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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 | |
---|---|---|---|---|---|---|---|---|---|---|
0.00 | 0.00% | 3,656.00 | 3,636.00 | 3,646.00 | 0.00 | 01:00:00 |
Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
---|---|---|---|---|---|
Pkg Paper, Plastics Film | 11.27B | 758M | 2.9114 | 12.56 | 9.52B |
TIDMSKG
30 July 2014: Smurfit Kappa Group plc ('SKG' or 'the Group') today announced results for the 3 months and 6 months ending 30 June 2014.
2014 Second Quarter & First Half | Key Financial Performance Measures EURm H1 H1 Change Q2 Q2 Change Q1 Change 2014 2013 2014 2013 2014 Revenue EUR3,947 EUR3,908 1% EUR2,015 EUR2,019 - EUR1,932 4% EBITDA EUR564 EUR512 10% EUR295 EUR271 9% EUR269 10% before Exceptional Items and Share-based Payment(1) EBITDA 14.3% 13.1% 14.6% 13.4% 13.9% margin Operating EUR363 EUR307 18% EUR194 EUR167 15% EUR169 15% Profit before Exceptional Items Profit EUR228 EUR127 79% EUR124 EUR70 78% EUR104 19% before Income Tax Basic EPS 62.3 32.1 94% 33.6 17.7 90% 28.8 17% (cent) Pre-exceptional 64.1 43.9 46% 33.3 24.1 38% 30.8 8% Basic EPS (cent) Return on 14.3% 12.0% 13.8% Capital Employed(2) Free Cash EUR135 EUR72 87% EUR76 EUR95 (20%) EUR59 31% Flow(3) Net Debt EUR2,676 EUR2,817 (5%) EUR2,640 1% Net Debt 2.3x 2.7x 2.3x to EBITDA (LTM) 1) EBITDA before exceptional items and share-based payment expense is denoted by EBITDA throughout the remainder of the management commentary for ease of reference. A reconciliation of profit for the period to EBITDA before exceptional items and share-based payment expense is set out on page 35. 2) LTM pre-exceptional operating profit plus share of associates' profit/average capital employed. 3) Free cash flow is set out on page 8. The IFRS cash flow is set out on page 18.
Second Quarter & Half Year Key Points
-- Pre-exceptional EPS growth of 46% year-on-year with EBITDA margin
expansion to 14.3% for the first six months
-- Robust capital structure with annualised cash interest reduced to EUR135
million
-- Strong free cash flows supporting the delivery of previously announced
capital allocation decisions
-- Interim dividend increased by 50% to 15.375 cent reflecting confidence
in future performance
-- Recycled and kraftliner containerboard price increases announced
Performance Review and Outlook
Gary McGann, Smurfit Kappa CEO, commented: "In the second quarter the Group has delivered EPS of EUR0.34, a strong EBITDA result of EUR295 million and continued EBITDA margin expansion. This has been achieved in spite of weaker than expected European containerboard pricing. The results reflect the resilience of SKG's earnings profile underpinned by its integrated model together with the benefit of its geographic diversity. The Group's return on capital employed of 14.3% validates the continued judicious approach to accretive capital investments and the continuous delivery on its cost take-out targets.
"As a result of continued demand growth, a fundamentally stable containerboard supply outlook and consistently high recovered fibre costs, SKG has announced containerboard price increases from 1 August in recycled containerboard and from 1 September in kraftliner. These initiatives will provide support to corrugated pricing, providing scope for further corrugated price recovery into 2015.
"The Group's operations in the Americas are performing well with volume growth expected to improve through the second half of the year.
"The Group's particular sales approach to international customers in both Europe and the Americas is continuing to make an impact in these markets with customers increasingly seeking a global and environmentally accredited partner for their packaging solutions.
"The Group is pleased to confirm a 50% increase in the interim dividend to 15.375 cent, reflecting confidence in its future performance.
"The continued delivery of strong free cash flows in the first half underpins SKG's capacity to drive its medium term capital allocation initiatives through the cycle. With earnings growth expected in 2014, alongside considerable cash interest reductions year-on-year, the Group is increasingly well placed to deploy capital to enhance returns for shareholders."
About Smurfit Kappa
Smurfit Kappa is one of the leading producers of paper-based packaging in the world, with around 41,000 employees in approximately 350 production sites across 32 countries and with sales revenue of EUR7.9 billion in 2013.
Innovation, service and pro-activity towards customers, using sustainable resources, is our primary focus. This focus is enhanced through us being an integrated producer, with our packaging plants sourcing the major part of their raw materials from our own paper mills. We are the European leader in paper-based packaging, operating in 21 countries selling products including corrugated, containerboard, bag-in-box, solidboard and solidboard packaging. We have a growing base in Eastern Europe in many of these product areas. We also have a key position in other product/market segments including graphicboard, MG paper and sack paper. We are the only large scale pan regional player in the Americas, operating in 11 countries in total in North, Central and South America.
Check out our microsite: www.openthefuture.infowww.smurfitkappa.com
Contacts Seamus Murphy FTI Consulting Smurfit Kappa T: +353 1 202 71 80 T: +353 1 663 36 80 E: ir@smurfitkappa.com E: smurfitkappa@fticonsulting.com
2014 Second Quarter & First Half | Performance Overview
The Group's strong earnings performance in the first half reflects the stability of the business despite short term volatility in European containerboard prices. Through the delivery of increasingly innovative packaging solutions to its customers, organic and acquisition led growth in the Americas and consistent cost take-out, SKG has fundamentally improved its business model in recent years. Additional developments such as SKG's extensive, customer focused differentiation initiatives and the commencement of a three-year "quick win" capital expenditure programme will further enhance the Group's earnings capacity.
Growth in European packaging volumes has persisted at low, but steady levels with 1% growth in box volumes in the year to date. While volumes shipped in France have decreased year-on-year, this is more than offset by strong performances in Germany, the UK, and Spain. Average corrugated pricing has remained steady over the course of the second quarter and remains 2% higher year-on-year. Successfully implemented recent containerboard price increase announcements will support stable and rising corrugated prices into 2015.
In its end market of paper-based packaging solutions, the Group seeks to constantly differentiate itself. To this end, the Group has undertaken an extensive, customer focused differentiation initiative over the last twelve months supported by a company-wide engagement programme. The process has identified key areas of opportunity to improve our understanding of the world in which SKG's customers operate and increasingly offer innovative packaging solutions based on their specific needs. This will be achieved through tangible initiatives such as global training programmes for sales executives, specific customer and market insight training and the development of a Global Innovation Lab at Schipol Airport in Amsterdam where we will showcase the Group's innovation and problem solving capabilities to our customers.
Against the backdrop of a fundamentally strong containerboard market, the Group has announced its intention to increase the recycled containerboard price by EUR60 per tonne from 1 August. Demand for containerboard has been strong with year-on-year growth of 3.4% reported by CEPI for the year to April, driven by relatively good market demand. Old Corrugated Containers ('OCC') prices have also remained at a relatively high level which has acted as an underpin to pricing during the recent weakness.
In kraftliner, the Group has also announced a price increase of EUR50 per tonne effective from 1 September in the context of the positive developments in the recycled containerboard market and the existence of a tight kraftliner market. The Group's 1.6 million tonne European kraftliner system provides a significant strategic advantage as recycling rates reach upper thresholds in Europe and recovered fibre scarcity continues to be a strategic consideration for industry participants.
The Group's Americas segment continues to deliver strong earnings with a 17.2% EBITDA margin in the second quarter. Operations in Colombia and Mexico reported particularly good performances with underlying volume increases of 6% and 3% respectively. Market commentators expect solid growth throughout the remainder of the year. Despite the continued challenging economic environment in both Argentina and Venezuela remaining, the Group is performing well in these markets.
On 3 July, the Group completed the refinancing of its EUR500 million 7.75% senior notes due 2019 with a seven-year bond at a rate of 3.25%, thereby saving an annualised EUR23 million in interest costs. This marks the completion of a two-year period in which the capital structure has been comprehensively repositioned, with the Group's average interest rate decreasing from 6.9% to 4.1% and annualised cash interest costs decreasing by EUR100 million.
Since IPO, the Group has transformed from a leveraged to a corporate credit profile and reduced its net debt by EUR873 million. As a corporate credit with leverage of 2.3 times net debt to EBITDA and a maturity profile of 5.2 years, SKG is confident that its financing structure now provides a solid platform to grow the business and support the delivery of enhanced returns.
2014 First Half | Financial Performance
Revenue for the half year grew by 1% from EUR3,908 million in 2013 to EUR3,947 million in 2014. Underlying growth in both Europe and the Americas increased revenues by 5%, but was partly offset by negative currency movements. These movements primarily relate to the Venezuelan Bolivar following the Group's adoption of the Sicad I rate in the first quarter of 2014. This has resulted in a change in the exchange rate used for translating the results of the Group's Venezuelan operations from the fixed rate of US$ / VEF 6.30 to a variable rate, which stood at US$ / VEF 10.70 at 31 March 2014 and US$ / VEF 10.60 at 30 June 2014.
EBITDA for the first half of 2014 increased by EUR52 million to EUR564 million with higher comparable earnings in both Europe and the Americas, as well as lower costs in the Group Centre. Allowing for net negative currency movements of EUR43 million and a contribution of EUR2 million from net acquisitions, the underlying move was an increase of EUR93 million (18%). The Group's margin for the six months benefited from the relatively strong growth in EBITDA and increased to 14.3% from 13.1% in 2013. This was also the case in the second quarter, wherein the EBITDA margin increased to 14.6% from 13.4% in 2013.
Operating profit before exceptional items for the half year was EUR363 million, compared to EUR307 million for the same period in 2013, an increase of 18%.
Exceptional items charged within the operating profit in the six months to June 2014 amounted to EUR9 million and related to losses on the translation of non-Bolivar denominated payables in Venezuela following the change to the Sicad I rate. Exceptional items of EUR32 million were charged in the first half of 2013, primarily comprising a EUR15 million trading currency loss as a result of the devaluation of the Venezuelan Bolivar in February 2013 and a EUR15 million charge relating to the closure of the Townsend Hook containerboard machines in July 2013. The remainder of the exceptional charges in 2013 related to additional reorganisation costs associated with the acquisition of Smurfit Kappa Orange Country ('SKOC').
Operating profit after exceptional items for the half year was EUR354 million, compared to EUR275 million for the same period in 2013, an increase of 29%.
Net finance costs of EUR127 million in 2014 were EUR22 million lower than the prior year primarily as a result of a reduced average interest cost.
Including the Group's share of associates' profit of EUR1 million in 2014, profit before income tax was EUR228 million for the half year 2014 compared to EUR127 million in 2013.
The Group reported an income tax expense of EUR84 million for the first half of 2014 compared to EUR50 million for the same period in 2013, largely explained by higher earnings, mainly in Europe, and the effect of non-recurring tax credits in 2013.
Basic earnings per share was 62.3 cent for the half year 2014 (2013: 32.1 cent), an increase of 94% year-on-year. Adjusting for exceptional items, pre-exceptional basic EPS was 64.1 cent (2013: 43.9 cent).
2014 Second Quarter & First Half | Free Cash Flow
Free cash flow amounted to EUR135 million in the first half of 2014 compared to EUR72 million in 2013. The increase of EUR63 million reflected higher EBITDA, lower cash interest and lower exceptional charges, partly offset by higher capital expenditure. At EUR76 million for the second quarter, the Group's free cash flow was EUR19 million lower than in 2013 with higher capital outflows and a larger increase in working capital more than offsetting the benefit of higher EBITDA and lower cash interest.
Working capital increased by EUR117 million in the first six months, broadly in line with 2013 levels. This outflow, which arose primarily in Europe, resulted from an increase in debtors and, to a lesser extent, stocks partly offset by an increase in creditors. The working capital increase in the second quarter of 2014 reflected stronger corrugated volume growth than in the first quarter offset somewhat by weaker containerboard pricing through the second quarter. At June 2014 working capital amounted to EUR646 million, representing 8.0% of annualised revenue, compared to 8.7% at the same point in 2013.
Capital expenditure amounted to EUR152 million in the first half of 2014, approximately 78% of depreciation, compared to 75% in 2013. The Group remains committed to delivering on its increased capital expenditure programme over the next three years.
Cash interest at EUR79 million in the first six months to June 2014 was EUR29 million lower than in 2013, reflecting the benefit of SKG's refinancing activities in 2012 and 2013 as well as debt paydown of EUR141 million year-on-year.
Tax payments in the first half were EUR43 million, EUR6 million higher than the previous year, reflecting higher payments in the Americas offset by lower payments in Europe. The tax payments in the Group's European operations continue to benefit from historical tax losses and tax credits.
2014 Second Quarter & First Half | Capital Structure
The Group's net debt has decreased by EUR141 million from EUR2,817 million at June 2013 to EUR2,676 million at June 2014 as a result of the Group's strong free cash generation during the period. Net debt to EBITDA has decreased to 2.3 times in June 2014 from 2.7 times in the same period in 2013, and has remained broadly flat since March 2014 despite a EUR71 million outflow in May relating to the 2013 final dividend payment.
On 3 July, the Group completed the refinancing of its EUR500 million 7.75% senior notes due 2019 with a seven-year bond at a rate of 3.25%, the lowest ever bond coupon achieved by SKG. The associated exceptional finance charges totalling EUR42 million, composed of cash and non-cash costs, will be included in the Group's third quarter results. The transaction will save an annualised EUR23 million in cash interest and marks the completion of a two-year programme in which over EUR3 billion of debt has been refinanced. As a result the Group has been fundamentally repositioned as an unsecured corporate credit with diversified funding sources and materially lower interest costs.
At June 2014 the average maturity profile of the Group's debt was 5.2 years, when adjusted for the bond redemption on 3 July, with approximately 90% maturing in 2018 and beyond. SKG's average interest rate at the end of the second quarter of 4.1%, when adjusted for the July bond redemption, compares to an adjusted average rate of 5.6% at June 2013 and 6.9% at June 2012. The Group maintains a high degree of financial flexibility with cash on the balance sheet of EUR383 million at the end of the second quarter (excluding cash used to redeem the Group's 7.75% senior notes) and further undrawn credit facilities of approximately EUR481 million.
Dividends
The Board has decided to increase the 2014 interim dividend to 15.375 cent per share, a 50% increase on last year. It is proposed to pay the interim dividend on 31 October 2014 to shareholders registered at the close of business on 3 October 2014.
Sustainability
Sustainability and social responsibility are at the heart of how SKG operates and interacts with stakeholders throughout the regions and communities in which it does business. This is driven by a long-term business focus and current opportunities to proactively build strategic relationships with its customers through the provision of sustainable and differentiated packaging solutions.
The Group's vision on sustainability has been translated into a number of key intermediate and long-term measurable targets which are audited and reported against on an annual basis. These include CO2 and overall waste reduction, the achievement of the highest standards of sustainable sourcing and operational excellence and a comprehensive code of conduct and community involvement initiatives. In an increasingly competitive environment, the key to future success will be to find growth opportunities that are economically, socially and environmentally balanced.
The seventh annual Sustainability Report was published in June 2014 and provides an extensive review of the Group's sustainability vision, its quantified targets and its progress against each measure to date.
Cost Take-out Programme
The Group's strong and improving EBITDA margins at 14.3% in the year to date are underpinned by the achievement of cost take-out initiatives throughout the business which primarily offset inflationary pressures. Almost EUR650 million in costs have been taken out of the business since 2008 and the Group is committed to continue the consistent delivery of cost efficiencies in future periods.
At 30 June, SKG's 2014 cost take-out programme has delivered cost savings of EUR50 million, predominantly in the areas of raw material usage with further material savings in the areas of labour and energy. The Group will deliver at least EUR100 million in cost take-out for the full year 2014 as previously guided.
2014 Second Quarter & First Half | Regional Performance Review
Europe
At EUR3,058 million, European revenue in the first six months increased by 3% year-on-year with an improved underlying performance in both corrugated and containerboard operations together with a small contribution from the UK business CRP acquired in 2013. European EBITDA of EUR421 million in the first half was EUR50 million higher than the same period in 2013, a 14% increase. This was primarily driven by a combination of higher volumes and higher corrugated pricing than the prior year.
The Group's European box volumes have continued to grow at a low level with 1% growth in box volumes in the quarter and year to date, with a broadly equal number of shipping days in the year to date 2014. Total packaging volumes have increased at a slightly higher level as a result of a 5% increase in sheet volumes in the first six months of the year. These volumes comprise approximately 13% of European volumes.
The Group's average corrugated prices have edged slightly upwards throughout the second quarter and maintained the 2% year-on-year increase achieved in the fourth quarter of 2013 and early 2014. These price levels will be supported by positive momentum in containerboard in the second half as producers implement price increases from 1 August. These increases will give further scope for corrugated price recovery in 2015.
The Group has announced a recycled containerboard price increase of EUR60 per tonne from 1 August as a result of a good demand backdrop and solid progress in lowering excess inventory levels through the second quarter and into July. Throughout the year recovered fibre costs have remained at a consistently high level and the capacity outlook remains fundamentally stable.
From 1 September, the Group has announced a EUR50 per tonne price increase in kraftliner following a sustained period of robust demand alongside steady domestic European production and 3% lower year-on-year import levels to May. The Group's kraftliner operations deliver consistently high returns and benefit from a strong position in a market structurally short of almost 1.2 million tonnes.
Energy costs have decreased by 11% year-on-year for the six months to June 2014 due to falling European gas prices and improved energy efficiencies throughout SKG's operations. Wood costs have remained broadly in line with 2013 levels with good woodchip availability in Scandinavia and Austria and some positive currency effects in our Swedish operations.
The Americas
The Americas has performed well in the year to date with strong underlying performances in the majority of the countries in which the Group operates. However, the segment reported revenue of EUR889 million and EBITDA of EUR155 million in the first half of 2014, representing year-on-year decreases of 7% and 4% respectively. This primarily reflects the negative effect of adopting the Sicad I exchange rate for SKG's Venezuelan operations, while the Group's key operations, particularly Mexico and Colombia, performed well with strong volume and margin expansion.
SKG's Argentinean operations reported lower volumes in the first half as a result of a continuing challenging economic backdrop and poorer than expected citric harvests. However, the Group has remained focused on achieving price increases and extensive cost efficiencies in order to offset economic headwinds.
In Colombia, volumes in the first half have increased by an underlying 6% year-on-year as a result of strong demand growth and some market share gains while the newly acquired Corrumed corrugated plant has further consolidated SKG's position as market leader. This has been achieved in conjunction with price increases across the Group's entire product offering over the period which has contributed to a materially improved EBITDA margin at the end of the six months to June 2014.
The Group's SKOC business continues to perform well with higher year-on-year EBITDA at the half year. The SKOC Mexican volumes in the year to date were 14% higher than the same period in 2013 and are clearly benefiting from increased activity along the border region with the US. The completion of "bottom-slicing" with a particular focus on the lower margin sheet business, has led to an overall flat volume performance for SKOC for the first half compared to 2013. However, the focus on pricing has resulted in a 2% increase in EBITDA margin and the Group expects a stronger second half performance as a result of underlying demand growth and improved productivity.
SKG's Mexican operations reported a 1% underlying increase in volumes in the first six months of 2014 excluding the SKOC Mexican volumes. The Group experienced some temporary decreases in corrugated volumes from large customers in the second quarter. However, this is expected to reverse and the business is well positioned for a strong second half to the year.
The Venezuelan market remains a difficult operating environment for multinationals. However the Group continues to operate its business well in the country with slight volume increases year-on-year in spite of some intermittent raw material shortages. Positively, the authorities have been more accommodating in providing US dollars to satisfy raw material and spare parts needs in 2014.
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-14 30-Jun-13 30-Jun-14 30-Jun-13 EURm EURm EURm EURm Pre-exceptional 295 271 564 512 EBITDA Exceptional items - (4) (9) (17) Cash interest (39) (54) (79) (108) expense Working capital (59) (18) (117) (116) change Current (1) (2) (2) (5) provisions Capital (86) (68) (152) (137) expenditure Change in capital (12) (4) (11) 3 creditors Tax paid (17) (21) (43) (37) Sale of fixed 1 1 4 1 assets Other (6) (6) (20) (24) Free cash flow 76 95 135 72 Share issues - 1 2 4 Purchase of - - (13) (15) own shares Sale 1 - 1 - of businesses and investments Purchase of (19) (2) (19) (5) businesses and investments Dividends (73) (50) (74) (50) Net (15) 44 32 6 cash (outflow)/inflow Net debt acquired - - - (1) Deferred debt (2) (3) (5) (12) issue costs amortised Currency (19) 13 (82) (18) translation adjustments (Increase)/decrease (36) 54 (55) (25) in net debt (1) The summary cash flow is prepared on a different basis to the Consolidated Statement of Cash Flows under IFRS ('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 below. (c) The IFRS cash flow has different sub-headings to those used in the summary cash flow. 6 months to 6 months to 30-Jun-14 30-Jun-13 EURm EURm Free cash 135 72 flow Add Cash interest 79 108 back: Capital expenditure (net of change in capital creditors) 163 134 Tax payments 43 37 Financing activities - 3 Less: Sale of fixed assets (4) (1) Profit on sale of assets and businesses - non exceptional (2) (3) Receipt of capital grants - (1) Dividends received from associates (1) (1) Non-cash financing activities (1) (1) Cash generated from 412 347 operations
Capital Resources
The Group's primary sources of liquidity are cash flow from operations and borrowings under the revolving credit facility. The Group's primary uses of cash are for funding day to day operations, capital expenditure, debt service, dividends and other investment activity including acquisitions.
At 30 June 2014, Smurfit Kappa Treasury Funding Limited had outstanding US$292.3 million 7.50% senior debentures due 2025. The Group had outstanding EUR146.3 million and STGGBP64.1 variable funding notes issued under the EUR240 million accounts receivable securitisation programme maturing in June 2019 (which replaced the EUR250 million accounts receivable securitisation programme maturing in November 2015), together with EUR175 million variable funding notes issued under the EUR175 million accounts receivable securitisation programme maturing in April 2018.
Smurfit Kappa Acquisitions had outstanding EUR200 million 5.125% senior notes due 2018, US$300 million 4.875% senior notes due 2018, EUR500 million 7.75% senior notes due 2019 (redeemed on 3 July 2014), EUR400 million 4.125% senior notes due 2020, EUR250 million senior floating rate notes due 2020 and EUR500 million 3.25% senior notes due 2021. Smurfit Kappa Acquisitions and certain subsidiaries are also party to a senior credit facility. At 30 June 2014, the Group's senior credit facility comprised term drawings of EUR700.9 million and US$64.4 million under the amortising Term A facility maturing in 2018. In addition, as at 30 June 2014, the facility included a EUR625 million revolving credit facility of which EUR125 million was drawn in revolver loans, with a further EUR19 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 2014 for each of the drawings under the various senior credit facility loans.
BORROWING ARRANGEMENT CURRENCY INTEREST RATE Term A Facility EUR 2.103% - 2.345% USD 2.152% Revolving Credit Facility EUR 1.853% - 2.095%
Borrowings under the revolving credit facility are available to fund the Group's working capital requirements, capital expenditures and other general corporate purposes.
On 24 July 2013, the Group completed a new five-year unsecured EUR1,375 million refinancing of its senior credit facility comprising a EUR750 million term loan with a current margin of 2.00% and a EUR625 million revolving credit facility with a current margin of 1.75%. The term loan is repayable EUR125 million on 24 July 2016, EUR125 million on 24 July 2017, with the balance of EUR500 million repayable on the maturity date. In connection with the refinancing, the collateral securing the obligations under the Group's various outstanding senior notes and debentures was also released and the senior notes and debentures are therefore now unsecured. The new unsecured senior credit facility is supported by substantially the same guarantee arrangements as the old senior credit facility. The existing senior notes and debentures likewise continue to have substantially similar guarantee arrangements as supported those instruments prior to the refinancing.
On 3 July 2013, the Group put in place a new five-year trade receivables securitisation programme of up to EUR175 million utilising the Group's receivables in Austria, Belgium, Italy and the Netherlands. The programme carries a margin of 1.70%.
On 4 November 2013, the Group completed the redemption of its EUR500 million 7.25% senior notes due 2017, utilising cash and existing credit facilities arranged as part of the senior credit facility and trade receivables securitisation transactions.
On 28 May 2014 the Group priced EUR500 million of seven-year euro denominated senior unsecured notes at a coupon of 3.25%. Following the issue of an early redemption notice the net proceeds together with cash balances of EUR37.5 million were used to redeem the Group's higher cost 2019 7.75% EUR500 million bonds on 3 July 2014.
On 25 June 2014 the Group completed a new five-year trade receivables securitisation programme of up to EUR240 million maturing in 2019 utilising the Group's receivables in France, the United Kingdom and Germany. The new programme, which has a margin of 1.40%, was used to refinance a similar facility maturing in 2015 which had a margin of 1.50%.
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 2014, the Group had fixed an average of 63% of its interest cost on borrowings over the following twelve months.
The Group's fixed rate debt comprised mainly EUR500 million 7.75% senior notes due 2019 (replaced in July 2014 with EUR500 million 3.25% senior notes due 2021), 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 and US$292.3 million 7.50% senior debentures due 2025. In addition the Group had EUR749 million in interest rate swaps with maturity dates ranging from July 2014 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 EUR13 million over the following twelve months. Interest income on the Group's cash balances would increase by approximately EUR4 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 2013 annual report on pages 43-44. The annual report is available on our website www.smurfitkappa.com. In addition, the risk relating to our Venezuelan operations was updated in our 2014 first quarter press release. 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 and result in an
increased economic slowdown which was sustained over any significant
length of time, or the sovereign debt crisis (including its impact on
the euro) were to reoccur, 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 and
currency exchange controls in Venezuela and Argentina.
-- The Group may not be able to attract and retain suitably qualified
employees as required for its business.
-- The Group is subject to a growing number of environmental laws and
regulations, and the cost of compliance or the failure to comply with
current and future laws and regulations may negatively affect the
Group's business.
-- The Group is subject to anti-trust and similar legislation in the
jurisdictions in which it operates.
-- The Group is exposed to potential risks in relation to its Venezuelan
operations which are set out as follows:
The Group is exposed to currency exchange rate fluctuations and in
addition, to exchange controls in Venezuela. Currently, Venezuela
operates a number of alternative exchange mechanisms, the official
rate (VEF 6.3 per US dollar) ('Official rate'), Sicad I and Sicad
II. Contrary to general market expectations, in January 2014 the
Government announced that it would not be devaluing the Official
rate but access to the Official rate would only be available to
certain priority sectors. Those not in these priority sectors
would access dollars through the Sistema Complementario de
Administración de Divisas ('Sicad'). The Group is awaiting
clarification on whether it will be part of the priority sector,
the non-priority sector or both sectors. The most recent Sicad I
rate is VEF 11.0 per US dollar and it is expected that this rate
is likely to vary over time. As set out on page 32, the Group
changed the rate at which it consolidates its Venezuelan
operations ('SKCV') from the Official rate to the Sicad I rate as
at 31 March 2014 (VEF 10.7 per US dollar). In March 2014 a new
foreign exchange trading platform began operation (Sicad II) which
permits foreign exchange barter transactions in the private sector
with the most recent Sicad II rate being VEF 50.0 per US dollar
and this rate is also likely to vary over time. In this multiple
foreign exchange rate system there is a risk that the Sicad I rate
will devalue further resulting in re-measurement of the local
currency denominated net monetary assets and the local earnings
and increase the cost of importing goods required to run the
business.
The Venezuelan government have also announced that companies can
only seek price increases if they have clearance that their
margins are within certain guidelines. SKCV is operating within
these guidelines. There is a risk that if SKCV cannot 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 devaluing currency it would have an adverse effect on its
results of operations. In this volatile environment the Group
continues to closely monitor developments, assess evolving
business risks and actively manage its investments.
The Board regularly monitors all of the above risks and appropriate actions are taken to mitigate those risks or address their potential adverse consequences.
Consolidated Income Statement - Six Months
6 months to 6 months to 30-Jun-13 30-Jun-14 Unaudited Unaudited Pre-exceptional2014 Exceptional2014 Total2014 Pre-exceptional2013 Exceptional2013 Total2013 EURm EURm EURm EURm EURm EURm Revenue 3,947 - 3,947 3,908 - 3,908 Cost of sales (2,768) - (2,768) (2,786) (9) (2,795) Gross profit 1,179 - 1,179 1,122 (9) 1,113 Distribution (307) - (307) (311) - (311) costs Administrative (510) - (510) (505) - (505) expenses Other operating 1 - 1 1 - 1 income Other operating - (9) (9) - (23) (23) expenses Operating 363 (9) 354 307 (32) 275 profit Finance costs (140) - (140) (158) (6) (164) Finance income 8 5 13 9 6 15 Share 1 - 1 1 - 1 of associates' profit (after tax) Profit before 232 (4) 228 159 (32) 127 income tax Income tax (84) (50) expense Profit for the 144 77 financial period Attributable to: Owners of the 142 73 parent Non-controlling 2 4 interests Profit for the 144 77 financial period Earnings per share Basic earnings 62.3 32.1 per share - cent Diluted 61.9 31.8 earnings per share - cent
Consolidated Income Statement - Second Quarter
3 months to 3 months to 30-Jun-13 30-Jun-14 Unaudited Unaudited Pre-exceptional2014 Exceptional2014 Total2014 Pre-exceptional2013 Exceptional2013 Total2013 EURm EURm EURm EURm EURm EURm Revenue 2,015 - 2,015 2,019 - 2,019 Cost of sales (1,408) - (1,408) (1,423) (9) (1,432) Gross profit 607 - 607 596 (9) 587 Distribution (156) - (156) (159) - (159) costs Administrative (258) - (258) (270) - (270) expenses Other operating 1 - 1 - - - income Other operating - - - - (10) (10) expenses Operating 194 - 194 167 (19) 148 profit Finance costs (77) - (77) (88) - (88) Finance income 6 - 6 8 1 9 Share 1 - 1 1 - 1 of associates' profit (after tax) Profit before 124 - 124 88 (18) 70 income tax Income tax (46) (26) expense Profit for the 78 44 financial period Attributable to: Owners of the 77 41 parent Non-controlling 1 3 interests Profit for the 78 44 financial period Earnings per share Basic earnings 33.6 17.7 per share - cent Diluted 33.4 17.5 earnings per share - cent
Consolidated Statement of Comprehensive Income - Six Months
6 months to 6 months to 30-Jun-14 30-Jun-13 Unaudited Unaudited EURm EURm Profit for the financial period 144 77 Other comprehensive income: Items that may subsequently be reclassified to profit or loss Foreign currency translation adjustments: - Arising in the period (210) (212) Effective portion of changes in fair value of cash flow hedges: - Movement out of reserve 10 14 - New fair value adjustments into reserve (24) (4) - Movement in deferred tax - (1) (224) (203) Items which will not be subsequently reclassified to profit or loss Defined benefit pension plans: - Actuarial loss (47) (8) - Movement in deferred tax 7 2 (40) (6) Total other comprehensive expense (264) (209) Total comprehensive expense (120) (132) for the financial period Attributable to: Owners of the parent (104) (109) Non-controlling interests (16) (23) Total comprehensive expense (120) (132) for the financial period
Consolidated Statement of Comprehensive Income - Second Quarter
3 months to 3 months to 30-Jun-14 30-Jun-13 Unaudited Unaudited EURm EURm Profit for the financial period 78 44 Other comprehensive income: Items that may subsequently be reclassified to profit or loss Foreign currency translation adjustments: - Arising in the period 24 (98) Effective portion of changes in fair value of cash flow hedges: - Movement out of reserve 6 9 - New fair value adjustments into reserve (15) (12) 15 (101) Items which will not be subsequently reclassified to profit or loss Defined benefit pension plans: - Actuarial loss (26) (50) - Movement in deferred tax 4 11 (22) (39) Total other comprehensive expense (7) (140) Total comprehensive income/(expense) 71 (96) for the financial period Attributable to: Owners of the parent 62 (89) Non-controlling interests 9 (7) Total comprehensive income/(expense) 71 (96) for the financial period
Consolidated Balance Sheet
*Restated 30-Jun-14 30-Jun-13 31-Dec-13 Unaudited Unaudited Audited EURm EURm EURm ASSETS Non-current assets Property, plant and equipment 2,957 2,974 3,022 Goodwill and intangible assets 2,297 2,312 2,326 Available-for-sale financial assets 27 33 27 Investment in associates 16 16 16 Biological assets 96 111 107 Trade and other receivables 4 5 5 Derivative financial instruments - - 1 Deferred income tax assets 191 201 203 5,588 5,652 5,707 Current assets Inventories 712 732 712 Biological assets 10 10 10 Trade and other receivables 1,503 1,548 1,344 Derivative financial instruments 1 7 4 Restricted cash 18 9 8 Cash and cash equivalents 897 462 447 3,141 2,768 2,525 Total assets 8,729 8,420 8,232 EQUITY Capital and reserves attributable to the owners of the parent Equity share capital - - - Share premium 1,981 1,976 1,979 Other reserves (4) 265 208 Retained earnings 234 (56) 121 Total equity attributable to 2,211 2,185 2,308 the owners of the parent Non-controlling interests 192 196 199 Total equity 2,403 2,381 2,507 LIABILITIES Non-current liabilities Borrowings 3,032 3,211 3,009 Employee benefits 743 724 713 Derivative financial instruments 69 54 59 Deferred income tax liabilities 189 241 214 Non-current income tax liabilities 22 14 17 Provisions for liabilities and charges 41 44 42 Capital grants 11 12 12 Other payables 8 8 9 4,115 4,308 4,075 Current liabilities Borrowings 559 77 67 Trade and other payables 1,573 1,580 1,525 Current income tax liabilities 31 14 11 Derivative financial instruments 36 39 33 Provisions for liabilities and charges 12 21 14 2,211 1,731 1,650 Total liabilities 6,326 6,039 5,725 Total equity and liabilities 8,729 8,420 8,232
*Details of restatement are set out in Note 17.
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 2014 - 1,979 208 121 2,308 199 2,507 Profit for the - - - 142 142 2 144 financial period Other comprehensive income Foreign currency - - (192) - (192) (18) (210) translation adjustments Defined benefit - - - (40) (40) - (40) pension plans Effective portion - - (14) - (14) - (14) of changes in fair value of cash flow hedges Total comprehensive - - (206) 102 (104) (16) (120) (expense)/income for the financial period Shares issued - 2 - - 2 - 2 Hyperinflation - - - 82 82 10 92 adjustment Dividends paid - - - (71) (71) (3) (74) Share-based payment - - 7 - 7 - 7 Shares acquired by - - (13) - (13) - (13) SKG Employee Trust Acquired - - - - - 2 2 non-controlling interest At 30 June 2014 - 1,981 (4) 234 2,211 192 2,403 At 1 January 2013 - 1,972 444 (159) 2,257 212 2,469 Profit for the - - - 73 73 4 77 financial period Other comprehensive income Foreign currency - - (185) - (185) (27) (212) translation adjustments Defined benefit - - - (6) (6) - (6) pension plans Effective portion - - 9 - 9 - 9 of changes in fair value of cash flow hedges Total comprehensive - - (176) 67 (109) (23) (132) (expense)/income for the financial period Shares issued - 4 - - 4 - 4 Hyperinflation - - - 83 83 10 93 adjustment Dividends paid - - - (47) (47) (3) (50) Share-based payment - - 12 - 12 - 12 Shares acquired by - - (15) - (15) - (15) SKG Employee Trust At 30 June 2013 - 1,976 265 (56) 2,185 196 2,381
An analysis of the movements in Other reserves is provided in Note 15.
Consolidated Statement of Cash Flows
6 months to 6 months to 30-Jun-14 30-Jun-13 Unaudited Unaudited EURm EURm Cash flows from operating activities Profit before income tax 228 127 Net finance costs 127 149 Depreciation charge 163 170 Impairment of assets - 9 Amortisation of intangible assets 14 12 Amortisation of capital grants (1) (1) Share-based payment expense 7 12 Profit on purchase/sale of (2) (3) assets and businesses Share of associates' profit (after tax) (1) (1) Net movement in working capital (117) (114) Change in biological assets 17 11 Change in employee benefits (26) (28) and other provisions Other 3 4 Cash generated from operations 412 347 Interest paid (79) (114) Income taxes paid: Overseas corporation tax (net (43) (37) of tax refunds) paid Net cash inflow from operating activities 290 196 Cash flows from investing activities Interest received 2 2 Additions to property, plant and (157) (131) equipment and biological assets Additions to intangible assets (6) (3) Receipt of capital grants - 1 Disposal of available-for-sale 1 - financial assets (Increase)/decrease in restricted cash (10) 5 Disposal of property, plant and equipment 5 4 Dividends received from associates 1 1 Purchase of subsidiaries and (18) (2) non-controlling interests Deferred consideration paid (1) (4) Net cash outflow from investing activities (183) (127) Cash flows from financing activities Proceeds from issue of new ordinary shares 2 4 Proceeds from bond issue 500 400 Purchase of own shares (13) (15) Increase in interest-bearing borrowings 20 28 Payment of finance leases (1) (3) Repayment of borrowings - (382) Deferred debt issue costs (7) (9) Dividends paid to shareholders (71) (47) Dividends paid to non-controlling interests (3) (3) Net cash inflow/(outflow) from 427 (27) financing activities Increase in cash and cash equivalents 534 42 Reconciliation of opening to closing cash and cash equivalents Cash and cash equivalents at 1 January 424 423 Currency translation adjustment (75) (22) Increase in cash and cash equivalents 534 42 Cash and cash equivalents at 30 June 883 443
An analysis of the Net movement in working capital is provided in Note 11.
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 and graphicboard. The Company is a public limited company whose shares are publicly traded. It is incorporated and tax resident in Ireland. The address of its registered office is Beech Hill, Clonskeagh, Dublin 4, Ireland.
2.Basis of Preparation
The condensed Group 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 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 2013 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 2013 included in the Group's 2013 annual report which is available on the Group's website www.smurfitkappa.com.
The accounting policies and methods of computation and presentation adopted in the preparation of the condensed Group interim financial statements are consistent with those described and applied in the annual report for the financial year ended 31 December 2013. There are a number of changes to IFRS issued and effective from 1 January 2014 which include IFRS 10, Consolidated Financial Statements, IFRS 11, Joint Arrangements, IFRS 12, Disclosure of Interests in Other Entities, IAS 27, Separate Financial Statements, and IAS 28, Investments in Associates and Joint Ventures. They do not have an effect on the condensed interim Group financial information included in this report.
The Group is a highly integrated paper and paperboard manufacturer with leading market positions, quality assets and broad geographic reach. The financial position of the Group, its cash generation, capital resources and liquidity 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 half year financial statements.
The condensed Group 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 tables in this interim statement may not add precisely due to rounding.
The Group's auditors have not audited or reviewed the condensed Group interim financial statements contained in this report.
The condensed Group interim financial statements presented do 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 2013 will be filed with the Irish Registrar of Companies in due course. The audit report on those Group accounts was unqualified.
3.Segmental Analyses
The Group has determined reportable 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 reportable 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 operations of Smurfit Kappa Orange County ('SKOC'). Inter-segment revenue is not material. No operating segments have been aggregated for disclosure purposes.
Segment profit is measured based on earnings before interest, tax, depreciation, amortisation, exceptional items and share-based payment expense ('EBITDA before exceptional items').
6 months to 30-Jun-14 6 months to 30-Jun-13 Europe TheAmericas Total Europe TheAmericas Total EURm EURm EURm EURm EURm EURm Revenue and Results Revenue 3,058 889 3,947 2,956 952 3,908 EBITDA before 421 155 576 371 161 532 exceptional items Segment - (9) (9) (6) (17) (23) exceptional items EBITDA after 421 146 567 365 144 509 exceptional items Unallocated (12) (20) centre costs Share-based (7) (12) payment expense Depreciation (180) (181) and depletion (net) Amortisation (14) (12) Impairment - (9) of assets Finance costs (140) (164) Finance income 13 15 Share 1 1 of associates' profit (after tax) Profit before 228 127 income tax Income tax (84) (50) expense Profit for the 144 77 financial period
3.Segmental Analyses (continued)
3 months to 30-Jun-14 3 months to 30-Jun-13 Europe TheAmericas Total Europe TheAmericas Total EURm EURm EURm EURm EURm EURm Revenue and Results Revenue 1,550 465 2,015 1,499 520 2,019 EBITDA before 222 80 302 193 96 289 exceptional items Segment - - - (6) (4) (10) exceptional items EBITDA after 222 80 302 187 92 279 exceptional items Unallocated (7) (18) centre costs Share-based - (7) payment expense Depreciation (94) (91) and depletion (net) Amortisation (7) (6) Impairment - (9) of assets Finance costs (77) (88) Finance income 6 9 Share 1 1 of associates' profit (after tax) Profit before 124 70 income tax Income tax (46) (26) expense Profit for the 78 44 financial period
4.Exceptional Items
6 months to 6 months to The following items are regarded 30-Jun-14 30-Jun-13 as exceptional in nature: EURm EURm Currency trading loss on change 9 15 in Venezuelan translation rate Impairment loss on property, - 9 plant and equipment Reorganisation and restructuring costs - 8 Exceptional items included 9 32 in operating profit Exceptional finance costs - 6 Exceptional finance income (5) (6) Exceptional items included (5) - in net finance costs
Exceptional items charged within operating profit in the six months to June 2014 amounted to EUR9 million and related to losses on the translation of non-Bolivar denominated payables following the Group's decision to translate its Venezuelan operations at the Sicad I rate. The translation loss reflected the higher cost to its Venezuelan operations of discharging these payables.
Exceptional finance income in the six months to June 2014 comprised a gain of EUR5 million in Venezuela on the retranslation of the US dollar denominated intra-group loans to the Sicad I rate.
Exceptional items charged within operating profit in the six months to June 2013 amounted to EUR32 million, EUR15 million of which related to the temporary closure of the Townsend Hook mill in the UK (comprising an impairment charge of EUR9 million and reorganisation and restructuring costs of EUR6 million). A further EUR2 million of reorganisation costs related to the restructuring of SKOC and the consolidation of the Group's two plants in Juarez, Mexico, into one plant. A currency trading loss of EUR15 million was recorded as a result of the devaluation of the Venezuelan Bolivar in February 2013, comprising EUR12 million booked in the first quarter and an adjustment of EUR3 million in the second quarter for hyperinflation and re-translation. The original loss reflected the higher cost to the Venezuelan operations of discharging its non-Bolivar denominated net payables following the devaluation.
Exceptional finance costs in the six months to June 2013 comprised an offsetting charge of EUR6 million in respect of the accelerated amortisation of deferred debt issue costs and a gain of EUR6 million in Venezuela on the value of US dollar denominated intra-group loans, following the devaluation of the Bolivar. The accelerated amortisation of deferred debt issue costs arose from the repayment of part of the senior credit facility from the proceeds of January's EUR400 million bond issue.
5.Finance Costs and Income
6 months to 6 months to 30-Jun-14 30-Jun-13 EURm EURm Finance costs: Interest payable on bank loans and overdrafts 26 41 Interest payable on other borrowings 60 76 Exceptional finance costs associated - 6 with debt restructuring Foreign currency translation loss on debt 5 4 Fair value loss on derivatives 2 1 not designated as hedges Net interest cost on net pension liability 13 13 Net monetary loss - hyperinflation 34 23 Total finance costs 140 164 Finance income: Other interest receivable (2) (2) Gain on sale of financial asset (1) - Foreign currency translation gain on debt (3) (3) Exceptional foreign currency translation gain (5) (6) Fair value gain on derivatives (2) (4) not designated as hedges Total finance income (13) (15) Net finance costs 127 149
On 3 July, the Group completed the refinancing of its EUR500 million 7.75% senior notes due 2019 with a seven-year bond at a rate of 3.25%. The associated exceptional finance charges totalling EUR42 million, composed of cash and non-cash costs, will be included in the Group's third quarter results.
6.Income Tax Expense
Income tax expense recognised in the Consolidated Income Statement
6 months to 6 months to 30-Jun-14 30-Jun-13 EURm EURm Current tax: Europe 43 15 The Americas 29 28 72 43 Deferred tax 12 7 Income tax expense 84 50 Current tax is analysed as follows: Ireland 2 1 Foreign 70 42 72 43
Income tax recognised in the Consolidated Statement of Comprehensive Income
6 months to 6 months to 30-Jun-14 30-Jun-13 EURm EURm Arising on actuarial loss (7) (2) on defined benefit plans Arising on qualifying derivative - 1 cash flow hedges (7) (1)
The tax expense in the first six months is EUR34 million more than in the comparable period. This is largely explained by higher earnings, mainly in Europe, and the effect of tax benefits recorded in 2013 that did not occur in 2014. The deferred tax includes a tax expense associated with using previously recognised tax losses. However, in 2013 the deferred tax also includes additional tax credits for previously unrecognised losses which did not arise in 2014.
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-14 30-Jun-13 EURm EURm Current service cost 25 26 Past service cost 1 - Net interest cost on net pension liability 13 13 Defined benefit cost 39 39
Included in cost of sales, distribution costs and administrative expenses is a defined benefit cost of EUR26 million (2013: EUR26 million). Net interest cost on net pension liability of EUR13 million (2013: EUR13 million) is included in finance costs in the Consolidated Income Statement.
The amounts recognised in the Consolidated Balance Sheet were as follows:
30-Jun-14 31-Dec-13 EURm EURm Present value of funded or partially (1,993) (1,851) funded obligations Fair value of plan assets 1,753 1,625 Deficit in funded or partially funded plans (240) (226) Present value of wholly unfunded obligations (503) (487) Net pension liability (743) (713)
The employee benefits provision has increased from EUR713 million at 31 December 2013 to EUR743 million at 30 June 2014, mainly as a result of lower Eurozone corporate bond yields.
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.
6 months to 6 months to 30-Jun-14 30-Jun-13 Profit attributable to owners 142 73 of the parent (EUR million) Weighted average number of ordinary 228 228 shares in issue (million) Basic earnings per share (cent) 62.3 32.1
Diluted
Diluted earnings per share is calculated by adjusting the weighted average number of ordinary shares outstanding to assume conversion of all dilutive potential ordinary shares which comprise convertible shares issued under the management equity plans.
6 months to 6 months to 30-Jun-14 30-Jun-13 Profit attributable to owners 142 73 of the parent (EUR million) Weighted average number of ordinary 228 228 shares in issue (million) Potential dilutive ordinary 1 2 shares assumed (million) Diluted weighted average ordinary 229 230 shares (million) Diluted earnings per share (cent) 61.9 31.8
Pre-exceptional
6 months to 6 months to 30-Jun-14 30-Jun-13 Profit attributable to owners 142 73 of the parent (EUR million) Exceptional items included in profit before 4 32 income tax (Note 4) (EUR million) Income tax on exceptional items (EUR million) - (5) Pre-exceptional profit attributable to 146 100 owners of the parent (EUR million) Weighted average number of ordinary 228 228 shares in issue (million) Pre-exceptional basic earnings 64.1 43.9 per share (cent) Diluted weighted average ordinary 229 230 shares (million) Pre-exceptional diluted earnings 63.6 43.5 per share (cent)
9.Dividends
During the period, the final dividend for 2013 of 30.75 cent per share was paid to the holders of ordinary shares. The Board has decided to pay an interim dividend of 15.375 cent per share for 2014 and it is proposed to pay this dividend on 31 October 2014 to all ordinary shareholders on the share register at the close of business on 3 October 2014.
10.Property, Plant and Equipment
Land andbuildings Plant andequipment Total EURm EURm EURm Six months ended 30 June 2014 Opening net book amount 1,107 1,915 3,022 Reclassifications 18 (22) (4) Additions 2 135 137 Acquisitions 8 5 13 Depreciation charge (23) (140) (163) for the period Retirements and (2) (1) (3) disposals Hyperinflation 20 16 36 adjustment Foreign currency (43) (38) (81) translation adjustment At 30 June 2014 1,087 1,870 2,957 Year ended 31 December 2013 Opening net book amount 1,125 1,979 3,104 Reclassifications 48 (55) (7) Additions 8 330 338 Acquisitions - 7 7 Depreciation charge (51) (295) (346) for the year Impairments (2) (7) (9) Retirements and (1) (2) (3) disposals Hyperinflation 41 43 84 adjustment Foreign currency (61) (85) (146) translation adjustment At 31 December 2013 1,107 1,915 3,022
11.Net Movement in Working Capital
6 months to 6 months to 30-Jun-14 30-Jun-13 EURm EURm Change in inventories (20) (28) Change in trade and other receivables (189) (178) Change in trade and other payables 92 92 Net movement in working capital (117) (114)
12.Analysis of Net Debt
30-Jun-14 31-Dec-13 EURm EURm Unsecured senior credit facility: Revolving credit facility(1)- interest at 119 119 relevant interbank rate + 1.75%(7) Facility A term loan(2)- interest at 741 740 relevant interbank rate + 2.00%(7) US$292.3 million 7.50% senior debentures 215 213 due 2025 (including accrued interest) Bank loans and overdrafts 59 67 Cash (915) (455) 2018 receivables securitisation 173 173 variable funding notes 2019 receivables securitisation 224 203 variable funding notes(3) 2018 senior notes (including accrued interest)(4) 417 414 EUR500 million 7.75% senior notes due 2019 496 495 (including accrued interest)(5) EUR400 million 4.125% senior notes due 401 401 2020 (including accrued interest) EUR250 million senior floating rate notes due 248 247 2020 (including accrued interest)(6) EUR500 million 3.25% senior notes due 2021 493 - (including accrued interest)(5) Net debt before finance leases 2,671 2,617 Finance leases 5 4 Net debt including leases 2,676 2,621 (1) Revolving credit facility ('RCF') of EUR625 million (available under the unsecured senior credit facility) to be repaid in 2018. (a) Revolver loans - EUR125 million (b) loans and overdrafts drawn under ancillary facilities - nil and (c) other operational facilities including letters of credit drawn under ancillary facilities - EUR19 million. (2) Facility A term loan ('Facility A') due to be repaid in certain instalments from 2016 to 2018. (3) In June 2014, the 2015 securitisation programme was refinanced with a securitisation programme maturing in 2019. (4) EUR200 million 5.125% senior notes due 2018 and US$300 million 4.875% senior notes due 2018. (5) On 28 May 2014 the Group priced EUR500 million of seven-year euro denominated senior unsecured notes at a coupon of 3.25%. Following the issue of an early redemption notice, the net proceeds, together with cash balances of EUR37.5 million, were used to redeem the Group's 2019 7.75% EUR500 million bonds on 3 July 2014. (6) Interest at EURIBOR + 3.5%. (7) The margins applicable to the unsecured senior credit facility are determined as follows: Net debt/EBITDA ratio RCF Facility A Greater than 3.0 : 1 2.50% 2.75% 3.0 : 1 or less but more than 2.5 : 1 2.00% 2.25% 2.5 : 1 or less but more than 2.0 : 1 1.75% 2.00% 2.0 : 1 or less 1.50% 1.75%
13.Fair Value Hierarchy
The following table presents the Group's financial assets and liabilities that are measured at fair value at 30 June 2014:
Level 1 Level 2 Level 3 Total EURm EURm EURm EURm Available-for-sale financial assets: Listed 1 - - 1 Unlisted - 7 19 26 Derivative financial instruments: Assets at fair value - 1 - 1 through Consolidated Income Statement Derivative financial instruments: Liabilities at fair value through - (47) - (47) Consolidated Income Statement Derivatives used for hedging - (58) - (58) 1 (97) 19 (77)
The following table presents the Group's financial assets and liabilities that are measured at fair value at 31 December 2013:
Level 1 Level 2 Level 3 Total EURm EURm EURm EURm Available-for-sale financial assets: Listed 1 - - 1 Unlisted - 7 19 26 Derivative financial instruments: Assets at fair value - 4 - 4 through Consolidated Income Statement Derivatives used for hedging - 1 - 1 Derivative financial instruments: Liabilities at fair value through - (46) - (46) Consolidated Income Statement Derivatives used for hedging - (46) - (46) 1 (80) 19 (60)
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. The Group uses discounted cash flow analysis for various available-for-sale financial assets that are not traded in active markets. There has been no movement to the level 3 financial instruments from 31 December 2013 to 30 June 2014.
There has been no transfers between level 1 and level 2 during the period.
14.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 2013 annual report.
30-Jun-14 31-Dec-13 Carrying value Fair value Carrying value Fair value EURm EURm EURm EURm Trade and other 1,400 1,400 1,263 1,263 receivables(1) Available-for-sale 27 27 27 27 financial assets(2) Cash 897 897 447 447 and cash equivalents(3) Derivative 1 1 5 5 assets(4) Restricted cash 18 18 8 8 2,343 2,343 1,750 1,750 Trade and other 1,268 1,268 1,231 1,231 payables(1) Senior credit 860 860 859 859 facility(5) 2018 173 173 173 173 receivables securitisation(3) 2019 224 224 203 203 receivables securitisation(3)(7) Bank 59 59 67 67 overdrafts(3) 2025 215 248 213 235 debentures(6) 2018 notes(6) 417 451 414 442 2019 notes(6) 496 529 495 543 (8) 2020 fixed rate 401 427 401 418 notes(6) 2020 floating 248 266 247 263 rate notes(6) 2021 fixed rate 493 491 - - notes(6) (8) 4,854 4,996 4,303 4,434 Finance leases 5 5 4 4 4,859 5,001 4,307 4,438 Derivative 105 105 92 92 liabilities(4) 4,964 5,106 4,399 4,530 Total net (2,621) (2,763) (2,649) (2,780) position (1) The fair value of trade and other receivables and payables is estimated as the present value of future cash flows, discounted at the 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 security including discounted cash flows and similar unlisted equity valuation models. (3) The carrying amount reported in the Consolidated Balance Sheet is estimated to approximate to fair value because of the short-term maturity of these instruments and, in the case of the receivables securitisation, the variable nature of the facility 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 listed market price is not available, then fair value is estimated by discounting the difference between the contractual forward price and the current forward price for the residual maturity of the contract using a risk-free interest rate (based on government bonds). The fair value of interest rate swaps is based on discounting estimated future cash flows based on the terms and maturity of each contract and using market interest rates for a similar instrument at the measurement date. (5) The fair value of the unsecured senior credit facility is estimated to approximate the carrying amount reported in the Consolidated Balance Sheet because of the variable nature of the facility and repricing dates. (6) Fair value is based on broker prices at the balance sheet date. (7) In June 2014, the 2015 securitisation programme was refinanced with a securitisation programme maturing in 2019. (8) On 28 May 2014 the Group priced EUR500 million of seven-year euro denominated senior unsecured notes at a coupon of 3.25%. Following the issue of an early redemption notice the net proceeds, together with cash balances of EUR37.5 million were used to redeem the Group's 2019 7.75% EUR500 million bonds on 3 July 2014.
15.Other Reserves
Other reserves included in the Consolidated Statement of Changes in Equity are comprised of the following:
Reverseacquisitionreserve Cash flowhedgingreserve Foreigncurrencytranslationreserve Share-basedpaymentreserve Ownshares Available-for-salereserve Total EURm EURm EURm EURm EURm EURm EURm At 1 January 2014 575 (15) (456) 131 (28) 1 208 Other comprehensive income Foreign currency translation - - (192) - - - (192) adjustments Effective portion of changes in - (14) - - - - (14) fair value of cash flow hedges Total other comprehensive - (14) (192) - - - (206) expense Share-based payment - - - 7 - - 7 Shares acquired by - - - - (13) - (13) SKG Employee Trust Shares granted to participants - - - (1) 1 - - of the SKG Employee Trust At 30 June 2014 575 (29) (648) 137 (40) 1 (4) At 1 January 2013 575 (26) (198) 105 (13) 1 444 Other comprehensive income Foreign currency translation - - (185) - - - (185) adjustments Effective portion of changes in - 9 - - - - 9 fair value of cash flow hedges Total other comprehensive - 9 (185) - - - (176) income/(expense) Share-based payment - - - 12 - - 12 Shares acquired by - - - - (15) - (15) SKG Employee Trust At 30 June 2013 575 (17) (383) 117 (28) 1 265
16.Venezuela
Hyperinflation
As discussed more fully in the 2013 annual report, Venezuela became hyperinflationary during 2009 when its cumulative inflation rate for the previous three years exceeded 100%. As a result, the Group applied the hyperinflationary accounting requirements of IAS 29 - Financial Reporting in Hyperinflationary Economies to its Venezuelan operations at 31 December 2009 and for all subsequent accounting periods.
The index used to reflect current values is derived from a combination of Banco Central de Venezuela's National Consumer Price Index from its initial publication in December 2007 and the Consumer Price Index for the metropolitan area of Caracas for earlier periods. The level of and movement in the price index at June 2014 and 2013 are as follows:
30-Jun-14 30-Jun-13 Index at period end 647.5 398.6 Movement in period 30.0% 25.0%
As a result of the entries recorded in respect of hyperinflationary accounting under IFRS, the Consolidated Income Statement is impacted as follows: Revenue EUR14 million decrease (2013: EUR14 million increase), pre-exceptional EBITDA EUR7 million decrease (2013: EUR2 million decrease) and profit after taxation EUR55 million decrease (2013: EUR44 million decrease). In 2014, a net monetary loss of EUR34 million (2013: EUR23 million loss) was recorded in the Consolidated Income Statement. The impact on our net assets and our total equity is an increase of EUR47 million (2013: EUR52 million increase).
Exchange Control and Devaluation
As a result of Venezuela operating a number of alternative currency exchange mechanisms (CENCOEX (formerly known as CADIVI), Sicad I and Sicad II) the Group continues to assess the appropriate rate at which to consolidate the results of its Venezuelan operations. With the introduction of Sicad I and Sicad II, Venezuela has now become a multiple rate foreign exchange system with three different official rates. One, the official CENCOEX rate of VEF 6.3 per US dollar ('Official rate') is a fixed rate for basic/essential goods. The two remaining rates are variable, Sicad I for goods excluded from CENCOEX and the Sicad II rate for SMEs and private individuals.
As a result of the January announcements by the Venezuelan government that there will be no official devaluation for at least two years Sicad I is now intended to offer an alternative currency exchange mechanism to foreign firms operating in Venezuela.
The Group believes that Sicad I is the more appropriate rate for accounting and consolidation and adopted it for translation from 31 March 2014. The change from the official rate of VEF 6.3 to VEF 10.7 (the SICAD I rate prevailing at date of adoption) reduced our cash by approximately EUR69 million and our net assets by EUR172 million at that time.
On this basis, in accordance with IFRS, the financial statements of the Group's operations in Venezuela were translated at 30 June 2014 using the prevailing Sicad I rate of VEF 10.6 per US dollar and the closing euro/US dollar rate of EUR1= US$ 1.37.
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 2014, the Group's operations in Venezuela represented approximately 5% (2013: 6%) of its total assets and 13% (2013: 15%) of its net assets. In addition, cumulative foreign translation losses arising on its net investment in these operations amounting to EUR534 million (2013: EUR336 million) are included in the foreign exchange translation reserve.
17.Restatement of Prior Periods
IFRS 3, Business Combinations
As required under IFRS 3, Business Combinations, the Consolidated Balance Sheet at 30 June 2013 has been restated for final adjustments to the provisional fair values of the SKOC acquisition on 30 November 2012. The effects on previously reported financial information are shown in the table below.
Impact on Financial Statements
Previouslyreported IFRS 3Adjustments Restated EURm EURm EURm Consolidated Balance Sheet At 30 June 2013 Non-current assets Property, plant 2,946 28 2,974 and equipment Goodwill and 2,302 10 2,312 intangible assets Deferred income 199 2 201 tax assets Current assets Inventories 744 (12) 732 Non-current liabilities Deferred income tax 217 24 241 liabilities Other payables 7 1 8 Current liabilities Trade and other 1,578 2 1,580 payables Provisions for 20 1 21 liabilities and charges
Initial goodwill arising on the SKOC acquisition was EUR88 million. The completion of the fair value exercise at the end of 2013 resulted in a EUR36 million reduction of this goodwill, giving a final amount of EUR52 million.
18.Related Party Transactions
Details of related party transactions in respect of the year ended 31 December 2013 are contained in Note 30 to the consolidated financial statements of the Group's 2013 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 2014 or changes to transactions with related parties disclosed in the 2013 consolidated financial statements that had a material effect on the financial position or the performance of the Group.
19.Board Approval
The interim report was approved by the Board of Directors on 29 July 2014.
20.Distribution of the Interim Report
The 2014 interim report is available on the Group's website www.smurfitkappa.com.
Responsibility Statement in Respect of the Six Months Ended 30 June 2014
The Directors, whose names and functions are listed on pages 34 and 35 in the Group's 2013 annual report, are responsible for preparing this interim management report and the condensed Group interim financial statements in accordance with the Transparency (Directive 2004/109/EC) Regulations 2007, the related Transparency Rules of the Irish Financial Services Regulatory Authority and with IAS 34, Interim Financial Reporting as adopted by the European Union.
The Directors confirm that, to the best of their knowledge:
-- The condensed Group interim financial statements for the half year
ended 30 June 2014 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 Group interim financial
statements for the half year ended 30 June 2014, 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
G.W. McGann, Director and Chief Executive Officer
I.J. Curley, Director and Chief Financial Officer
29 July 2014
Supplementary Financial Information
EBITDA before exceptional items and share-based payment expense is denoted by EBITDA in the following schedules for ease of reference.
Reconciliation of Profit to EBITDA 3 months to 3 months to 6 months to 6 months to 30-Jun-14 30-Jun-13 30-Jun-14 30-Jun-13 EURm EURm EURm EURm Profit for the 78 44 144 77 financial period Income tax expense 46 26 84 50 Currency trading - 3 9 15 loss on change in Venezuelan translation rate Impairment loss - 9 - 9 on property, plant and equipment Reorganisation and - 7 - 8 restructuring costs Share (1) (1) (1) (1) of associates' profit (after tax) Net finance costs 71 79 127 149 Share-based - 7 7 12 payment expense Depreciation, 101 97 194 193 depletion (net) and amortisation EBITDA 295 271 564 512 Supplementary Historical Financial Information EURm Q2, 2013 Q3, 2013 Q4, 2013 FY, 2013 Q1, 2014 Q2, 2014 Group and 3,285 3,319 3,346 13,030 3,217 3,289 third party revenue Third 2,019 2,016 2,033 7,957 1,932 2,015 party revenue EBITDA 271 303 291 1,107 269 295 EBITDA 13.4% 15.0% 14.3% 13.9% 13.9% 14.6% margin Operating 148 195 173 643 160 194 profit Profit 70 104 62 294 104 124 before income tax Free cash 95 190 103 365 59 76 flow Basic 17.7 24.0 26.0 82.2 28.8 33.6 earnings per share - cent Weighted 229 229 229 229 227 228 average number of shares used in EPS calculation (million) Net debt 2,817 2,630 2,621 2,621 2,640 2,676 Net debt 2.74 2.50 2.37 2.37 2.33 2.31 to EBITDA (LTM) This information is provided by Business Wire
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