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| Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
|---|---|---|---|---|---|
| Smurfit Kappa Group Plc | LSE:SKG | London | Ordinary Share | IE00B1RR8406 | ORD EUR0.001 (CDI) |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| 34.00 | 0.98% | 3,518.00 | 3,510.00 | 3,512.00 | 3,518.00 | 3,454.00 | 3,462.00 | 383,761 | 16:35:00 |
| Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
|---|---|---|---|---|---|
| Pkg Paper, Plastics Film | 11.27B | 758M | 2.9114 | 12.06 | 9.14B |
TIDMSKG
2 August 2017: Smurfit Kappa Group plc ('SKG' or 'the Group') today announced results for the 3 months and 6 months ending 30 June 2017.
2017 Second Quarter & First Half | Key Financial Performance Measures
Hot Features
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EURm H1 H1 Change Q2 Q2 Change Q1 Change
2017 2016 2017 2016 2017
Revenue EUR4,233 EUR4,049 5% EUR2,104 EUR2,049 3% EUR2,129 (1%)
EBITDA(1) EUR569 EUR593 (4%) EUR292 EUR312 (7%) EUR278 5%
EBITDA margin(1) 13.4% 14.6% 13.9% 15.3% 13.0%
Operating Profit before ExceptionalItems EUR358 EUR390 (8%) EUR190 EUR211 (10%) EUR168 13%
Profit before Income Tax EUR245 EUR312 (21%) EUR136 EUR184 (26%) EUR109 24%
Basic EPS (cent) 74.3 90.8 (18%) 42.8 52.0 (18%) 31.5 36%
Pre-exceptional Basic EPS (cent)(1) 75.0 85.6 (12%) 42.8 46.9 (9%) 32.2 33%
Return on Capital Employed(1) 14.7% 15.4% 15.0%
Free Cash Flow(1) EUR46 EUR35 31% EUR30 EUR28 6% EUR16 85%
Net Debt(1) EUR2,985 EUR3,121 (4%) EUR2,931 2%
Net Debt to EBITDA (LTM)(1) 2.5x 2.5x 2.4x
(1) Additional information in relation to these Alternative Performance Measures ('APMs') is set out in Supplementary FinancialInformation on page 37.
Second Quarter and Half Year Key Points
-- Group revenue growth of 5% for the first six months with strong demand
in most markets
-- Second quarter EBITDA of EUR292 million with increased sequential EBITDA
margin of 13.9%
-- Kraftliner demand robust with additional EUR50 per tonne price increase
implemented in the third quarter
-- Containerboard price increases feeding through to corrugated price
recovery
-- Interim dividend increased by 5% to 23.1 cent per share
Performance Review and Outlook
Tony Smurfit, Group CEO, commented:
"We are pleased to report a good set of results for the first half which were achieved against a backdrop of continued and unprecedented recovered fibre cost inflation of approximately EUR75 million year-on-year. We are in the process of recovering these input costs as we move through the remainder of 2017 and into 2018.
"The Group reported sequentially improved EBITDA margins at 13.9% with both Europe and the Americas delivering improvement as a result of corrugated price recovery.
"In the first half, global containerboard supply has been very tight, and remains so. As a result of our integrated system which gives security of supply in both kraftliner and testliner, SKG continues to meet its customers' supply needs, a competitive strength valued by both local and multinational customers. Our business continues to attract new customers as a result of this changed dynamic. We maintain our focus on investing in our asset base both organically and through acquisition to ensure we have sufficient mill and conversion capacities to meet and exceed our customers' requirements.
"In Europe we have seen a strong demand environment in the second quarter leading to a first half increase in absolute corrugated volumes of over 2.5% with growth of 5% for the second quarter on a days adjusted basis. In the Americas, the Group reported strong volume growth in Colombia, Mexico and Brazil while Argentina and Venezuela remained challenging.
"As a result of the containerboard price increases in the first half of the year, we began, in the second quarter, increasing corrugated prices in Europe and the Americas and these increases will be progressively implemented throughout the remainder of the year and into the first quarter of 2018. However, shortage of supply and unabated input cost pressures in both regions have necessitated further containerboard price increase announcements for implementation in the third quarter. This will require a further round of corrugated price increases in the fourth quarter and beyond.
"During the first half we completed investments of EUR177 million across our regions and expect to spend over EUR400 million by year end. SKG continues to develop and improve its operations across all its business areas. Growth and cost reduction investments allied with our track record of earnings enhancing acquisitions will continue to improve the prospects for the Group.
"While recovered fibre cost pressures present short-term challenges, SKG is better positioned today than at any other point in our recent history. Our capital structure, our asset base and our integrated business model continue to strengthen. This will enhance our ability to translate today's market conditions into improved earnings in 2017 and beyond".
About Smurfit Kappa
Smurfit Kappa, a FTSE 100 company, is one of the leading providers of paper-based packaging solutions in the world, with around 45,000 employees in approximately 370 production sites across 34 countries and with revenue of EUR8.2 billion in 2016. We are located in 21 countries in Europe, and 13 in the Americas. We are the only large-scale pan-regional player in Latin America.
With our pro-active team, we relentlessly use our extensive experience and expertise, supported by our scale, to open up opportunities for our customers. We collaborate with forward thinking customers by sharing superior product knowledge, market understanding and insights in packaging trends to ensure business success in their markets. We have an unrivalled portfolio of paper-packaging solutions, which is constantly updated with our market-leading innovations. This is enhanced through the benefits of our integration, with optimal paper design, logistics, timeliness of service, and our packaging plants sourcing most of their raw materials from our own paper mills.
smurfitkappa.com
Check out our microsite: openthefuture.info
Follow us on Twitter at @smurfitkappa and on LinkedIn at 'Smurfit Kappa'.
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 Garrett Quinn Melanie Farrell or Mark Kenny Smurfit Kappa FTI Consulting T: +353 1 202 71 80 T: +353 1 663 36 80 E: ir@smurfitkappa.com E: smurfitkappa@fticonsulting.com
2017 Second Quarter & First Half | Performance Overview
The Group delivered a 5% increase in revenue year-on-year for the first half and broadly similar on an underlying1 basis. For the quarter, this was a 3% increase and 4% on an underlying basis. EBITDA of EUR292 million for the quarter was 7% down on the same period in 2016 and 5% ahead of the first quarter of 2017. The underlying EBITDA for the quarter was down 4% year-on-year negatively impacted by reduced working days due to the timing of Easter and the continued pressure of increasing recovered fibre costs.
EBITDA margin improved in the second quarter, recovering to 13.9% from 13.0% in the first quarter driven by improved margins in both Europe and the Americas. The recovery in margin was driven by the Group's investment in high return capital projects, the strength of our integrated business model and the start of our corrugated price recovery.
In Europe, reported EBITDA was EUR227 million or a reduction of EUR24 million year-on-year. The result for the quarter was adversely impacted by reduced working days and increased recovered fibre costs. In the second quarter of 2016 the result included a one-off benefit from the elimination of a deficit in one of our Dutch pension schemes which totalled approximately EUR12 million. The reported result for the first half was EUR439 million, 4% down year-on-year predominantly due to increased recovered fibre costs of approximately EUR50 million.
High demand in Europe and the far-east has resulted in European recovered fibre costs continuing to increase, up nearly 20% in the first half of 2017 against the same period in 2016. Recovered fibre costs in the Americas have also experienced the same pressure with approximately EUR25 million in additional recovered fibre costs year-on-year for the first half.
Kraftliner supply remains extremely tight globally, due to continued strong demand. The Group successfully implemented a EUR50 per tonne price increase in Europe in the first quarter and an additional EUR40 per tonne in May. In June the Group announced a further EUR50 per tonne increase which will be fully implemented
In European recycled containerboard, the Group was successful in implementing an EUR80 per tonne increase in the first half of 2017. Recycled containerboard continues to be in high demand with inventory levels remaining tight despite the recent capacity additions by third parties in Germany and the Netherlands. Margin pressure remains for recycled containerboard due to continuing increases in recovered fibre costs and as a result the Group has announced a further EUR50 per tonne price increase.
In Europe, the realised corrugated price increase on a constant currency basis and from a first quarter 2017 baseline was almost 2% for the second quarter or just under 1% against the 2016 average price. Corrugated price recovery is continuing through 2017 and into 2018.
In the Americas, the underlying result was 5% better year-on-year for the second quarter with the reported result decreasing by EUR2 million or 2% due primarily to adverse currency movements. For the first half the underlying result was 3% down and the reported result down 6% with adverse currency movements and increased recovered fibre costs the main contributors to the lower result. As is the case in Europe containerboard price increases have been implemented with corrugated price increases being realised as we progress through 2017 and into 2018. Excluding Venezuela, volumes in the Americas for the first half grew over 3%. Our businesses in Colombia, Mexico and the US represented just under 80% of the region's EBITDA.
2017 Second Quarter & First Half | Financial Performance
Revenue in the first half of EUR4,233 million was up EUR184 million on 2016. Revenue in Europe increased by EUR62 million year-on-year or EUR86 million on an underlying basis. In the Americas revenue increased by EUR122 million year-on-year or EUR94 million on an underlying basis.
EBITDA was EUR569 million, EUR24 million down on the same period in 2016 with lower earnings in both Europe and the Americas offset by marginally lower Group centre costs. The underlying quarterly sequential move was an increase of EUR21 million (the equivalent of over 7%), which arose mainly in Europe.
____________________
1 Underlying in relation to financial measures throughout this report excludes acquisitions, disposals, currency and hyperinflation movements where applicable
Operating profit before exceptional items in the first half of 2017 was EUR358 million compared to EUR390 million for the same period in 2016, 8% lower.
There were no exceptional items charged within operating profit in the first half of either 2017 or 2016.
Net pre-exceptional finance costs at EUR111 million for the first half were EUR20 million higher than in 2016, primarily as the result of an increase in cash interest and a net monetary loss of EUR11 million relating to hyperinflation. Cash interest was EUR8 million higher year-on-year, mainly as a result of an increased interest cost in Latin America driven by our capital programmes in the region and relatively high local interest rates.
The exceptional finance cost of EUR2 million in the first half of 2017 represented the accelerated amortisation of the issue costs relating to the debt within our senior credit facility which was paid down with the proceeds of the EUR500 million bond issue in January. In the first half of 2016 the Group reported exceptional finance income of EUR12 million, which was recorded in the second quarter, in relation to the profit on the sale of our shareholding in the Swedish company IL Recycling.
Profit before income tax was EUR245 million for the half year compared to EUR312 million for the same period in 2016.
The income tax expense (current and deferred) was EUR69 million for the first half compared to EUR97 million in 2016. The decrease in the expense largely reflects lower profitability.
Basic EPS for the first half was 74.3 cent, 18% lower than the 90.8 cent earned in the same period of 2016. The second quarter basic EPS was 42.8 cent against 52.0 cent in the second quarter of 2016, a reduction of 18%. On a pre-exceptional basis, EPS was 75.0 cent for the first half, 12% lower than the 85.6 cent in 2016 while EPS for the second quarter was 9% lower year-on-year at 42.8 cent compared to 46.9 cent in 2016.
2017 Second Quarter and First Half | Free Cash Flow
Free Cash Flow for the second quarter of 2017 was EUR30 million compared to EUR28 million in 2016. Although EBITDA was EUR20 million lower, this was more than offset by a lower working capital outflow and lower capital outflows. Cash interest and tax payments were higher in 2017.
Despite the decline of EUR24 million in EBITDA, our Free Cash Flow of EUR46 million for the six months to June 2017 was EUR11 million higher than in 2016. The year-on-year increase was driven mainly by lower outflows for working capital and 'other' (relating primarily to retirement benefits), partly offset by higher capital outflows, cash interest and tax payments.
Capital expenditure amounted to EUR177 million in the six months to June 2017 and equated to 88% of depreciation compared to 109% in 2016. Capital expenditure in the second quarter represented 110% of deprecation compared to 67% in the first quarter. This relatively low percentage in the first quarter reflected the high level of capital expenditure (equating to 179% of depreciation) in the fourth quarter of 2016.
The working capital move in the six months to June 2017 was an outflow of EUR125 million compared to EUR161 million in 2016. The outflow in 2017 was the combination of an increase in debtors and stocks partly offset by an increase in creditors. These increases reflect the combination of volume growth, strengthening European containerboard pricing and higher OCC costs.
Working capital amounted to EUR695 million at June 2017, representing 8.3% of annualised revenue compared to 8.3% at March 2017 and 8.5% at June 2016. Working capital increased by EUR122 million in the six months, reflecting mainly the net cash outflow of EUR125 million.
Cash interest of EUR80 million in the six months to June was EUR8 million higher in 2017, mainly as a result of an increased interest cost in Latin America driven by our capital programmes in the region and relatively high local interest rates.
Tax payments of EUR77 million were EUR6 million higher than in 2016, this was primarily down to the timing of payments.
2017 Second Quarter and First Half | Capital Structure
Net debt was EUR2,985 million at the end of June resulting in a net debt to EBITDA ratio of 2.5 times compared to 2.5 times at the end of the second quarter of 2016 and 2.4 times at the end of 2016. The Group's balance sheet continues to provide the Group with considerable financial strategic flexibility subject to the stated leverage range of 2.0x to 3.0x through the cycle and SKG's Ba1/BB+/BB+ credit rating.
At 30 June 2017 the Group's average interest rate was 4.2%, compared to 4.2% at 30 June 2016. The Group's diversified funding base and long dated maturity profile at 3.9 years provide a stable funding outlook. In terms of liquidity, the Group held cash on the balance sheet of EUR459 million at the end of the quarter which was further supplemented by available commitments under its revolving credit facility of approximately EUR833 million.
Dividends
The Board will increase the 2017 interim dividend by 5% to 23.1 cent per share. It is proposed to pay the interim dividend on 27 October 2017 to shareholders registered at the close of business on 29 September 2017.
2017 Second Quarter and First Half | Operating Efficiency
Commercial Offering and Innovation
SKG continues to create new ways of adding value and as a result help our customers succeed in their markets. Our efforts have been recognised with 22 awards in the first six months across many of our key geographies.
In April, the Group opened its first Experience Centre in the Americas, located in Dallas, and its latest European Experience Centre in Madrid. The Group also plans to open two additional centres in Cali, Colombia and Mexico City by the end of 2017 which will bring our global network to 19. These Experience Centres together with our industry leading business applications continue to help our customers succeed in their marketplace whether it is increasing sales through using ShelfSmart, or reducing costs by using SupplySmart.
In May, we hosted our European Innovation and Sustainability Conference in the Netherlands which was attended by over 150 multinational customers from across Europe. The event showcased our best designs, innovative solutions and most sustainable projects as voted for internally, by our customers and by members of the investment community. The future of packaging, the store of the future and consumer buying behaviour were presented by a number of external experts, highlighting the challenges and opportunities that lie ahead.
Sustainability
The Group published its tenth Sustainable Development Report in May 2017, outlining the progress made by the Group against the five strategic key sustainability priorities.
At the end of 2016 we reached our target to deliver 90% of our packaging solutions as chain of custody certified. This allows our customers' packaging to be labelled as certified. On climate change, the Group reported a 22.9% reduction in carbon emissions per tonne of paper produced since 2005. For water, SKG reported a reduction of 31.9% in the organic content of water ("COD") returned to the environment from paper and board mills since 2005. The Group has achieved a 13.3% reduction in waste sent to landfill from paper and board mills since 2013. In relation to health and safety, a core value of the Group, we have reduced our lost time accident (LTA) frequency by 10% in 2016.
The full 2016 Sustainability Report is available at smurfitkappa.com
Cost Take-out Programme
Since the programme's inception in 2008 the Group has achieved cost savings of over EUR850 million and the Group continues to view these projects as a key tool in combating cost inflation throughout the business. In 2017, as in previous years, we expect to offset wage inflation through internal cost take-out initiatives.
Capital Expenditure ('Quick Win') Programme
In 2016 the Group completed the investment stage of the 'Quick Win' capital expenditure programme. The benefits of these high return investments have been delivered since 2014 and are expected to deliver a total incremental EBITDA of EUR75 million by the end of the programme.
2017 Second Quarter and First Half | Regional Performance Review
Europe
The EBITDA margin of the European business recovered in the second quarter to 14.2% from 13.6% in the first quarter and a reported sequential increase in EBITDA of EUR14 million at EUR227 million. Europe reported EBITDA of EUR439 million for the first half, down EUR21 million or 4% year-on-year. Impacted by EUR5 million in adverse currency moves, on an underlying basis the result was EUR16 million lower. The anticipated first half margin squeeze as a result of higher recovered fibre costs was offset by the benefits of our capital investment programme, our continued focus on cost efficiencies and volume growth.
On a constant currency basis corrugated pricing was marginally up in the second quarter year-on-year and up almost 2% sequentially reflecting some positive momentum in pricing in the sheet-feeding business and in some negotiated accounts. The Group is well positioned to further recover margin through the implementation of corrugated price increases over the remainder of 2017 and into 2018.
The price of recovered fibre continues to increase after a slight reduction in April and shows no sign of abating. The main drivers of the increase are a combination of continued demand from local European markets, general global growth and strong Chinese demand. In the first half the price of recovered fibre in Europe for the Group was up nearly 20% against the same period in 2016 and is continuing its upward trend in July. The Group expects the trend for recovered fibre to remain at high levels in the medium-term, this dynamic supports containerboard pricing and in turn corrugated pricing.
Kraftliner demand remains very strong globally. The Group is approximately 500,000 tonnes net long on kraftliner, with which it supplies the open market covering both brown and white kraftliner grades. The Group successfully implemented price increases in Europe on brown kraftliner of EUR50 per tonne in the first quarter, an additional EUR40 per tonne was implemented in May and a further EUR50 per tonne was announced for late July implementation. On white top kraftliner the Group implemented EUR30 per tonne in April and has announced an additional EUR50 per tonne.
In European recycled containerboard, the Group was successful in implementing an EUR80 per tonne increase in the first half with an additional EUR50 per tonne announced. Recycled containerboard continues to be in very high demand with inventory levels remaining tight.
Good demand in most markets led to total corrugated volumes increasing 2% in the first half, with box volume growth of over 2.5% and the more commodity like sheet business down 1%. Box volumes represented over 88% of our corrugated volume in Europe in the half year to June 2017. With a stronger volume development in the second quarter (on a days adjusted basis), the Group expects the second half to continue this trend.
Our Sack business and Machine Glazed ("MG") business continue to benefit from extremely strong demand with healthy order books buoyed by increased demand in Africa and the Far East for sacks, and increased demand for MG paper as a result of recent international plastic bag bans.
The Americas
The EBITDA margin in the Americas business improved in the second quarter to 14.2% from 13.1% in the first quarter of 2017. EBITDA for the second quarter was lower than the same period last year by 2%. For the first half EBITDA was lower by 6% due to adverse currency movements and increased recovered fibre costs. Volumes for the first six months were up over 3% excluding Venezuela.
As is the case in Europe, containerboard price increases have been implemented with corrugated price increases being realised as we progress through 2017 into 2018.
In Colombia the Group's operations have continued to perform well with volumes up 5% in the first six months of the year over the same period in 2016. The continued expansion of the agricultural and fruit sector has been a significant contributor to the growth levels. Corrugated price increases were implemented in the first six months totalling close to 7% year-on-year in local currency and further increases are expected in the second half. The Group expects the Papelsa paper mill rebuild to begin operations in the second half which will deliver additional capacity.
In Mexico, volumes were up 4% for the first half with particularly high growth in our Northern Mexican business. The US dollar price for recovered fibre was up over 25% at the half year which together with strong demand has driven containerboard price increases. Corrugated prices are up over 11% in the first half against the same period in 2016. The Group expects the 100,000 tonne Los Reyes Mill project to start up in the second half, with incremental Group contribution expected in 2018.
In the US, SKG's recovered fibre prices have increased by almost 60% in the six months to June 2017 over the same period in 2016. The EBITDA margin in the country improved from the first quarter of 2017 with the implementation of some corrugated price increases and this will continue into the second half of 2017. The Group opened its first Experience Centre outside Europe in Dallas during the second quarter. This location will allow the Group to showcase the unique tools and business applications that enable our customers to succeed in their marketplace.
In Brazil, SKG's year-on-year volumes were up 11% for the first half and 16% for the second quarter showing a very strong turnaround in Latin America's largest market. Margins also improved sequentially for the second quarter due to a combination of increased volumes, favourable currency, some corrugated price increases and lower waste paper prices. The growth of our Pan American Sales in Brazil remains a key opportunity for SKG in the region.
EBITDA margins in the rest of the Americas operations suffered from similar input cost pressures in the second quarter of the year and consequent margin compression. The Group expects pricing initiatives to recapture margin through corrugated price increases in the latter part of 2017 and into 2018.
In Venezuela the Group's corrugated shipments were down 53% in the six months to June 2017 over the same period in 2016. However, the Group's operations continue to perform in extremely difficult circumstances. The business represented 1.6% of Group EBITDA in the first half. During the second quarter the DICOM rate devalued which continues to reduce the country's EBITDA contribution to the Group. The macro situation in Venezuela remains uncertain. We continue to monitor events as they unfold. Net assets in Venezuela decreased to EUR77 million as at 30 June 2017 (31 December 2016: EUR91 million).
Summary Cash Flow
Summary cash flows(1) 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-17 30-Jun-16 30-Jun-17 30-Jun-16
EURm EURm EURm EURm
EBITDA 292 312 569 593
Cash interest (41) (36) (80) (72)
expense
Working capital (48) (63) (125) (161)
change
Current (2) (3) (3) (7)
provisions
Capital (106) (104) (177) (211)
expenditure
Change in capital 5 (16) (50) (8)
creditors
Tax paid (46) (43) (77) (71)
Sale of fixed 1 1 3 1
assets
Other (25) (20) (14) (29)
Free cash flow 30 28 46 35
Share issues - - 1 -
Purchase of - - (11) (10)
own shares
Sale 1 13 5 13
of businesses
and investments
Purchase of - (10) (10) (41)
businesses
and investments
Dividends (138) (115) (138) (115)
Derivative (1) - (1) -
termination
payments
Net cash outflow (108) (84) (108) (118)
Deferred debt (3) (3) (7) (5)
issue
costs amortised
Currency 57 (5) 71 50
translation
adjustment
Increase in (54) (92) (44) (73)
net debt
(1) The summary cash flow is prepared on a different basis to the Condensed Consolidated Statement of Cash Flows under IFRS ('IFRS cash flow') and as such the reconciling items between EBITDA and decrease/(increase) in net debt may differ to amounts presented in the IFRS cash flow. The principal differences are as follows:
(a) The summary cash flow details movements in net debt. The IFRS cash flow details movements in cash and cash equivalents.
(b) Free cash flow reconciles to cash generated from operations in the IFRS cash flow as shown in the table on the next page. The main adjustments are in respect of cash interest, capital expenditure, tax payments and the sale of fixed assets and businesses.
(c) The IFRS cash flow has different sub-headings to those used in the summary cash flow.
-- Current provisions in the summary cash flow are included within change
in employee benefits and other provisions in the IFRS cash flow.
-- The total of capital expenditure and change in capital creditors in
the summary cash flow includes additions to intangible assets which is
shown separately in the IFRS cash flow. It also includes capitalised
leased assets which are excluded from additions to property, plant and
equipment and biological assets in the IFRS cash flow.
-- Other in the summary cash flow includes changes in employee benefits
and other provisions (excluding current provisions), amortisation of
capital grants, receipt of capital grants and dividends received from
associates which are shown separately in the IFRS cash flow.
Reconciliation of Free Cash Flow to Cash Generated from Operations
6 months to 6 months to
30-Jun-17 30-Jun-16
EURm EURm
Free cash flow 46 35
Add back: Cash interest 80 72
Capital expenditure (net of change in capital creditors) 227 219
Tax payments 77 71
Less: Sale of fixed assets (3) (1)
Profit on sale of assets and businesses - non-exceptional (6) (4)
Receipt of capital grants (in 'Other' in summary cash flow) - (1)
Dividends received from associates - (1)
Non-cash financing activities (1) (1)
Cash generated from operations 420 389
Capital Resources
The Group's primary sources of liquidity are cash flow from operations and borrowings under the revolving credit facility. The Group's primary uses of cash are for funding day to day operations, capital expenditure, debt service, dividends and other investment activity including acquisitions.
At 30 June 2017, Smurfit Kappa Treasury Funding Limited had outstanding US$292.3 million 7.50% senior debentures due 2025. The Group had outstanding EUR117 million and STGGBP61.5 million variable funding notes issued under the EUR240 million accounts receivable securitisation programme maturing in June 2019, together with EUR5 million variable funding notes issued under the EUR175 million accounts receivable securitisation programme maturing in February 2022.
Smurfit Kappa Acquisitions had outstanding EUR200 million 5.125% senior notes due 2018, US$300 million 4.875% senior notes due 2018, EUR400 million 4.125% senior notes due 2020, EUR250 million senior floating rate notes due 2020, EUR500 million 3.25% senior notes due 2021, EUR500 million 2.375% senior notes due 2024 and EUR250 million 2.75% senior notes due 2025. Smurfit Kappa Acquisitions and certain subsidiaries are also party to a senior credit facility. At 30 June 2017, the Group's senior credit facility comprised term drawings of EUR312.6 million, US$55.8 million and STGGBP106.9 million under the amortising Term A facility maturing in 2020. In addition, as at 30 June 2017, the facility included an EUR845 million revolving credit facility of which EUR6 million was drawn in revolver loans, with a further EUR6 million in operational facilities including letters of credit drawn under various ancillary facilities.
The following table provides the range of interest rates as of 30 June 2017 for each of the drawings under the various senior credit facility loans.
Borrowing arrangement Currency Interest Rate
Term A Facility EUR 0.976% - 1.021%
USD 2.576%
GBP 1.602%
Revolving Credit Facility EUR 0.728%
Borrowings under the revolving credit facility are available to fund the Group's working capital requirements, capital expenditures and other general corporate purposes.
In January 2017, the Group issued EUR500 million of seven-year euro denominated senior notes at a coupon of 2.375%, the proceeds of which were used to prepay term debt under the senior credit facility, reduce indebtedness under existing securitisation facilities and for general corporate purposes. In February 2017, the Group increased the revolving credit facility under the senior credit facility by EUR220 million thereby further enhancing liquidity.
In May 2017, the Group amended, restated and extended its EUR175 million 2018 receivables securitisation programme, which utilises the Group's receivables in Austria, Belgium, Italy and the Netherlands, extending the maturity to 2022 and reducing the margin on the variable funding notes from 1.70% to 1.375%.
Market Risk and Risk Management Policies
The Group is exposed to the impact of interest rate changes and foreign currency fluctuations due to its investing and funding activities and its operations in different foreign currencies. Interest rate risk exposure is managed by achieving an appropriate balance of fixed and variable rate funding. As at 30 June 2017, the Group had fixed an average of 81% of its interest cost on borrowings over the following twelve months.
The Group's fixed rate debt comprised EUR200 million 5.125% senior notes due 2018, US$300 million 4.875% senior notes due 2018 (US$50 million swapped to floating), EUR400 million 4.125% senior notes due 2020, EUR500 million 3.25% senior notes due 2021, EUR500 million 2.375% senior notes due 2024, EUR250 million 2.75% senior notes due 2025 and US$292.3 million 7.50% senior debentures due 2025. In addition the Group had EUR349 million in interest rate swaps with maturity dates ranging from October 2018 to January 2021.
The Group's earnings are affected by changes in short-term interest rates as a result of its floating rate borrowings. If LIBOR/EURIBOR interest rates for these borrowings increase by one percent, the Group's interest expense would increase, and income before taxes would decrease, by approximately EUR8 million over the following twelve months. Interest income on the Group's cash balances would increase by approximately EUR5 million assuming a one percent increase in interest rates earned on such balances over the following twelve months.
The Group uses foreign currency borrowings, currency swaps, options and forward contracts in the management of its foreign currency exposures.
Principal Risks and Uncertainties
Risk assessment and evaluation is an integral part of the management process throughout the Group. Risks are identified, evaluated and appropriate risk management strategies are implemented at each level.
The 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 2016 annual report on pages 30-35. The annual report is available on our website smurfitkappa.com. The principal risks and uncertainties for the remaining six months of the financial year are summarised below.
-- If the current economic climate were to deteriorate, for example
following Brexit or changes in world trade agreements, and result in
an economic slowdown which was sustained over any significant length
of time, or the sovereign debt crisis (including its impact on the
euro) were to re-emerge or exacerbate, it could adversely affect the
Group's financial position and results of operations.
-- The cyclical nature of the packaging industry could result in
overcapacity and consequently threaten the Group's pricing structure.
-- If operations at any of the Group's facilities (in particular its key
mills) were interrupted for any significant length of time it could
adversely affect the Group's financial position and results of
operations.
-- Price fluctuations in raw materials and energy costs could adversely
affect the Group's manufacturing costs.
-- The Group 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.
-- Failure to maintain good health and safety practices may have an
adverse effect on our business.
-- The Group is subject to a growing number of environmental laws and
regulations, and the cost of compliance or the failure to comply with
current and future laws and regulations may negatively affect the
Group's business.
-- The Group is subject to anti-trust and similar legislation in the
jurisdictions in which it operates.
-- The Group, similar to other large global companies, is susceptible to
cyber attacks with the threat to the confidentiality, integrity and
availability of data in its systems.
-- The Group is exposed to potential risks in relation to the current
political situation in Venezuela which are set out as follows:
The Venezuelan economy remains depressed and the political
situation unpredictable, increasing the risk of future
inflationary pressures and currency devaluations. The effect of
high inflation without a corresponding devaluation of the exchange
rate would result in a net monetary loss which may distort some of
the Group's key metrics. Were the exchange rate to devalue in line
with inflation it would have an adverse effect on the Group's
results of operations and financial position. We will continue to
monitor events as they unfold. Net assets in Venezuela amounted to
EUR77 million at 30 June 2017.
Our Venezuelan operations have mitigated to some extent the loss
of revenue due to the drop in corrugated volumes in the country by
exporting paper to our operations in other Latin American
countries. This export of paper is subject to the availability of
local raw materials to produce the paper, the quality of the paper
being maintained to a satisfactory standard for our end markets
and the renewal of an export licence by the Government every five
months. There is a risk that if the quality of paper materially
deteriorated due to a lack of raw materials or if we were unable
to renew the export licence it would have an adverse effect on our
results of operations.
In 2014 the Venezuelan government decreed that companies could
only seek price increases if they had clearance that their margins
were within certain guidelines. Our Venezuelan operations may not
be able to implement price increases in a timely manner to cover
the cost of its increasing raw material and labour costs as a
result of inflation and the devaluation of currency, which would
have an adverse effect on our results of operations in Venezuela.
The Board regularly monitors all of the above risks and appropriate actions are taken to mitigate those risks or address their potential adverse consequences.
Condensed Consolidated Income Statement - Six Months
6 months to 30-Jun-17 6 months to 30-Jun-16
Unaudited Unaudited
Pre-exceptional2017 Exceptional2017 Total2017 Pre-exceptional2016 Exceptional2016 Total2016
EURm EURm EURm EURm EURm EURm
Revenue 4,233 - 4,233 4,049 - 4,049
Cost of (3,011) - (3,011) (2,829) - (2,829)
sales
Gross 1,222 - 1,222 1,220 - 1,220
profit
Distribution (332) - (332) (314) - (314)
costs
Administrative (532) - (532) (516) - (516)
expenses
Operating 358 - 358 390 - 390
profit
Finance (129) (2) (131) (117) - (117)
costs
Finance 18 - 18 26 12 38
income
Share - - - 1 - 1
of
associates'
profit(after
tax)
Profit 247 (2) 245 300 12 312
before
income tax
Income tax (69) (97)
expense
Profit for 176 215
the
financial
period
Attributable
to:
Owners 175 212
of the
parent
Non-controlling 1 3
interests
Profit for 176 215
the
financial
period
Earnings
per
share
Basic 74.3 90.8
earnings
per
share -
cent
Diluted 73.9 90.0
earnings
per share
- cent
Condensed Consolidated Income Statement - Second Quarter
3 months to 30-Jun-17 3 months to 30-Jun-16
Unaudited Unaudited
Pre-exceptional2017 Exceptional2017 Total2017 Pre-exceptional2016 Exceptional2016 Total2016
EURm EURm EURm EURm EURm EURm
Revenue 2,104 - 2,104 2,049 - 2,049
Cost of (1,490) - (1,490) (1,419) - (1,419)
sales
Gross 614 - 614 630 - 630
profit
Distribution (164) - (164) (160) - (160)
costs
Administrative (260) - (260) (259) - (259)
expenses
Operating 190 - 190 211 - 211
profit
Finance (68) - (68) (56) - (56)
costs
Finance 14 - 14 16 12 28
income
Share - - - 1 - 1
of
associates'
profit(after
tax)
Profit 136 - 136 172 12 184
before
income tax
Income tax (34) (59)
expense
Profit for 102 125
the
financial
period
Attributable
to:
Owners 101 122
of the
parent
Non-controlling 1 3
interests
Profit for 102 125
the
financial
period
Earnings
per
share
Basic 42.8 52.0
earnings
per
share -
cent
Diluted 42.6 51.6
earnings
per share
- cent
Condensed Consolidated Statement of Comprehensive Income - Six Months
6 months to 6 months to
30-Jun-17 30-Jun-16
Unaudited Unaudited
EURm EURm
Profit for the financial period 176 215
Other comprehensive income:
Items that may be subsequently
reclassified to profit or loss
Foreign currency translation adjustments:
- Arising in the period (129) (98)
Effective portion of changes in fair
value of cash flow hedges:
- Movement out of reserve 3 3
- New fair value adjustments into reserve (1) (4)
(127) (99)
Items which will not be subsequently
reclassified to profit or loss
Defined benefit pension plans:
- Actuarial gain/(loss) 15 (129)
- Movement in deferred tax (2) 21
13 (108)
Total other comprehensive expense (114) (207)
Total comprehensive income 62 8
for the financial period
Attributable to:
Owners of the parent 83 5
Non-controlling interests (21) 3
Total comprehensive income 62 8
for the financial period
Condensed Consolidated Statement of Comprehensive Income - Second Quarter
3 months to 3 months to
30-Jun-17 30-Jun-16
Unaudited Unaudited
EURm EURm
Profit for the financial period 102 125
Other comprehensive income:
Items that may be subsequently
reclassified to profit or loss
Foreign currency translation adjustments:
- Arising in the period (160) (34)
Effective portion of changes in fair
value of cash flow hedges:
- Movement out of reserve 2 1
- New fair value adjustments into reserve (1) (2)
(159) (35)
Items which will not be subsequently
reclassified to profit or loss
Defined benefit pension plans:
- Actuarial gain/(loss) 10 (72)
- Movement in deferred tax (2) 14
8 (58)
Total other comprehensive expense (151) (93)
Total comprehensive (expense)/income (49) 32
for the financial period
Attributable to:
Owners of the parent (26) 25
Non-controlling interests (23) 7
Total comprehensive (expense)/income (49) 32
for the financial period
Condensed Consolidated Balance Sheet
30-Jun-17 30-Jun-16 31-Dec-16
Unaudited Unaudited Audited
EURm EURm EURm
ASSETS
Non-current assets
Property, plant and equipment 3,191 3,086 3,261
Goodwill and intangible assets 2,426 2,488 2,478
Available-for-sale financial assets 21 21 21
Investment in associates 16 16 17
Biological assets 97 95 114
Trade and other receivables 23 32 29
Derivative financial instruments 20 30 42
Deferred income tax assets 191 193 190
5,985 5,961 6,152
Current assets
Inventories 768 740 779
Biological assets 11 9 10
Trade and other receivables 1,622 1,604 1,470
Derivative financial instruments 8 13 10
Restricted cash 8 10 7
Cash and cash equivalents 451 289 436
2,868 2,665 2,712
Total assets 8,853 8,626 8,864
EQUITY
Capital and reserves attributable
to owners of the parent
Equity share capital - - -
Share premium 1,984 1,983 1,983
Other reserves (615) (524) (507)
Retained earnings 974 638 853
Total equity attributable 2,343 2,097 2,329
to owners of the parent
Non-controlling interests 145 155 174
Total equity 2,488 2,252 2,503
LIABILITIES
Non-current liabilities
Borrowings 3,243 3,314 3,247
Employee benefits 845 906 884
Derivative financial instruments 19 30 12
Deferred income tax liabilities 141 157 183
Non-current income tax liabilities 31 31 30
Provisions for liabilities and charges 61 52 69
Capital grants 13 13 14
Other payables 13 13 13
4,366 4,516 4,452
Current liabilities
Borrowings 201 106 137
Trade and other payables 1,718 1,679 1,705
Current income tax liabilities 37 40 21
Derivative financial instruments 19 14 27
Provisions for liabilities and charges 24 19 19
1,999 1,858 1,909
Total liabilities 6,365 6,374 6,361
Total equity and liabilities 8,853 8,626 8,864
Condensed Consolidated Statement of Changes in Equity
Attributable to owners of the parent
Equitysharecapital Sharepremium Otherreserves Retainedearnings Total Non-controllinginterests Totalequity
EURm EURm EURm EURm EURm EURm EURm
Unaudited
At 1 January 2017 - 1,983 (507) 853 2,329 174 2,503
Profit for the financial - - - 175 175 1 176
period
Other comprehensive
income
Foreign - - (107) - (107) (22) (129)
currency
translationadjustments
Defined benefit - - - 13 13 - 13
pension plans
Effective portion - - 2 - 2 - 2
of changes in
fairvalue of cash
flow hedges
Total - - (105) 188 83 (21) 62
comprehensive(expense)/income
for thefinancial
period
Shares issued - 1 - - 1 - 1
Acquired non-controlling - - - - - (15) (15)
interests
Hyperinflation - - - 69 69 9 78
adjustment
Dividends paid - - - (136) (136) (2) (138)
Share-based payment - - 8 - 8 - 8
Shares acquired by - - (11) - (11) - (11)
SKG EmployeeTrust
At 30 June 2017 - 1,984 (615) 974 2,343 145 2,488
Unaudited
At 1 January 2016 - 1,983 (425) 619 2,177 151 2,328
Profit for the financial - - - 212 212 3 215
period
Other comprehensive
income
Foreign - - (98) - (98) - (98)
currency
translationadjustments
Defined benefit - - - (108) (108) - (108)
pension plans
Effective portion - - (1) - (1) - (1)
of changes in
fairvalue of cash
flow hedges
Total - - (99) 104 5 3 8
comprehensive(expense)/income
for thefinancial
period
Hyperinflation - - - 28 28 3 31
adjustment
Dividends paid - - - (113) (113) (2) (115)
Share-based payment - - 10 - 10 - 10
Shares acquired by - - (10) - (10) - (10)
SKG EmployeeTrust
At 30 June 2016 - 1,983 (524) 638 2,097 155 2,252
An analysis of the movements in Other reserves is provided in Note 13.
Condensed Consolidated Statement of Cash Flows
6 months to 6 months to
30-Jun-17 30-Jun-16
Unaudited Unaudited
EURm EURm
Cash flows from operating activities
Profit before income tax 245 312
Net finance costs 113 79
Depreciation charge 177 172
Amortisation of intangible assets 21 16
Amortisation of capital grants (1) (1)
Equity settled share-based payment expense 8 10
Profit on sale of assets and businesses (6) (4)
Share of associates' profit (after tax) - (1)
Net movement in working capital (125) (161)
Change in biological assets 5 5
Change in employee benefits (28) (44)
and other provisions
Other (primarily hyperinflation 11 6
adjustments)
Cash generated from operations 420 389
Interest paid (81) (74)
Income taxes paid:
Irish corporation tax paid (6) (9)
Overseas corporation tax (net (71) (62)
of tax refunds) paid
Net cash inflow from operating activities 262 244
Cash flows from investing activities
Interest received 1 2
Business disposals 4 -
Additions to property, plant and (222) (213)
equipment and biological assets
Additions to intangible assets (5) (6)
Receipt of capital grants - 1
Disposal of available-for-sale 1 13
financial assets
Increase in restricted cash (1) (5)
Disposal of property, plant and equipment 9 5
Dividends received from associates - 1
Purchase of subsidiaries and (9) (32)
non-controlling interests
Deferred consideration paid (1) (9)
Net cash outflow from investing activities (223) (243)
Cash flows from financing activities
Proceeds from issue of new ordinary shares 1 -
Proceeds from bond issue 500 -
Proceeds from other debt issues - 250 Purchase of own shares (11) (10) Increase in other interest-bearing 4 35 borrowings Repayment of finance leases (1) (1) Repayment of borrowings (366) (169) Derivative termination payments (1) - Deferred debt issue costs paid (9) (2) Dividends paid to shareholders (136) (113) Dividends paid to non-controlling interests (2) (2) Net cash outflow from financing activities (21) (12) Increase/(decrease) in cash 18 (11) and cash equivalents Reconciliation of opening to closing cash and cash equivalents Cash and cash equivalents at 1 January 402 263 Currency translation adjustment 8 22 Increase/(decrease) in cash 18 (11) and cash equivalents Cash and cash equivalents at 30 June 428 274
An analysis of the net movement in working capital is provided in Note 11.
Notes to the Condensed Consolidated Interim Financial Statements
1.General Information
Smurfit Kappa Group plc ('SKG plc' or 'the Company') and its subsidiaries (together 'SKG' or 'the Group') manufacture, distribute and sell containerboard, corrugated containers and other paper-based packaging products such as solidboard, graphicboard and bag-in-box. The Company is a public limited company whose shares are publicly traded. It is incorporated and domiciled in Ireland. The address of its registered office is Beech Hill, Clonskeagh, Dublin 4, D04 N2R2, Ireland.
2.Basis of Preparation and Accounting Policies
The condensed consolidated interim financial statements included in this report have been prepared in accordance with the Transparency (Directive 2004/109/EC) Regulations 2007, the related Transparency Rules of the Central Bank of Ireland 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 2016 have been included in this report; this information is supplementary and not required by IAS 34. This report should be read in conjunction with the consolidated financial statements for the year ended 31 December 2016 included in the Group's 2016 annual report which is available on the Group's website; smurfitkappa.com.
The accounting policies and methods of computation and presentation adopted in the preparation of the condensed consolidated interim financial statements are consistent with those described and applied in the annual report for the financial year ended 31 December 2016. There are no new IFRS standards effective from 1 January 2017 which have a material effect on the condensed consolidated interim financial information included in this report.
The IASB has issued a number of new standards which are not yet effective or early adopted by the Group. They do not have an effect on the financial information contained in this report and will be more fully discussed in our annual report for 2017. Those standards which are relevant for the Group are:
-- IFRS 9, Financial Instruments, is the standard which will
replace IAS 39, Financial Instruments: Recognition and Measurement.
The Standard addresses the classification, measurement and
derecognition of financial assets and liabilities, introduces new
rules for hedge accounting and a new impairment model for financial
assets. IFRS 9 is effective for annual periods beginning on or after 1
January 2018, and the Group will apply IFRS 9 from its effective date.
The Group is currently assessing the effects of applying IFRS 9, and
while our assessment of the effects of applying the new standard is
ongoing we do not expect a material impact on the financial statements.
-- IFRS 15, Revenue from Contracts with Customers, replaces IAS
18, Revenue and IAS 11, Construction contracts and
related interpretations. IFRS 15 establishes principles for reporting
the nature, amount, timing and uncertainty of revenue and cash flows
arising from contracts with customers. It specifies how and when
revenue should be recognised as well as requiring enhanced
disclosures. IFRS 15 is effective for annual periods beginning on or
after 1 January 2018, and the Group will apply IFRS 15 from its
effective date. Note 2 to the consolidated financial statements of the
Group's 2016 annual report outlined a number of areas that could
potentially be affected by IFRS 15 and which were being assessed by
the Group. These areas included the revenue recognition policy in
respect of our contract manufacturing packaging business and the
policy for accounting for contract fulfilment costs. We have advanced
our assessment in these areas during the six month period to June 2017
and while our assessment of the effects of applying the new standard
is ongoing we do not expect a material impact on the financial
statements.
2.Basis of Preparation and Accounting Policies (continued)
-- IFRS 16, Leases replaces IAS 17 Leases and related
interpretations. IFRS 16 sets out the principles for the recognition,
measurement, presentation and disclosure of leases for both the lessee
and the lessor. For lessees, IFRS 16 eliminates the classification of
leases as either operating leases or finance leases and introduces a
single lessee accounting model whereby all leases are accounted for as
finance leases, with some exemptions for short-term and low-value
leases. For lessors, IFRS 16 substantially carried forward the
accounting requirement in IAS 17. IFRS 16 is effective for annual
periods beginning on or after 1 January 2019, and subject to EU
endorsement, the Group will apply IFRS 16 from its effective date. The
standard will affect primarily the accounting for the Group's
operating leases. The Group's non-cancellable operating lease
commitments at 31 December 2016 are detailed in Note 29 to the
consolidated financial statements of the Group's 2016 annual report.
However, the Group has not yet determined to what extent these
commitments will result in the recognition of an asset and a liability
for future payments and how this will affect the Group's profit or
loss and classification of cash flows. Some of the commitments may be
covered by the exception for short-term and low-value leases and some
may relate to arrangements which will not qualify as leases under IFRS
16. The Group is currently assessing the impact of IFRS 16.
The Group is a highly integrated manufacturer of paper-based packaging products with leading market positions, quality assets and broad geographic reach. The financial position of the Group, its cash generation, capital resources and liquidity continue to provide a stable financing platform. Having made enquiries, the Directors have a reasonable expectation that the Company, and the Group as a whole, have adequate resources to continue in operational existence for the foreseeable future. For this reason, they continue to adopt the going concern basis in preparing the condensed consolidated interim financial statements.
The condensed consolidated interim financial statements include all adjustments that management considers necessary for a fair presentation of such financial information. All such adjustments are of a normal recurring nature. Certain cumulative amounts in this interim statement may not equate precisely to the sum of the current and previous quarters' amounts due to rounding.
The Group's auditors have not audited or reviewed the condensed consolidated interim financial statements contained in this report.
The condensed consolidated interim financial statements presented do not constitute full statutory accounts. Full statutory accounts for the year ended 31 December 2016 will be filed with the Irish Registrar of Companies in due course. The audit report on those statutory accounts was unqualified.
3.Segmental Analyses
The Group has determined operating segments based on the manner in which reports are reviewed by the chief operating decision maker ('CODM'). The CODM is determined to be the executive management team responsible for assessing performance, allocating resources and making strategic decisions. The Group has identified two operating segments: 1) Europe and 2) The Americas.
The Europe segment is highly integrated. It includes a system of mills and plants that primarily produces a full line of containerboard that is converted into corrugated containers. The Americas segment comprises all forestry, paper, corrugated and folding carton activities in a number of Latin American countries and the United States. Inter-segment revenue is not material. No operating segments have been aggregated for disclosure purposes.
Segment profit is measured based on EBITDA(1)
6 months to 30-Jun-17 6 months to 30-Jun-16
Europe TheAmericas Total Europe TheAmericas Total
EURm EURm EURm EURm EURm EURm
Revenue and
results
Revenue 3,164 1,069 4,233 3,102 947 4,049
EBITDA 439 146 585 460 154 614
Unallocated (16) (21)
centre
costs
Share-based (8) (10)
payment
expense
Depreciation (182) (177)
and
depletion (net)
Amortisation (21) (16)
Finance costs (131) (117)
Finance income 18 38
Share - 1
of associates'
profit (after
tax)
Profit before 245 312
income tax
Income tax (69) (97)
expense
Profit for the 176 215
financial
period
(1) EBITDA is defined within Alternative Performance Measures set out in Supplementary Financial Information.
3.Segmental Analyses (continued)
3 months to 30-Jun-17 3 months to 30-Jun-16
Europe TheAmericas Total Europe TheAmericas Total
EURm EURm EURm EURm EURm EURm
Revenue and
results
Revenue 1,601 503 2,104 1,583 466 2,049
EBITDA 227 71 298 251 73 324
Unallocated (6) (12)
centre
costs
Share-based (5) (5)
payment
expense
Depreciation (87) (88)
and
depletion (net)
Amortisation (10) (8)
Finance costs (68) (56)
Finance income 14 28
Share - 1
of associates'
profit (after
tax)
Profit before 136 184
income tax
Income tax (34) (59)
expense
Profit for the 102 125
financial
period
4.Exceptional Items
6 months to 6 months to
The following items are regarded 30-Jun-17 30-Jun-16
as exceptional in nature:
EURm EURm
Exceptional finance costs 2 -
Exceptional finance income - (12)
Exceptional items included in net finance costs 2 (12)
Exceptional finance costs of EUR2 million in the first quarter of 2017 represented the accelerated amortisation of the issue costs relating to the debt within our senior credit facility which was paid down with the proceeds of January's EUR500 million bond issue.
The exceptional finance income in 2016 related to the gain of EUR12 million on the sale of our shareholding in the Swedish company, IL Recycling, in the second quarter.
5.Finance Costs and Income
6 months to 6 months to
30-Jun-17 30-Jun-16
EURm EURm
Finance costs:
Interest payable on bank loans and overdrafts 28 26
Interest payable on other borrowings 59 53
Exceptional finance costs associated 2 -
with debt restructuring
Foreign currency translation loss on debt 20 11
Fair value loss on derivatives - 16
not designated as hedges
Net interest cost on net pension liability 11 11
Net monetary loss-hyperinflation 11 -
Total finance costs 131 117
Finance income:
Other interest receivable (1) (2)
Foreign currency translation gain on debt (10) (23)
Exceptional gain on sale of investment - (12)
Fair value gain on derivatives (7) (1)
not designated as hedges
Total finance income (18) (38)
Net finance costs 113 79
6.Income Tax Expense
Income tax expense recognised in the Condensed Consolidated Income Statement
6 months to 6 months to
30-Jun-17 30-Jun-16
EURm EURm
Current tax:
Europe 71 55
The Americas 29 31
100 86
Deferred tax (31) 11
Income tax expense 69 97
Current tax is analysed as follows:
Ireland 8 7
Foreign 92 79
100 86
Income tax recognised in the Condensed Consolidated Statement of Comprehensive Income
6 months to 6 months to
30-Jun-17 30-Jun-16
EURm EURm
Arising on defined benefit plans 2 (21)
The tax expense in 2017 is EUR28 million lower than in the comparable period in 2016. This is primarily due to tax effects from lower earnings, foreign currency losses, tax rate reductions and other timing items. The tax expense is approximately EUR9 million lower in Europe and EUR19 million lower in the Americas. The increase in current tax is more than offset by a reduction in deferred tax.
The Group's historic tax losses have now been fully utilised in a number countries and the impact of this, together with other timing items, is included in the increased current tax expense in 2017.
The EUR42 million reduction in deferred tax includes the effects from the reversal of timing differences on which deferred tax liabilities have been previously been recorded, the recognition of tax benefits on losses and other tax credits which were partly offset by the use of prior period tax losses.
7.Employee Benefits - Defined Benefit Plans
The table below sets out the components of the defined benefit cost for the period:
6 months to 6 months to
30-Jun-17 30-Jun-16
EURm EURm
Current service cost 13 17
Past service cost - (12)
Gain on settlement - (2)
Actuarial loss arising on other - 1
long-term employee benefits
Net interest cost on net pension liability 10 11
Defined benefit cost 23 15
Included in cost of sales, distribution costs and administrative expenses is a defined benefit cost of EUR13 million (2016: EUR4 million). Net interest cost on net pension liability of EUR10 million (2016: EUR11 million) is included in finance costs in the Condensed Consolidated Income Statement.
The amounts recognised in the Condensed Consolidated Balance Sheet were as follows:
30-Jun-17 31-Dec-16
EURm EURm
Present value of funded or partially (2,251) (2,320)
funded obligations
Fair value of plan assets 1,914 1,953
Deficit in funded or partially funded plans (337) (367)
Present value of wholly unfunded obligations (508) (517)
Net pension liability (845) (884)
8.Earnings per Share
Basic
Basic earnings per share is calculated by dividing the profit attributable to owners of the parent by the weighted average number of ordinary shares in issue during the period less own shares.
6 months to 6 months to
30-Jun-17 30-Jun-16
Profit attributable to owners 175 212
of the parent (EUR million)
Weighted average number of ordinary 235 234
shares in issue (million)
Basic earnings per share (cent) 74.3 90.8
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. These comprise convertible shares issued under the Share Incentive Plan, which were based on performance and the passage of time, and deferred shares held in trust issued under the Deferred Annual Bonus Plan, which are based on the passage of time.
6 months to 6 months to
30-Jun-17 30-Jun-16
Profit attributable to owners 175 212
of the parent (EUR million)
Weighted average number of ordinary 235 234
shares in issue (million)
Potential dilutive ordinary 2 2
shares assumed (million)
Diluted weighted average ordinary 237 236
shares (million)
Diluted earnings per share (cent) 73.9 90.0
Pre-exceptional
6 months to 6 months to
30-Jun-17 30-Jun-16
Profit attributable to owners 175 212
of the parent (EUR million)
Exceptional items included in profit before 2 (12)
income tax (Note 4) (EUR million)
Pre-exceptional profit attributable to 177 200
owners of the parent (EUR million)
Weighted average number of ordinary 235 234
shares in issue (million)
Pre-exceptional basic earnings 75.0 85.6
per share (cent)
Diluted weighted average ordinary 237 236
shares (million)
Pre-exceptional diluted earnings 74.5 84.9
per share (cent)
9.Dividends
During the period, the final dividend for 2016 of 57.6 cent per share was paid to the holders of ordinary shares. The Board has decided to pay an interim dividend of 23.1 cent per share for 2017 and it is proposed to pay this dividend on 27 October 2017 to all ordinary shareholders on the share register at the close of business on 29 September 2017.
10.Property, Plant and Equipment
Land andbuildings Plant andequipment Total
EURm EURm EURm
Six months ended
30 June 2017
Opening net book amount 1,004 2,257 3,261
Reclassifications 32 (32) -
Additions 1 166 167
Acquisitions - 1 1
Depreciation charge (25) (152) (177)
Retirements and (2) - (2)
disposals
Hyperinflation 23 17 40
adjustment
Foreign currency (36) (63) (99)
translation
adjustment
At 30 June 2017 997 2,194 3,191
Year ended 31 December
2016
Opening net book amount 988 2,115 3,103
Reclassifications 42 (43) (1)
Additions 11 465 476
Acquisitions 10 56 66
Depreciation charge (48) (309) (357)
Retirements and (1) (11) (12)
disposals
Hyperinflation 25 21 46
adjustment
Foreign currency (23) (37) (60)
translation
adjustment
At 31 December 2016 1,004 2,257 3,261
11.Net Movement in Working Capital
6 months to 6 months to
30-Jun-17 30-Jun-16
EURm EURm
Change in inventories (27) (24)
Change in trade and other receivables (181) (171)
Change in trade and other payables 83 34
Net movement in working capital (125) (161)
12.Analysis of Net Debt
30-Jun-17 31-Dec-16
EURm EURm
Senior credit facility:
Revolving credit facility(1)- interest at 2 1
relevant interbank rate + 1.10%(6)
Term loan facility(2)- interest at relevant 480 741
interbank rate + 1.35%(6)
US$292.3 million 7.50% senior debentures 257 279
due 2025 (including accrued interest)
Bank loans and overdrafts 139 167
Cash (459) (443)
2019 receivables securitisation 186 182
variable funding notes
2022 receivables securitisation variable funding 4 114
notes (including accrued interest)(3)
2018 senior notes (including accrued interest)(4) 467 488
EUR400 million 4.125% senior notes due 404 404
2020 (including accrued interest)
EUR250 million senior floating rate notes due 250 249
2020 (including accrued interest)(5)
EUR500 million 3.25% senior notes due 497 496
2021 (including accrued interest)
EUR500 million 2.375% senior notes due 497 -
2024 (including accrued interest)
EUR250 million 2.75% senior notes due 249 249
2025 (including accrued interest)
Net debt before finance leases 2,973 2,927
Finance leases 12 14
Net debt including leases 2,985 2,941
(1) Revolving credit facility ('RCF') of EUR845 million (available
under the senior credit facility) to
be repaid in 2020. The RCF wasincreased by EUR220
million in February 2017. (a) Revolver loans
- EUR6 million, (b) drawn under ancillary facilities
and facilitiessupported by letters of credit
- nil and (c) other operational facilities
including letters of credit - EUR6 million.
(2) Term loan facility due to be repaid in certain instalments
from 2018 to 2020. In January and
February 2017, the Group prepaidEUR260 million
of drawings under the term loan facility.
(3) In May 2017, the EUR175 million receivables securitisation
programme was amended and restated, extending
the maturity to 2022and reducing the variable
funding notes margin from 1.70% to 1.375%.
(4) EUR200 million 5.125% senior notes due 2018 and US$300
million 4.875% senior notes due 2018.
(5) Interest at EURIBOR + 3.5%.
(6) The margins applicable under the senior credit
facility are determined as follows:
Net debt/EBITDA ratio RCF Term Loan Facility
Greater than 3.0 : 1 1.85% 2.10%
3.0 : 1 or less but more than 2.5 : 1 1.35% 1.60%
2.5 : 1 or less but more than 2.0 : 1 1.10% 1.35%
2.0 : 1 or less 0.85% 1.10%
13.Other Reserves
Other reserves included in the Condensed Consolidated Statement of Changes in Equity are comprised of the following:
Reverseacquisitionreserve Cash flowhedging Foreigncurrencytranslationreserve Share-basedpaymentreserve Ownshares Available-for-salereserve
reserve Total
EURm EURm EURm EURm EURm EURm EURm
At 1 January 2017 575 (22) (1,193) 165 (33) 1 (507)
Other comprehensiveincome
Foreign currencytranslation - - (107) - - - (107)
adjustments
Effective portion ofchanges - 2 - - - - 2
in fair
value ofcash flow hedges
Total - 2 (107) - - - (105)
othercomprehensiveincome/(expense)
Share-based payment - - - 8 - - 8
Shares acquired by - - - - (11) - (11)
SKGEmployee Trust
Shares distributed by - - - (10) 10 - -
SKGEmployee Trust
At 30 June 2017 575 (20) (1,300) 163 (34) 1 (615)
At 1 January 2016 575 (22) (1,109) 168 (38) 1 (425)
Other comprehensiveincome
Foreign currencytranslation - - (98) - - - (98)
adjustments
Effective portion ofchanges - (1) - - - - (1)
in fair
value ofcash flow hedges
Total othercomprehensive - (1) (98) - - - (99)
expense
Share-based payment - - - 10 - - 10
Shares acquired by - - - - (10) - (10)
SKGEmployee Trust
Shares distributed by - - - (15) 15 - - SKGEmployee Trust At 30 June 2016 575 (23) (1,207) 163 (33) 1 (524)
14.Fair Value Hierarchy
The following table presents the Group's financial assets and liabilities that are measured at fair value at 30 June 2017:
Level 1 Level 2 Level 3 Total
EURm EURm EURm EURm
Available-for-sale financial assets:
Listed 1 - - 1
Unlisted - 8 12 20
Derivative financial instruments:
Assets at fair value through Condensed - 7 - 7
Consolidated Income Statement
Derivatives used for hedging - 21 - 21
Derivative financial instruments:
Liabilities at fair value - (11) - (11)
through Condensed
Consolidated Income Statement
Derivatives used for hedging - (27) - (27)
1 (2) 12 11
The following table presents the Group's financial assets and liabilities that are measured at fair value at 31 December 2016:
Level 1 Level 2 Level 3 Total
EURm EURm EURm EURm
Available-for-sale financial assets:
Listed 1 - - 1
Unlisted - 8 12 20
Derivative financial instruments:
Assets at fair value through Condensed - 9 - 9
Consolidated Income Statement
Derivatives used for hedging - 43 - 43
Derivative financial instruments:
Liabilities at fair value - (20) - (20)
through Condensed
Consolidated Income Statement
Derivatives used for hedging - (19) - (19)
1 21 12 34
The fair value of the level 2 derivative financial instruments set out above has been measured using observable market inputs as defined under IFRS 13, Fair Value Measurement. All are plain derivative instruments, valued with reference to observable foreign exchange rates, interest rates or broker prices. There have been no transfers between level 1 and level 2 during the period.
The Group uses discounted cash flow analysis for various available-for-sale financial assets that are not traded in active markets.
There were no material changes in the level 3 instruments for the period.
15.Fair Value
The following table sets out the fair value of the Group's principal financial assets and liabilities. The determination of these fair values is based on the descriptions set out within Note 2 to the consolidated financial statements of the Group's 2016 annual report.
30-Jun-17 31-Dec-16
Carrying value Fair value Carrying value Fair value
EURm EURm EURm EURm
Trade and 1,521 1,521 1,415 1,415
other
receivables(1)
Available-for-sale 21 21 21 21
financial
assets(2)
Cash 451 451 436 436
and
cash
equivalents(3)
Derivative 28 28 52 52
assets(4)
Restricted 8 8 7 7
cash
2,029 2,029 1,931 1,931
Trade and 1,385 1,385 1,392 1,392
other
payables(1)
Senior credit 482 482 742 742
facility(5)
2019 186 186 182 182
receivables
securitisation(3)
2022 4 4 114 114
receivables
securitisation(3)
Bank 139 139 167 167
overdrafts(3)
2025 257 312 279 330
debentures(6)
2018 notes(6) 467 485 488 517
2020 fixed 404 445 404 446
rate
notes(6)
2020 floating 250 271 249 270
rate
notes(6)
2021 fixed 497 541 496 538
rate
notes(6)
2024 fixed 497 513 - -
rate
notes(6)
2025 fixed 249 259 249 255
rate
notes(6)
4,817 5,022 4,762 4,953
Finance 12 12 14 14
leases
4,829 5,034 4,776 4,967
Derivative 38 38 39 39
liabilities(4)
4,867 5,072 4,815 5,006
Total net (2,838) (3,043) (2,884) (3,075)
position
(1) The fair value of trade and other receivables and
payables is estimated as the present value
of future cash flows, discounted atthe market
rate of interest at the reporting date.
(2) The fair value of listed available-for-sale financial
assets is determined by reference
to their bid price at the reporting date.Unlisted
available-for-sale financial
assets are valued using recognised valuation techniques
for the underlying securityincluding
discounted cash flows and similar unlisted
equity valuation models.
(3) The carrying amount reported in the Condensed
Consolidated Balance Sheet
is estimated to approximate to fair
value becauseof the short-term
maturity of these instruments and, in the case
of the receivables securitisation,
the variable nature of thefacility and repricing dates.
(4) The fair value of forward foreign currency
and energy contracts is based on their
listed market price if available. If a
listedmarket price is not available,
then fair value is estimated by discounting
the difference between the contractual
forward priceand the current forward
price for the residual maturity
of the contract using a risk-free interest
rate (based on governmentbonds).
The fair value of interest rate swaps
is based on discounting estimated
future cash flows based on the terms andmaturity
of each contract and using
market interest rates for a similar
instrument at the measurement date.
(5) The fair value of the senior credit facility is based
on the present value of its estimated future
cash flows discounted at anappropriate market
discount rate at the balance sheet date.
(6) Fair value is based on broker prices at the balance sheet date.
16.Venezuela
Hyperinflation
As discussed more fully in the 2016 annual report, Venezuela became hyperinflationary during 2009 when its cumulative inflation rate for the past three years exceeded 100%. As a result, the Group applied the hyperinflationary accounting requirements of IAS 29 - Financial Reporting in Hyperinflationary Economies to its Venezuelan operations at 31 December 2009 and for all subsequent accounting periods.
In 2017 and 2016 management engaged an independent expert to determine an estimate of the annual inflation rate. The level of and movement in the price index at June 2017 and 2016 are as follows:
30-Jun-17 30-Jun-16
Index at period-end 44,716.9 5,468.7
Movement in period 300.9% 112.4%
As a result of the entries recorded in respect of hyperinflationary accounting under IFRS, the Condensed Consolidated Income Statement is impacted as follows: Revenue EUR25 million decrease (2016: EUR8 million decrease), EBITDA EUR22 million decrease (2016: EUR4 million decrease) and profit after taxation EUR27 million decrease (2016: EUR4 million decrease). In 2017, a net monetary loss of EUR11 million (2016: EURnil) was recorded in the Condensed Consolidated Income Statement. The impact on our net assets and our total equity is an increase of EUR127 million (2016: EUR31 million increase).
Exchange Control
The Group consolidates its Venezuelan operations at the variable DICOM rate. The Group believes that DICOM is the most appropriate rate for accounting and consolidation, as it believes that this is the rate at which the Group extracts economic benefit. On this basis, in accordance with IFRS, the financial statements of the Group's operations in Venezuela were translated at 30 June 2017 using the DICOM rate of VEF 2,640.00 per US dollar and the closing euro/US dollar rate of 1 euro = US$1.1412.
Control
The nationalisation of foreign owned companies or assets by the Venezuelan government remains a risk. Market value compensation is either negotiated or arbitrated under applicable laws or treaties in these cases. However, the amount and timing of such compensation is necessarily uncertain.
The Group continues to control operations in Venezuela and, as a result, continues to consolidate all of the results and net assets of these operations at the period end in accordance with the requirement of IFRS 10.
In 2017, the Group's operations in Venezuela represented approximately 1.6% (2016: 1.0%) of its EBITDA, 1.4% (2016: 1.0%) of its total assets and 3.3% (2016: 2.2%) of its net assets. Cumulative foreign translation losses arising on its net investment in these operations amounting to EUR1,072 million (2016: EUR987 million) are included in the foreign currency translation reserve.
17. Related Party Transactions
Details of related party transactions in respect of the year ended 31 December 2016 are contained in Note 30 to the consolidated financial statements of the Group's 2016 annual report. The Group continued to enter into transactions in the normal course of business with its associates and other related parties during the period. There were no transactions with related parties in the first half of 2017 or changes to transactions with related parties disclosed in the 2016 consolidated financial statements that had a material effect on the financial position or the performance of the Group.
18. Audit Tendering
In the context of the relevant regulatory requirements, the Group noted in its 2016 Annual Report its intention to conduct an audit tender during 2017. A competitive tender process, overseen by the Group's Audit Committee ('GAC'), has recently been undertaken and the Board of Directors has approved GAC's recommendation for the appointment of KPMG as Group External Auditor for the year ending 31 December 2018 and beyond. The appointment of KPMG will be recommended to shareholders for approval at the 2018 Annual General Meeting.
PricewaterhouseCoopers ('PwC'), the current Group External Auditor, will continue in its role and audit the Group's consolidated accounts for the year ending 31 December 2017.
19. Board Approval
This interim report was approved by the Board of Directors on 1 August 2017.
20. Distribution of the Interim Report
This 2017 interim report is available on the Group's website smurfitkappa.com.
Responsibility Statement in Respect of the Six Months Ended 30 June 2017
The Directors, whose names and functions are listed on pages 56 to 58 in the Group's 2016 annual report, are responsible for preparing this interim management report and the condensed consolidated interim financial statements in accordance with the Transparency (Directive 2004/109/EC) Regulations 2007, the related Transparency Rules of the Central Bank of Ireland and with IAS 34, Interim Financial Reporting as adopted by the European Union.
The Directors confirm that, to the best of their knowledge:
-- the condensed consolidated interim financial statements for the half
year ended 30 June 2017 have 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 consolidated interim financial
statements for the half year ended 30 June 2017, 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 party transactions described in the last annual
report that could have a material effect on the financial position or
performance of the Group in the first six months of the current
financial year.
Signed on behalf of the Board
A. Smurfit, Director and Chief Executive Officer
1 August 2017.
Supplementary Financial Information
Alternative Performance Measures
Certain financial measures set out in this report are not defined under International Financial Reporting Standards ('IFRS'). An explanation for the use of these Alternative Performance Measures ('APMs') is set out within Financial Key Performance Indicators on pages 40-42 of the Group's 2016 annual report. The key APMs of the Group are set out below.
APM Description
EBITDA Earnings before exceptional items,
share-based paymentexpense,
share of associates' profit
(after tax), net
financecosts, income tax
expense, depreciation and
depletion (net)and intangible
assets amortisation.
EBITDA Margin % EBITDA
___________ x 100
Revenue
Pre-exceptional Basic EPS (cent) Profit attributable to
owners of the parent,
adjustedfor exceptional items
included in profit before tax andincome
tax on exceptional items
_____________________________________________
x 100
Weighted average number of
ordinary shares inissue
Return on Capital Employed % Last twelve months ('LTM')
pre-exceptional
operatingprofit
plus share of associates'
profit (after tax)
___________________________________________
x 100
Average capital employed (where capital
employedis the average of
total equity and net
debt at thebeginning
and end of the period)
Free Cash Flow Free cash flow is the result
of the cash inflows
and outflowsfrom our
operating activities,
and is before those arising
fromacquisition
and disposal activities.
Free cash flow (APM)
and a reconciliation
of free cash flow tocash
generated from operations (IFRS
measure) are includedin
the management commentary. The
IFRS cash flow isincluded
in the Condensed Consolidated
Financial Statements.
Net Debt Net debt is comprised of
borrowings net of cash
and cashequivalents
and restricted cash.
Net Debt to EBITDA (LTM) times Net debt
EBITDA (LTM)
Reconciliation of
Profit to EBITDA
3 months to 3 months to 6 months to 6 months to
30-June-17 30-June-16 30-June-17 30-June-16
EURm EURm EURm EURm
Profit for the 102 125 176 215
financial
period
Income tax 34 59 69 97
expense
Share - (1) - (1)
of associates'
profit (after
tax)
Net finance costs 54 28 113 79
(after
exceptional
items)
Share-based 5 5 8 10
payment
expense
Depreciation, 97 96 203 193
depletion
(net)
and amortisation
EBITDA 292 312 569 593
Return on Capital Employed
Q2, 2017 Q2, 2016 Q1, 2017
EURm EURm EURm
Pre-exceptional operating 799 823 820
profit plus share
of associates' profit
(aftertax) (LTM)
Total equity - current period end 2,488 2,252 2,670
Net debt - current period end 2,985 3,121 2,931
Capital employed - current period end 5,473 5,373 5,601
Total equity - prior period end 2,252 2,210 2,310
Net debt - prior period end 3,121 3,100 3,029
Capital employed - prior period end 5,373 5,310 5,339
Average capital employed 5,423 5,342 5,470
Return on capital employed 14.7% 15.4% 15.0%
Supplementary Historical Financial Information
EURm Q2, 2016 Q3, 2016 Q4, 2016 FY, 2016 Q1, 2017 Q2, 2017
Group and 3,375 3,424 3,441 13,521 3,573 3,590
third
party
revenue
Third 2,049 2,050 2,060 8,159 2,129 2,104
party
revenue
EBITDA 312 323 320 1,236 278 292
EBITDA 15.3% 15.7% 15.5% 15.1% 13.0% 13.9%
margin
Operating 211 219 206 815 168 190
profit
Profit 184 187 155 654 109 136
before
income
tax
Free cash 28 164 104 303 16 30 flow Basic 52.0 56.4 42.3 189.4 31.5 42.8 earnings per share - cent Weighted 234 234 235 235 235 235 average number of shares used inEPS calculation (million) Net debt 3,121 2,953 2,941 2,941 2,931 2,985 EBITDA 1,224 1,242 1,236 1,236 1,233 1,212 (LTM) Net debt 2.55 2.38 2.38 2.38 2.38 2.46 to EBITDA (LTM)
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(END) Dow Jones Newswires
August 02, 2017 02:00 ET (06:00 GMT)
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