Final Results

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2012 Fourth Quarter Results

Smurfit Kappa Group plc (‘SKG’ or the ‘Group’), one of the world’s largest integrated manufacturers of paper-based packaging products, with operations in Europe and the Americas, today announced results for the 3 months and 12 months ending 31 December 2012.

2012 Fourth Quarter & Full Year | Key Financial Performance Measures

€ m   FY 2012   FY 2011   Change   Q4 2012   Q4 2011   Change  

Q3

2012

  Change
 
Revenue €7,335 €7,357 - €1,824 €1,819 - €1,830 -
 
EBITDA before Exceptional Items

and Share-based Payment (1)

€1,020 €1,015 - €240 €245 (2%) €280 (14%)
 
EBITDA Margin 13.9% 13.8% - 13.1% 13.4% - 15.3% -
 
Operating Profit before Exceptional Items €616 €624 (1)% €130 €148 (12%) €181 (28%)
 
Profit before Income Tax €331 €299 11% €36 €77 (54)% €105 (66)%
 
Basic EPS (cent) 111.2 93.0 20% 26.2 39.4 (34%) 33.4 (22%)
 
Pre-exceptional EPS (cent) 108.3 100.1 8% 35.1 30.4 15% 33.4 5%
 
Return on Capital Employed (2) 12.1% 12.5% - 12.7% -
 
Free Cash Flow (3) €282 €394 (28%) €118 €199 (41%) €118 -
                 
                 
 
Net Debt €2,792 €2,752 1% €2,640 6%
 
Net Debt to EBITDA (LTM) 2.7x 2.7x -       2.6x -

(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 32.

(2) LTM pre-exceptional operating profit plus share of associates’ profit/average capital employed.

(3) Free cash flow is set out on page 10. The IFRS cash flow is set out on page 19.

Full Year 2012 Highlights

  • Pre-exceptional EPS growth of 8% to 108.3 cent per share
  • Strong EBITDA of €1,020 million and EBITDA margin of 13.9%
  • Final dividend per share increased by 37% from 15 cent to 20.5 cent
  • Two bond transactions completed in 2012 with a combined value of €690 million. A further €400 million bond issued in January 2013 at a rate of 4.125% maturing 2020
  • Orange County Container Group (‘OCCG’) acquisition finalised on 30 November 2012 and immediately earnings accretive on acquisition
  • Strong growth in sales to our Pan European customers in 2012

Performance Review & Outlook

Gary McGann, Smurfit Kappa Group CEO commented: “Continuing our drive for earnings growth, we are pleased to report EBITDA of €1,020 million with strong pre-exceptional EPS growth of 8% to 108.3 cent for the full year 2012. Notwithstanding the challenging macro environment, a robust operational performance has allowed SKG to undertake a number of financial and strategic initiatives, which have left the Group in a very good position to drive future growth and deliver increased value to shareholders.

SKG continues to be the best positioned supplier of innovative, market leading paper-based packaging in its chosen markets of Europe and the Americas. The high quality of its earnings is supported by the Group’s market oriented integrated model, the substantial geographic footprint of its operations and its clear focus on customer service which allows SKG to at least meet, and in many cases define, customer needs.

The recovery of only €20 to €30 per tonne of the €100 per tonne testliner price increase sought in the fourth quarter of 2012 has resulted in the price level for these paper grades continuing at an uneconomically low level. As a result, the Group has announced a €60 per tonne price increase for our recycled containerboard grades with effect from 1 February. Throughout 2012 SKG’s kraftliner operations performed well and are benefiting from price increases implemented during the year, alongside efficiency improvements.

In line with SKG’s stated strategy to focus on higher growth markets, the acquisition of OCCG was finalised on 30 November 2012 at a consideration of approximately €260 million, the Group’s first substantial acquisition since the 2007 IPO. OCCG is an integrated paper-based packaging company with significant corrugated and converting operations in Mexico, and two corrugated plants and a paper mill in the United States. Full year 2012 EBITDA for OCCG was US$60 million, compared with pro-forma EBITDA of US$53 million, and the integration of the new company is progressing very well to date.

Reflecting SKG’s increasing ability to fund accretive acquisitions from operating cash flows, net debt has been maintained at 2.7 times EBITDA notwithstanding the acquisition of OCCG. The Group remains committed to its target of remaining below 3.0 times Net Debt/EBITDA through the cycle.

In spite of the continuing challenging environment the Group is reporting a solid start to the year, and in line with SKG’s strong financial progress, the Board is recommending a final dividend of 20.5 cent for 2012, a 37% increase on last year. This step reflects the Board’s confidence in the underlying performance and prospects of the Group and the sustainable strength of its business model”.

About Smurfit Kappa Group

SKG is a world leader in paper-based packaging with operations in Europe and the Americas. SKG operates in 21 countries in Europe and 11 in the Americas. With innovation, service and pro-activity towards customers as its primary focus, SKG is the European leader in paper-based packaging including, corrugated, containerboard, bag-in-box, solidboard, and solidboard packaging. It also has a key position in a number of other product/market segments, including graphicboard, MG paper and sack paper. SKG has a growing base in Eastern Europe, and it is the only large scale pan regional operator in Latin America.

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  

 

Seamus Murphy

Smurfit Kappa Group


Tel: +353 1 202 71 80

E-mail: ir@smurfitkappa.com

 

FTI Consulting


Tel: +353 1 663 36 86

E-mail: smurfitkappa@fticonsulting.com

2012 Fourth Quarter & Full Year | Performance Overview

The Group is reporting EBITDA of €1,020 million and an EBITDA margin of 13.9% for the full year 2012, its second highest result since its IPO in 2007. This strong performance is the product of our integrated model which maximises efficiencies throughout the system. As a result, SKG’s paper system is capable of running efficiently through the cycle, and its packaging network benefits from an optimised product portfolio, a clear focus on sustainability and an efficient distribution system throughout its markets.

Having shown signs of some erosion over the course of the year due to general market sentiment and a short-term downward trend in OCC and testliner prices, SKG’s underlying packaging pricing remained flat for the fourth quarter. The Group has sought to mitigate the effects of volatile input costs on pricing by focusing on adding value to customer products and supply chains. SKG provides much more than a simple transport medium, focusing instead on being a partner to our customers through cost take-out programmes, a constant flow of innovative packaging solutions and a focus on sustainable products and processes.

Compared to 2011 levels, European box volumes grew by 1% in the fourth quarter of 2012, and were unchanged for the full year 2012. Total corrugated volumes for SKG were marginally down year-on-year, and reflect the Group’s stated position of sacrificing volumes when necessary where satisfactory margins cannot be achieved. Sheet feeding volumes have decreased 8% for the full year 2012 year-on-year for that reason.

The Group has announced a €60 per tonne testliner price increase effective from 1 February given the unsustainable economics of recycled paper grades and the satisfactory demand environment.

Further factors supportive of the increase include: increased Chinese demand for OCC and recovered paper grades; testliner export markets remaining reasonably strong and; recycled containerboard inventories dropping to levels which have been supportive of previous price increases. Current European capacity remains unchanged compared to December 2011, due to almost 700,000 tonnes of announced capacity closures, offsetting capacity additions, during 2012. This should support a more stable pricing environment in the medium term.

The European kraftliner market achieved price increases of €90 per tonne in 2012. SKG is the market leader and is net long in the grade by approximately 500,000 tonnes. With limited scope to expand current production of the grade in Europe, US exports to Europe particularly influence availability and pricing. Based on official statistics, these exports have reduced by 2% for the year to November 2012, maintaining a balanced supply into the market. This is due to continuing good demand, and reduced inventories in the US market.

Following the acquisition of OCCG, the Americas segment of our business comprises our Latin American operations and OCCG. OCCG has been re-named Smurfit Kappa Orange County.

The performance of the Latin American business varied significantly between countries for the full year 2012, with the overall EBITDA margin decreasing to 15.0%. Political and social unrest in both Venezuela and Argentina led to a number of production interruptions during the year, and to an overall decrease in Latin American volume of 3% year-on-year. Colombia continued to perform well throughout the year and SKG’s growing Mexican business had a strong 2012 result and has a good near term outlook as US paper price increases are passed through to corrugated pricing.

The acquisition of OCCG was completed on 30 November 2012 and has been immediately earnings accretive. As a result of the successful implementation of the US paper price increase of US$50 per ton in the fourth quarter, OCCG’s performance exceeded expectations with a full year EBITDA of US$60 million compared with a pro-forma of US$53 million. The business is expected to continue to perform well in 2013 as the paper price increase flows through to corrugated prices. The integration process has started strongly and an update on the synergy potential will be given with the release of our first quarter results.

The Group’s ROCE was 12.1% for 2012. However this increases to 12.6% on a pro-forma basis for OCCG, demonstrating SKG’s progress against its objective to consistently maximise shareholder returns. SKG’s steadily appreciating underlying ROCE is driven by the company’s considered capital allocation decisions and the operational performance of our people. Internal investment opportunities have focused on increasing our innovative commercial offering to customers whilst maintaining an emphasis on enhancing our asset base to increase output and profitability.

Over the course of 2012 the Group successfully re-financed a significant portion of existing debt improving its debt maturity profile and diversifying its funding base. Following an amendment and extension of its senior credit facility in March 2012, the Group successfully completed €690 million equivalent of bond issues in September 2012. These comprised €200 million 5.125% and US$300 million 4.875% notes maturing in 2018 together with a €250 million floating rate note with an interest cost of EURIBOR plus 3.50% maturing in 2020.

In January 2013 the Group completed a €400 million note offering at an interest rate of 4.125% maturing in 2020. This is the first time SKG has been able to secure rates at this level and is indicative of the solid fundamentals of SKG’s operational performance and capital management. Year-on-year, the average maturity of the Group’s debt has increased from 4.4 to 5.8 years and the bond component now constitutes 69% of drawn debt.

A consistently strong operating performance and free cash flow of €282 million for the year, has delivered a net debt to EBITDA ratio of 2.7 times at the year end. This is unchanged compared with 2011 despite the OCCG acquisition for approximately €260 million during the year, demonstrating SKG’s ability to fund such accretive acquisitions from operational cash flows.

Consequent to the final disposal of shares by the former private equity holders, Madison Dearborn Partners and SK Feeder, SKG’s free float now stands at 99%.

2012 Fourth Quarter | Financial Performance

At €1,824 million, revenue in the fourth quarter of 2012 was marginally higher than in 2011. With revenue boosted by a net €19 million from currency movements and hyperinflationary adjustments and €34 million from acquisitions, primarily OCCG, comparable revenue decreased by approximately €48 million.

Although revenue in the fourth quarter was only €6 million lower than the €1,830 million reported in the third quarter, the underlying move was a decrease in comparable revenue of €38 million, the equivalent of 2%.

At €240 million, EBITDA in the fourth quarter of 2012 was €5 million lower, than the fourth quarter of 2011 the equivalent of 2%. However, allowing for the positive impact of currency movements, hyperinflationary adjustments, acquisitions and closures, the underlying move was a decrease of €9 million, the equivalent of 4%. It should be noted, as previously highlighted, that due to the forced seven week shut of our Facture kraftliner mill in July, annual downtime typically taken in the third quarter was delayed to December. Whilst boosting quarter three results, this has negatively impacted quarter four EBITDA by approximately €10 million due to the changed timing.

Compared to the third quarter of 2012, EBITDA showed an underlying decrease of €43 million in the fourth quarter, the equivalent of a 15% reduction. This again is distorted by the Facture mill shut and subsequent compensatory measures undertaken by the Group including those outlined above.

An exceptional charge of €10 million within operating profit in the fourth quarter relates primarily to OCCG acquisition costs of €6 million and restructuring costs of €3 million. Exceptional items charged in the fourth quarter in 2011 were negligible.

Pre-exceptional earnings per share increased year-on-year by over 15% to 35.1 cent for the quarter to December 2012 (2011: 30.4).

2012 Full Year | Financial Performance

Revenue for the full year 2012 fell marginally from €7,357 million in 2011 to €7,335 million in 2012. As was the case in the quarter, revenue was boosted by €98 million in positive currency and hyperinflationary adjustments and by €58 million from acquisitions net of disposals, resulting in a decrease of €178 million in comparable sales year-on-year.

At €1,020 million, the Group’s EBITDA for the full year 2012 was €5 million higher than the €1,015 million reported in 2011. However, allowing for the positive impact of currency movements, hyperinflationary adjustments, acquisitions and closures, the underlying move was a decrease of €14 million, the equivalent of over 1%. This decrease mainly reflected a combination of earnings growth in Europe and lower earnings in the Americas as a result of a significant decrease in the profitability of our Venezuelan operations.

Exceptional items charged within operating profit in 2012 amounted to a net gain of €18 million, comprising gains of €28 million and costs of €10 million. The exceptional gains were booked in the first quarter and comprised €10 million from the sale of land at the Group’s former Valladolid mill in Spain and €18 million relating to the disposal of a company in Slovakia. This gain primarily relates to the reclassification (under IFRS) of the cumulative translation differences from the Group Statement of Comprehensive Income to the Group Income Statement. The exceptional costs, which were booked in the fourth quarter, mainly comprised acquisition costs relating to OCCG and restructuring costs in Europe. Exceptional items of €34 million charged within operating profit in 2011 related almost entirely to the closure of the Nanterre mill.

Operating profit after exceptional items for the year was €634 million compared to €590 million for 2011, an increase of approximately 8%.

At €294 million, our net pre-exceptional finance costs were €7 million lower than in 2011, primarily as a result of a lower cash interest charge, reflecting in turn both reduced average debt levels and generally lower interest rates. Exceptional finance costs of €12 million in 2012 related mainly to the accelerated amortisation of issue costs relating to the debt paid down with the proceeds of the bond issues and also to the call premium payable on the early repayment of the 2015 bonds. The exceptional finance income of €6 million in 2011 arose entirely in the fourth quarter and related to the receipt of monies from the liquidator of a Spanish company in which the Group previously held an investment.

Profit before income tax of €331 million compared to a profit before income tax of €299 million last year.

Pre-exceptional EPS was 108.3 cent for the full year 2012, an 8% increase on the 100.1 cent reported in 2011. The increased EPS in 2012 primarily reflects the benefit of a lower pre-exceptional income tax expense, which more than offset the decrease of less than 1% in our pre-exceptional profit before income tax. Basic EPS was 111.2 cent for the full year 2012, compared to 93.0 cent for 2011.

2012 Fourth Quarter & Full Year | Free Cash Flow

The Group’s reported free cash flow of €282 million in 2012 reflects SKG’s continued cash management focus. The causes of the decrease relative to the €394 million delivered in 2011 are primarily a change in working capital of €55 million, higher capital outflows and increased cash tax of €41 million. Conversely the Group had a lower cash interest expense of €235 million in 2012 compared with €245 million in 2011.

Capital expenditure for the full year 2012 equated to 82% of depreciation, the equivalent of €293 million, broadly in line with the Group’s stated guidance.

Primarily as a result of the acquisition of OCCG, our working capital of €638 million at December 2012 was €120 million higher than at December 2011. On an unadjusted basis, the Group reported a working capital to revenue ratio at December 2012 of 8.7%, which decreases to 8.4% when taken pro-forma for OCCG. Working capital represented 7.1% of revenue at December 2011, reflecting the impact of lower end-market demand at the time.

Cash interest expense in 2012 of €235 million was 4% lower than in 2011, a product of year-on-year debt pay-down and lower debt servicing costs. Cash tax payments of €113 million in 2012 were €41 million higher than in 2011, which included the effects of improving profitability, legislative changes in Europe restricting the annual use of tax losses and credits and the effects of higher tax rates in Latin America from changes to the geographical mix of earnings.

2012 Fourth Quarter & Full Year | OCCG Acquisition Update

The Group successfully completed the acquisition of OCCG on 30 November 2012 which has been immediately earnings accretive. OCCG, mirroring our own integrated system with ten packaging facilities and one recycled containerboard mill, has benefited from the US$50 per ton paper price increase which was implemented in the US during the fourth quarter. As a result its 2012 earnings have exceeded expectations with a positive outlook for performance in 2013 as the paper price increase is passed through to box prices.

SKG continues to expect the delivery of the US$14 million target for initially identified synergies over the next two years and the process is underway to identify additional savings throughout the business. The main areas of focus have been operational improvements in the recycled mill, rationalisation of administration and distribution processes where possible and increased integration with our already existing Mexican packaging network.

The Mexican market remains one of the fastest growing economies in Latin America and with this acquisition SKG is now the strong number two manufacturer in the sector. With increasingly favourable comparisons to China as a destination for offshoring, above average growth is expected to continue in 2013 and beyond.

2012 Fourth Quarter & Full Year | Capital Structure

A number of successful refinancing activities undertaken in the last twelve months have, in aggregate, served to reduce the absolute debt servicing cost, extend the debt maturity profile and further enhance the diversity of SKG’s funding sources. Most notably, the Group availed of interest rates of 4.125% in its most recent €400 million seven year bond issue. This is the lowest rate of any bond issued by SKG and is testament to the Group’s sustained operational performance and effective financial management.

The Group’s net debt at 31 December 2012 remained broadly in line with 2011 levels notwithstanding the acquisition of OCCG for approximately €260 million during the period. Net debt at year end was €2,792 million, an increase of €40 million from €2,752 million in 2011. This ability to fund acquisitions predominantly from current year cash flows is a key underpin to SKG’s strategy to drive increased market share in its targeted high growth markets.

The average debt maturity profile has increased from 4.4 to 5.8 years, and the Group continues to maintain a strong liquidity position with cash on the balance sheet of €462 million and undrawn credit facilities of €525 million at 31 December 2012.

At year end net debt to EBITDA remained at 2.7 times and management reiterates its commitment to maintain a net debt to EBITDA ratio of below 3.0 times through the cycle. The Group continues to believe that further debt pay down represents an effective use of funds in 2013. However, with greater strategic and financial flexibility now than at any other time since its IPO, SKG will maintain a balanced approach to its use of cash.

Dividend Policy

As a result of the consistently improved operational performance and free cash flow, the Group reintroduced a dividend in February 2012. This was an important milestone for the Group, as the dividend is viewed as providing certainty of value to our shareholders and was included as an important underpin to the original investment proposition in the 2007 SKG IPO.

The Board is recommending a final dividend of approximately 20.5 cent per share for 2012, a 37% increase on last year’s final dividend. It is proposed to pay the final dividend on 10 May 2013 to all ordinary shareholders on the share register at the close of business on 12 April 2013. The interim and final dividends are paid in October and May in each year in the approximate proportions of one third to two thirds respectively.

This increased dividend stream reflects the improved operational performance of the Group, and represents a tangible transfer of the benefits to the shareholders of the Group’s debt pay-down and effective capital structure management.

2012 Fourth Quarter & Full Year | Operating Efficiency

Commercial offering and innovation

SKG is the market leader in paper-based packaging in Europe and is the only large scale pan regional supplier in Latin America, putting us in the unique position to provide our 60,000 customers worldwide with an unrivalled product and service offering. The Group’s Pan European sales business has had continued success in 2012 with 3% year-on-year volume growth, made up of both organic growth with current customers and new business wins.

With approximately 60% of our customers in the FMCG space, SKG has enhanced its product range to increasingly provide high quality retail ready packaging and merchandising displays, as well as standard transport packaging. In the case of retail ready packaging, approximately 75% of buying decisions are made at the point of purchase, therefore, high quality packaging has a significant role to play in this regard. With 675 graphic designers worldwide, an array of design and logistical tools and unparalleled breadth of experience SKG is uniquely equipped to make the difference for our customers.

Innovation will continue to form an important underpin to SKG’s service offering, and a range of new product developments were announced in 2012. Retail Ready Packaging is an area of increasing focus by our customers and is an area where SKG adds real value. Through our experience in the field and our scientific approach we strive to maximise both functionality and end user impact with the lowest cost to our customers.

SKG also launched its new ‘S-Flute’ offering in October, combining superior printing properties with high strength and lower weight. This innovation encapsulates SKG’s approach to product development guaranteeing lower supply chain costs whilst building on existing quality.

During the fourth quarter the Group was presented with a number of industry awards reflecting SKG’s established position as the recognised leader in the fields of product innovation and brand management. The awards included: four WorldStar awards from the World Packaging Organisation; a Gold for Corrugated Post-Print from Flexotech International; two awards in the Deutscher Verpackungspreis, the annual German Industry’s packaging competition; and the Pulp & Paper International Award for innovation in sustainable packaging.

In addition, SKG has been continuously recognised by our customers directly, and in recent months such recognition has included winning the Holistic Margin Management award from General Mills. The award was specifically in recognition of SKG’s contributions as a business partner working to reduce costs and add value over a 15 year period.

In line with our objective to maintain the best integrated system in Europe, SKG undertook a number of significant investments in our Paper Division in 2012, with the purpose of maximising efficiencies and driving future earnings. A rebuild of our Hoya recycled containerboard machine will increase capacity by approximately 80,000 tonnes per year at more economical lower grammages. Investments in energy projects in our Sanguesa and Nervion mills in Spain will materially decrease energy costs in 2013, and the conversion of our Wrexen mill in Germany to white top testliner will have a positive effect on the range of our offerings, the quality of our product and our cost base.

Latin American capital investment projects completed during 2012 included a shoe press installation in our Cerro Gordo mill in Mexico and a water treatment facility in the Bernal facility in Argentina, with a combined investment value of almost US$15 million. The level of capital investment in our Latin American operations is typically above the Group average, in line with the Group’s focus on its high growth markets. The investments comprise of both new equipment and quality used equipment from other parts of the Group.

Cost take-out programme

SKG delivered €191 million in cost take-out as part of the two-year programme 2011/2012. This was €41 million ahead of the original target of €150 million set at the outset of 2011. It was however €9 million below the revised target of €200 million set in May 2012, and this was primarily due to the stoppage in our Facture mill.

Over the past five years SKG has delivered €500 million in cost take-out benefits based on a detailed bottom-up approach. These have served to support the high quality earnings of the Group despite the upward trend in input costs year-on-year and low growth markets.

The Group has identified a further €100 million in cost take-out opportunities in 2013. These are predominantly focused in the areas of raw materials, labour and energy.

Sustainability

The area of sustainability is one of key importance for a number of the stakeholders of SKG, and is increasingly becoming a driver for serving consumers. The Group considers sustainability to be a key differentiating factor in the market and is acting to progressively embed sustainability into our operations on a day-to-day basis.

As a Group we evaluate our progress on sustainability issues against set metrics under four headings: Sustainable use of fibres; CO2 emissions; Water; and Code of Business Conduct. By 2015 we have pledged that: all our fibres produced or purchased will be from sustainable origins; over 90% of the paper and board produced will be certified Chain of Custody and; over 90% of our converting operations will operate under a Chain of Custody certification.

The Group is making good progress against each of these metrics and continues to advance in a number of other areas, notably the reduction of water discharge and CO2 emissions.

2012 Fourth Quarter & Full Year | Performance Review

Europe

European EBITDA increased by €32 million to €844 million with a reported EBITDA margin of 14.2% for the full year 2012. This margin increase was achieved due to maintenance of solid corrugated pricing in combination with continued implementation of process efficiencies.

Corrugated based packaging prices have held up well throughout 2012 despite the volatility in OCC prices which characterised much of the year. Compared with the third quarter, box prices in the fourth quarter, on average, decreased by less than 1%. This was reflective of the full year position where prices decreased by an average of 0.7% year-on-year.

The Group saw broad stability year-on-year with a total reduction in total corrugated volumes of 1% in the full year 2012 and a flat demand environment in the fourth quarter of 2012 compared to the same period in 2011. The primary loss of volume has been in the sheet side of the business, which accounts for up to 13% of European volume. It has been a conscious decision of SKG to intentionally forego these lower priced volumes preferring instead to focus on the value added packaging market.

The principal input into the system, OCC, is still largely priced on the basis of Chinese demand, and this relationship is expected to continue for the foreseeable future. Despite there being a clear upward trend over the longer term, 2012 prices fluctuated by 37% over the base price peak to trough. SKG remains a leading operator in the recovered fibre market and maintains 75% ‘grip’ on its recovered fibre needs through its own supply and contractual agreements with suppliers throughout Europe.

Recycled containerboard pricing has deteriorated over the course of the year as a result of unstable OCC pricing and an inability to push through price increases. However, the unsustainable margins which have developed in the grade cannot persist. On that basis SKG has announced a €60 per tonne increase on all recycled containerboard grades, from 1 February 2013, which is supported by current OCC dynamics and industry inventory levels.

Following the closure of Peterson’s kraftliner mill in Norway in April, and continued strength in demand, the European market for virgin paper has been tight, and this was reflected by the price increase of €50 per tonne which was successfully implemented in September. The reduction in domestic supply was compounded by the reduction in imports from the US which were meaningfully reduced for much of the year.

In line with the Group’s policy of focusing on high growth sectors, a number of investments in its Bag-in-box division have been announced in 2012. Following a €13 million investment in upgrading the facilities and increasing capacity of existing plants in France and Italy, SKG committed a further €28 million to build an additional facility in Ibi, Spain. Already the European market leader, these investments will give access to further markets and enhance the strategic options for the future. The Group’s Baguin Bag-in-box facility, acquired in January 2012, further enhances the geographic footprint of the business.

The Americas

The Americas business segment comprises the Group’s operations in Latin America and the US. These operations reported EBITDA of €212 million for 2012, representing 21% of the Group’s total earnings, and a lower EBITDA margin on revenue of 15.0% compared to 18.4% in 2011. The reduction in margin is primarily as a result of political and labour issues experienced in Venezuela and Argentina in 2012. Most of the labour issues have now been resolved, and the Group expects future margins to be in line with the five year average margin of 17.5%.

SKG operations in Venezuela had a challenging year, particularly affected by a number of ‘work to rule’ difficulties. Volumes decreased by 17% year-on-year, and EBITDA performance was adversely affected by approximately 35%. A devaluation of the currency is expected to take place in the first half of 2013. Overall, the difficult business environment that has generally prevailed over the last number of years continues to persist.

Following the successful implementation of a US$50 per ton paper price increase in the US, SKG’s Mexican business was able to implement a similar price increase. Excluding the OCCG business, volumes increased by 2% during the year and EBITDA increased significantly. With a comprehensive network of plants bolstered by the recent OCCG acquisition, and the Mexican economy poised to grow on the back of a US economic recovery, especially in the Maquiladora region, the Group is well positioned for 2013.

The Colombian economy has been stable throughout 2012 and this was reflected in the Group’s volumes which remained flat in 2012. Despite some local pricing pressure, cost take-out initiatives facilitated the delivery of a very good EBITDA margin for the year. A number of major capital expenditure projects were completed in 2012, such as the installation of a new lime kiln and a gas turbo-generator in our Cali and Barranquilla mills respectively, and are expected to produce benefits in 2013. While the Colombian Peso is strengthening, the central bank appears determined to positively intervene.

Increased economic and political pressures in Argentina have contributed to SKG’s lower performance for the year, with a 12% year-on-year decline in volumes. This was caused predominantly by a 70 day strike in our Sunchales converting plant and should not represent a permanent reduction. Inflationary pressures are being addressed where possible by corrugated price increases.

Latin America remains at the centre of SKG’s strategy for future growth, and despite country specific issues it continues to deliver important geographic diversity and access to high growth markets. Our experienced local management teams continue to focus on maximising returns from the existing business, whilst developing new markets for our products reinforced by the Group’s worldwide technical expertise and high standard of innovative performance packaging.

Summary Cash Flow(1)
 
Summary cash flows for the fourth quarter and twelve months are set out in the following table.
  3 months to   3 months to   12 months to   12 months to
31-Dec-12 31-Dec-11 31-Dec-12 31-Dec-11
€m €m €m €m
Pre-exceptional EBITDA 240 245 1,020 1,015
Exceptional items (4) (1) (4) (6)
Cash interest expense (55) (61) (235) (245)
Working capital change 79 133 (12) 43
Current provisions (2) (4) (10) (11)
Capital expenditure (113) (113) (293) (309)
Change in capital creditors 2 32 (35) 26
Tax paid (31) (24) (113) (72)
Sale of fixed assets 1 1 14 3
Other 1 (9) (50) (50)
Free cash flow 118 199 282 394
 
Share issues 14 - 27 8
Ordinary shares purchased - own shares - - (13) -
Sale of businesses and investments (1) - (1) (4)
Purchase of investments (177) (9) (184) (10)
Dividends (18) (1) (56) (5)
Derivative termination (payments)/receipts (2) 1 (3) -
Early repayment of 2015 bonds (4) - (4) -
Net cash (outflow)/inflow (70) 190 48 383
 
Net cash acquired/disposed 1 1 2 1
Acquired OCCG debt (85) - (85) -
Deferred debt issue costs amortised (12) (4) (26) (16)
Currency translation adjustments 14 (18) 21 (10)
(Increase)/decrease in net debt (152) 169 (40) 358

(1) The summary cash flow is prepared on a different basis to the cash flow statement under IFRS. The principal difference is that the summary cash flow details movements in net debt while the IFRS cash flow details movements in cash and cash equivalents. In addition, the IFRS cash flow has different sub-headings to those used in the summary cash flow. A reconciliation of the free cash flow to cash generated from operations in the IFRS cash flow is set out below.

    12 months to   12 months to
31-Dec-12 31-Dec-11
    €m €m
Free cash flow 282 394
 
Add back: Cash interest 235 245
Capital expenditure (net of change in capital creditors) 328 283
Tax payments 113 72
Less: Sale of fixed assets (14) (3)
Profit on sale of assets and businesses – non exceptional (6) (15)
Receipt of capital grants (in “Other”) (1) (2)
Dividends received from associates (in “Other”) (2) (1)
Non-cash financing activities (6) (8)
Exceptional finance income received - (6)
Cash generated from operations 929 959

Capital Resources

The Group's primary sources of liquidity are cash flow from operations and borrowings under the revolving credit facility. The Group's primary uses of cash are for debt service and capital expenditure.

At 31 December 2012 Smurfit Kappa Treasury Funding Limited had outstanding US$292.3 million 7.50% senior debentures due 2025 and the Group had outstanding €199 million variable funding notes issued under the €250 million accounts receivable securitisation program maturing in November 2015.

Smurfit Kappa Acquisitions had outstanding €200 million 5.125% senior secured notes due 2018, US$300 million 4.875% senior secured notes due 2018 and €250 million senior secured floating rate notes due 2020. In addition, Smurfit Kappa Acquisitions had outstanding €500 million 7.25% senior secured notes due 2017 and €500 million 7.75% senior secured notes due 2019. Smurfit Kappa Acquisitions and certain subsidiaries are also party to a senior credit facility. The senior credit facility comprises a €550 million Tranche B maturing in 2016 and a €556 million Tranche C maturing in 2017. In addition, as at 31 December 2012, the facility includes a €525 million revolving credit facility of which there was €0.1 million drawn under facilities supported by letters of credit.

The following table provides the range of interest rates as of 31 December 2012 for each of the drawings under the various senior credit facility term loans.

BORROWING ARRANGEMENT   CURRENCY   INTEREST RATE
Term Loan B EUR 3.735% – 3.841%
USD 3.977%
Term Loan C EUR 3.985% - 4.091%
USD 4.227%

Borrowings under the revolving credit facility are available to fund the Group's working capital requirements, capital expenditures and other general corporate purposes.

Market Risk and Risk Management Policies

The Group is exposed to the impact of interest rate changes and foreign currency fluctuations due to its investing and funding activities and its operations in different foreign currencies. Interest rate risk exposure is managed by achieving an appropriate balance of fixed and variable rate funding. Following the January 2013 issuance of €400 million 4.125% senior secured notes due 2020, the Group had fixed an average of 85% of its interest cost on borrowings over the following twelve months.

Our fixed rate debt comprised mainly €500 million 7.25% senior secured notes due 2017, €500 million 7.75% senior secured notes due 2019, €200 million 5.125% senior secured notes due 2018, US$300 million 4.875% senior secured notes due 2018 (US$50 million swapped to floating) and US$292.3 million 7.50% senior debentures due 2025. In addition the Group also has €760 million in interest rate swaps with maturity dates ranging from June 2013 to July 2014.

Our earnings are affected by changes in short-term interest rates as a result of our floating rate borrowings. If LIBOR interest rates for these borrowings increase by one percent, our interest expense would increase, and income before taxes would decrease, by approximately €7 million over the following twelve months. Interest income on our cash balances would increase by approximately €5 million assuming a one percent increase in interest rates earned on such balances over the following twelve months.

The Group uses foreign currency borrowings, currency swaps, options and forward contracts in the management of its foreign currency exposures.

Group Income Statement – Twelve Months

  Unaudited   Audited
12 months to 31-Dec-12 12 months to 31-Dec-11
Pre-exceptional 2012   Exceptional 2012   Total 2012 Pre-exceptional 2011   Exceptional 2011   Total 2011
  €m €m €m €m €m €m
Revenue 7,335 - 7,335 7,357 - 7,357
Cost of sales (5,238) - (5,238) (5,290) (15) (5,305)
Gross profit 2,097 - 2,097 2,067 (15) 2,052
Distribution costs (579) - (579) (552) - (552)
Administrative expenses (938) - (938) (897) - (897)
Other operating income 36 28 64 6 - 6
Other operating expenses - (10) (10) - (19) (19)
Operating profit 616 18 634 624 (34) 590
Finance costs (387) (12) (399) (405) - (405)
Finance income 93 - 93 104 6 110
Profit on disposal of associate - - - 2 - 2
Share of associates’ profit (after tax) 3 - 3 2 - 2
Profit before income tax 325 6 331 327 (28) 299
Income tax expense (71) (81)
Profit for the financial year 260 218
 
Attributable to:
Owners of the Parent 249 206
Non-controlling interests 11 12
Profit for the financial year 260 218
 

Earnings per share

Basic earnings per share - cent

111.2

93.0

Diluted earnings per share - cent

108.3

91.1

Group Income Statement – Fourth Quarter

  Unaudited   Unaudited
3 months to 31-Dec-12 3 months to 31-Dec-11
Pre-exceptional 2012   Exceptional 2012   Total 2012 Pre-exceptional 2011   Exceptional 2011   Total 2011
  €m €m €m €m €m €m
Revenue 1,824 - 1,824 1,819 - 1,819
Cost of sales (1,320) - (1,320) (1,310) (3) (1,313)
Gross profit 504 - 504 509 (3) 506
Distribution costs (145) - (145) (135) - (135)
Administrative expenses (240) - (240) (230) - (230)
Other operating income 11 - 11 4 - 4
Other operating expenses - (10) (10) - 4 4
Operating profit 130 (10) 120 148 1 149
Finance costs (95) (12) (107) (110) - (110)
Finance income 22 - 22 32 6 38
Share of associates’ profit (after tax) 1 - 1 - - -
Profit before income tax 58 (22) 36 70 7 77
Income tax expense 27 18
Profit for the financial period 63 95
 
Attributable to:
Owners of the Parent 60 87
Non-controlling interests 3 8
Profit for the financial period 63 95
 

Earnings per share

Basic earnings per share - cent

26.2

39.4

Diluted earnings per share - cent

25.5

39.2

Group Statement of Comprehensive Income – Twelve Months

  Unaudited   Audited
12 months to 12 months to
31-Dec-12 31-Dec-11
  €m €m
 
Profit for the financial year 260 218
 
Other comprehensive income:
Foreign currency translation adjustments:
- Arising in the year 56 (9)
- Currency translation adjustment recycled to Group Income Statement on disposal (17) -
Defined benefit pension plans:
- Actuarial loss (108) (88)
- Movement in deferred tax 19 20
Effective portion of changes in fair value of cash flow hedges:
- Movement out of reserve 24 21
- New fair value adjustments into reserve (13) (10)
- Movement in deferred tax (2) (1)
Net change in fair value of available for sale financial assets 1 -
Total other comprehensive expense (40) (67)
 
Total comprehensive income for the financial year 220 151
 
Attributable to:
Owners of the Parent 202 136
Non-controlling interests 18 15
220 151

Group Statement of Comprehensive Income – Fourth Quarter

  Unaudited   Unaudited
3 months to 3 months to
31-Dec-12 31-Dec-11
  €m €m
 
Profit for the financial period 63 95
 
Other comprehensive income:
Foreign currency translation adjustments (35) 44
Defined benefit pension plans:
- Actuarial gain/(loss) 37 (76)
- Movement in deferred tax (5) 20
Effective portion of changes in fair value of cash flow hedges:
- Movement out of reserve 7 5
- New fair value adjustments into reserve (7) -
- Movement in deferred tax (1) -
Net change in fair value of available-for-sale financial assets 1 -
Total other comprehensive expense (3) (7)
 
Total comprehensive income for the financial period 60 88
 
Attributable to:
Owners of the Parent 60 75
Non-controlling interests - 13
60 88

Group Balance Sheet

  Unaudited   Audited
31-Dec-12 31-Dec-11
  €m €m
ASSETS
Non-current assets
Property, plant and equipment 3,076 2,973
Goodwill and intangible assets 2,336 2,210
Available-for-sale financial assets 33 32
Investment in associates 16 14
Biological assets 127 114
Trade and other receivables 4 5
Derivative financial instruments 1 6
Deferred income tax assets 191 177
5,784 5,531
Current assets
Inventories 745 690
Biological assets 6 10
Trade and other receivables 1,422 1,326
Derivative financial instruments 10 7
Restricted cash 15 12
Cash and cash equivalents 447 845
2,645 2,890
Total assets 8,429 8,421
 
EQUITY
Capital and reserves attributable to the owners of the Parent
Equity share capital - -
Share premium 1,972 1,945
Other reserves 444 391
Retained earnings (160) (341)
Total equity attributable to the owners of the Parent 2,256 1,995
Non-controlling interests 212 191
Total equity 2,468 2,186
 
LIABILITIES
Non-current liabilities
Borrowings 3,188 3,450
Employee benefits 737 655
Derivative financial instruments 65 54
Deferred income tax liabilities 211 210
Non-current income tax liabilities 15 10
Provisions for liabilities and charges 59 55
Capital grants 12 13
Other payables 9 10
4,296 4,457
Current liabilities
Borrowings 66 159
Trade and other payables 1,534 1,504
Current income tax liabilities 4 36
Derivative financial instruments 43 59
Provisions for liabilities and charges 18 20
1,665 1,778
Total liabilities 5,961 6,235
Total equity and liabilities 8,429 8,421

Group Statement of Changes in Equity

                     
Equity attributable to the owners of the Parent Non-controlling

interests

Total equity
Equity share capital   Share premium   Other reserves   Retained earnings   Total
  €m €m €m €m €m €m €m
Unaudited
At 1 January 2012 - 1,945 391 (341) 1,995 191 2,186
 
Profit for the financial year - - - 249 249 11 260
Other comprehensive income
Foreign currency translation adjustments - - 30 - 30 9 39
Defined benefit pension plans - - - (87) (87) (2) (89)
Effective portion of changes in fair value of cash flow hedges - - 9 - 9 - 9
Net change in fair value of

available-for-sale financial assets

- - 1 - 1 - 1
Total other comprehensive income for the financial year - - 40 162 202 18 220
 
Shares issued - 27 - - 27 - 27
Hyperinflation adjustment - - - 69 69 9 78
Dividends paid - - - (50) (50) (6) (56)
Share-based payment - - 26 - 26 - 26
Shares acquired by Deferred Share Awards Trust - - (13) - (13) - (13)
At 31 December 2012 - 1,972 444 (160) 2,256 212 2,468
 
Audited
At 1 January 2011 - 1,937 378 (552) 1,763 173 1,936
 
Profit for the financial year - - - 206 206 12 218
Other comprehensive income
Foreign currency translation adjustments - - (12) - (12) 3 (9)
Defined benefit pension plans - - - (68) (68) - (68)
Effective portion of changes in fair value of cash flow hedges - - 10 - 10 - 10
Total other comprehensive income/ (expense) for the financial year - - (2) 138 136 15 151
 
Shares issued - 8 - - 8 - 8
Hyperinflation adjustment - - - 73 73 8 81
Dividends paid - - - - - (5) (5)
Share-based payment - - 15 - 15 - 15
At 31 December 2011 - 1,945 391 (341) 1,995 191 2,186

Other reserves included in the Group Statement of Changes in Equity are comprised of the following:

  Reverse acquisition reserve   Cash flow

hedging reserve

  Foreign

currency

translation

reserve

  Share-

based

payment

reserve

  Own shares   Available-for-sale reserve  

 

Total

  €m €m €m €m €m €m €m
Unaudited
At 1 January 2012 575 (35) (228) 79 - - 391
Other comprehensive income
Foreign currency translation adjustments - - 30 - - - 30
Effective portion of changes in fair value of cash flow hedges - 9 - - - - 9
Net change in fair value of available-for-sale financial assets - - - - - 1 1
Total other comprehensive income for the financial year - 9 30 - - 1 40
 
Share-based payment - - - 26 - - 26
Shares acquired by Deferred Share Awards Trust - - - - (13) - (13)
At 31 December 2012 575 (26) (198) 105 (13) 1 444
 
Audited
At 1 January 2011 575 (45) (216) 64 - - 378
Other comprehensive income
Foreign currency translation adjustments - - (12) - - - (12)
Effective portion of changes in fair value of cash flow hedges - 10 - - - - 10
Total other comprehensive income/(expense) for the financial year - 10 (12) - - - (2)
 
Share-based payment - - - 15 - - 15
At 31 December 2011 575 (35) (228) 79 - - 391

Group Cash Flow Statement

  Unaudited   Audited
12 months to 12 months to
31-Dec-12 31-Dec-11
  €m €m
Cash flows from operating activities
Profit for the financial year 260 218
Adjustment for
Income tax expense 71 81
Profit on sale of assets and businesses (30) (17)
Amortisation of capital grants (2) (3)
Impairment of property, plant and equipment - 15
Share-based payment expense 26 15
Amortisation of intangible assets 21 30
Share of associates’ profit (after tax) (3) (2)
Profit on disposal of associate - (2)
Depreciation charge 332 346
Net finance costs 306 295
Change in inventories 2 (53)
Change in biological assets 25 -
Change in trade and other receivables (23) (46)
Change in trade and other payables 2 136
Change in provisions 3 4
Change in employee benefits (65) (57)
Other 4 (1)
Cash generated from operations 929 959
Interest paid (246) (253)
Income taxes paid:
Overseas corporation tax (net of tax refunds) paid (113) (72)
Net cash inflow from operating activities 570 634
 
Cash flows from investing activities
Interest received 7 8
Exceptional finance income received - 6
Business disposals (1) -
Purchase of property, plant and equipment and biological assets (316) (277)
Purchase of intangible assets (11) (5)
Receipt of capital grants 1 2
Increase in restricted cash (2) (5)
Disposal of property, plant and equipment 20 18
Disposal of associates - 4
Dividends received from associates 2 1
Purchase of subsidiaries and non-controlling interests (179) (11)
Deferred consideration paid (1) (6)
Net cash outflow from investing activities (480) (265)
 
Cash flows from financing activities
Proceeds from issue of new ordinary shares 27 8
Proceeds from bond issuance 688 -
Ordinary shares purchased - own shares (13) -
Increase in interest-bearing borrowings - 57
Repayment of finance lease liabilities (8) (9)
Repayment of interest-bearing borrowings (1,099) (87)
Derivative termination payments (3) -
Deferred debt issue costs (30) -
Dividends paid to shareholders (50) -
Dividends paid to non-controlling interests (6) (5)
Net cash outflow from financing activities (494) (36)
(Decrease)/increase in cash and cash equivalents (404) 333
 
Reconciliation of opening to closing cash and cash equivalents
Cash and cash equivalents at 1 January 825 481
Currency translation adjustment 2 11
(Decrease)/increase in cash and cash equivalents (404) 333
Cash and cash equivalents at 31 December 423 825

1. General Information

Smurfit Kappa Group plc (‘SKG plc’) (‘the Company’) (‘the Parent’) and its subsidiaries (together the ‘Group’) manufacture, distribute and sell containerboard, corrugated containers and other paper-based packaging products such as solidboard and graphicboard. The Company is a public limited company 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 consolidated financial statements of the Group are prepared in accordance with International Financial Reporting Standards (‘IFRS’) issued by the International Accounting Standards Board (‘IASB’) and adopted by the European Union (‘EU’); and, in accordance with Irish law.

The financial information in this report has been prepared in accordance with the Listing Rules of the Irish Stock Exchange and with Group accounting policies. Full details of the accounting policies adopted by the Group are contained in the consolidated financial statements included in the Group’s annual report for the year ended 31 December 2011 which is available on the Group’s website; www.smurfitkappa.com. The accounting policies and methods of computation and presentation adopted in the preparation of the Group financial information are consistent with those described and applied in the annual report for the year ended 31 December 2011. No new standards, amendments or interpretations which became effective in 2012 have had a material effect on the Group financial statements.

The financial information includes all adjustments that management considers necessary for a fair presentation of such financial information. All such adjustments are of a normal recurring nature. Some tables in the financial information may not add precisely due to rounding.

The financial information presented in this preliminary release does not constitute ‘full group accounts’ under 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. The preliminary release was approved by the Board of Directors. The annual report and accounts will be approved by the Board of Directors and reported on by the auditors in due course. The annual accounts reported on by the auditors will not contain quarterly information. Accordingly, the financial information is unaudited. Full Group accounts for the year ended 31 December 2011 received an unqualified audit report and have been filed with the Irish Registrar of Companies.

3. Segmental Analyses

The Group has determined reportable operating segments based on the manner in which reports are reviewed by the executive management team in assessing performance, allocating resources and making strategic decisions. Prior to the acquisition of Orange County Container Group (‘OCCG’), the two business segments identified were Europe and Latin America. Due to the high level of integration between OCCG and our existing operations in Mexico, OCCG is included with our existing Latin American operations which have been renamed as 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 OCCG. Inter segment revenue is not material. No operating segments have been aggregated for disclosure purposes.

Segment disclosures are based on operating segments identified under IFRS 8. Segment profit is measured based on earnings before interest, tax, depreciation, amortisation, exceptional items and share-based payment expense (‘EBITDA before exceptional items’). Segment assets consist primarily of property, plant and equipment, biological assets, goodwill and intangible assets, inventories, trade and other receivables, deferred income tax assets and cash and cash equivalents.

  12 months to 31-Dec-12   12 months to 31-Dec-11
Europe   The Americas   Total Europe   The Americas   Total
  €m €m €m €m €m €m
Revenue and Results
Revenue 5,928 1,407 7,335 6,068 1,289 7,357
 
EBITDA before exceptional items 844 212 1,056 812 237 1,049
Segment exceptional items 24 (6) 18 (19) - (19)
EBITDA after exceptional items 868 206 1,074 793 237 1,030
 
Unallocated centre costs (36) (34)
Share-based payment expense (26) (15)
Depreciation and depletion (net) (357) (346)
Amortisation (21) (30)
Impairment of assets - (15)
Finance costs (399) (405)
Finance income 93 110
Profit on disposal of associate - 2
Share of associates’ profit (after tax) 3 2
Profit before income tax 331 299
Income tax expense (71) (81)
Profit for the financial year 260 218
 
Assets
Segment assets 6,099 1,933 8,032 6,142 1,488 7,630
Investment in associates 2 14 16 1 13 14
Group centre assets 381 777
Total assets 8,429 8,421

3. Segmental Analyses (continued)

  3 months to 31-Dec-12   3 months to 31-Dec-11
Europe   The Americas   Total Europe   The Americas   Total
  €m €m €m €m €m €m
Revenue and Results
Revenue 1,449 375 1,824 1,474 345 1,819
 
EBITDA before exceptional items 200 52 252 194 60 254
Segment exceptional items (4) (6) (10) 4 - 4
EBITDA after exceptional items 196 46 242 198 60 258
 
Unallocated centre costs (12) (9)
Share-based payment expense (6) (5)
Depreciation and depletion (net) (98) (84)
Amortisation (6) (8)
Impairment of assets - (3)
Finance costs (107) (110)
Finance income 22 38
Share of associates’ profit (after tax) 1 -
Profit before income tax 36 77
Income tax expense 27 18
Profit for the financial period 63 95

4. Other Operating Income

Pre-exceptional other operating income of €36 million in 2012 includes insurance proceeds of €34 million in respect of the collapse of a black liquor tank in the Group’s mill in Facture, France. The costs of the collapse and related downtime are included in the appropriate cost headings within operating profit.

In 2011, other operating income of €6 million included a gain of €3 million on the acquisition of the St. Petersburg box plant in Russia.

5. Exceptional Items

  12 months to   12 months to
The following items are regarded as exceptional in nature: 31-Dec-12 31-Dec-11
  €m €m
 
Impairment loss on property, plant and equipment - 15
Reorganisation and restructuring costs 3 19
Disposal of assets and operations (27) -
Business acquisition costs 6 -
Exceptional items included in operating profit (18) 34
 
Exceptional finance cost 12 -
Exceptional finance income - (6)
Exceptional items included in net finance costs 12 (6)

In 2012, we reported an exceptional gain of €27 million in relation to the disposal of assets and operations. This comprised €10 million in respect of the sale of land at SKG’s former Valladolid mill in Spain (operation closed in 2008), together with €18 million relating to the disposal of a company in Slovakia. This gain primarily relates to the reclassification (under IFRS) of the cumulative translation differences from the Group Statement of Comprehensive Income to the Group Income Statement. These gains were offset by a €1 million post disposal adjustment in respect of the paper sack plants sold to Mondi in 2010.

The business acquisition costs for 2012 of €6 million relate to SKG’s acquisition of OCCG.

Reorganisation and restructuring costs of €3 million in 2012 primarily relate to additional costs in the recycled containerboard mill in Nanterre, France which was closed in 2011.

Exceptional finance costs of €12 million in 2012 relates mainly to the accelerated amortisation of debt issue costs resulting from debt paid down with bond issue proceeds and to the call premium payable on the early repayment of the 2015 bonds.

In June 2011, SKG closed its recycled containerboard mill in Nanterre, France. This resulted in an impairment loss on property, plant and equipment of €15 million for the year and reorganisation and restructuring costs of €20 million.

Also included in the reorganisation and restructuring costs was a release of an over-provision of €1 million in respect of the closure of the Sturovo mill, the exceptional costs in relation to which had been booked in 2009.

The exceptional finance income of €6 million in 2011 related to the partial recovery of an investment held in a Spanish company which went into liquidation in 1993, but was the subject of a legal case.

6. Finance Costs and Income

  12 months to   12 months to
31-Dec-12 31-Dec-11
  €m €m
Finance costs:
Interest payable on bank loans and overdrafts 119 136
Interest payable on finance leases and hire purchase contracts 1 2
Interest payable on other borrowings 139 131
Exceptional finance costs associated with debt restructuring 12 -
Unwinding discount element of provisions 1 1
Foreign currency translation loss on debt 8 15
Fair value loss on derivatives not designated as hedges - 4
Interest cost on employee benefit plan liabilities 101 101
Net monetary loss – hyperinflation 18 15
Total finance costs 399 405
 
Finance income:
Other interest receivable (7) (8)
Exceptional finance income - (6)
Foreign currency translation gain on debt (3) (7)
Fair value gain on derivatives not designated as hedges (3) (12)
Expected return on employee benefit plan assets (80) (77)
Total finance income (93) (110)
Net finance costs 306 295

7. Income Tax Expense

Income tax expense recognised in the Group Income Statement

  12 months to   12 months to
31-Dec-12 31-Dec-11
  €m €m
Current taxation:
Europe 51 44
The Americas 34 65
85 109
Deferred taxation (14) (28)
Income tax expense 71 81
 
Current tax is analysed as follows:
Ireland 5 8
Foreign 80 101
85 109

Income tax recognised in the Group Statement of Comprehensive Income

  12 months to   12 months to
31-Dec-12 31-Dec-11
  €m €m
Arising on actuarial losses on defined benefit plans including payroll tax (19) (20)
Arising on qualifying derivative cash flow hedges 2 1
(17) (19)

The tax expense of €71 million (2011: €81 million) includes the effects of improving profitability, legislative changes, tax rate reductions and non-cash benefits related to tax losses and credits. The tax expense in 2012 also includes approximately €1 million associated with OCCG in the Americas.

The current tax expense in the Americas in 2011 includes €23 million arising from the implementation of a new equity tax law in Colombia in January 2011 which, although payable over four years, was required to be expensed fully in 2011. The net movement in deferred tax in 2012 includes a €10 million non-recurring credit for a reduction in the tax rate in Sweden and the recognition of additional deferred tax assets net of impairments on tax losses in Europe. In 2012 the net tax associated with exceptional items is not material whereas in 2011 it included a net tax credit of €13 million.

8. Employee Post Retirement Schemes – Defined Benefit Expense

The table below sets out the components of the defined benefit expense for the year:

  12 months to   12 months to
31-Dec-12 31-Dec-11
  €m €m
 
Current service cost 29 27
Past service cost 1 2
Recognition of net loss 2 -
Gain on curtailment (12) (1)
20 28
 
Expected return on plan assets (80) (77)
Interest cost on plan liabilities 101 101
Net financial expense 21 24
Defined benefit expense 41 52

Included in cost of sales, distribution costs and administrative expenses is a defined benefit expense of €20 million for the year (2011: €28 million). The gain on curtailment of €12 million in 2012 was due to the restructuring of the UK pension scheme. Expected return on plan assets of €80 million (2011: €77 million) is included in finance income and interest cost on plan liabilities of €101 million (2011: €101 million) is included in finance costs in the Group Income Statement.

The amounts recognised in the Group Balance Sheet were as follows:

    31-Dec-12   31-Dec-11
      €m €m
Present value of funded or partially funded obligations (1,832) (1,715)
Fair value of plan assets 1,598 1,486
Deficit in funded or partially funded plans (234) (229)
Present value of wholly unfunded obligations (503) (426)
Net employee benefit liabilities (737) (655)

The employee benefits provision has increased from €655 million at 31 December 2011 to €737 million at 31 December 2012. The main reason for this is the increase in liabilities due to lower discount rates as a result of lower Eurozone and Sterling AA Corporate bond yields.

9. Earnings Per Share

Basic

Basic earnings per share is calculated by dividing the profit attributable to the owners of the Parent by the weighted average number of ordinary shares in issue during the year.

  12 months to   12 months to
  31-Dec-12 31-Dec-11
Profit attributable to the owners of the Parent (€ million) 249 206
 
Weighted average number of ordinary shares in issue (million) 224 222
 
Basic earnings per share – cent 111.2 93.0

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 and matching shares issued under the Deferred Annual Bonus Plan.

  12 months to   12 months to
  31-Dec-12 31-Dec-11
Profit attributable to the owners of the Parent (€ million) 249 206
 
Weighted average number of ordinary shares in issue (million) 224 222
Dilutive potential ordinary shares assumed (million) 6 4
Diluted weighted average ordinary shares (million) 230 226
 
Diluted earnings per share – cent 108.3 91.1

Pre-exceptional

  12 months to   12 months to
  31-Dec-12 31-Dec-11
Profit attributable to the owners of the Parent (€ million) 249 206
Exceptional items included in profit before income tax (Note 5) (€ million) (6) 28
Taxation on exceptional items (€ million) - (13)
Pre-exceptional profit attributable to the owners of the Parent (€ million) 243 221
 
Weighted average number of ordinary shares in issue (million) 224 222
 
Pre-exceptional earnings per share – cent 108.3 100.1

10. Dividends

During the year, the final dividend for 2011 of 15 cent per share was paid to the holders of ordinary shares. In October, an interim dividend for 2012 of 7.5 cent per share was paid to the holders of ordinary shares.

The Board is recommending a final dividend of approximately 20.5 cent per share for 2012. It is proposed to pay the final dividend on 10 May 2013 to all ordinary shareholders on the share register at the close of business on 12 April 2013. The interim and final dividends are paid in October and May in each year in the approximate proportions of one third to two thirds respectively.

11. Property, Plant and Equipment

 

Land and buildings

 

Plant and equipment

 

Total

 

€m

€m €m
Year ended 31 December 2012
Opening net book amount 1,115 1,858 2,973
Reclassification 10 (15) (5)
Additions 13 247 260
Acquisitions 1 118 119
Depreciation charge for the year (22) (310) (332)
Retirements and disposals (5) (2) (7)
Hyperinflation adjustment 17 19 36
Foreign currency translation adjustment 12 20 32
At 31 December 2012 1,141 1,935 3,076
 

Land and buildings

 

Plant and equipment

 

Total

€m

€m

€m

Year ended 31 December 2011
Opening net book amount 1,128 1,880 3,008
Reclassification 19 (25) (6)
Additions 4 282 286
Acquisitions 2 7 9
Depreciation charge for the year (50) (296) (346)
Impairments (5) (10) (15)
Retirements and disposals (2) (1) (3)
Hyperinflation adjustment 21 23 44
Foreign currency translation adjustment (2) (2) (4)
At 31 December 2011 1,115 1,858 2,973

12. Analysis of Net Debt

  31-Dec-12   31-Dec-11
  €m €m
Senior credit facility
Revolving credit facility(1) – interest at relevant interbank rate +3.25% on RCF(10) (7) (6)
Tranche A term loan(2a) – interest at relevant interbank rate + 2.5% - 94
Tranche B term loan(2b) – interest at relevant interbank rate + 3.625%(10) 550 822
Tranche C term loan(2c) – interest at relevant interbank rate + 3.875%(10) 556 819
US Yankee bonds (including accrued interest) (3) 222 226
Bank loans and overdrafts 65 71
Cash (462) (857)
2015 receivables securitisation variable funding notes(4) 197 206
2015 cash pay subordinated notes (including accrued interest) (5) - 376
2017 senior secured notes (including accrued interest)(6) 492 490
2018 senior secured notes (including accrued interest) (7) 423 -
2019 senior secured notes (including accrued interest)(8) 494 492
2020 senior secured floating rate notes (including accrued interest) (9) 247 -
Net debt before finance leases 2,777 2,733
Finance leases 8 13
Net debt including leases 2,785 2,746
Balance of revolving credit facility reclassified to debtors 7 6
Net debt after reclassification 2,792 2,752

(1) Revolving credit facility (‘RCF’) of €525 million (available under the senior credit facility) to be repaid in full in 2016.

(Revolver loans - nil, drawn under ancillary facilities and facilities supported by letters of credit – €0.1 million).

(2a) Tranche A term loan prepaid in April 2012.

(2b) Tranche B term loan due to be repaid in full in 2016 (maturity date extended from 2013 on 1 March 2012).

(2c) Tranche C term loan due to be repaid in full in 2017 (maturity date extended from 2014 on 1 March 2012).

(3) US$292.3 million 7.50% senior debentures due 2025.

(4) Receivables securitisation variable funding notes due 2015.

(5) €217.5 million 7.75% senior subordinated notes due 2015 and US$200 million 7.75% senior subordinated notes due 2015. Prepaid in October 2012.

(6) €500 million 7.25% senior secured notes due 2017.

(7) €200 million 5.125% senior secured notes due 2018 and US$300 million 4.875% senior secured notes due 2018.

(8) €500 million 7.75% senior secured notes due 2019.

(9) €250 million senior secured floating rate notes due 2020. Interest at EURIBOR + 3.5%.

(10) The margins applicable to the senior credit facility are determined as follows:

Net debt/EBITDA ratio   RCF   Tranche B   Tranche C
 
Greater than 4.0 : 1 4.000% 3.875% 4.125%
4.0 : 1 or less but more than 3.5 : 1 3.750% 3.625% 3.875%
3.5 : 1 or less but more than 3.0 : 1 3.500% 3.625% 3.875%
3.0 : 1 or less but more than 2.5 : 1 3.250% 3.625% 3.875%
2.5 : 1 or less 3.125% 3.500% 3.750%

The reduction in the Group’s cash position reflects the voluntary early debt repayment of €330 million in the second quarter and the acquisition of OCCG in the fourth quarter.

13. Venezuela

Hyperinflation

As discussed more fully in the 2011 annual report, Venezuela became hyperinflationary during 2009 when its cumulative inflation rate for the past three years exceeded 100%. As a result, the Group applied the hyperinflationary accounting requirements of IAS 29 – Financial Reporting in Hyperinflationary Economies to its Venezuelan operations at 31 December 2009 and for all subsequent accounting periods.

The index used to reflect current values is derived from a combination of Banco Central de Venezuela’s National Consumer Price Index from its initial publication in December 2007 and the Consumer Price Index for the metropolitan area of Caracas for earlier periods. The level of and movement in the price index at December 2012 and 2011 are as follows:

    31-Dec-12   31-Dec-11
Index at year end 318.9 265.6
Movement in year 20.1% 27.6%

As a result of the entries recorded in respect of hyperinflationary accounting under IFRS, the Group Income Statement is impacted as follows: Revenue €27 million increase (2011: €70 million increase), pre-exceptional EBITDA €4 million decrease (2011: €11 million increase) and profit after taxation €48 million decrease (2011: €32 million decrease). In 2012, a net monetary loss of €18 million (2011: €15 million loss) was recorded in the Group Income Statement. The impact on the Group’s net assets and total equity is an increase of €33 million (2011: €41 million increase).

Control

The nationalisation of foreign owned companies by the Venezuelan government continues and would suggest that the risk of similar such action against the Group’s operations in Venezuela remains. In July 2011, the Venezuelan authorities issued precautionary measures over a further 7,253 hectares of the Group’s forestry land, with a view to acquiring it and converting its use to food production and related activities. 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 year end in accordance with the requirement of IAS 27.

In 2012, the Group’s operations in Venezuela represented approximately 7% (2011: 6%) of its total assets and 18% (2011: 17%) of its net assets. In addition, cumulative foreign translation losses arising on our net investment in these operations amounting to €198 million (2011: €190 million) are included in the foreign exchange translation reserve.

14. Business Combinations

The two acquisitions completed by the Group during the year, together with percentages acquired and completion dates were as follows:

  • OCCG (100%, 30 November 2012), corrugated and containerboard manufacturer in Northern Mexico and Southern United States;
  • Baguin (100%, 26 January 2012), a Bag-in-Box packaging solutions company in Argentina.

As part of the ongoing fair value exercise of OCCG, stock has been increased by €1 million and deferred tax liabilities have been increased by €11 million. In accordance with IFRS 3 revised, management is currently assessing the fair value of the remaining assets and liabilities acquired and will finalise the accounting for the business combination in 2013 within the allowed measurement period of IFRS 3 revised.

  Book value   Revaluation   Fair value
  €m €m €m
Non-current assets 121 - 121
Current assets 118 1 119
Non-current liabilities (89) (11) (100)
Current liabilities (49) - (49)
Net assets acquired 101 (10) 91
Goodwill     97
Consideration     188
 
Settled by:
Cash 183
Deferred consideration     5
Consideration     188

No contingent liability was recognised on the acquisition.

Acquisition costs of €6 million are included as exceptional items in the Group Income Statement.

15. Events after the balance sheet date

On 23 January 2013, the Group successfully completed the pricing of an upsized offering of €400 million of senior secured notes due 2020 issued by its wholly owned subsidiary Smurfit Kappa Acquisitions. The net proceeds of the offering will be used to prepay a portion of the term loans outstanding under SKG's senior credit facility and to pay certain fees and expenses related to the offering. The notes were offered in a private placement, and there was no public offering of the notes.

The notes priced at an issue price of 100 percent and at an interest rate of 4.125%. The closing of the sale of the notes was completed on 28 January 2013.

Supplemental Financial Information

EBITDA before exceptional items and share-based payment expense is denoted by EBITDA in the following schedules for ease of reference.

Reconciliation of Profit to EBITDA
  3 months to   3 months to   12 months to   12 months to
31-Dec-12 31-Dec-11 31-Dec-12 31-Dec-11
  €m €m €m €m
 
Profit for the financial period 63 95 260 218
Income tax expense (27) (18) 71 81
Impairment loss on property, plant and equipment - 3 - 15
Reorganisation and restructuring costs 3 (4) 3 19
Disposal of assets and operations 1 - (27) -
Business acquisition costs 6 - 6 -
Profit on disposal of associate - - - (2)
Share of associates’ profit (after tax) (1) - (3) (2)
Net finance costs 85 72 306 295
Share-based payment expense 6 5 26 15
Depreciation, depletion (net) and amortisation 104 92 378 376
EBITDA 240 245 1,020 1,015
Supplemental Historical Financial Information
€m   FY, 2011   Q1, 2012   Q2, 2012   Q3, 2012   Q4, 2012   FY, 2012
 
Group and third party revenue 12,108 2,950 3,050 2,944 2,951 11,896
Third party revenue 7,357 1,823 1,857 1,830 1,824 7,335
EBITDA 1,015 246 255 280 240 1,020
EBITDA margin 13.8% 13.5% 13.7% 15.3% 13.1% 13.9%
Operating profit 590 177 156 181 120 634
Profit before income tax 299 105 85 105 36 331
Free cash flow 394 (16) 63 118 118 282
Basic earnings per share - cent 93.0 27.1 24.5 33.4 26.2 111.2
Weighted average number of shares used in EPS calculation (million) 222 222 223 223 226 224
Net debt 2,752 2,775 2,785 2,640 2,792 2,792
Net debt to EBITDA (LTM) 2.71 2.73 2.76 2.58 2.74 2.74

Short Name: Smurfit Kappa GrpPLC
Category Code: FR
Sequence Number: 362349
Time of Receipt (offset from UTC): 20130205T174528+0000

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