% year-on-year, reflecting lower demand
from the construction industry, particularly in Spain, France and Ireland.
The Group's bag-in-box business reported good growth in profitability
year-on-year in the first half of 2008, despite lower demand than expected. The
recently acquired Spanish Plasticos operation performed well, and the Group is
seeing good progress in the Russian bag operation which commenced production in
March this year.
Second Quarter, 2008 | Cash Flow
Free cash flow in the second quarter of 2008 was EUR 76 million compared to EUR
3 million in the same period in 2007. Despite a slightly lower level of EBITDA
in 2008, the improved cash flow primarily reflected reduced outflows for working
capital and current provisions and lower capital expenditure outflows.
The working capital outflow in the second quarter of 2008 was EUR 8 million
compared to EUR 70 million in 2007.
Capital expenditure of EUR 65 million in the second quarter represented
approximately 75% of depreciation compared to 92% in 2007. The variance is
mainly due to the phasing of projects, with expenditure for the half-year
representing 73% of depreciation in 2008 compared to 84% in 2007.
Including investment and financing activities, our total cash surplus for the
second quarter of 2008 was EUR 91 million compared to a usage of EUR 49 million
in 2007. Our cash flow in 2008 was boosted by the proceeds of EUR 55 million
from the sale of our 40% shareholding in Duropack while dividends of EUR 40
million included EUR 35 million paid to our shareholders, and EUR 5 million to
our minorities. In the second quarter of 2007, our investment and financing
activities included outflows in respect of costs relating to the IPO and our
subsequent debt refinancing.
The total surplus for the second quarter of 2008 was reduced by EUR 4 million in
respect of the amortisation of debt issuance costs and increased by EUR 1
million in respect of currency. The overall result was a reduction of EUR 88
million in net borrowing during the second quarter of 2008, compared to an
increase of EUR 56 million in the same period in 2007.
First half, 2008 | Cash Flow
Free cash flow for the first six months of 2008 was a net inflow of EUR 77
million compared to an outflow of EUR 37 million in the same period in 2007.
While pre-exceptional EBITDA was unchanged, the improved cash flow primarily
reflected reduced outflows for cash interest, current provisions and lower
capital expenditure outflows. The relatively large outflow for current
provisions in 2007 was mainly in respect of reorganisation and restructuring
charges provided for in 2006 as part of the major rationalisation programme
undertaken following the merger.
Working capital increased by EUR 83 million in the first six months of 2008,
with higher debtors and stocks offset by higher creditors. The comparative
increase in 2007 was EUR 98 million. As a percentage of annualised net sales
revenue, working capital of EUR 769 million at June 2008 represented 10.4%,
compared to 10.2% at March 2008 and 10.4% at June 2007. It is anticipated that
this ratio will reduce in the second half.
Capital expenditure at EUR 128 million in the first six months of 2008
represented 73% of depreciation compared to 84% in 2007. As in 2007, the outflow
of EUR 19 million in 2008 in respect of capital creditors arose primarily in the
first quarter and was essentially the reversal of an inflow in the fourth
quarter of the previous year.
Tax payments of EUR 30 million in 2008 were higher than in 2007 as a result of
the significant improvement in pre-tax profits.
Including investment and financing activities, our total cash surplus for the
first six months of 2008 was EUR 90 million compared to the underlying usage of
EUR 52 million in 2007 which excludes the net proceeds from the IPO and the
costs of the subsequent refinancing of our debt. With modest cash flow movements
in the first quarter of 2008, those in the half-year were essentially those of
the second quarter, namely the proceeds from the sale of our shareholding in
Duropack offset by increased dividend payments.
As well as the total surplus of EUR 90 million for the first six months of 2008,
the Group benefited from a net positive currency translation adjustments of EUR
37 million offset by a charge of EUR 8 million in respect of the amortisation of
debt issuance costs. The positive currency movement mainly reflected the
relative strengthening of the euro against the U.S. dollar since December 2007,
resulting in a reduction in the euro value of our dollar denominated debt. Debt
issuance cost amortisation was considerably higher in 2007 with the accelerated
write-off of costs resulting from the early paydown of debt following the IPO.
As a result of the paydown of the PIK debt following the IPO, no non-cash
interest accrual arose in 2008.
Net borrowing decreased by EUR 119 million in the first six months of 2008 from
EUR 3,404 million at December 2007 to EUR 3,285 million at June 2008, a decrease
of over 3%.
Summary Cash Flows
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-Jun-08 30-Jun-07 30-Jun-08 30-Jun-07
EUR Million EUR Million EUR Million EUR Million
------------- ------------- ------------- -------------
Pre-exceptional EBITDA 257 260 514 514
Exceptional items - (4) - (14)
Cash interest (62) (64) (122) (151)
Working capital change (8) (70) (83) (98)
Current provisions (11) (23) (23) (61)
Capital expenditure (65) (79) (128) (147)
Change in capital creditors (6) (10) (19) (48)
Sale of fixed assets 2 16 3 18
Tax paid (15) (14) (30) (25)
Other (16) (9) (35) (25)
------------- ------------- ------------- -------------
Free cash flow 76 3 77 (37)
Shares issued through IPO, net of costs - (19) - 1,437
Refinancing costs - (18) - (74)
Sale of businesses and investments 55 4 56 8
Investments - (2) - (3)
Derivative termination payments - (14) (3) (14)
Dividends (40) (3) (40) (6)
------------- ------------- ------------- -------------
Total surplus/(usage) 91 (49) 90 1,311
Net cash acquired - - - 1
Deferred debt issue costs amortised (4) (13) (8) (37)
Non-cash interest accrued - - - (12)
Currency translation adjustments 1 6 37 14
------------- ------------- ------------- -------------
Decrease/(increase) in net borrowing 88 (56) 119 1,277
------------- ------------- ------------- -------------
(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
borrowing 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-08 30-Jun-07
EUR Million EUR Million
---------------------------------- --------------------------------- ------------- -------------
Free cash flow 77 (37)
Add back: Cash interest 122 151
Capital expenditure 128 147
Change in capital creditors 19 48
Tax payments 30 25
Less: Sale of fixed assets (3) (18)
Receipt of capital grants (in
"Other") (1) -
Dividends from associates (in
"Other") (4) (3)
---------------------------------- --------------------------------- ------------- -------------
Cash flow generated from
operations 368 313
---------------------------------- --------------------------------- ------------- -------------
Capital Resources
The Group's primary sources of liquidity are cash flow from operations and
borrowings under the revolving credit and restructuring facilities. The Group's
primary uses of cash are for debt service and capital expenditure and, from time
to time, opportunistic acquisitions.
At 30 June, 2008 Smurfit Kappa Funding plc had outstanding EUR 217.5 million
7.75% senior subordinated notes due 2015 and US$200 million 7.75% senior
subordinated notes due 2015. In addition Smurfit Kappa Treasury Funding Limited
had outstanding US$292.3 million 7.50% senior debentures due 2025 and the Group
had outstanding EUR 210 million floating rate notes issued under an accounts
receivable securitisation program maturing in 2011.
Smurfit Kappa Acquisitions and certain subsidiaries are party to a Senior Credit
Facility. The senior credit facility comprises a EUR 397 million amortising A
Tranche maturing in 2012, a EUR 1,185 million B Tranche maturing in 2013 and a
EUR 1,184 million C Tranche maturing in 2014. In addition, as at 30 June, 2008,
the facility included EUR 875 million in committed lines including a EUR 600
million revolving credit facility of which there was EUR 19 million drawn under
letters of credit and a EUR 275 million restructuring facility of which EUR 103
million was drawn.
The following table provides the range of interest rates as of 30 June, 2008 for
each of the drawings under the various Senior Credit Facility term loans.
BORROWING ARRANGEMENT CURRENCY INTEREST RATE
Restructuring Facility EUR 5.91% - 5.97%
Term Loan A EUR 5.93% - 6.62%
Term Loan B EUR 6.30% - 7.00%
USD 4.60%
Term Loan C EUR 6.60% - 7.25%
USD 4.85%
Borrowings under the revolving credit facility are available to fund the Group's
working capital requirements, capital expenditures and other general corporate
purposes and will terminate in December 2012.
The Group manages its refinancing risk by maintaining a long term debt maturity
profile and seeking to avoid material near term maturities and this mitigates
its exposure to changes in global debt market conditions.
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,
2008 the Group had fixed an average of 59% of its interest cost on borrowings
over the following twelve months.
Our fixed rate debt comprised mainly EUR 217.5 million 7.75% senior subordinated
notes due 2015, US$200 million 7.75% senior subordinated notes due 2015 and
US$292 million 7.50% senior debentures due 2025. In addition the Group also has
EUR 2,280 million in interest rate swaps with maturity dates ranging from
October 2008 to June 2013.
Our earnings are affected by changes in short-term interest rates as a result of
our floating rate borrowings. If variable interest rates for these borrowings
increase by one percent, our interest expense would increase, and income before
taxes would decrease, by approximately EUR 16 million over the following twelve
months. Interest income on our cash balances would increase by approximately EUR
5 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 31
December, 2007 annual report on page 44. The annual report is available on our
website www.smurfitkappa.com.
These 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
-- The Group is exposed to the risk of an economic slowdown
-- 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 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
The Board regularly monitors all of the above risks and appropriate actions are
taken to mitigate those risks or address the potential adverse consequences.
Group Income Statement - Six Months
Unaudited Unaudited
----------------------------------------- ------------------------------------------
6 Months to 30-Jun-08 6 Months to 30-Jun-07
Pre-Exceptional Exceptional Pre-Exceptional Exceptional
2008 2008 Total 2008 2007 2007 Total 2007
EUR '000 EUR '000 EUR '000 EUR '000 EUR '000 EUR '000
---------------------------------- --------------- ------------ ------------ --------------- ------------- ------------
Revenue 3,678,006 - 3,678,006 3,624,739 - 3,624,739
Cost of sales (2,607,723) (10,950) (2,618,673) (2,594,528) (4,662) (2,599,190)
--------------- ------------ ------------ --------------- ------------- ------------
Gross profit 1,070,283 (10,950) 1,059,333 1,030,211 (4,662) 1,025,549
Distribution costs (296,056) - (296,056) (298,241) - (298,241)
Administrative expenses (463,394) - (463,394) (468,226) - (468,226)
Other operating income 845 - 845 36,236 5,870 42,106
Other operating expenses - (17,318) (17,318) - (36,569) (36,569)
--------------- ------------ ------------ --------------- ------------- ------------
Operating profit 311,678 (28,268) 283,410 299,980 (35,361) 264,619
Finance costs (240,984) - (240,984) (253,654) (103,236) (356,890)
Finance income 106,951 - 106,951 86,502 - 86,502
Loss on disposal of associate - (6,905) (6,905) - - -
Share of associates' profit (after
tax) 2,551 - 2,551 6,239 - 6,239
--------------- ------------ ------------ --------------- ------------- ------------
Profit before income tax 180,196 (35,173) 145,023 139,067 (138,597) 470
Income tax expense (14,912) (32,328)
--------------- ------------ ------------ --------------- ------------- ------------
Profit/(loss) for the financial
period EUR 130,111 EUR (31,858)
=============== ============ ============ =============== ============= ============
Attributable to:
Equity holders of the Company 123,603 (39,095)
Minority interest 6,508 7,237
------------ --------------- ------------- ------------
Profit/(loss) for the financial
period EUR 130,111 EUR (31,858)
============ =============== ============= ============
Earnings per share:
Basic earnings per share (cent per share) 56.7 (21.9)
============ ============
Diluted earnings per share (cent per share) 55.9 (21.9)
============ ============
The notes to the condensed interim Group Financial Statements on pages 18 to 27
form an integral part of this financial information.
Group Income Statement - Second Quarter
Unaudited Unaudited
----------------------------------------- ------------------------------------------
3 Months to 30-Jun-08 3 Months to 30-Jun-07
Pre-Exceptional Exceptional Pre-Exceptional Exceptional
2008 2008 Total 2008 2007 2007 Total 2007
EUR '000 EUR '000 EUR '000 EUR '000 EUR '000 EUR '000
---------------------------------- ---------------- ------------ ----------- ---------------- ------------- -----------
Revenue 1,845,990 - 1,845,990 1,831,034 - 1,831,034
Cost of sales (1,308,388) - (1,308,388) (1,302,037) (4,662) (1,306,699)
---------------- ------------ ----------- ---------------- ------------- -----------
Gross profit 537,602 - 537,602 528,997 (4,662) 524,335
Distribution costs (149,209) - (149,209) (149,048) - (149,048)
Administrative expenses (232,914) - (232,914) (228,783) - (228,783)
Other operating income 442 - 442 7,915 5,141 13,056
Other operating expenses - - - - (25,429) (25,429)
---------------- ------------ ----------- ---------------- ------------- -----------
Operating profit 155,921 - 155,921 159,081 (24,950) 134,131
Finance costs (103,319) - (103,319) (117,208) (27,840) (145,048)
Finance income 36,679 - 36,679 48,328 - 48,328
Loss on disposal of associate - (6,905) (6,905) - - -
Share of associates' profit (after
tax) 1,094 - 1,094 5,485 - 5,485
---------------- ------------ ----------- ---------------- ------------- -----------
Profit before income tax 90,375 (6,905) 83,470 95,686 (52,790) 42,896
Income tax expense 3,800 (8,093)
---------------- ------------ ----------- ---------------- ------------- -----------
Profit for the financial period 87,270 EUR 34,803
================ ============ =========== ================ ============= ===========
Attributable to:
Equity holders of the Company 83,440 31,295
Minority interest 3,830 3,508
----------- -----------
Profit for the financial period EUR 87,270 EUR 34,803
=========== ===========
Earnings per share:
Basic earnings per share (cent per share) 38.3 14.4
=========== ===========
Diluted earnings per share (cent per share) 37.6 14.0
=========== ===========
Group Statement of Recognised Income and Expense
Unaudited Unaudited
------------ ------------
6 months to 6 months to
30-Jun-08 30-Jun-07
EUR '000 EUR '000
Restated
-------------------------------------------------------- ------------ ------------
Items of income and expense recognised directly within
equity:
Foreign currency translation adjustments (14,153) (4,451)
Defined benefit pension schemes
- Actuarial gain 31,004 119,900
- Movement in deferred tax (7,377) (30,135)
Effective portion of changes in fair value of cash flow
hedges:
- movement out of reserve (7,678) (4,524)
- new fair value adjustments into reserve 16,791 10,097
Net change in fair value of available-for-sale financial
assets (300) 610
------------ ------------
Net income and expense recognised directly within equity 18,287 91,497
Profit/(loss) for the financial period 130,111 (31,858)
------------ ------------
Total recognised income and expense for the financial
period 148,398 EUR 59,639
============ ============
Attributable to:
Equity holders of the Company 145,341 44,480
Minority interest 3,057 15,159
------------ ------------
148,398 59,639
============ ============
Effects of changes in accounting policy:
Attributable to:
Equity holders of the Company (163)
Minority interest -
------------
(163)
============
The notes to the condensed interim Group Financial Statements on pages 18 to 27
form an integral part of this financial information.
Group Balance Sheet
Unaudited Unaudited Audited
------------- ------------- -------------
30-Jun-08 30-Jun-07 31-Dec-07
EUR '000 EUR '000 EUR '000
Restated Restated
---------------------------------------------------------------------- ------------- ------------- -------------
Assets
Non-current assets
Property, plant and equipment 3,171,818 3,337,455 3,251,479
Goodwill and intangible assets 2,391,938 2,448,016 2,416,785
Biological assets 75,910 79,608 74,758
Investment in associates 15,456 76,463 79,307
Available-for-sale financial assets 43,196 43,329 43,511
Trade and other receivables 4,781 5,512 6,716
Derivative financial instruments 8,966 10,545 4,301
Deferred income tax assets 342,691 271,006 340,875
------------- ------------- -------------
6,054,756 6,271,934 6,217,732
------------- ------------- -------------
Current assets
Inventories 708,562 694,543 682,169
Biological assets 6,712 7,083 6,862
Trade and other receivables 1,473,748 1,535,997 1,379,105
Derivative financial instruments 31,435 28,054 28,261
Restricted cash 14,144 15,385 13,096
Cash and cash equivalents 453,704 262,003 401,622
------------- ------------- -------------
2,688,305 2,543,065 2,511,115
Non-current assets held for sale 10,999 5,000 15,999
------------- ------------- -------------
Total assets EUR 8,754,060 EUR 8,819,999 EUR 8,744,846
============= ============= =============
Equity
Capital and reserves attributable to the equity holders of the Company
Equity share capital 228 227 228
Capital and other reserves 2,543,653 2,604,233 2,538,047
Retained earnings (375,239) (613,232) (486,126)
------------- ------------- -------------
Total equity attributable to equity holders of the Company 2,168,642 1,991,228 2,052,149
Minority interest 135,588 146,214 137,443
------------- ------------- -------------
Total equity 2,304,230 2,137,442 2,189,592
============= ============= =============
Liabilities
Non-current liabilities
Borrowings 3,613,960 3,729,973 3,667,618
Deferred income - 1,120 -
Employee benefits 431,608 447,901 482,497
Deferred income tax liabilities 510,866 535,293 530,102
Non-current taxes payable 28,256 3,027 19,704
Provisions for liabilities and charges 60,123 79,294 77,698
Capital grants 14,076 12,877 14,176
Other payables 2,302 - 8,535
------------- ------------- -------------
4,661,191 4,809,485 4,800,330
------------- ------------- -------------
Current liabilities
Borrowings 139,082 152,639 150,976
Trade and other payables 1,418,447 1,476,752 1,402,687
Current income tax liabilities 31,542 54,499 25,650
Derivative financial instruments 142,726 119,704 121,058
Provisions for liabilities and charges 56,842 69,478 54,553
------------- ------------- -------------
1,788,639 1,873,072 1,754,924
------------- ------------- -------------
Total liabilities 6,449,830 6,682,557 6,555,254
------------- ------------- -------------
Total equity and liabilities EUR 8,754,060 EUR 8,819,999 EUR 8,744,846
============= ============= =============
The notes to the condensed interim Group Financial Statements on pages 18 to 27
form an integral part of this financial information.
Group Cash Flow Statement
Unaudited Unaudited
------------ -----------
6 months to 6 months to
30-Jun-08 30-Jun-07
EUR '000 EUR '000
----------------------------------------------------------------- ------------ -----------
Cash flows from operating activities
Profit/(loss) for the financial period 130,111 (31,858)
Adjustment for
Income tax expense 14,912 32,328
Loss on sale of assets and businesses - continuing operations - (5,870)
Amortisation of capital grants (844) (792)
Impairment of property, plant and equipment 10,950 4,662
Equity settled share-based payment transactions 6,050 16,896
Amortisation of intangible assets 22,302 21,120
Share of profit of associates 4,354 (6,239)
Depreciation charge 171,741 175,051
Net finance costs 134,033 270,388
Change in inventories (29,504) (67,850)
Change in biological assets 2,406 645
Change in trade and other receivables (100,613) (198,113)
Change in trade and other payables 46,798 168,292
Change in provisions (21,902) (42,702)
Change in employee benefits (21,236) (21,840)
Foreign currency translation adjustments (1,401) (657)
------------ -----------
Cash generated from operations 368,157 313,461
Interest paid (145,674) (257,154)
Income taxes paid:
Irish corporation tax paid (1,499) (1,100)
Overseas corporation tax (net of tax refunds) paid (28,471) (23,775)
------------ -----------
Net cash inflow from operating activities 192,513 31,432
------------ -----------
Cash flows from investing activities
Interest received 19,529 11,139
Business disposals 580 7,905
Purchase of property, plant & equipment and biological assets (142,588) (191,421)
Purchase of intangible assets (3,634) -
Repayment of capital grants 789 (194)
Purchase of available-for-sale financial assets (4) (4)
(Increase) in restricted cash (1,048) (4,921)
Disposal of property, plant and equipment 3,357 17,621
Disposal of investments - 167
Dividends received from associates 4,382 3,366
Disposals of associates 54,969 893
Purchase of subsidiaries and minorities (148) (3,227)
Deferred and contingent acquisition consideration paid - (14)
------------ -----------
Net cash outflow from investing activities (63,816) (158,690)
------------ -----------
Cash flows from financing activities
Proceeds from issue of new ordinary shares 102 1,495,173
Costs associated with issuing new shares - (57,926)
(Decrease) in interest-bearing borrowings (15,650) (1,364,965)
Repayment of finance lease liabilities (7,506) (8,024)
Derivative termination payments (2,841) (14,005)
Dividends paid to shareholders (35,000) -
Dividends paid to minority interests (4,913) (5,718)
------------ -----------
Net cash (outlfow)/inflow from financing activities (65,808) 44,535
------------ -----------
Increase / (decrease) in cash and cash equivalents 62,889 (82,723)
============ ===========
Reconciliation of opening to closing cash and cash equivalents
Cash and cash equivalents at 1 January 375,390 321,494
Currency translation adjustment (6,925) (368)
Increase / (decrease) in cash and cash equivalents 62,889 (82,723)
------------ -----------
Cash and cash equivalents at 30 June EUR 431,354 EUR 238,403
============ ===========
The notes to the condensed interim Group Financial Statements on pages 18 to 27
form an integral part of this financial information.
Responsibility Statement in Respect of the Six Months Ended 30 June 2008
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 International Accounting
Standard 34, Interim Financial Reporting (IAS 34) 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 2008 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 2008, 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.
G.W. McGann
I.J. Curley
Directors
11 August, 2008
1. General information
Smurfit Kappa Group plc ('SKG plc') ('the Company') 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 with its registered office at Beech
Hill, Clonskeagh, Dublin 4, Ireland.
On 14 March, 2007 SKG plc completed an IPO with the placing to institutional
investors of 78,787,879 new ordinary shares. This offering, together with the
issue of an additional 11,818,181 ordinary shares, generated gross proceeds of
EUR 1,495 million. The additional shares were issued on admission by Deutsche
Bank acting as stabilising manager under an over-allocation option and represent
the permitted maximum 15% of the total number of shares in the IPO. The issue
proceeds, net of costs, were used to repay certain debt obligations of the Group
and to repay the shareholder PIK note issued in connection with the Group's 2005
acquisition of Kappa Packaging. Trading in the shares on the Irish Stock
Exchange and the London Stock Exchange commenced on 20 March, 2007.
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 2007 has been included in this
report which is supplementary and not subject to the requirements of IAS 34.
This report should be read in conjunction with the consolidated financial
statements for the year ended 31 December, 2007 included in the Group's 2007
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,
2007 and are described in those financial statements; with the exception of the
application of IFRIC 14.
The Group adopted IFRIC 14, 'IAS19 - The limit on a defined benefit asset,
minimum funding requirements and their interaction' from 1 January, 2008. IFRIC
14 provides general guidance on how to assess the limit in IAS 19 Employee
Benefits, on the amount of a surplus that can be recognised as an asset. It also
explains how the pensions asset or liability may be affected when there is a
statutory or contractual minimum funding requirement. The Group has applied
IFRIC 14 from 1 January, 2008. On adoption, in accordance with IFRIC 14, the
Group defined benefit pension liability increased by approximately EUR 1,533,000
with an increase of EUR 460,000 in deferred income tax assets. The resulting
effect on equity of EUR 1,073,000 is shown as an adjustment to the opening
balance of retained earnings.
In addition to IFRIC 14, the following new standards, amendments to standards or
interpretations are mandatory for the first time for the financial year
beginning 1 January, 2008, but are not currently relevant to the group:
* IFRIC 12, Service concession arrangements
* IFRIC 13, Customer Loyalty Programmes
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.
The Group's auditors have not audited or reviewed the interim group financial
information contained in this report.
The condensed financial information presented does not constitute full group
accounts within the meaning of Regulation 40(1) of the European Communities
(Companies: Group Accounts) Regulations, 1992 of Ireland insofar as such group
accounts would have to comply with all of the disclosure and other requirements
of those Regulations. Full group accounts for the year ended 31 December, 2007
have been filed with the Irish Registrar of Companies. The audit report on those
group accounts was unqualified.
3. Segmental Analyses
6 months to 30-Jun-08 6 months to 30-Jun-07
Packaging Specialties Total Packaging Specialties Total
EUR '000 EUR '000 EUR '000 EUR '000 EUR '000 EUR '000
--------------------------------------- -------------- ----------- ------------- ------------- ----------- -------------
Third party revenue (external) EUR 3,190,374 EUR 487,632 EUR 3,678,006 EUR 3,153,864 EUR 470,875 EUR 3,624,739
============== =========== ============= ============= =========== =============
Segment results-pre exceptional items 303,509 30,994 334,503 301,867 23,805 325,672
Exceptional items (28,268) - (28,268) (18,172) (7,284) (25,456)
-------------- ----------- ------------- ------------- ----------- -------------
275,241 30,994 306,235 283,695 16,521 300,216
Unallocated centre costs-pre
exceptional items (22,825) (25,692)
Group centre exceptional items - (9,905)
------------- -------------
Operating profit 283,410 264,619
Share of associates' profit/(loss)
(after tax) 2,551 - 2,551 7,568 (1,329) 6,239
Loss on disposal of associate (6,905) - (6,905) - - -
Finance costs (240,984) (356,890)
Finance income 106,951 86,502
------------- -------------
Profit before income tax EUR 145,023 EUR 470
============= =============
3 months to 30-Jun-08 3 months to 30-Jun-07
Packaging Specialties Total Packaging Specialties Total
EUR '000 EUR '000 EUR '000 EUR '000 EUR '000 EUR '000
--------------------------------------- -------------- ----------- ------------- ------------- ----------- -------------
Third party revenue (external) EUR 1,588,087 EUR 257,903 EUR 1,845,990 EUR 1,584,743 EUR 246,291 EUR 1,831,034
============== =========== ============= ============= =========== =============
Segment results-pre exceptional items 148,467 21,637 170,104 151,677 16,394 168,071
Exceptional items - - - (16,302) (7,362) (23,664)
-------------- ----------- ------------- ------------- ----------- -------------
148,467 21,637 170,104 135,375 9,032 144,407
Unallocated centre costs-pre
exceptional items (14,183) (8,990)
Group centre exceptional items - (1,286)
------------- -------------
Operating profit 155,921 134,131
Share of associates' profit/(loss)
(after tax) 1,094 - 1,094 6,156 (671) 5,485
Loss on disposal of associate (6,905) - (6,905) - - -
Finance costs (103,319) (145,048)
Finance income 36,679 48,328
------------- -------------
Profit before income tax EUR 83,470 EUR 42,896
============= =============
4. Exceptional Items
6 months to 6 months to
The following items are regarded as exceptional in nature: 30-Jun-08 30-Jun-07
EUR '000 EUR '000
-------------------------------------------------------------- -------------- -------------
Reorganisation and restructuring costs (17,318) (36,569)
Impairment of property, plant and equipment (10,950) (4,662)
Net income on sale of assets and operations - 5,870
-------------- -------------
Total exceptional items included in operating costs EUR (28,268) EUR (35,361)
============== =============
Total exceptional items included in finance costs - EUR (103,236)
============== =============
-------------- -------------
Loss on disposal of associate EUR (6,905) -
============== =============
The reorganisation and restructuring costs and impairment of property, plant and
equipment in 2008, relate entirely to the announced closure of our Valladolid
recycled containerboard mill in Spain.
The loss on disposal of associate resulted from the sale of the Group's
principal associate Duropack AG.
The reorganisation and restructuring costs in 2007 include the termination costs
on closures of a containerboard mill in France, a cartons plant and a small
sheet plant in Ireland and a solid board packaging plant in Norway.
In 2007 an impairment charge of EUR 4.7 million resulted from the closure of the
containerboard mill in France.
Net income on sale of assets and operations in 2007 included gains on the sale
of land and buildings in Spain, Italy, the UK and Venezuela. We also sold a
small sack plant in Sweden and a small solid board operation in Mexico.
Exceptional finance costs of EUR 103 million arose in 2007 following our use of
the proceeds from the IPO to pay down debt. These costs comprise refinancing
costs of EUR 74 million and the non-cash accelerated amortisation of debt costs
of EUR 29 million.
5. Other Operating Income
Other operating income in 2007 includes insurance proceeds of EUR 28 million in
respect of a fire in the Group's mill in Facture, France. The costs of the fire
and related downtime were included in the appropriate cost headings within
operating profit.
6 Finance Costs and Finance Income
6 Months to 6 Months to
30-Jun-08 30-Jun-07
EUR '000 EUR '000
--------------------------------------------------------------- ---------------- ----------------
Finance costs
Interest payable on bank loans and overdrafts 106,691 101,789
Interest payable on finance leases and hire purchase contracts 2,813 3,400
Interest payable on other borrowings 32,164 70,220
Amortisation of deferred debt issue costs 7,524 37,140
Finance costs associated with debt restructuring - 73,935
Impairment loss on available-for-sale financial assets - 54
Unwinding of discount element of provisions 1,099 113
Foreign currency translation loss on debt 9,320 7,874
Fair value loss on derivatives 29,929 13,692
Interest cost on employee benefit plan liabilities 51,444 48,673
---------------- ----------------
Total finance cost 240,984 356,890
---------------- ----------------
Finance income
Other interest receivable 19,529 11,727
Foreign currency translation gain on debt 35,153 16,197
Fair value gain on commodity derivatives 652 1,854
Fair value gain on other derivatives 7,156 12,704
Expected return on employee benefit plan assets 44,461 44,020
---------------- ----------------
Total finance income 106,951 86,502
---------------- ----------------
Net finance cost EUR 134,033 EUR 270,388
================ ================
7. Income Tax Expense
Income tax expense recognised in the Group Income Statement
6 Months to 6 Months to
30-Jun-08 30-Jun-07
EUR '000 EUR '000
---------------------------------------------------------------- --------------- ---------------
Current taxation
Europe 26,680 23,078
United States and Canada 18 (1,721)
Latin America 16,188 17,659
--------------- ---------------
42,886 39,016
Deferred taxation (27,974) (6,688)
--------------- ---------------
Income tax expense EUR 14,912 EUR 32,328
=============== ===============
Current tax is analysed as follows:
Ireland 2,802 8,199
Foreign 40,084 30,817
--------------- ---------------
EUR 42,886 EUR 39,016
=============== ===============
Income tax recognised directly in equity
6 Months to 6 Months to
30-Jun-08 30-Jun-07
EUR '000 EUR '000
---------------------------------------------------------------- --------------- ---------------
Arising on actuarial gains on defined benefit plans 7,377 30,135
=============== ===============
A net credit of EUR 1.6 million is included in the 2008 current tax charge for
exceptional items.
Interim period income tax is accrued based on the estimated 2008 annual
effective income tax rate of 20%.
The increase in the deferred tax credit for the period ended 30 June 2008 arose
primarily due to the recognition of tax losses and movement in other timing
differences.
8. Employee Post Retirement Schemes
The table below sets out the components of the defined benefit expense for the
period:
6 Months to 6 Months to
30-Jun-08 30-Jun-07
EUR '000 EUR '000
--------------------------------------------------------------- -------------- --------------
Current service cost 21,222 26,451
Past service cost 608 185
(Gain) on settlements and curtailments (326) (2,778)
Actuarial gains and losses arising on long-term employee
benefits other than defined benefit schemes 839 (26)
-------------- --------------
22,343 23,832
-------------- --------------
Expected return on scheme assets (44,461) (44,020)
Interest cost on scheme liabilities 51,444 48,673
-------------- --------------
Net financial expense 6,983 4,653
-------------- --------------
Defined benefit expense EUR 29,326 EUR 28,485
============== ==============
Included in cost of sales and distribution and administrative expenses is a
total defined benefit expense of EUR 22,343,000 for the first six months (2007:
EUR 23,832,000). Expected Return on Scheme Assets of EUR 44,461,000 for the
first six months (2007: EUR 44,020,000) is included in Finance Income and
Interest Cost on Scheme Liabilities of EUR 51,444,000 for the first six months
(2007: EUR 48,673,000) is included in Finance Expense in the Group Income
Statement.
The amounts recognised in the balance sheet were as follows:
30-Jun-08 30-Jun-07 31-Dec-07
EUR '000 EUR '000 EUR '000
----------------------------------------------- ------------------ -------------- -------------
Present value of funded obligations (1,337,623) (1,500,820) (1,498,547)
Fair value of plan assets 1,278,244 1,460,380 1,411,223
Present value of unfunded obligations (372,229) (407,461) (395,173)
------------------ -------------- -------------
Liability in the balance sheet (431,608) (447,901) (482,497)
================== ============== =============
The adoption of IFRIC 14, 'IAS19 - The limit on a defined benefit asset, minimum
funding requirements and their interaction' resulted in the following
adjustments to the comparative figures:
30-Jun-07 31-Dec-07
EUR '000 EUR '000
------------------------------------------------------------------------------ --------------
Liability in the balance sheet - As previously stated 447,386 480,964
Impact of adoption of IFRIC 14 515 1,533
-------------------- --------------
Liability in the balance sheet - restated 447,901 482,497
==================== ==============
The above impact of the adoption of IFRIC 14 is reflected as a movement in the
Statement of Recognised Income and Expense.
The employee benefits provision has decreased from EUR 481 million at 31
December 2007 to EUR 432 million at 30 June 2008. The fall in provision was
mainly as a result of asset losses being more than compensated by significant
increases in AA Corporate yields which reduced pension liabilities. Over this
period euro bond yields increased by 0.75% and Sterling bond yields increased by
0.55%. This reduced the value of pension liabilities by approximately EUR 152
million.
9. Earnings Per Share
Basic
Basic earnings per share is calculated by dividing the profit or loss
attributable to equity holders of the Company by the weighted average number of
ordinary shares in issue during the year.
3 Months to 3 Months to 6 Months to 6 Months to
30-Jun-08 30-Jun-07 30-Jun-08 30-Jun-07
EUR '000 EUR '000 EUR '000 EUR '000
------------------------------------------------- ----------- ----------- ----------- -----------
Profit/(loss) attributable to equity holders of
the Company 83,440 31,295 123,603 (39,095)
Weighted average number of ordinary shares in
issue ('000) (1) 218,022 217,702 218,008 178,191
Basic earnings per share (cent per share) 38.3 14.4 56.7 (21.9)
=========== =========== =========== ===========
Diluted
Diluted earnings per share is calculated by adjusting the weighted average
number of ordinary shares outstanding to assume conversion of all dilutive
potential ordinary shares which comprise convertible shares issued under the
Management Equity Plan.
3 Months to 3 Months to 6 Months to 6 Months to
30-Jun-
30-Jun-08 30-Jun-07 30-Jun-08 07(2)
EUR '000 EUR '000 EUR '000 EUR '000
------------------------------------------------- ----------- ----------- ----------- -----------
Profit/(loss) attributable to equity holders of
the Company 83,440 31,295 123,603 (39,095)
Weighted average number of ordinary shares in
issue ('000) (1) 218,022 217,702 218,008 178,191
Potential dilutive ordinary shares assumed 3,948 5,606 3,041 -
----------- ----------- ----------- -----------
Diluted weighted average ordinary shares 221,970 223,308 221,049 178,191
----------- ----------- ----------- -----------
Diluted earnings per share (cent per share) 37.6 14.0 55.9 (21.9)
=========== =========== =========== ===========
(1) Average of ordinary shares in issue pre and post the IPO. Ordinary shares in
issue at 30 June 2008 amounted to 218,022,794.
(2) There is no difference between basic and diluted loss per share in the six
months to 30 June, 2007 as the inclusion of the dilutive impact of the
convertible shares would have the effect of reducing the loss per share.
10. Dividends
During the period, the final dividend for 2007 of 16.05 cent per share was paid
to the holders of ordinary shares.
11. Property, Plant and Equipment
Land and Buildings Plant and Equipment Total
EUR '000 EUR '000 EUR '000
-------------------------------------------------- --------------------- -------------------- --------------
Half year ended 30 June 2008
Opening net book amount 1,176,694 2,074,785 3,251,479
Reclassification 10,465 (10,465) -
Additions 2,661 115,313 117,974
Depreciation charge for the period (24,687) (147,054) (171,741)
Impairment losses recognised in profit and loss (1,233) (9,717) (10,950)
Retirements and disposals (1,288) (2,518) (3,806)
Foreign currency translation adjustment (2,610) (8,528) (11,138)
--------------------- -------------------- --------------
At 30 June 2008 EUR 1,160,002 EUR 2,011,816 EUR 3,171,818
===================== ==================== ==============
Land and Buildings Plant and Equipment Total
EUR '000 EUR '000 EUR '000
-------------------------------------------------- --------------------- -------------------- --------------
Year ended 31 December 2007
Opening net book amount 1,215,877 2,166,104 3,381,981
Reclassification 34,382 (34,941) (559)
Acquisitions 772 6,783 7,555
Additions 14,547 288,742 303,289
Transfer to assets held for sale (9,123) (1,026) (10,149)
Depreciation charge for the year (51,406) (305,819) (357,225)
Impairment losses recognised in profit and loss (225) (6,208) (6,433)
Retirements and disposals (10,703) (7,934) (18,637)
Foreign currency translation adjustment (17,427) (30,916) (48,343)
--------------------- -------------------- --------------
At 31 December 2007 1,176,694 2,074,785 3,251,479
===================== ==================== ==============
12 Investment in Associates
6 Months to 12 Months to
30-Jun-08 31-Dec-2007
EUR '000 EUR '000
------------------------------------------------------------------- -------------- --------------
At 1 January 79,307 76,668
Share of profits for the period 2,551 12,513
Dividends received from associates (4,382) (3,617)
Disposals (61,878) (3,810)
Transfer to subsidiaries (2,000)
Reclassification - 631
Foreign currency translation adjustment (142) (1,078)
-------------- --------------
At 30 June EUR 15,456 EUR 79,307
============== ==============
13. Share-based Payment
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 automatically convert on a one-to-one basis
into D convertible shares on the first, second and third anniversaries
respectively of the IPO, provided their holder remains an employee of the Group
at the relevant anniversary. The D convertible shares resulting from these
conversions are convertible on a one-to-one basis into ordinary shares, at the
instance of the holder, upon the payment by the holder of the agreed conversion
price. The life of the D convertible shares arising from the vesting of these
new classes of convertible share ends on 20 March, 2014.
The plans provide for equity settlement only, no cash settlement alternative is
available.
13. Share-based Payment - (Continued)
In March 2007, SKG plc adopted the 2007 Share Incentive Plan (the "2007 SIP").
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 EUR 0.001 per share. On satisfaction of specified performance criteria
the New B and New 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 market value of an
ordinary share on the date 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.
As of 30 June 2008, SKG plc had a total of 15,310,509 convertible shares in
issue in total, 10,114,029 under the 2002 Plan, as amended and 5,196,480 under
the 2007 SIP.
A summary of the activity under the 2002 Plan, as amended, for the period from
31 December, 2007 to 30 June, 2008 is presented below.
Shares 000's Class of Convertible shares
-------------------------------------------------------
D A1 A2 A3 Total
------------------------------------------ ----------- --------- --------- --------- -------------
Balance December 2007 8,399.8 583.7 583.7 583.6 10,150.8
------------------------------------------ ----------- --------- --------- --------- -------------
Vested into D 583.7 (583.7) - - -
Converted into Ordinary shares (36.8) - - - (36.8)
Balance June 2008 8,946.7 - 583.7 583.6 10,114.0
Exercisable June 2008 8,946.7 - - - 8,946.7
------------------------------------------ ----------- --------- --------- --------- -------------
The exercise price for all D convertible shares other than those derived from
Class H convertibles at 30 June, 2008 was EUR 4.28. The exercise price for D
convertible shares derived from Class H convertibles was EUR 5.69 at 30 June,
2008. The weighted average remaining contractual life of all the awards issued
under the 2002 Plan, as amended, at 30 June, 2008 was 4.49 years.
A summary of the activity under the 2007 SIP, for the period from 31 December,
2007 to 30 June, 2008 is presented below:
Shares 000's Class of Convertible shares
------------------------------------------------------------
New B New C Total
Balance December 2007 1,374.6 1,374.6 2,749.2
Exercisable December 2007 - - -
March 2008 Allotted 1,223.6 1,223.6 2,447.3
Balance June 2008 2,598.2 2,598.2 5,196.5
Exercisable June 2008 - - -
As at 30 June, 2008 the weighted average exercise price for all New B and New C
convertible shares upon conversion would be EUR 13.68. The weighted average
remaining contractual life of all the awards issued under the 2007 SIP at
30 June, 2008 was 9.28 years.
14. Reconciliation of Movements in Total Equity
Attributable to
equity holders Minority
of the Company interests Total equity
EUR '000 EUR '000 EUR '000
------------------------------------------------ --------------- --------------- ---------------
31 December 2007, as previously reported 2,053,222 137,443 2,190,665
Adjustment in respect of the implementation of
IFRIC 14 (1,073) - (1,073)
--------------- --------------- ---------------
31 December 2007, as adjusted 2,052,149 137,443 2,189,592
Total recognised income and expense 145,341 3,057 148,398
Share premium on shares issued 102 - 102
Share-based payment expense 6,050 - 6,050
Dividend paid to shareholders (35,000) - (35,000)
Dividends paid to minorities - (4,912) (4,912)
--------------- --------------- ---------------
At 30 June 2008 2,168,642 135,588 2,304,230
=============== =============== ===============
1 January 2007, as previously reported 495,178 136,343 631,521
Adjustment in respect of the implementation of
IFRIC 14 (197) - (197)
--------------- --------------- ---------------
1 January 2007, as adjusted 494,981 136,343 631,324
Total recognised gains and losses 99,430 8,337 107,767
Shares issued 1,432,997 - 1,432,997
Share-based payment expense 24,741 - 24,741
Purchase of minorities - (1,462) (1,462)
Dividends paid to minorities - (5,775) (5,775)
--------------- --------------- ---------------
At 31 December 2007 2,052,149 137,443 2,189,592
=============== =============== ===============
IFRIC 14 provides guidance on how to assess the limit in IAS 19 Employee
Benefits, on the amount of a surplus that can be recognised as an asset. It also
explains how the pensions asset or liability may be affected when there is a
statutory or contractual minimum funding requirement. The Group has applied
IFRIC 14 from 1 January 2008. On adoption, in accordance with IFRIC 14, the
Group defined benefit pension liability increased by EUR 1,533,000 with an
increase of EUR 460,000 in deferred income tax assets. The resulting effect on
equity of EUR 1,073,000 is shown as an adjustment to the opening balance of
retained earnings on 1 January 2008, with a corresponding reduction of EUR
197,000 at 1 January 2007.
15. Analysis of Net Debt
30-Jun-08 31-Dec-07
EUR '000 EUR '000
------------------------------------------------------------------------ ----------- -----------
Senior credit facility:
Revolving credit facility(1) - interest at relevant interbank rate +
1.5% (8,692) (10,746)
Restructuring facility(2) - interest at relevant interbank rate +
1.5% until conversion to Term Loan 103,200 103,200
Tranche A Term loan(3a) - interest at relevant interbank rate + 1.5% 396,908 422,214
Tranche B Term loan(3b) - interest at relevant interbank rate +
1.875% 1,185,131 1,187,045
Tranche C Term loan(3c) - interest at relevant interbank rate +
2.125% 1,184,011 1,186,147
Yankee bonds (including accrued interest)(4) 185,571 198,674
Bank loans and overdrafts/(cash) (381,405) (324,946)
2011 Receivables securitisation floating rate notes (including accrued
interest)(5) 206,370 205,815
----------- -----------
2,871,094 2,967,403
2015 Cash pay subordinated notes (including accrued interest) (6) 344,320 352,985
----------- -----------
Net debt before finance leases 3,215,414 3,320,388
Finance leases 64,051 72,786
----------- -----------
Net debt including leases - Smurfit Kappa Funding plc 3,279,465 3,393,174
Balance of revolving credit facility reclassified to debtors 8,692 10,746
----------- -----------
Net debt after reclassification - Smurfit Kappa Funding plc 3,288,157 3,403,920
Net (cash) in parents of Smurfit Kappa Funding plc (2,963) (44)
----------- -----------
EUR EUR
Net Debt including leases - Smurfit Kappa Group plc 3,285,194 3,403,876
=========== ===========
(1) Revolving credit facility of EUR 600 million (available under the senior credit facility) to be repaid in full in
2012
(Revolver Loans = Nil, drawn under ancillary facilities and facilities supported by letters of credit = EUR 0.96
million, letters of credit issued in support of other liabilities-EUR 18.3 million)
(2) Restructuring credit facility of EUR 275 million (available under the senior credit facility)
(3a) Term Loan A due to be repaid in certain instalments up to 2012
(3b) Term Loan B due to be repaid in full in 2013
(3c) Term Loan C due to be repaid in full in 2014
(4) 7.50% senior debentures due 2025 of $292.3 million
(5) Receivables securitisation floating rate notes mature September 2011
(6) EUR 217.5 million 7.75% senior subordinated notes due 2015 and US$200.0 million 7.75% senior subordinated notes due
2015
16. Board Approval
This interim management report and condensed interim financial statements were
approved by the board of directors on 11 August, 2008.
17. Distribution of Interim Management Report
The 2008 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.
Supplemental Financial Information
Reconciliation of net income to EBITDA, before exceptional items & share-based payment expense
6 months to 6 months to 3 months to 3 months to
30-Jun-08 30-Jun -07 30-Jun-08 30-Jun -07
EUR '000 EUR '000 EUR '000 EUR '000
-------------------------------------------- ------------ ------------- ------------ --------------
Profit/(loss) for the financial period 123,603 (39,095) 83,440 31,295
Equity minority interests 6,508 7,237 3,830 3,508
Income tax expense 14,912 32,328 (3,800) 8,093
Share of associates' operating income (2,551) (6,239) (1,094) (5,485)
Profit on sale of assets and operations
-subsidiaries - (5,870) - (5,141)
Loss on disposal of associates 6,905 - 6,905 -
Reorganisation and restructuring costs 17,318 36,569 - 25,429
Impairment of fixed assets 10,950 4,662 - 4,662
Total net interest 134,033 270,388 66,640 96,720
Share-based payment expense 6,050 16,896 2,368 3,659
Depreciation, depletion (net) and
amortisation 196,449 196,816 98,629 96,928
------------ ------------- ------------ --------------
EBITDA before exceptional items and share-
based payment expense EUR 514,177 EUR 513,692 EUR 256,918 EUR 259,668
------------ ------------- ------------ --------------
EUR Million Q1, 2007 Q2, 2007 Q3, 2007 Q4, 2007 FY 2007 Q1, 2008 Q2, 2008
-------------------------------- --------- --------- --------- --------- --------- --------- ---------
Group and third party revenue 2,628 2,650 2,689 2,656 10,624 2,702 2,713
Third party revenue 1,794 1,831 1,829 1,818 7,272 1,832 1,846
EBITDA before exceptional items
and share-based payment expense 254 260 275 275 1,064 257 257
EBITDA margin 14.2% 14.2% 15.1% 15.1% 14.6% 14.0% 13.9%
Operating profit 130 134 171 126 562 127 156
(Loss)/profit before tax (42) 43 106 64 170 62 83
Free cash flow (40) 3 150 73 186 1 76
Basic earnings per share (cent
per share) (50.9) 14.4 38.6 46.9 74.3 18.4 38.3
Weighted average number of
shares used in EPS calculation 138,241 217,702 217,768 217,952 198,188 217,994 218,022
Net debt 3,549 3,605 3,448 3,404 3,404 3,373 3,285
Net debt to EBITDA (LTM) 3.71 3.62 3.30 3.20 3.20 3.16 3.09
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