3rd May 2013 07:00
Smurfit Kappa Group plc
Notes to the Consolidated Financial Statements (continued)
3 May 2013: 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 ending 31 March 2013.
| 2013 First Quarter | Key Financial Performance Measures | ||||||||||||||||||||
| € m | Q12013 | Q1(1)2012 | Change | Q4(1)2012 | Change | |||||||||||||||
| Revenue | €1,889 | €1,823 | 4% | €1,824 | 4% | |||||||||||||||
| EBITDA before Exceptional Items and Share-based Payment (2) | €241 | €245 | (2%) | €239 | 1% | |||||||||||||||
| EBITDA Margin | 12.7% | 13.4% | - | 13.1% | - | |||||||||||||||
| Operating Profit before Exceptional Items | €139 | €148 | (6%) | €129 | 8% | |||||||||||||||
| Profit before Income Tax | €57 | €102 | (43%) | €33 | 76% | |||||||||||||||
| Basic EPS (cent) | 14.4 | 26.0 | (45%) | 25.2 | (43%) | |||||||||||||||
| Pre-exceptional basic EPS (cent) | 19.8 | 14.2 | 39% | 34.0 | (42%) | |||||||||||||||
| Return on Capital Employed (3) | 11.7% | 12.4% | - | 12.0% | - | |||||||||||||||
| Free Cash Flow (4) | (€23) | (€16) | (42%) | €118 | - | |||||||||||||||
| Net Debt | €2,871 | €2,775 | 3% | €2,792 | 3% | |||||||||||||||
| Net Debt to EBITDA (LTM) | 2.8x | 2.7x | - | 2.7x | - | |||||||||||||||
(1) Comparative figures reflect the required restatement to employee benefits under the revision of IAS 19, as set out in Note 7.(2) 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 27.(3) LTM pre-exceptional operating profit plus share of associates’ profit/average capital employed.(4) Free cash flow is set out on page 8. The IFRS cash flow is set out on page 14.
First Quarter Highlights
Improving corrugated demand and paper price increases should support corrugated price increases in the second half of 2013 SK Orange County (‘SKOC’) integration and performance ahead of expectations. Synergy estimates doubled to US$28 million EBITDA margins in the Americas return to their historical range Proposed final 2012 dividend of 20.5 cent to be paid on 10 MayPerformance Review & Outlook
Gary McGann, Smurfit Kappa Group CEO, commented: “The Group is pleased to report year-on-year revenue growth of 4% in the first quarter. Despite a number of one-off costs, EBITDA for the first quarter remained strong at €241 million. SKG’s performance reflects the previously guided margin compression in Europe following OCC and recycled paper price increases which are not yet reflected in corrugated pricing.
A €40 per tonne recycled paper price increase in Europe during the quarter supports corrugated pricing. Input costs including OCC continue to move upwards. Paper price increases and a good inventory position across Europe are creating an environment for corrugated price recovery in the second half of 2013.
The performance of SKOC and the progress of its integration into the Group has exceeded our original expectations. We have doubled our synergy expectations from US$14 million to US$28 million. Over US$9 million of this synergy target will be delivered in 2013 compared to US$6 million in the original pro-forma calculation. Additionally, the trading performance of the business has been significantly helped by the implementation of two paper price increases in the United States within an eight month period, with consequent increases in corrugated prices in the US and Mexican markets.
The overall performance of the Americas segment has resulted in the region returning towards its historic EBITDA margin range. Our objective is to increase our exposure to higher growth markets such as the Americas. In the period the region delivered over 27% of Group EBITDA.
As part of our previously announced strategic investment in the Townsend Hook mill in the UK, we are accelerating the closure of the two existing paper machines at the mill. They have a combined capacity of 250,000 tonnes and are expected to close on 1 July 2013, after the completion of a consultation process with all employees, instead of 2014 as originally planned. We are bringing forward the closure in order to extend the training period for our workforce, advance the start-up of the new paper machine and increase the pace of the expected ramp up. The approximate £100 million (€114 million) investment involves the rebuilding of the machine acquired from the Cadidavid liquidator in 2011 into one 250,000 tonne modern lightweight machine which will now be operational by the fourth quarter of 2014 rather than the first quarter of 2015. This investment will significantly increase productivity and lower costs in our UK business.
SKG’s integrated operations and an unrelenting focus on efficiency continue to deliver a consistent and quality earnings stream. This, in turn, has contributed to a substantially improved capital structure with net debt reduction of €190 million in the past 24 months. Our net debt to EBITDA multiple is and will remain within our stated range of 3.0x through an industry cycle. The strength of our business today has increased the available range of strategic and financial options to drive value.
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 | ||||
| Smurfit Kappa Group | FTI Consulting | |||
| Seamus Murphy, +353 1 202 71 80 | +353 1 663 36 80 | |||
2013 First Quarter | Performance Overview
The Group has seen a strong increase in demand with European box volumes up 4% on the same period last year when adjusted for two fewer working days in the first quarter. This has been achieved despite continued macroeconomic weakness throughout most of Europe, and bears testament to the Group’s focus on high quality, innovative packaging solutions.
Due to the negative momentum in paper pricing throughout 2012 the Group has faced pressure on product pricing, with European corrugated prices decreasing by over 1% in the first quarter. Paper price increases achieved in February will act as a catalyst for further corrugated price recovery, the benefit of which can be expected to accrue to the business in the second half of the year.
The first quarter EBITDA of €241 million has been achieved against the backdrop of the predicted margin squeeze and one-off costs such as the maintenance closures of the Nettingsdorfer kraftliner mill in Europe and the Cali mill site in Colombia, both of which normally occur in other quarters of the year.
The Group’s three million tonne European recycled paper system benefited from a €40 per tonne price increase in February, which will partially address the below average operating margins in the grade throughout 2012. The market remained robust in the first quarter as a result of good demand levels from SKG’s customer base, strong export markets and the maintenance of inventories at satisfactory levels. OCC prices have continued their steady appreciation since September 2012 and markets appear to remain balanced in Europe underpinned by increased demand from the new paper capacity addition in Eastern Europe.
The European kraftliner industry achieved a €20 per tonne price increase in April, as a result of solid demand, steady supply and a disciplined market dynamic. This brings total price increases since January 2012 to €95 per tonne, or 18%. SKG is the strong market leader in Europe and continues to benefit from its net long position in the grade by approximately 500,000 tonnes per annum. Due to rising OCC costs and the necessity of virgin fibre in a sustainable containerboard system, we continue to believe that our well-invested and profitable kraftliner mills are essential to the Group’s performance and differentiation, and present a real driver of shareholder value into the future.
The Group’s SKOC acquisition is out-performing initial expectations, partially driven by the benefit of last year’s US$50 per ton paper price increase. The out-performance of the business compared to pro-forma is also supported by the fact that the integration of the business is proceeding very well to date, and the Group has revised its synergy run-rate to US$28 million over a two year period. This is twice the level of the initially identified synergies and reflective of the cost focus of the Group and the successful application of knowledge gained during previous integration processes. With a solid position in the market and the potential for upside to pricing as a result of the US April paper price increase, the Group remains very positive about SKOC’s 2013 performance.
Following a number of one-off issues in 2012, the Americas business improved its EBITDA margin to 15.2% in the first quarter of 2013 from 13.8% in the fourth quarter of 2012. SKG’s Mexican business is performing strongly and the economy is forecast to grow by over 3% in 2013 aided by wide ranging domestic reforms. Colombian performance was solid in the first quarter and the Cali mill reported a successful start-up following its planned maintenance downtime. The Group’s Venezuelan operations were negatively affected by a 32% devaluation during the quarter and reduced working days as a result of the death of President Chavez. However, volumes remain in line year-on-year.
SKG’s net debt to EBITDA increased from 2.7 to 2.8 times primarily as a result of working capital outflows and the effect of the Venezuelan devaluation in the first quarter. The timing of the Easter period at the end of March also had an impact on the Group’s cash inflow at month end.
Stakeholders’ value creation remains the primary driver for the Group and, to this end SKG will continue to balance its allocation of capital between a progressive dividend policy, capital expenditure programmes, accretive acquisitions in target growth markets and debt paydown.
2013 First Quarter | Financial Performance
At €1,889 million, sales revenue was €66 million higher year-on-year in the first quarter of 2013 representing a 4% increase over the same period in 2012. However, underlying sales were broadly flat when adjusting for a positive €104 million from acquisitions and negative currency movements and hyperinflationary adjustments of €32 million. Compared to the fourth quarter of 2012, sales revenue was €65 million higher in the first quarter of 2013.
As a result of a required restatement to employee benefits under the revision of IAS 19, the Group’s quarterly EBITDA in 2012 was reduced by €1 million and the full year result reduced by €4 million. At €241 million, EBITDA in the first quarter of 2013 was €4 million lower than the first quarter of 2012, a 2% decrease. Allowing for net currency movements, hyperinflationary adjustments and the contribution from recent acquisitions, primarily SKOC, the underlying year-on-year move was a decrease of €10 million.
Exceptional charges of €13 million were included in the first quarter’s 2013 operating profit, €12 million of which related to losses on the translation of non-Bolivar denominated payables following the devaluation of the Venezuelan Bolivar in February 2013. The remainder of the exceptional charges related to additional SKOC acquisition costs. In the first quarter of 2012 exceptional gains of €28 million were included in operating profit including €10 million primarily relating to the sale of land at SKG’s former Valladolid mill, together with €18 million relating to the disposal of a company in Slovakia.
The Group’s basic EPS for the first quarter of 2013 was 14.4 cent compared to 26.0 cent in 2012, with the year-on-year decrease reflecting the impact of exceptional items. On a pre-exceptional basis, SKG’s EPS for the first quarter of 2013 increased to 19.8 cent compared to 14.2 cent in the same period in 2012.
2013 First Quarter | Free Cash Flow
The Group reported a free cash outflow of €23 million in the first quarter of 2013, compared to a similar outflow of €16 million in the first quarter of 2012. Although EBITDA decreased by only €4 million year-on-year, there was an exceptional outflow of €13 million, primarily in respect of the devaluation of the Bolivar. The working capital outflow was higher in the first quarter of 2013 when compared to the same period in 2012, while both cash interest and capital outflows were lower.
Capital expenditure of €69 million in the first quarter of 2013 equated to 76% of depreciation, compared to 74% in the first quarter of 2012. For the full year 2013, SKG expects to increase its capital expenditure towards 100% of depreciation.
In the first quarter there was a working capital outflow of €98 million, compared to €88 million in the same period of 2012. The increase arose primarily in Europe and reflected corrugated volume growth and the impact of the recycled containerboard price increase. The Group reported a working capital to revenue ratio of 9.4% for the first quarter of 2013, compared to 8.7% for the first quarter of 2012.
Cash interest of €54 million in the first quarter of 2013 was €7 million lower than the first quarter of 2012, reflecting the benefit of the Group’s refinancing activities throughout 2012 and early 2013.
Tax payments of €16 million in the first quarter of 2013 were €2 million higher than in the same period of 2012.
SKG has a consistent focus on strong free cash flow generation, which will continue to enhance the range of capital allocation options available to it. Capital expenditure undertakings will remain disciplined and cash interest is expected to decrease materially year-on-year due to our recent re-financing activities. Cash tax payments are projected to remain broadly in line with 2012.
2013 First Quarter | Capital Structure
The Group’s net debt increased by €79 million to €2,871 million during the first quarter, reflecting negative free cash flow of €23 million, a €15 million outflow in respect of the purchase of own shares for the Group’s Deferred Annual Bonus Plan and a €31 million negative currency movement on net debt mainly as a result of the Venezuelan devaluation in February 2013. The Group’s net debt to EBITDA ratio of 2.8x at the end of March 2013 remains comfortably below its committed upper threshold of 3.0x throughout the cycle.
On 28 January, the Group issued €400 million seven year senior secured notes at a rate of 4.125%. The successful issuance at these low rates highlights the recognition in the credit market of SKG’s consistently robust operational performance and sustained strong free cash flow. On 15 February 2013 Standard & Poor’s changed the outlook on the Group’s BB credit rating from stable to positive.
The Group will continue to actively manage its capital structure, and will remain alert to any capital market opportunities. Implementing incremental improvements in the capital structure remains a key focus of SKG, and has delivered material benefits to the Group by way of lower debt service costs, extended debt maturities and a more diversified capital funding base.
The Group’s average debt maturity profile at the end of March 2013 has increased year-on-year from 5.1 years to 5.6 years. The Group’s liquidity remains strong, with undrawn credit facilities of approximately €517 million and approximately €510 million of cash on its balance sheet at the end of March 2013.
2013 First Quarter | Operating efficiency
Commercial offering and innovation
With a constant focus on product and process innovations, the Group strives to provide its customers with performance packaging solutions to meet their needs across the globe. Utilising state of the art, low cost paper making facilities, and a suite of bespoke design and logistics tools, SKG is working in partnership with many of its customers to maximise the value added at all points in their supply chain. Underlying this focus on product innovation the additional services provided to our customers such as supply chain optimisation, customer training programmes and pan European product benchmarking remain a core element of our business model.
Reflective of this, SKG’s pan European business continued to perform well during the quarter, with a 6% year-on-year increase in volume when adjusted for the average of two fewer shipping days in the first quarter of 2013. SKG’s commitment to consistently high quality products, its ability to guarantee supply of paper at all times in the cycle, and its geographic scale across two continents allow international customers to harmonise their processes and product offering in each of their markets. In March 2013, Coca Cola Hellenic recognised the Group for its consistent service standards as a supplier, emphasising the holistic approach taken by the Group to add value to the relationship.
On 24 April, SKG launched its new and improved Innobook. The design platform provides the Group’s 60,000 customers worldwide with the collective power of over 700 designers, and is currently consulted over 400 times per day by more than 250 Smurfit Kappa experts. The Innobook has a portfolio of over 4,800 designs, which can now be viewed in 3D and in greater detail than before.
Sustainability
The Group’s 2013 Sustainability Report is currently being finalised and is expected to be published in June 2013. SKG continues to regard the area of sustainability as a key business driver and remains committed to playing a leading role in fostering sustainable practices throughout the Group, whether it be through our customer relationships and business development, environmental programmes or corporate social responsibility initiatives. During the quarter the Group achieved its aim of gaining Chain of Custody certification in all relevant packaging operations across 19 countries throughout Europe. SKG was also recognised by Forest Stewardship Council (‘FSC’) for its outstanding contribution in the United Kingdom in raising awareness of responsible forestry.
Cost take-out programme
In February SKG announced a further one year cost take-out programme with a target of €100 million. This new initiative follows two such programmes over the last five years which have delivered approximately €500 million in cost savings, and has underpinned the Group’s ability to consistently generate good quality earnings.
In the first quarter of 2013, independent of the SKOC synergy programme, which includes cost take-out initiatives, the anticipated €20 million of cost take-out was delivered, focusing on the core areas of raw material usage, labour costs and energy efficiencies. The Group fully expects to deliver its full year 2013 target.
2013 First Quarter | Regional Performance Review
Europe
The Group’s European business reported a reduction in EBITDA of €22 million compared to the first quarter of 2012. The decrease was primarily caused by temporary margin compression resulting from increasing input costs and corrugated prices still under pressure from paper price weakness in mid-2012. Maintenance downtime in the Group’s Nettingsdorfer kraftliner mill usually undertaken in the second half of the year also impacted profitability for the quarter.
SKG’s box shipments were 4% higher in the first quarter than in the same period of 2012 when adjusted for two less shipping days. On an absolute basis volumes also increased slightly year-on-year, and reflected solid demand throughout the quarter in spite of poor weather conditions in February and March and the early Easter holidays in March this year. Total corrugated shipments increased almost 3% year-on-year on a like for like basis, and were marginally down on an absolute basis as a result of a continuation in the decline in sheet shipments, due to unacceptable prices.
European corrugated prices were flat through the first quarter but fell 1% compared to the underlying price in the fourth quarter of 2012, and over 2% compared to the average price for the year 2012. This decline is a function of the volatile and declining OCC and paper prices over the period, and highlights the importance of positive momentum in paper pricing in our integrated system. The successful paper price increases in the first quarter will again act as a catalyst for further corrugated price recovery primarily benefiting the second half. As expected the normal three to six month time lag in recovering corrugated prices has produced some short-term margin compression.
OCC prices have been steadily increasing since the last trough in September 2012, with a €25 per tonne, or 33% increase recognised in the public indexes. While Europe remained net long OCC by approximately 1.5 million tonnes in 2012, increasing Chinese demand and one million additional tonnes of testliner capacity expected in the US for 2013 are likely to continue to underpin global OCC prices over the long-term. Counter intuitively, higher recovered fibre costs benefit SKG as higher OCC and testliner prices provide the necessary catalyst for higher corrugated pricing.
The Group implemented a €40 per tonne testliner price increase in the first quarter which was necessary to address the increasingly uneconomic margin level for the grade. Supporting factors included good demand levels throughout the quarter, reduced industry inventories, and a strong export market for the first three months of the year, and these factors have persisted into the second quarter. In spite of recent price initiatives, the spread between OCC and testliner remains broadly in line with the same period 2012 and almost 10% below the peak in July 2011.
With a continuing strong export market, European capacity is currently reasonably balanced with a positive outlook for at least the next twelve months. During the quarter a net 370,000 tonnes of capacity was added in Poland, and a further 280,000 tonne newsprint machine conversion is expected in France in late 2013, or more probably early 2014. This follows a net reduction in capacity of approximately 300,000 tonnes in 2012, and does not account for further potential closures during the year.
As market leader in European kraftliner SKG continues to benefit from the strong fundamentals in the market with a net long position of approximately 500,000 tonnes. A price increase of €40 per tonne was announced for implementation from 1 April 2013, and an initial €20 per tonne has been implemented in April.
US imports have risen year-on-year in the first two months of 2013 by only 23,000 tonnes, and this has contributed to maintaining a balanced market in the first quarter with Europe structurally short kraftliner by over one million tonnes per annum. The Group’s three kraftliner mills performed well in the year-to-date, notwithstanding nine days of scheduled downtime in our Nettingsdorfer mill postponed from the third quarter of 2012. The Group’s Facture mill has recovered well after the collapse of a black liquor tank shut the plant for seven weeks in July/August 2012.
The Group is now expected to close its Townsend Hook site on 1 July 2013 after a consultation process with all employees. The facility will be rebuilt (using a machine acquired from the Cadidavid liquidator in 2011) into one 250,000 tonne modern lightweight machine which will now be operational by the fourth quarter of 2014 rather than the first quarter of 2015. While strategically optimal, advancing the closure of the existing machines will negatively impact 2013 EBITDA by €5 million and we will also incur exceptional charges of €15 million, consisting of €11 million of fixed asset impairments and €4 million of cash costs.
The Americas
In the first quarter, the Americas reported EBITDA of €66 million, 19% higher year-on-year, and which represented 27% of the Group’s total EBITDA. Excluding the SKOC acquisition, EBITDA decreased by 4% over the same period of 2012 as a result of one-offs, disruption in two of the region’s markets, and the early Easter this year. After a poor performance in the fourth quarter of 2012, the Americas delivered an improved EBITDA margin of 15.2% in the first quarter of 2013, returning to the long-term higher average margins normal for the region.
The Group’s Mexican operations performed well in the first quarter with stable EBITDA year-on-year despite higher material and converting costs. Corrugated volumes increased 6% in the first quarter compared to the same period of 2012 as a result of a series of high profile business wins with multinational customers. A fire in our Cerro Gordo mill necessitated a two and a half day shut in March, and negatively impacted the quarter. However, the business benefited from a strong performance in the Group’s main containerboard machine in Mexico City which had been shut for installation of the shoe press during the first quarter of 2012.
The Argentinian market remains challenging, as a result of higher year-on-year input costs and negative translation effects. However, corrugated volumes have recovered significantly in the first quarter with a 31% increase as a result of the resumption of production at our Sunchales plant.
Corrugated volumes in Colombia increased slightly in the first quarter in spite of the reduction in shipping days due to the timing of Easter holidays in March. The Group continues to seek price increases and cost containment where possible to offset moderate inflationary pressures and a very strong currency. A planned shut of the Cali mill for maintenance, which previously occurred in the second quarter of 2012, negatively impacted EBITDA in March. However, the start-up proceeded better than expected.
A number of factors weighed on the performance of the Group’s Venezuelan operations in the first quarter, most notably a 32% devaluation in February and the political uncertainty and loss of productivity experienced around the time of the president’s death. As a result, corrugated volumes decreased by 6% compared to the prior year. The Venezuelan mill system performed well, supported by price increases and reductions in material costs due to higher consumption of lower cost local recovered paper. SKG does not expect any significant change to trading conditions as a result of the recent elections, although the country will remain volatile for the foreseeable future.
The increasing prominence of the Americas within the Group in EBITDA terms reflects the commitment of SKG to growth in the emerging markets. Throughout SKG’s 27 year exposure to the region, it has consistently provided the Group with enhanced operating margins, vital geographic diversity and access to a talented and dynamic people within the Group. With trends across the region increasingly pointing to demand for higher quality innovative packaging solutions, SKG is uniquely positioned to benefit from this shift into the future, leveraging its pan-regional scale and extensive creative resources to drive its superior performance.
SK Orange County Update
Corrugated price increases have been implemented in both the Mexican and US parts of the business following the third quarter price hike, and the current pricing initiative will have a further beneficial effect on the Group’s corrugated pricing in the region. First quarter corrugated volumes were stable year-on-year.
The company’s 290,000 tonne paper mill in Texas continues to benefit from the consolidated and disciplined US market dynamics with US paper prices increasing US$100 per ton in the last eight months. Recovered fibre costs have increased by less than US$30 per ton in this period and these superior spreads are expected to be maintained by the industry.
SKOC represents the Group’s first significant M&A transaction since the Kappa merger in 2005, and its integration is progressing very well. A detailed review of the business has been conducted and over 35 potential synergy initiatives have been identified which will deliver US$28 million over two years. These initiatives fall under the headings of headcount and overheads reduction, paper mill improvements, optimisation of sales focus, fibre sourcing integration, packaging innovation and purchasing. The Group expects to achieve over US$9 million of the synergies in 2013.
| Summary Cash Flow | ||||||||
| Summary cash flows1 for the first quarter are set out in the following table. | ||||||||
| 3 months to31-Mar-13€m | Restated3 months to31-Mar-12€m | |||||||
| Pre-exceptional EBITDA | 241 | 245 | ||||||
| Exceptional items | (13) | - | ||||||
| Cash interest expense | (54) | (61) | ||||||
| Working capital change | (98) | (88) | ||||||
| Current provisions | (3) | (4) | ||||||
| Capital expenditure | (69) | (63) | ||||||
| Change in capital creditors | 7 | (27) | ||||||
| Tax paid | (16) | (14) | ||||||
| Sale of fixed assets | - | 8 | ||||||
| Other | (18) | (12) | ||||||
| Free cash flow | (23) | (16) | ||||||
| Share issues | 3 | 4 | ||||||
| Purchase of own shares | (15) | (13) | ||||||
| Sale of businesses and investments | - | 1 | ||||||
| Purchase of investments | (3) | (6) | ||||||
| Dividends | - | (1) | ||||||
| Derivative termination receipts | - | 1 | ||||||
| Net cash outflow | (38) | (30) | ||||||
| Net debt/cash acquired/disposed | (1) | - | ||||||
| Deferred debt issue costs amortised | (9) | (4) | ||||||
| Currency translation adjustments | (31) | 11 | ||||||
| Increase in net debt | (79) | (23) | ||||||
1 The summary cash flow is prepared on a different basis to the Consolidated Statement of Cash Flows 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.
| 3 months to31-Mar-13€m | 3 months to31-Mar-12€m | |||||||||||
| Free cash flow | (23) | (16) | ||||||||||
| Addback: | Cash interest | 54 | 61 | |||||||||
| Capital expenditure (net of change in capital creditors) | 62 | 90 | ||||||||||
| Tax payments | 16 | 14 | ||||||||||
| Less: | Sale of fixed assets | - | (8) | |||||||||
| Profit on purchase/sale of assets and businesses – non exceptional | (2) | (3) | ||||||||||
| Non-cash financing activities | (1) | (5) | ||||||||||
| Cash generated from operations | 106 | 133 | ||||||||||
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 March 2013 Smurfit Kappa Treasury Funding Limited had outstanding US$292.3 million 7.50% senior debentures due 2025 and the Group had outstanding €202 million variable funding notes issued under the €250 million accounts receivable securitisation programme 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, €400 million 4.125% senior secured notes due 2020 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 €385 million Tranche B maturing in 2016 and a €411 million Tranche C maturing in 2017, of which €25.5 million Tranche B and €47.9 million Tranche C were prepaid in April 2013. In addition, as at 31 March 2013, the facility includes a €525 million revolving credit facility which was substantially undrawn apart from €7.7 million drawn under various ancillary facilities and letters of credit.
The following table provides the range of interest rates as of 31 March 2013 for each of the drawings under the various senior credit facility term loans.
| BORROWING ARRANGEMENT | CURRENCY | INTEREST RATE | ||||||
| Term Loan B | EUR | 3.742% - 3.838% | ||||||
| USD | 3.93% | |||||||
| Term Loan C | EUR | 3.993% - 4.088% | ||||||
| USD | 4.18% |
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. The Group had fixed an average of 83% 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), €400 million 4.125% senior secured notes due 2020 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 €4 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.
| Consolidated Income Statement – First Quarter | ||||||||||||||||||||||||
| Restated | ||||||||||||||||||||||||
| Unaudited | Unaudited | |||||||||||||||||||||||
| 3 months to 31-Mar-13 | 3 months to 31-Mar-12 | |||||||||||||||||||||||
| Pre-exceptional2013 | Exceptional2013 | Total2013 | Pre-exceptional2012 | Exceptional2012 | Total2012 | |||||||||||||||||||
| €m | €m | €m | €m | €m | €m | |||||||||||||||||||
| Revenue | 1,889 | - | 1,889 | 1,823 | - | 1,823 | ||||||||||||||||||
| Cost of sales | (1,363) | - | (1,363) | (1,297) | - | (1,297) | ||||||||||||||||||
| Gross profit | 526 | - | 526 | 526 | - | 526 | ||||||||||||||||||
| Distribution costs | (152) | - | (152) | (143) | - | (143) | ||||||||||||||||||
| Administrative expenses | (235) | - | (235) | (235) | - | (235) | ||||||||||||||||||
| Other operating income | - | - | - | - | 28 | 28 | ||||||||||||||||||
| Other operating expenses | - | (13) | (13) | - | - | - | ||||||||||||||||||
| Operating profit | 139 | (13) | 126 | 148 | 28 | 176 | ||||||||||||||||||
| Finance costs | (79) | (6) | (85) | (89) | - | (89) | ||||||||||||||||||
| Finance income | 10 | 6 | 16 | 15 | 15 | |||||||||||||||||||
| Profit before income tax | 70 | (13) | 57 | 74 | 28 | 102 | ||||||||||||||||||
| Income tax expense | (24) | (41) | ||||||||||||||||||||||
| Profit for the financial period | 33 | 61 | ||||||||||||||||||||||
| Attributable to: | ||||||||||||||||||||||||
| Owners of the parent | 33 | 58 | ||||||||||||||||||||||
| Non-controlling interests | - | 3 | ||||||||||||||||||||||
| Profit for the financial period | 33 | 61 | ||||||||||||||||||||||
| Earnings per share | ||||||||||||||||||||||||
| Basic earnings per share - cent | 14.4 | 26.0 | ||||||||||||||||||||||
| Diluted earnings per share - cent | 14.3 | 25.5 | ||||||||||||||||||||||
| Consolidated Statement of Comprehensive Income – First Quarter | ||||||||
| Unaudited3 months to31-Mar-13€m | RestatedUnaudited3 months to31-Mar-12€m | |||||||
| Profit for the financial period | 33 | 61 | ||||||
| Other comprehensive income: | ||||||||
| Items that may subsequently be reclassified to profit or loss | ||||||||
| Foreign currency translation adjustments: | ||||||||
| - Arising in the period | (114) | 35 | ||||||
| - Recycled to Consolidated Income Statement on disposal of subsidiary | - | (17) | ||||||
| Effective portion of changes in fair value of cash flow hedges: | ||||||||
| - Movement out of reserve | 5 | 6 | ||||||
| - New fair value adjustments into reserve | 8 | (4) | ||||||
| - Movement in deferred tax | (1) | - | ||||||
| (102) | 20 | |||||||
| Items which will not be subsequently reclassified to profit or loss | ||||||||
| Defined benefit pension plans: | ||||||||
| - Actuarial gain/(loss) | 42 | (28) | ||||||
| - Movement in deferred tax | (9) | 2 | ||||||
| 33 | (26) | |||||||
| Total other comprehensive expense | (69) | (6) | ||||||
| Total comprehensive (expense)/income for the period | (36) | 55 | ||||||
| Attributable to: | ||||||||
| Owners of the parent | (20) | 47 | ||||||
| Non-controlling interests | (16) | 8 | ||||||
| Total comprehensive (expense)/income for the financial period | (36) | 55 | ||||||
| Consolidated Balance Sheet | ||||||||||||
| Unaudited31-Mar-13€m | RestatedUnaudited31-Mar-12€m | RestatedUnaudited31-Dec-12€m | ||||||||||
| ASSETS | ||||||||||||
| Non-current assets | ||||||||||||
| Property, plant and equipment | 3,013 | 2,976 | 3,076 | |||||||||
| Goodwill and intangible assets | 2,311 | 2,231 | 2,336 | |||||||||
| Available-for-sale financial assets | 33 | 32 | 33 | |||||||||
| Investment in associates | 17 | 14 | 16 | |||||||||
| Biological assets | 120 | 120 | 127 | |||||||||
| Trade and other receivables | 5 | 4 | 4 | |||||||||
| Derivative financial instruments | 1 | 3 | 1 | |||||||||
| Deferred income tax assets | 171 | 164 | 191 | |||||||||
| 5,671 | 5,544 | 5,784 | ||||||||||
| Current assets | ||||||||||||
| Inventories | 747 | 704 | 745 | |||||||||
| Biological assets | 2 | 9 | 6 | |||||||||
| Trade and other receivables | 1,524 | 1,430 | 1,422 | |||||||||
| Derivative financial instruments | 10 | 4 | 10 | |||||||||
| Restricted cash | 8 | 9 | 15 | |||||||||
| Cash and cash equivalents | 502 | 811 | 447 | |||||||||
| 2,793 | 2,967 | 2,645 | ||||||||||
| Total assets | 8,464 | 8,511 | 8,429 | |||||||||
| EQUITY | ||||||||||||
| Capital and reserves attributable to the owners of the parent | ||||||||||||
| Equity share capital | - | - | - | |||||||||
| Share premium | 1,975 | 1,949 | 1,972 | |||||||||
| Other reserves | 349 | 401 | 444 | |||||||||
| Retained earnings | (69) | (295) | (159) | |||||||||
| Total equity attributable to the owners of the parent | 2,255 | 2,055 | 2,257 | |||||||||
| Non-controlling interests | 199 | 200 | 212 | |||||||||
| Total equity | 2,454 | 2,255 | 2,469 | |||||||||
| LIABILITIES | ||||||||||||
| Non-current liabilities | ||||||||||||
| Borrowings | 3,214 | 3,410 | 3,188 | |||||||||
| Employee benefits | 681 | 681 | 738 | |||||||||
| Derivative financial instruments | 44 | 55 | 65 | |||||||||
| Deferred income tax liabilities | 194 | 209 | 211 | |||||||||
| Non-current income tax liabilities | 16 | 13 | 15 | |||||||||
| Provisions for liabilities and charges | 44 | 58 | 57 | |||||||||
| Capital grants | 12 | 13 | 12 | |||||||||
| Other payables | 7 | 7 | 9 | |||||||||
| 4,212 | 4,446 | 4,295 | ||||||||||
| Current liabilities | ||||||||||||
| Borrowings | 167 | 185 | 66 | |||||||||
| Trade and other payables | 1,562 | 1,502 | 1,534 | |||||||||
| Current income tax liabilities | 15 | 47 | 4 | |||||||||
| Derivative financial instruments | 39 | 60 | 43 | |||||||||
| Provisions for liabilities and charges | 15 | 16 | 18 | |||||||||
| 1,798 | 1,810 | 1,665 | ||||||||||
| Total liabilities | 6,010 | 6,256 | 5,960 | |||||||||
| Total equity and liabilities | 8,464 | 8,511 | 8,429 | |||||||||
| Consolidated Statement of Changes in Equity | ||||||||||||||||||||||||||||
| Restated | ||||||||||||||||||||||||||||
| Attributable to the owners of the parent | Non-controllinginterests€m | Totalequity€m | ||||||||||||||||||||||||||
| Equitysharecapital€m | Sharepremium€m | Otherreserves€m | Retainedearnings€m | Total€m | ||||||||||||||||||||||||
| Unaudited | ||||||||||||||||||||||||||||
| At 1 January 2013 | - | 1,972 | 444 | (159) | 2,257 | 212 | 2,469 | |||||||||||||||||||||
| Profit for the financial period | - | - | - | 33 | 33 | - | 33 | |||||||||||||||||||||
| Other comprehensive income | ||||||||||||||||||||||||||||
| Foreign currency translation adjustments | - | - | (98) | - | (98) | (16) | (114) | |||||||||||||||||||||
| Defined benefit pension plans | - | - | - | 33 | 33 | - | 33 | |||||||||||||||||||||
| Effective portion of changes in fair value of cash flow hedges | - | - | 12 | - | 12 | - | 12 | |||||||||||||||||||||
| Total comprehensive (expense)/income for the financial period | - | - | (86) | 66 | (20) | (16) | (36) | |||||||||||||||||||||
| Shares issued | - | 3 | - | - | 3 | - | 3 | |||||||||||||||||||||
| Hyperinflation adjustment | - | - | - | 24 | 24 | 3 | 27 | |||||||||||||||||||||
| Share-based payment | - | - | 6 | - | 6 | - | 6 | |||||||||||||||||||||
| Shares acquired by SKG Employee Trust | - | - | (15) | - | (15) | - | (15) | |||||||||||||||||||||
| At 31 March 2013 | - | 1,975 | 349 | (69) | 2,255 | 199 | 2,454 | |||||||||||||||||||||
| At 1 January 2012 | - | 1,945 | 391 | (340) | 1,996 | 191 | 2,187 | |||||||||||||||||||||
| Profit for the financial period | - | - | - | 58 | 58 | 3 | 61 | |||||||||||||||||||||
| Other comprehensive income | ||||||||||||||||||||||||||||
| Foreign currency translation adjustments | - | - | 13 | - | 13 | 5 | 18 | |||||||||||||||||||||
| Defined benefit pension plans | - | - | - | (26) | (26) | - | (26) | |||||||||||||||||||||
| Effective portion of changes in fair value of cash flow hedges | - | - | 2 | - | 2 | - | 2 | |||||||||||||||||||||
| Total comprehensive income for the financial period | - | - | 15 | 32 | 47 | 8 | 55 | |||||||||||||||||||||
| Shares issued | - | 4 | - | - | 4 | - | 4 | |||||||||||||||||||||
| Hyperinflation adjustment | - | - | - | 13 | 13 | 2 | 15 | |||||||||||||||||||||
| Dividends paid | - | - | - | - | - | (1) | (1) | |||||||||||||||||||||
| Share-based payment | - | - | 8 | - | 8 | - | 8 | |||||||||||||||||||||
| Shares acquired by SKG Employee Trust | - | - | (13) | - | (13) | - | (13) | |||||||||||||||||||||
| At 31 March 2012 | - | 1,949 | 401 | (295) | 2,055 | 200 | 2,255 | |||||||||||||||||||||
| An analysis of the movements in Other reserves is provided in Note 13. | ||||||||||||||||||||||||||||
| Consolidated Statement of Cash Flows | ||||||||
| Unaudited3 months to31-Mar-13€m | RestatedUnaudited3 months to31-Mar-12€m | |||||||
| Cash flows from operating activities | ||||||||
| Profit before income tax | 57 | 102 | ||||||
| Net finance costs | 69 | 74 | ||||||
| Depreciation charge | 83 | 80 | ||||||
| Amortisation of intangible assets | 5 | 5 | ||||||
| Amortisation of capital grants | (1) | (1) | ||||||
| Share-based payment expense | 6 | 8 | ||||||
| Profit on purchase/sale of assets and businesses | (2) | (28) | ||||||
| Net movement in working capital | (99) | (92) | ||||||
| Change in biological assets | 8 | 4 | ||||||
| Change in employee benefits and other provisions | (23) | (20) | ||||||
| Other | 3 | 1 | ||||||
| Cash generated from operations | 106 | 133 | ||||||
| Interest paid | (36) | (47) | ||||||
| Income taxes paid: | ||||||||
| Overseas corporation tax (net of tax refunds) paid | (16) | (14) | ||||||
| Net cash inflow from operating activities | 54 | 72 | ||||||
| Cash flows from investing activities | ||||||||
| Interest received | 1 | 2 | ||||||
| Additions to property, plant and equipment and biological assets | (60) | (88) | ||||||
| Additions to intangible assets | (2) | (2) | ||||||
| Decrease in restricted cash | 6 | 3 | ||||||
| Disposal of property, plant and equipment | 1 | 11 | ||||||
| Purchase of subsidiaries and non-controlling interests | (2) | (5) | ||||||
| Deferred consideration paid | (2) | - | ||||||
| Net cash outflow from investing activities | (58) | (79) | ||||||
| Cash flows from financing activities | ||||||||
| Proceeds from issue of new ordinary shares | 3 | 4 | ||||||
| Proceeds from bond issuance | 400 | - | ||||||
| Purchase of own shares | (15) | (13) | ||||||
| Increase in interest-bearing borrowings | 16 | 4 | ||||||
| Payment of finance leases | (1) | (2) | ||||||
| Repayment of borrowings | (318) | (14) | ||||||
| Derivative termination receipts | - | 1 | ||||||
| Deferred debt issue costs | (6) | (10) | ||||||
| Dividends paid to non-controlling interests | - | (1) | ||||||
| Net cash inflow/(outflow) from financing activities | 79 | (31) | ||||||
| Increase/(decrease) in cash and cash equivalents | 75 | (38) | ||||||
| Reconciliation of opening to closing cash and cash equivalents | ||||||||
| Cash and cash equivalents at 1 January | 423 | 825 | ||||||
| Currency translation adjustment | (20) | 2 | ||||||
| Increase/(decrease) in cash and cash equivalents | 75 | (38) | ||||||
| Cash and cash equivalents at 31 March | 478 | 789 | ||||||
| An analysis of the Net movement in working capital is provided in Note 12. | ||||||||
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 Consolidated Financial Statements of SKG plc 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 presented in this report has been prepared to comply with the requirement to publish an ‘Interim management statement’ for the first quarter, in accordance with the Transparency Regulations. The Transparency Regulations do not require Interim management statements to be prepared in accordance with International Accounting Standard 34 – ‘Interim Financial Information’ (‘IAS 34’). Accordingly the Group has not prepared this financial information in accordance with IAS 34.
The financial information has been prepared in accordance with the Group’s accounting policies. Full details of the accounting policies adopted by the Group are contained in the financial statements included in the Group’s Annual Report for the year ended 31 December 2012 which is available on the Group’s website www.smurfitkappa.com. The accounting policies and methods of computation and presentation adopted in the preparation of the Group financial information are consistent with those described and applied in the Annual Report for the financial year ended 31 December 2012 with the exception of the standards described below.
IAS 19 Revised
The IASB has issued a number of amendments to IAS 19, Employee Benefits, which became effective for the Group from 1 January 2013. The main effect on the Group financial statements stems from the removal of the concept of expected return on plan assets. As a result the expected return on plan assets is now calculated using the same discount rate as that used to determine the present value of plan liabilities. The difference between the implied return and the actual return on assets is recognised in other comprehensive income. The amendments have been applied retrospectively in accordance with IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors, resulting in the adjustment of prior year financial information. The effect of these adjustments is shown in Note 7.
Amendments to IAS 1
The amended IAS 1, Presentation of Financial Statements, requires the grouping of items of other comprehensive income that may be reclassified to profit or loss at a future point in time separately from those items which will never be reclassified. The revised standard, which has been adopted by the Group with effect from 1 January 2013, affects presentation only and does not impact the Group’s financial position or performance.
There are a number of other changes to IFRS issued and effective from 1 January 2013 which include IFRS 10, Consolidated Financial Statements, IFRS 11, Joint Arrangements, IFRS 12, Disclosure of Interests in Other Entities, IFRS 13, Fair Value Measurement, IAS 27, Separate Financial Statements, and IAS 28, Investments in Associates and Joint Ventures. They either do not have an effect on the Consolidated Financial Statements or they are not currently relevant for the Group.
The condensed interim Group financial information includes all adjustments that management considers necessary for a fair presentation of such financial information. All such adjustments are of a normal recurring nature. Some tables in this report may not add correctly due to rounding.
The condensed interim Group financial information does not constitute full group accounts within the meaning of Regulation 40(1) of the European Communities (Companies: Group Accounts) Regulations, 1992 of Ireland insofar as such group accounts would have to comply with all of the disclosure and other requirements of those Regulations. Full Group accounts for the year ended 31 December 2012 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 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. Because of the high level of integration between OCCG and our existing operations in Mexico, OCCG was included with our existing Latin American operations which were renamed as the Americas. OCCG has been renamed as Smurfit Kappa Orange County (‘SKOC’)
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 SKOC. 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. Group centre assets are comprised primarily of available-for-sale financial assets, derivative financial assets, deferred income tax assets, cash and cash equivalents and restricted cash.
| Restated | ||||||||||||||||||||||||
| 3 months to 31-Mar-13 | 3 months to 31-Mar-12 | |||||||||||||||||||||||
| Europe€m | TheAmericas€m | Total€m | Europe€m | TheAmericas€m | Total€m | |||||||||||||||||||
| Revenue and Results | ||||||||||||||||||||||||
| Revenue | 1,457 | 432 | 1,889 | 1,490 | 333 | 1,823 | ||||||||||||||||||
| EBITDA before exceptional items | 177 | 66 | 243 | 199 | 55 | 254 | ||||||||||||||||||
| Segment exceptional items | - | (13) | (13) | 28 | - | 28 | ||||||||||||||||||
| EBITDA after exceptional items | 177 | 53 | 230 | 227 | 55 | 282 | ||||||||||||||||||
| Unallocated centre costs | (2) | (9) | ||||||||||||||||||||||
| Share-based payment expense | (6) | (8) | ||||||||||||||||||||||
| Depreciation and depletion (net) | (91) | (84) | ||||||||||||||||||||||
| Amortisation | (5) | (5) | ||||||||||||||||||||||
| Finance costs | (85) | (89) | ||||||||||||||||||||||
| Finance income | 16 | 15 | ||||||||||||||||||||||
| Profit before income tax | 57 | 102 | ||||||||||||||||||||||
| Income tax expense | (24) | (41) | ||||||||||||||||||||||
| Profit for the financial period | 33 | 61 | ||||||||||||||||||||||
| Assets | ||||||||||||||||||||||||
| Segment assets | 6,191 | 1,818 | 8,009 | 6,220 | 1,554 | 7,774 | ||||||||||||||||||
| Investment in associates | 2 | 15 | 17 | 1 | 13 | 14 | ||||||||||||||||||
| Group centre assets | 438 | 723 | ||||||||||||||||||||||
| Total assets | 8,464 | 8,511 | ||||||||||||||||||||||
4. Exceptional Items
| The following items are regarded as exceptional in nature: | 3 months to31-Mar-13€m | Restated3 months to31-Mar-12€m | ||||||
| Gain on disposal of assets and operations | - | (28) | ||||||
| Currency trading loss on Venezuelan Bolivar devaluation | 12 | - | ||||||
| Business acquisition costs | 1 | - | ||||||
| Exceptional items included in operating profit | 13 | (28) | ||||||
| Exceptional finance cost | 6 | - | ||||||
| Exceptional finance income | (6) | - | ||||||
| Exceptional items included in net finance costs | - | - | ||||||
Exceptional items charged within operating profit in the first quarter of 2013 amounted to €13 million, over €12 million of which related to losses on the translation of non-Bolivar denominated payables following the devaluation of the Venezuelan Bolivar in February. The translation loss reflects the higher cost to our Venezuelan operations of discharging these payables. The remainder of less than €1 million was in respect of SKOC related acquisition costs.
Exceptional finance costs in the first quarter of 2013 comprised an offsetting charge of €6 million in respect of the accelerated amortisation of debt issue costs and a gain of €6 million in Venezuela on the value of US dollar denominated intra-group loans, following the devaluation of the Bolivar. The accelerated amortisation of debt issue costs arose from our repayment of part of the Senior Credit Facility from the proceeds of January’s €400 million bond issue.
In 2012, we reported an exceptional gain of €28 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 Consolidated Statement of Comprehensive Income to the Consolidated Income Statement.
5. Finance Cost and Income
| 3 months to31-Mar-13€m | Restated3 months to31-Mar-12€m | |||||||
| Finance cost: | ||||||||
| Interest payable on bank loans and overdrafts | 21 | 33 | ||||||
| Interest payable on other borrowings | 37 | 33 | ||||||
| Exceptional finance costs associated with debt restructuring | 6 | - | ||||||
| Foreign currency translation loss on debt | 8 | 2 | ||||||
| Fair value loss on derivatives not designated as hedges | - | 10 | ||||||
| Net interest cost on net pension liability | 7 | 8 | ||||||
| Net monetary loss - hyperinflation | 6 | 3 | ||||||
| Total finance cost | 85 | 89 | ||||||
| Finance income: | ||||||||
| Other interest receivable | (1) | (2) | ||||||
| Foreign currency translation gain on debt | - | (11) | ||||||
| Exceptional foreign currency translation gain | (6) | - | ||||||
| Fair value gain on derivatives not designated as hedges | (9) | (2) | ||||||
| Total finance income | (16) | (15) | ||||||
| Net finance cost | 69 | 74 | ||||||
6. Income Tax Expense
| Income tax expense recognised in the Consolidated Income Statement | ||||||||
| 3 months to31-Mar-13€m | Restated3 months to31-Mar-12€m | |||||||
| Current tax: | ||||||||
| Europe | 8 | 17 | ||||||
| The Americas | 15 | 11 | ||||||
| 23 | 28 | |||||||
| Deferred tax | 1 | 13 | ||||||
| Income tax expense | 24 | 41 | ||||||
| Current tax is analysed as follows: | ||||||||
| Ireland | 1 | 1 | ||||||
| Foreign | 22 | 27 | ||||||
| 23 | 28 | |||||||
| Income tax recognised in the Consolidated Statement of Comprehensive Income | ||||||||
| 3 months to31-Mar-13€m | Restated3 months to31-Mar-12€m | |||||||
| Arising on actuarial gain/(loss) on defined benefit plans | 9 | (2) | ||||||
| Arising on qualifying derivative cash flow hedges | 1 | - | ||||||
| 10 | (2) | |||||||
The €17 million reduction in income tax expense compared to 2012 is largely explained by lower taxable profits and gains from non-recurring asset sales, a non-cash reduction in the value of deferred tax assets in 2012 due to a reduction in tax rates and a non-recurring tax credit in 2013 from a change in tax law in Italy. The income tax expense also includes the effects in 2013 of the acquisition of SKOC which was completed in the fourth quarter in 2012.
The income tax expense includes a tax credit associated with exceptional items in 2013 of €1 million compared to a €2 million tax expense in 2012.
7. Employee Benefits – Defined Benefit Plans
The table below sets out the components of the defined benefit cost for the quarter:
| 3 months to31-Mar-13€m | Restated3 months to31-Mar-12€m | |||||||
| Current service cost | 13 | 8 | ||||||
| Net interest cost on net pension liability | 7 | 8 | ||||||
| Defined benefit cost | 20 | 16 | ||||||
Included in cost of sales, distribution costs and administrative expenses is a defined benefit cost of €13 million for the quarter (2012: €8 million). Net interest cost on net pension liability of €7 million (2012: €8 million) is included in finance costs in the Consolidated Income Statement.
The amounts recognised in the Consolidated Balance Sheet were as follows:
| 31-Mar-13€m | Restated31-Dec-12€m | |||||||
| Present value of funded or partially funded obligations | (1,813) | (1,832) | ||||||
| Fair value of plan assets | 1,632 | 1,598 | ||||||
| Deficit in funded or partially funded plans | (181) | (234) | ||||||
| Present value of wholly unfunded obligations | (500) | (504) | ||||||
| Net pension liability | (681) | (738) | ||||||
The employee benefits provision has decreased from €738 million at 31 December 2012 to €681 million at 31 March 2013. The main reason for this is that the assets outperformed their assumed return.
Restatement of prior periods in accordance with IAS 19 and IAS 8
The Group adopted IAS 19 (as revised) from 1 January 2013. In accordance with the previous version of IAS 19 the Consolidated Income Statement included an interest cost based on present value calculations of projected pension payments and, finance income based on the expected rates of income generated by plan assets. Generally the rate of expected income on plan assets exceeded the discount rate used in calculating the interest cost. Under the revised standard the interest cost and expected return on plan assets have been replaced with a net interest amount and the rate of return on plan assets is calculated using the same discount rate as that used to determine the present value of plan liabilities. The difference between the lower rate of return on plan assets and the actual return on assets is recognised in other comprehensive income, largely offsetting the higher net interest cost in the income statement. There are other minor changes which we have allowed for but they do not have a material effect on the financial statements.
The revised standard has been applied retrospectively in accordance with IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors, resulting in the adjustment of prior year financial information. The effects of adoption on previously reported financial information are shown in the table below.
| PreviouslyReported€m | Adjustments€m | Restated€m | ||||||||||
| As at 1 January 2012 | ||||||||||||
| Employee benefits - non-current liabilities | 655 | 1 | 656 | |||||||||
| Provisions for liabilities and charges - non-current liabilities | 55 | (2) | 53 | |||||||||
| Deferred income tax assets | 177 | - | 177 | |||||||||
| Retained earnings | (341) | 1 | (340) | |||||||||
| As at and for the year ended 31 December 2012 | ||||||||||||
| Employee benefits - non-current liabilities | 737 | 1 | 738 | |||||||||
| Provisions for liabilities and charges - non-current liabilities | 59 | (2) | 57 | |||||||||
| Deferred income tax assets | 191 | - | 191 | |||||||||
| Retained earnings | (160) | 1 | (159) | |||||||||
| Cost of sales | (5,238) | (2) | (5,240) | |||||||||
| Administrative expenses | (938) | (2) | (940) | |||||||||
| Finance costs | (399) | 71 | (328) | |||||||||
| Finance income | 93 | (79) | 14 | |||||||||
| Profit before income tax | 331 | (12) | 319 | |||||||||
| Income tax expense | (71) | 3 | (68) | |||||||||
| Profit for the financial year | 260 | (9) | 251 | |||||||||
| Attributable to owners of the parent | 249 | (9) | 240 | |||||||||
| Basic earnings per share - cent | 111.2 | (4.3) | 106.9 | |||||||||
| Diluted earnings per share - cent | 108.3 | (4.1) | 104.2 | |||||||||
| Other Comprehensive income | ||||||||||||
| Defined benefit pension plans: | ||||||||||||
| - Actuarial loss | (108) | 12 | (96) | |||||||||
| - Movement in deferred tax | 19 | (3) | 16 | |||||||||
| As at and for the three months ended 31 March 2012 | ||||||||||||
| Employee benefits - non-current liabilities | 680 | 1 | 681 | |||||||||
| Provisions for liabilities and charges - non-current liabilities | 60 | (2) | 58 | |||||||||
| Deferred income tax assets | 164 | - | 164 | |||||||||
| Retained earnings | (296) | 1 | (295) | |||||||||
| Cost of sales | (1,296) | (1) | (1,297) | |||||||||
| Administrative expenses | (235) | - | (235) | |||||||||
| Finance costs | (106) | 17 | (89) | |||||||||
| Finance income | 34 | (19) | 15 | |||||||||
| Profit before income tax | 105 | (3) | 102 | |||||||||
| Income tax expense | (42) | 1 | (41) | |||||||||
| Profit for the financial period | 63 | (2) | 61 | |||||||||
| Attributable to owners of the parent | 60 | (2) | 58 | |||||||||
| Basic earnings per share - cent | 27.1 | (1.1) | 26.0 | |||||||||
| Diluted earnings per share - cent | 26.5 | (1.0) | 25.5 | |||||||||
| Other Comprehensive income | ||||||||||||
| Defined benefit pension plans: | ||||||||||||
| - Actuarial loss | (31) | 3 | (28) | |||||||||
| - Movement in deferred tax | 3 | (1) | 2 | |||||||||
8. 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 period.
| 3 months to31-Mar-13 | Restated3 months to31-Mar-12 | |||||||
| Profit attributable to the owners of the parent (€ million) | 33 | 58 | ||||||
| Weighted average number of ordinary shares in issue (million) | 228 | 222 | ||||||
| Basic earnings per share (cent) | 14.4 | 26.0 | ||||||
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.
| 31-Mar-13 | Restated3 months to31-Mar-12 | |||||||
| Profit attributable to the owners of the parent (€ million) | 33 | 58 | ||||||
| Weighted average number of ordinary shares in issue (million) | 228 | 222 | ||||||
| Potential dilutive ordinary shares assumed (million) | 2 | 5 | ||||||
| Diluted weighted average ordinary shares (million) | 230 | 227 | ||||||
| Diluted earnings per share (cent) | 14.3 | 25.5 | ||||||
| Pre-exceptional | ||||||||
| 31-Mar-13 | Restated3 months to31-Mar-12 | |||||||
| Profit attributable to the owners of the parent (€ million) | 33 | 58 | ||||||
| Exceptional items included in profit before income tax (Note 4) (€ million) | 13 | (28) | ||||||
| Income tax on exceptional items (€ million) | (1) | 2 | ||||||
| Pre-exceptional profit attributable to the owners of the parent (€ million) | 45 | 32 | ||||||
| Weighted average number of ordinary shares in issue (million) | 228 | 222 | ||||||
| Pre-exceptional basic earnings per share (cent) | 19.8 | 14.2 | ||||||
| Diluted weighted average ordinary shares (million) | 230 | 227 | ||||||
| Pre-exceptional diluted earnings per share (cent) | 19.6 | 13.9 | ||||||
9. Dividends
The Board has recommended a final dividend of 20.5 cent per share for 2012 payable on 10 May 2013 subject to the approval of shareholders at the AGM.
10. Property, Plant and Equipment
| Land andbuildings€m | Plant andequipment€m | Total€m | ||||||||||
| Three months ended 31 March 2013 | ||||||||||||
| Opening net book amount | 1,119 | 1,957 | 3,076 | |||||||||
| Reclassifications | 11 | (11) | - | |||||||||
| Additions | - | 63 | 63 | |||||||||
| Acquisitions | - | 1 | 1 | |||||||||
| Depreciation charge for the period | (12) | (71) | (83) | |||||||||
| Hyperinflation adjustment | 6 | 5 | 11 | |||||||||
| Foreign currency translation adjustment | (31) | (24) | (55) | |||||||||
| At 31 March 2013 | 1,093 | 1,920 | 3,013 | |||||||||
| Year ended 31 December 2012 | ||||||||||||
| Opening net book amount | 1,115 | 1,858 | 2,973 | |||||||||
| Reclassifications | 10 | (15) | (5) | |||||||||
| Additions | 13 | 247 | 260 | |||||||||
| Acquisitions | 1 | 118 | 119 | |||||||||
| Depreciation charge for the year | (44) | (288) | (332) | |||||||||
| Retirements and disposals | (5) | (2) | (7) | |||||||||
| Hyperinflation adjustment | 17 | 19 | 36 | |||||||||
| Foreign currency translation adjustment | 12 | 20 | 32 | |||||||||
| At 31 December 2012 | 1,119 | 1,957 | 3,076 | |||||||||
11. Analysis of Net Debt
| 31-Mar-13€m | 31-Dec-12€m | |||||||
| Senior credit facility | ||||||||
| Revolving credit facility(1) – interest at relevant interbank rate +3.25% on RCF(10) | (7) | (7) | ||||||
| Tranche B term loan(2a) – interest at relevant interbank rate + 3.625%(10) | 385 | 550 | ||||||
| Tranche C term loan(2b) – interest at relevant interbank rate + 3.875%(10) | 411 | 556 | ||||||
| US Yankee bonds (including accrued interest) (3) | 233 | 222 | ||||||
| Bank loans and overdrafts | 72 | 65 | ||||||
| Cash | (510) | (462) | ||||||
| 2015 receivables securitisation variable funding notes(4) | 200 | 197 | ||||||
| 2017 senior secured notes (including accrued interest)(5) | 502 | 492 | ||||||
| 2018 senior secured notes (including accrued interest) (6) | 425 | 423 | ||||||
| 2019 senior secured notes (including accrued interest)(7) | 504 | 494 | ||||||
| 2020 senior secured notes (including accrued interest)(8) | 396 | - | ||||||
| 2020 senior secured floating rate notes (including accrued interest)(9) | 247 | 247 | ||||||
| Net debt before finance leases | 2,858 | 2,777 | ||||||
| Finance leases | 6 | 8 | ||||||
| Net debt including leases | 2,864 | 2,785 | ||||||
| Balance of revolving credit facility reclassified to debtors | 7 | 7 | ||||||
| Net debt after reclassification | 2,871 | 2,792 |
| (1) | Revolving credit facility (‘RCF’) of €525 million (available under the senior credit facility) to be repaid in full in 2016. (a) Revolver loans - nil, (b) drawn under ancillary facilities and facilities supported by letters of credit – €0.4 million and (c) other operational letters of credit €7.3 million. | |||
| (2a) | Tranche B term loan due to be repaid in 2016. €168.4 million prepaid January – March 2013, €25.5 million prepaid April 2013. | |||
| (2b) | Tranche C term loan due to be repaid in 2017. €149.2 million prepaid January – March 2013, €47.9 million prepaid April 2013. | |||
| (3) | US$292.3 million 7.50% senior debentures due 2025. | |||
| (4) | Receivables securitisation variable funding notes due 2015. | |||
| (5) | €500 million 7.25% senior secured notes due 2017. | |||
| (6) | €200 million 5.125% senior secured notes due 2018 and US$300 million 4.875% senior secured notes due 2018. | |||
| (7) | €500 million 7.75% senior secured notes due 2019. | |||
| (8) | €400 million 4.125% senior secured notes due 2020. | |||
| (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% | |||||||||
12. Net Movements in Working Capital
| 3 months to31-Mar-13€m | 3 months to31-Mar-12€m | |||||||
| Changes in inventories | (17) | (8) | ||||||
| Change in trade and other receivables | (133) | (92) | ||||||
| Change in trade and other payables | 51 | 8 | ||||||
| Net movement in working capital | (99) | (92) | ||||||
13. Other Reserves
Other reserves included in the Consolidated Statement of Changes in Equity are comprised of the following:
| Reverseacquisitionreserve€m | Cashflowhedgingreserve€m | Foreigncurrencytranslationreserve€m | Share-basedpaymentreserve€m | Ownshares€m | Available-for-salereserve€m | Total€m | ||||||||||||||||||||||
| Unaudited | ||||||||||||||||||||||||||||
| At 1 January 2013 | 575 | (26) | (198) | 105 | (13) | 1 | 444 | |||||||||||||||||||||
| Other comprehensive income | ||||||||||||||||||||||||||||
| Foreign currency translation adjustments | - | - | (98) | - | - | - | (98) | |||||||||||||||||||||
| Effective portion of changes in fair value of cash flow hedges | - | 12 | - | - | - | - | 12 | |||||||||||||||||||||
| Total other comprehensive income/(expense) | - | 12 | (98) | - | - | - | (86) | |||||||||||||||||||||
| Share-based payment | - | - | - | 6 | - | - | 6 | |||||||||||||||||||||
| Shares acquired by SKG Employee Trust | - | - | - | - | (15) | - | (15) | |||||||||||||||||||||
| At 31 March 2013 | 575 | (14) | (296) | 111 | (28) | 1 | 349 | |||||||||||||||||||||
| Unaudited | ||||||||||||||||||||||||||||
| At 1 January 2012 | 575 | (35) | (228) | 79 | - | - | 391 | |||||||||||||||||||||
| Other comprehensive income | ||||||||||||||||||||||||||||
| Foreign currency translation adjustments | - | - | 13 | - | - | - | 13 | |||||||||||||||||||||
| Effective portion of changes in fair value of cash flow hedges | - | 2 | - | - | - | - | 2 | |||||||||||||||||||||
| Total other comprehensive income | - | 2 | 13 | - | - | - | 15 | |||||||||||||||||||||
| Share-based payment | - | - | - | 8 | - | - | 8 | |||||||||||||||||||||
| Shares acquired by SKG Employee Trust | - | - | - | - | (13) | - | (13) | |||||||||||||||||||||
| At 31 March 2012 | 575 | (33) | (215) | 87 | (13) | - | 401 | |||||||||||||||||||||
14. Venezuela
Hyperinflation
As discussed more fully in the 2012 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 March 2013 and 2012 are as follows:
| 31-Mar-13 | 31-Mar-12 | |||||||
| Index at period end | 344.1 | 275.0 | ||||||
| Movement in period | 7.9% | 3.5% | ||||||
As a result of the entries recorded in respect of hyperinflationary accounting under IFRS, the Consolidated Income Statement is impacted as follows: Revenue €8 million decrease (2012: €1 million decrease), pre-exceptional EBITDA €4 million decrease (2012: €2 million decrease) and profit after taxation €15 million decrease (2012: €10 million decrease). In 2013, a net monetary loss of €6 million (2012: €3 million loss) was recorded in the Consolidated Income Statement. The impact on our net assets and our total equity is an increase of €14 million (2012: €5 million increase).
15. Post Balance Sheet Events
The Group has decided to bring forward the closure of the two existing paper machines at its Townsend Hook mill in the UK. The facility will be rebuilt (using a machine acquired from the Cadidavid liquidator in 2011) into one modern lightweight machine which will now be operational by the fourth quarter of 2014. Advancing the closure of the existing machines will negatively impact 2013 EBITDA by €5 million and the Group will also incur exceptional charges of €15 million, consisting of €11 million of fixed asset impairments and €4 million of cash costs.
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 to31-Mar-13€m | Restated3 months to31-Mar-12 | |||||||
| Profit for the financial period | 33 | 61 | ||||||
| Income tax expense | 24 | 41 | ||||||
| Gain on disposal of assets and operations | - | (28) | ||||||
| Business acquisition costs | 1 | - | ||||||
| Currency trading loss on Venezuelan Bolivar devaluation | 12 | - | ||||||
| Net finance costs | 69 | 74 | ||||||
| Share-based payment expense | 6 | 8 | ||||||
| Depreciation, depletion (net) and amortisation | 96 | 89 | ||||||
| EBITDA | 241 | 245 | ||||||
Supplemental Historical Financial Information
| Restated | ||||||||||||||||||||||||
| €m | Q1, 2012 | Q2, 2012 | Q3, 2012 | Q4, 2012 | FY, 2012 | Q1, 2013 | ||||||||||||||||||
| Group and third party revenue | 2,950 | 3,050 | 2,944 | 2,951 | 11,896 | 3,080 | ||||||||||||||||||
| Third party revenue | 1,823 | 1,857 | 1,830 | 1,824 | 7,335 | 1,889 | ||||||||||||||||||
| EBITDA | 245 | 254 | 279 | 239 | 1,016 | 241 | ||||||||||||||||||
| EBITDA margin | 13.4% | 13.6% | 15.2% | 13.1% | 13.8% | 12.7% | ||||||||||||||||||
| Operating profit | 176 | 155 | 180 | 120 | 630 | 126 | ||||||||||||||||||
| Profit before income tax | 102 | 82 | 102 | 33 | 319 | 57 | ||||||||||||||||||
| Free cash flow | (16) | 63 | 118 | 118 | 282 | (23) | ||||||||||||||||||
| Basic earnings per share - cent | 26.0 | 24.0 | 32.9 | 25.2 | 106.9 | 14.4 | ||||||||||||||||||
| Weighted average number of shares used in EPS calculation (million) | 222 | 223 | 223 | 226 | 224 | 228 | ||||||||||||||||||
| Net debt | 2,775 | 2,785 | 2,640 | 2,792 | 2,792 | 2,871 | ||||||||||||||||||
| Net debt to EBITDA (LTM) | 2.74 | 2.78 | 2.59 | 2.75 | 2.75 | 2.84 | ||||||||||||||||||
Copyright Business Wire 2013
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