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Smurfit Kappa Group PLC  -  SKG   

Half-year Report

Released 07:00 02-Aug-2017

Half-year Report

DUBLIN--(BUSINESS WIRE)--

2 August 2017: Smurfit Kappa Group plc (‘SKG’ or ‘the Group’) today announced results for the 3 months and 6 months ending 30 June 2017.

2017 Second Quarter & First Half | Key Financial Performance Measures

               
€m H1
2017
H1
2016
Change Q2
2017
Q2
2016
Change Q1
2017
Change
Revenue €4,233 €4,049 5% €2,104 €2,049 3% €2,129 (1%)
EBITDA (1) €569 €593 (4%) €292 €312 (7%) €278 5%
EBITDA margin (1) 13.4% 14.6% 13.9% 15.3% 13.0%

Operating Profit before Exceptional
Items

€358 €390 (8%) €190 €211 (10%) €168 13%
Profit before Income Tax €245 €312 (21%) €136 €184 (26%) €109 24%
Basic EPS (cent) 74.3 90.8 (18%) 42.8 52.0 (18%) 31.5 36%
Pre-exceptional Basic EPS (cent) (1) 75.0 85.6 (12%) 42.8 46.9 (9%) 32.2 33%
Return on Capital Employed (1) 14.7% 15.4% 15.0%
Free Cash Flow (1)   €46   €35   31%   €30   €28   6%   €16   85%
                                 
Net Debt (1) €2,985 €3,121 (4%) €2,931 2%
Net Debt to EBITDA (LTM) (1)               2.5x   2.5x       2.4x    

(1) Additional information in relation to these Alternative Performance Measures (‘APMs’) is set out in Supplementary Financial
Information on page 37.

 

Second Quarter and Half Year Key Points

Performance Review and Outlook

Tony Smurfit, Group CEO, commented:

“We are pleased to report a good set of results for the first half which were achieved against a backdrop of continued and unprecedented recovered fibre cost inflation of approximately €75 million year-on-year. We are in the process of recovering these input costs as we move through the remainder of 2017 and into 2018.

“The Group reported sequentially improved EBITDA margins at 13.9% with both Europe and the Americas delivering improvement as a result of corrugated price recovery.

“In the first half, global containerboard supply has been very tight, and remains so. As a result of our integrated system which gives security of supply in both kraftliner and testliner, SKG continues to meet its customers’ supply needs, a competitive strength valued by both local and multinational customers. Our business continues to attract new customers as a result of this changed dynamic. We maintain our focus on investing in our asset base both organically and through acquisition to ensure we have sufficient mill and conversion capacities to meet and exceed our customers’ requirements.

“In Europe we have seen a strong demand environment in the second quarter leading to a first half increase in absolute corrugated volumes of over 2.5% with growth of 5% for the second quarter on a days adjusted basis. In the Americas, the Group reported strong volume growth in Colombia, Mexico and Brazil while Argentina and Venezuela remained challenging.

“As a result of the containerboard price increases in the first half of the year, we began, in the second quarter, increasing corrugated prices in Europe and the Americas and these increases will be progressively implemented throughout the remainder of the year and into the first quarter of 2018. However, shortage of supply and unabated input cost pressures in both regions have necessitated further containerboard price increase announcements for implementation in the third quarter. This will require a further round of corrugated price increases in the fourth quarter and beyond.

“During the first half we completed investments of €177 million across our regions and expect to spend over €400 million by year end. SKG continues to develop and improve its operations across all its business areas. Growth and cost reduction investments allied with our track record of earnings enhancing acquisitions will continue to improve the prospects for the Group.

“While recovered fibre cost pressures present short-term challenges, SKG is better positioned today than at any other point in our recent history. Our capital structure, our asset base and our integrated business model continue to strengthen. This will enhance our ability to translate today’s market conditions into improved earnings in 2017 and beyond”.

About Smurfit Kappa

Smurfit Kappa, a FTSE 100 company, is one of the leading providers of paper-based packaging solutions in the world, with around 45,000 employees in approximately 370 production sites across 34 countries and with revenue of €8.2 billion in 2016. We are located in 21 countries in Europe, and 13 in the Americas. We are the only large-scale pan-regional player in Latin America.

With our pro-active team, we relentlessly use our extensive experience and expertise, supported by our scale, to open up opportunities for our customers. We collaborate with forward thinking customers by sharing superior product knowledge, market understanding and insights in packaging trends to ensure business success in their markets. We have an unrivalled portfolio of paper-packaging solutions, which is constantly updated with our market-leading innovations. This is enhanced through the benefits of our integration, with optimal paper design, logistics, timeliness of service, and our packaging plants sourcing most of their raw materials from our own paper mills.

smurfitkappa.com

Check out our microsite: openthefuture.info

Follow us on Twitter at @smurfitkappa and on LinkedIn at ‘Smurfit Kappa’.

Forward Looking Statements

Some statements in this announcement are forward-looking. They represent expectations for the Group’s business, and involve risks and uncertainties. These forward-looking statements are based on current expectations and projections about future events. The Group believes that current expectations and assumptions with respect to these forward-looking statements are reasonable. However, because they involve known and unknown risks, uncertainties and other factors, which are in some cases beyond the Group’s control, actual results or performance may differ materially from those expressed or implied by such forward-looking statements.

Contacts

Garrett Quinn

Smurfit Kappa

T: +353 1 202 71 80

E: ir@smurfitkappa.com

 

     

Melanie Farrell or Mark Kenny

FTI Consulting

T: +353 1 663 36 80

E: smurfitkappa@fticonsulting.com

2017 Second Quarter & First Half | Performance Overview

The Group delivered a 5% increase in revenue year-on-year for the first half and broadly similar on an underlying1 basis. For the quarter, this was a 3% increase and 4% on an underlying basis. EBITDA of €292 million for the quarter was 7% down on the same period in 2016 and 5% ahead of the first quarter of 2017. The underlying EBITDA for the quarter was down 4% year-on-year negatively impacted by reduced working days due to the timing of Easter and the continued pressure of increasing recovered fibre costs.

EBITDA margin improved in the second quarter, recovering to 13.9% from 13.0% in the first quarter driven by improved margins in both Europe and the Americas. The recovery in margin was driven by the Group’s investment in high return capital projects, the strength of our integrated business model and the start of our corrugated price recovery.

In Europe, reported EBITDA was €227 million or a reduction of €24 million year-on-year. The result for the quarter was adversely impacted by reduced working days and increased recovered fibre costs. In the second quarter of 2016 the result included a one-off benefit from the elimination of a deficit in one of our Dutch pension schemes which totalled approximately €12 million. The reported result for the first half was €439 million, 4% down year-on-year predominantly due to increased recovered fibre costs of approximately €50 million.

High demand in Europe and the far-east has resulted in European recovered fibre costs continuing to increase, up nearly 20% in the first half of 2017 against the same period in 2016. Recovered fibre costs in the Americas have also experienced the same pressure with approximately €25 million in additional recovered fibre costs year-on-year for the first half.

Kraftliner supply remains extremely tight globally, due to continued strong demand. The Group successfully implemented a €50 per tonne price increase in Europe in the first quarter and an additional €40 per tonne in May. In June the Group announced a further €50 per tonne increase which will be fully implemented

In European recycled containerboard, the Group was successful in implementing an €80 per tonne increase in the first half of 2017. Recycled containerboard continues to be in high demand with inventory levels remaining tight despite the recent capacity additions by third parties in Germany and the Netherlands. Margin pressure remains for recycled containerboard due to continuing increases in recovered fibre costs and as a result the Group has announced a further €50 per tonne price increase.

In Europe, the realised corrugated price increase on a constant currency basis and from a first quarter 2017 baseline was almost 2% for the second quarter or just under 1% against the 2016 average price. Corrugated price recovery is continuing through 2017 and into 2018.

In the Americas, the underlying result was 5% better year-on-year for the second quarter with the reported result decreasing by €2 million or 2% due primarily to adverse currency movements. For the first half the underlying result was 3% down and the reported result down 6% with adverse currency movements and increased recovered fibre costs the main contributors to the lower result. As is the case in Europe containerboard price increases have been implemented with corrugated price increases being realised as we progress through 2017 and into 2018. Excluding Venezuela, volumes in the Americas for the first half grew over 3%. Our businesses in Colombia, Mexico and the US represented just under 80% of the region’s EBITDA.

2017 Second Quarter & First Half | Financial Performance

Revenue in the first half of €4,233 million was up €184 million on 2016. Revenue in Europe increased by €62 million year-on-year or €86 million on an underlying basis. In the Americas revenue increased by €122 million year-on-year or €94 million on an underlying basis.

EBITDA was €569 million, €24 million down on the same period in 2016 with lower earnings in both Europe and the Americas offset by marginally lower Group centre costs. The underlying quarterly sequential move was an increase of €21 million (the equivalent of over 7%), which arose mainly in Europe.

____________________

1 Underlying in relation to financial measures throughout this report excludes acquisitions, disposals, currency and hyperinflation movements where applicable

Operating profit before exceptional items in the first half of 2017 was €358 million compared to €390 million for the same period in 2016, 8% lower.

There were no exceptional items charged within operating profit in the first half of either 2017 or 2016.

Net pre-exceptional finance costs at €111 million for the first half were €20 million higher than in 2016, primarily as the result of an increase in cash interest and a net monetary loss of €11 million relating to hyperinflation. Cash interest was €8 million higher year-on-year, mainly as a result of an increased interest cost in Latin America driven by our capital programmes in the region and relatively high local interest rates.

The exceptional finance cost of €2 million in the first half of 2017 represented the accelerated amortisation of the issue costs relating to the debt within our senior credit facility which was paid down with the proceeds of the €500 million bond issue in January. In the first half of 2016 the Group reported exceptional finance income of €12 million, which was recorded in the second quarter, in relation to the profit on the sale of our shareholding in the Swedish company IL Recycling.

Profit before income tax was €245 million for the half year compared to €312 million for the same period in 2016.

The income tax expense (current and deferred) was €69 million for the first half compared to €97 million in 2016. The decrease in the expense largely reflects lower profitability.

Basic EPS for the first half was 74.3 cent, 18% lower than the 90.8 cent earned in the same period of 2016. The second quarter basic EPS was 42.8 cent against 52.0 cent in the second quarter of 2016, a reduction of 18%. On a pre-exceptional basis, EPS was 75.0 cent for the first half, 12% lower than the 85.6 cent in 2016 while EPS for the second quarter was 9% lower year-on-year at 42.8 cent compared to 46.9 cent in 2016.

2017 Second Quarter and First Half | Free Cash Flow

Free Cash Flow for the second quarter of 2017 was €30 million compared to €28 million in 2016. Although EBITDA was €20 million lower, this was more than offset by a lower working capital outflow and lower capital outflows. Cash interest and tax payments were higher in 2017.

Despite the decline of €24 million in EBITDA, our Free Cash Flow of €46 million for the six months to June 2017 was €11 million higher than in 2016. The year-on-year increase was driven mainly by lower outflows for working capital and ‘other’ (relating primarily to retirement benefits), partly offset by higher capital outflows, cash interest and tax payments.

Capital expenditure amounted to €177 million in the six months to June 2017 and equated to 88% of depreciation compared to 109% in 2016. Capital expenditure in the second quarter represented 110% of deprecation compared to 67% in the first quarter. This relatively low percentage in the first quarter reflected the high level of capital expenditure (equating to 179% of depreciation) in the fourth quarter of 2016.

The working capital move in the six months to June 2017 was an outflow of €125 million compared to €161 million in 2016. The outflow in 2017 was the combination of an increase in debtors and stocks partly offset by an increase in creditors. These increases reflect the combination of volume growth, strengthening European containerboard pricing and higher OCC costs.

Working capital amounted to €695 million at June 2017, representing 8.3% of annualised revenue compared to 8.3% at March 2017 and 8.5% at June 2016. Working capital increased by €122 million in the six months, reflecting mainly the net cash outflow of €125 million.

Cash interest of €80 million in the six months to June was €8 million higher in 2017, mainly as a result of an increased interest cost in Latin America driven by our capital programmes in the region and relatively high local interest rates.

Tax payments of €77 million were €6 million higher than in 2016, this was primarily down to the timing of payments.

2017 Second Quarter and First Half | Capital Structure

Net debt was €2,985 million at the end of June resulting in a net debt to EBITDA ratio of 2.5 times compared to 2.5 times at the end of the second quarter of 2016 and 2.4 times at the end of 2016. The Group’s balance sheet continues to provide the Group with considerable financial strategic flexibility subject to the stated leverage range of 2.0x to 3.0x through the cycle and SKG’s Ba1/BB+/BB+ credit rating.

At 30 June 2017 the Group’s average interest rate was 4.2%, compared to 4.2% at 30 June 2016. The Group’s diversified funding base and long dated maturity profile at 3.9 years provide a stable funding outlook. In terms of liquidity, the Group held cash on the balance sheet of €459 million at the end of the quarter which was further supplemented by available commitments under its revolving credit facility of approximately €833 million.

Dividends

The Board will increase the 2017 interim dividend by 5% to 23.1 cent per share. It is proposed to pay the interim dividend on 27 October 2017 to shareholders registered at the close of business on 29 September 2017.

2017 Second Quarter and First Half | Operating Efficiency

Commercial Offering and Innovation

SKG continues to create new ways of adding value and as a result help our customers succeed in their markets. Our efforts have been recognised with 22 awards in the first six months across many of our key geographies.

In April, the Group opened its first Experience Centre in the Americas, located in Dallas, and its latest European Experience Centre in Madrid. The Group also plans to open two additional centres in Cali, Colombia and Mexico City by the end of 2017 which will bring our global network to 19. These Experience Centres together with our industry leading business applications continue to help our customers succeed in their marketplace whether it is increasing sales through using ShelfSmart, or reducing costs by using SupplySmart.

In May, we hosted our European Innovation and Sustainability Conference in the Netherlands which was attended by over 150 multinational customers from across Europe. The event showcased our best designs, innovative solutions and most sustainable projects as voted for internally, by our customers and by members of the investment community. The future of packaging, the store of the future and consumer buying behaviour were presented by a number of external experts, highlighting the challenges and opportunities that lie ahead.

Sustainability

The Group published its tenth Sustainable Development Report in May 2017, outlining the progress made by the Group against the five strategic key sustainability priorities.

At the end of 2016 we reached our target to deliver 90% of our packaging solutions as chain of custody certified. This allows our customers’ packaging to be labelled as certified. On climate change, the Group reported a 22.9% reduction in carbon emissions per tonne of paper produced since 2005. For water, SKG reported a reduction of 31.9% in the organic content of water (“COD”) returned to the environment from paper and board mills since 2005. The Group has achieved a 13.3% reduction in waste sent to landfill from paper and board mills since 2013. In relation to health and safety, a core value of the Group, we have reduced our lost time accident (LTA) frequency by 10% in 2016.

The full 2016 Sustainability Report is available at smurfitkappa.com

Cost Take-out Programme

Since the programme’s inception in 2008 the Group has achieved cost savings of over €850 million and the Group continues to view these projects as a key tool in combating cost inflation throughout the business. In 2017, as in previous years, we expect to offset wage inflation through internal cost take-out initiatives.

Capital Expenditure (‘Quick Win’) Programme

In 2016 the Group completed the investment stage of the ‘Quick Win’ capital expenditure programme. The benefits of these high return investments have been delivered since 2014 and are expected to deliver a total incremental EBITDA of €75 million by the end of the programme.

2017 Second Quarter and First Half | Regional Performance Review

Europe

The EBITDA margin of the European business recovered in the second quarter to 14.2% from 13.6% in the first quarter and a reported sequential increase in EBITDA of €14 million at €227 million. Europe reported EBITDA of €439 million for the first half, down €21 million or 4% year-on-year. Impacted by €5 million in adverse currency moves, on an underlying basis the result was €16 million lower. The anticipated first half margin squeeze as a result of higher recovered fibre costs was offset by the benefits of our capital investment programme, our continued focus on cost efficiencies and volume growth.

On a constant currency basis corrugated pricing was marginally up in the second quarter year-on-year and up almost 2% sequentially reflecting some positive momentum in pricing in the sheet-feeding business and in some negotiated accounts. The Group is well positioned to further recover margin through the implementation of corrugated price increases over the remainder of 2017 and into 2018.

The price of recovered fibre continues to increase after a slight reduction in April and shows no sign of abating. The main drivers of the increase are a combination of continued demand from local European markets, general global growth and strong Chinese demand. In the first half the price of recovered fibre in Europe for the Group was up nearly 20% against the same period in 2016 and is continuing its upward trend in July. The Group expects the trend for recovered fibre to remain at high levels in the medium-term, this dynamic supports containerboard pricing and in turn corrugated pricing.

Kraftliner demand remains very strong globally. The Group is approximately 500,000 tonnes net long on kraftliner, with which it supplies the open market covering both brown and white kraftliner grades. The Group successfully implemented price increases in Europe on brown kraftliner of €50 per tonne in the first quarter, an additional €40 per tonne was implemented in May and a further €50 per tonne was announced for late July implementation. On white top kraftliner the Group implemented €30 per tonne in April and has announced an additional €50 per tonne.

In European recycled containerboard, the Group was successful in implementing an €80 per tonne increase in the first half with an additional €50 per tonne announced. Recycled containerboard continues to be in very high demand with inventory levels remaining tight.

Good demand in most markets led to total corrugated volumes increasing 2% in the first half, with box volume growth of over 2.5% and the more commodity like sheet business down 1%. Box volumes represented over 88% of our corrugated volume in Europe in the half year to June 2017. With a stronger volume development in the second quarter (on a days adjusted basis), the Group expects the second half to continue this trend.

Our Sack business and Machine Glazed (“MG”) business continue to benefit from extremely strong demand with healthy order books buoyed by increased demand in Africa and the Far East for sacks, and increased demand for MG paper as a result of recent international plastic bag bans.

The Americas

The EBITDA margin in the Americas business improved in the second quarter to 14.2% from 13.1% in the first quarter of 2017. EBITDA for the second quarter was lower than the same period last year by 2%. For the first half EBITDA was lower by 6% due to adverse currency movements and increased recovered fibre costs. Volumes for the first six months were up over 3% excluding Venezuela.

As is the case in Europe, containerboard price increases have been implemented with corrugated price increases being realised as we progress through 2017 into 2018.

In Colombia the Group’s operations have continued to perform well with volumes up 5% in the first six months of the year over the same period in 2016. The continued expansion of the agricultural and fruit sector has been a significant contributor to the growth levels. Corrugated price increases were implemented in the first six months totalling close to 7% year-on-year in local currency and further increases are expected in the second half. The Group expects the Papelsa paper mill rebuild to begin operations in the second half which will deliver additional capacity.

In Mexico, volumes were up 4% for the first half with particularly high growth in our Northern Mexican business. The US dollar price for recovered fibre was up over 25% at the half year which together with strong demand has driven containerboard price increases. Corrugated prices are up over 11% in the first half against the same period in 2016. The Group expects the 100,000 tonne Los Reyes Mill project to start up in the second half, with incremental Group contribution expected in 2018.

In the US, SKG’s recovered fibre prices have increased by almost 60% in the six months to June 2017 over the same period in 2016. The EBITDA margin in the country improved from the first quarter of 2017 with the implementation of some corrugated price increases and this will continue into the second half of 2017. The Group opened its first Experience Centre outside Europe in Dallas during the second quarter. This location will allow the Group to showcase the unique tools and business applications that enable our customers to succeed in their marketplace.

In Brazil, SKG’s year-on-year volumes were up 11% for the first half and 16% for the second quarter showing a very strong turnaround in Latin America’s largest market. Margins also improved sequentially for the second quarter due to a combination of increased volumes, favourable currency, some corrugated price increases and lower waste paper prices. The growth of our Pan American Sales in Brazil remains a key opportunity for SKG in the region.

EBITDA margins in the rest of the Americas operations suffered from similar input cost pressures in the second quarter of the year and consequent margin compression. The Group expects pricing initiatives to recapture margin through corrugated price increases in the latter part of 2017 and into 2018.

In Venezuela the Group’s corrugated shipments were down 53% in the six months to June 2017 over the same period in 2016. However, the Group’s operations continue to perform in extremely difficult circumstances. The business represented 1.6% of Group EBITDA in the first half. During the second quarter the DICOM rate devalued which continues to reduce the country’s EBITDA contribution to the Group. The macro situation in Venezuela remains uncertain. We continue to monitor events as they unfold. Net assets in Venezuela decreased to €77 million as at 30 June 2017 (31 December 2016: €91 million).

Summary Cash Flow
 

Summary cash flows(1) for the second quarter and six months are set out in the following table.

       
3 months to 3 months to 6 months to 6 months to
30-Jun-17 30-Jun-16 30-Jun-17 30-Jun-16
    €m   €m   €m   €m
EBITDA 292 312 569 593
Cash interest expense (41) (36) (80) (72)
Working capital change (48) (63) (125) (161)
Current provisions (2) (3) (3) (7)
Capital expenditure (106) (104) (177) (211)
Change in capital creditors 5 (16) (50) (8)
Tax paid (46) (43) (77) (71)
Sale of fixed assets 1 1 3 1
Other (25)   (20)   (14)   (29)
Free cash flow 30 28 46 35
 
Share issues - - 1 -
Purchase of own shares - - (11) (10)
Sale of businesses and investments 1 13 5 13
Purchase of businesses and investments - (10) (10) (41)
Dividends (138) (115) (138) (115)
Derivative termination payments (1)   -   (1)   -
Net cash outflow (108) (84) (108) (118)
 
Deferred debt issue costs amortised (3) (3) (7) (5)
Currency translation adjustment 57   (5)   71   50
Increase in net debt (54)   (92)   (44)   (73)
 

(1) The summary cash flow is prepared on a different basis to the Condensed Consolidated Statement of Cash Flows under IFRS (‘IFRS cash flow’) and as such the reconciling items between EBITDA and decrease/(increase) in net debt may differ to amounts presented in the IFRS cash flow. The principal differences are as follows:

(a) The summary cash flow details movements in net debt. The IFRS cash flow details movements in cash and cash equivalents.

(b) Free cash flow reconciles to cash generated from operations in the IFRS cash flow as shown in the table on the next page. The main adjustments are in respect of cash interest, capital expenditure, tax payments and the sale of fixed assets and businesses.

(c) The IFRS cash flow has different sub-headings to those used in the summary cash flow.

Reconciliation of Free Cash Flow to Cash Generated from Operations

             
6 months to 6 months to
30-Jun-17 30-Jun-16
                €m   €m
Free cash flow 46 35
 
Add back: Cash interest 80 72
Capital expenditure (net of change in capital creditors) 227 219
Tax payments 77 71
 
Less: Sale of fixed assets (3) (1)
Profit on sale of assets and businesses – non-exceptional (6) (4)
Receipt of capital grants (in ‘Other’ in summary cash flow) - (1)
Dividends received from associates - (1)
Non-cash financing activities (1)   (1)
Cash generated from operations 420   389
 

Capital Resources

The Group's primary sources of liquidity are cash flow from operations and borrowings under the revolving credit facility. The Group's primary uses of cash are for funding day to day operations, capital expenditure, debt service, dividends and other investment activity including acquisitions.

At 30 June 2017, Smurfit Kappa Treasury Funding Limited had outstanding US$292.3 million 7.50% senior debentures due 2025. The Group had outstanding €117 million and STG£61.5 million variable funding notes issued under the €240 million accounts receivable securitisation programme maturing in June 2019, together with €5 million variable funding notes issued under the €175 million accounts receivable securitisation programme maturing in February 2022.

Smurfit Kappa Acquisitions had outstanding €200 million 5.125% senior notes due 2018, US$300 million 4.875% senior notes due 2018, €400 million 4.125% senior notes due 2020, €250 million senior floating rate notes due 2020, €500 million 3.25% senior notes due 2021, €500 million 2.375% senior notes due 2024 and €250 million 2.75% senior notes due 2025. Smurfit Kappa Acquisitions and certain subsidiaries are also party to a senior credit facility. At 30 June 2017, the Group’s senior credit facility comprised term drawings of €312.6 million, US$55.8 million and STG£106.9 million under the amortising Term A facility maturing in 2020. In addition, as at 30 June 2017, the facility included an €845 million revolving credit facility of which €6 million was drawn in revolver loans, with a further €6 million in operational facilities including letters of credit drawn under various ancillary facilities.

The following table provides the range of interest rates as of 30 June 2017 for each of the drawings under the various senior credit facility loans.

               

Borrowing arrangement

Currency

Interest Rate

 
Term A Facility EUR 0.976% - 1.021%
USD 2.576%
GBP 1.602%
 
Revolving Credit Facility EUR 0.728%
 

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

In January 2017, the Group issued €500 million of seven-year euro denominated senior notes at a coupon of 2.375%, the proceeds of which were used to prepay term debt under the senior credit facility, reduce indebtedness under existing securitisation facilities and for general corporate purposes. In February 2017, the Group increased the revolving credit facility under the senior credit facility by €220 million thereby further enhancing liquidity.

In May 2017, the Group amended, restated and extended its €175 million 2018 receivables securitisation programme, which utilises the Group’s receivables in Austria, Belgium, Italy and the Netherlands, extending the maturity to 2022 and reducing the margin on the variable funding notes from 1.70% to 1.375%.

Market Risk and Risk Management Policies

The Group is exposed to the impact of interest rate changes and foreign currency fluctuations due to its investing and funding activities and its operations in different foreign currencies. Interest rate risk exposure is managed by achieving an appropriate balance of fixed and variable rate funding. As at 30 June 2017, the Group had fixed an average of 81% of its interest cost on borrowings over the following twelve months.

The Group’s fixed rate debt comprised €200 million 5.125% senior notes due 2018, US$300 million 4.875% senior notes due 2018 (US$50 million swapped to floating), €400 million 4.125% senior notes due 2020, €500 million 3.25% senior notes due 2021, €500 million 2.375% senior notes due 2024, €250 million 2.75% senior notes due 2025 and US$292.3 million 7.50% senior debentures due 2025. In addition the Group had €349 million in interest rate swaps with maturity dates ranging from October 2018 to January 2021.

The Group’s earnings are affected by changes in short-term interest rates as a result of its floating rate borrowings. If LIBOR/EURIBOR interest rates for these borrowings increase by one percent, the Group’s interest expense would increase, and income before taxes would decrease, by approximately €8 million over the following twelve months. Interest income on the Group’s 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.

Principal Risks and Uncertainties

Risk assessment and evaluation is an integral part of the management process throughout the Group. Risks are identified, evaluated and appropriate risk management strategies are implemented at each level.

The Board in conjunction with senior management identifies major business risks faced by the Group and determines the appropriate course of action to manage these risks.

The principal risks and uncertainties faced by the Group were outlined in our 2016 annual report on pages 30-35. The annual report is available on our website smurfitkappa.com. The principal risks and uncertainties for the remaining six months of the financial year are summarised below.

The Board regularly monitors all of the above risks and appropriate actions are taken to mitigate those risks or address their potential adverse consequences.

Condensed Consolidated Income Statement – Six Months

   
6 months to 30-Jun-17 6 months to 30-Jun-16
Unaudited Unaudited

Pre-
exceptional
2017

 

Exceptional
2017

 

Total
2017

Pre-
exceptional
2016

 

Exceptional
2016

 

Total
2016

    €m   €m   €m   €m   €m   €m
Revenue 4,233 - 4,233 4,049 - 4,049
Cost of sales (3,011)   -   (3,011)   (2,829)   -   (2,829)
Gross profit 1,222 - 1,222 1,220 - 1,220
Distribution costs (332) - (332) (314) - (314)
Administrative expenses (532)   -   (532)   (516)   -   (516)
Operating profit 358 - 358 390 - 390
Finance costs (129) (2) (131) (117) - (117)
Finance income 18 - 18 26 12 38

Share of associates’ profit
(after tax)

-   -   -   1   -   1
Profit before income tax 247   (2) 245 300   12 312
Income tax expense (69) (97)
Profit for the financial period 176 215
 
Attributable to:
Owners of the parent 175 212
Non-controlling interests 1 3
Profit for the financial period 176 215
 

Earnings per share

Basic earnings per share - cent

74.3

90.8

Diluted earnings per share - cent

73.9

90.0

 

Condensed Consolidated Income Statement – Second Quarter

   
3 months to 30-Jun-17 3 months to 30-Jun-16
Unaudited Unaudited

Pre-
exceptional
2017

 

Exceptional
2017

 

Total
2017

Pre-
exceptional
2016

 

Exceptional
2016

 

Total
2016

    €m   €m   €m   €m   €m   €m
Revenue 2,104 - 2,104 2,049 - 2,049
Cost of sales (1,490)   -   (1,490)   (1,419)   -   (1,419)
Gross profit 614 - 614 630 - 630
Distribution costs (164) - (164) (160) - (160)
Administrative expenses (260)   -   (260)   (259)   -   (259)
Operating profit 190 - 190 211 - 211
Finance costs (68) - (68) (56) - (56)
Finance income 14 - 14 16 12 28

Share of associates’ profit
(after tax)

-   -   -   1   -   1
Profit before income tax 136   - 136 172   12 184
Income tax expense (34) (59)
Profit for the financial period 102 125
 
Attributable to:
Owners of the parent 101 122
Non-controlling interests 1 3
Profit for the financial period 102 125
 

Earnings per share

Basic earnings per share - cent

42.8

52.0

Diluted earnings per share - cent

42.6

51.6

 

Condensed Consolidated Statement of Comprehensive Income – Six Months

   
6 months to 6 months to
30-Jun-17 30-Jun-16
Unaudited Unaudited
    €m   €m
 
Profit for the financial period 176   215
 
Other comprehensive income:
Items that may be subsequently reclassified to profit or loss
Foreign currency translation adjustments:
- Arising in the period (129) (98)
 
Effective portion of changes in fair value of cash flow hedges:
- Movement out of reserve 3 3
- New fair value adjustments into reserve (1)   (4)
(127) (99)
 
Items which will not be subsequently reclassified to profit or loss
Defined benefit pension plans:
- Actuarial gain/(loss) 15 (129)
- Movement in deferred tax (2)   21
13 (108)
     
Total other comprehensive expense (114)   (207)
 
Total comprehensive income for the financial period 62   8
 
Attributable to:
Owners of the parent 83 5
Non-controlling interests (21)   3
Total comprehensive income for the financial period 62   8
 

Condensed Consolidated Statement of Comprehensive Income – Second Quarter

   
3 months to 3 months to
30-Jun-17 30-Jun-16
Unaudited Unaudited
    €m   €m
 
Profit for the financial period 102   125
 
Other comprehensive income:
Items that may be subsequently reclassified to profit or loss
Foreign currency translation adjustments:
- Arising in the period (160) (34)
 
Effective portion of changes in fair value of cash flow hedges:
- Movement out of reserve 2 1
- New fair value adjustments into reserve (1)   (2)
(159) (35)
 
Items which will not be subsequently reclassified to profit or loss
Defined benefit pension plans:
- Actuarial gain/(loss) 10 (72)
- Movement in deferred tax (2)   14
8 (58)
     
Total other comprehensive expense (151)   (93)
 
Total comprehensive (expense)/income for the financial period (49)   32
 
Attributable to:
Owners of the parent (26) 25
Non-controlling interests (23)   7
Total comprehensive (expense)/income for the financial period (49)   32
 

Condensed Consolidated Balance Sheet

     
30-Jun-17 30-Jun-16 31-Dec-16
Unaudited Unaudited Audited
    €m   €m   €m
ASSETS
Non-current assets
Property, plant and equipment 3,191 3,086 3,261
Goodwill and intangible assets 2,426 2,488 2,478
Available-for-sale financial assets 21 21 21
Investment in associates 16 16 17
Biological assets 97 95 114
Trade and other receivables 23 32 29
Derivative financial instruments 20 30 42
Deferred income tax assets 191   193   190
5,985   5,961   6,152
Current assets
Inventories 768 740 779
Biological assets 11 9 10
Trade and other receivables 1,622 1,604 1,470
Derivative financial instruments 8 13 10
Restricted cash 8 10 7
Cash and cash equivalents 451   289   436
2,868   2,665   2,712
Total assets 8,853   8,626   8,864
 
EQUITY
Capital and reserves attributable to owners of the parent
Equity share capital - - -
Share premium 1,984 1,983 1,983
Other reserves (615) (524) (507)
Retained earnings 974   638   853
Total equity attributable to owners of the parent 2,343 2,097 2,329
Non-controlling interests 145   155   174
Total equity 2,488   2,252   2,503
 
LIABILITIES
Non-current liabilities
Borrowings 3,243 3,314 3,247
Employee benefits 845 906 884
Derivative financial instruments 19 30 12
Deferred income tax liabilities 141 157 183
Non-current income tax liabilities 31 31 30
Provisions for liabilities and charges 61 52 69
Capital grants 13 13 14
Other payables 13   13   13
4,366   4,516   4,452
Current liabilities
Borrowings 201 106 137
Trade and other payables 1,718 1,679 1,705
Current income tax liabilities 37 40 21
Derivative financial instruments 19 14 27
Provisions for liabilities and charges 24   19   19
1,999   1,858   1,909
Total liabilities 6,365   6,374   6,361
Total equity and liabilities 8,853   8,626   8,864
 

Condensed Consolidated Statement of Changes in Equity

       
Attributable to owners of the parent

Equity
share
capital

 

Share
premium

 

Other
reserves

 

Retained
earnings

 

Total

Non-
controlling
interests

Total
equity

      €m   €m   €m   €m   €m   €m   €m
Unaudited
At 1 January 2017 - 1,983 (507) 853 2,329 174 2,503
 
Profit for the financial period - - - 175 175 1 176
Other comprehensive income

Foreign currency translation
adjustments

- - (107) - (107) (22) (129)
Defined benefit pension plans - - - 13 13 - 13

Effective portion of changes in fair
value of cash flow hedges

-   -   2   -   2   -   2

Total comprehensive
(expense)/income for the
financial period

-   -   (105)   188   83   (21)   62
 
Shares issued - 1 - - 1 - 1
Acquired non-controlling interests - - - - - (15) (15)
Hyperinflation adjustment - - - 69 69 9 78
Dividends paid - - - (136) (136) (2) (138)
Share-based payment - - 8 - 8 - 8

Shares acquired by SKG Employee
Trust

-   -   (11)   -   (11)   -   (11)
At 30 June 2017 -   1,984   (615)   974   2,343   145   2,488
 
Unaudited
At 1 January 2016 - 1,983 (425) 619 2,177 151 2,328
 
Profit for the financial period - - - 212 212 3 215
Other comprehensive income

Foreign currency translation
adjustments

- - (98) - (98) - (98)
Defined benefit pension plans - - - (108) (108) - (108)

Effective portion of changes in fair
value of cash flow hedges

-   -   (1)   -   (1)   -   (1)

Total comprehensive
(expense)/income for the
financial period

-   -   (99)   104   5   3   8
 
Hyperinflation adjustment - - - 28 28 3 31
Dividends paid - - - (113) (113) (2) (115)
Share-based payment - - 10 - 10 - 10

Shares acquired by SKG Employee
Trust

-   -   (10)   -   (10)   -   (10)
At 30 June 2016 -   1,983   (524)   638   2,097   155   2,252
 

An analysis of the movements in Other reserves is provided in Note 13.

Condensed Consolidated Statement of Cash Flows

   
6 months to 6 months to
30-Jun-17 30-Jun-16
Unaudited Unaudited
    €m   €m
Cash flows from operating activities
Profit before income tax 245 312
 
Net finance costs 113 79
Depreciation charge 177 172
Amortisation of intangible assets 21 16
Amortisation of capital grants (1) (1)
Equity settled share-based payment expense 8 10
Profit on sale of assets and businesses (6) (4)
Share of associates’ profit (after tax) - (1)
Net movement in working capital (125) (161)
Change in biological assets 5 5
Change in employee benefits and other provisions (28) (44)
Other (primarily hyperinflation adjustments) 11   6
Cash generated from operations 420 389
Interest paid (81) (74)
Income taxes paid:
Irish corporation tax paid (6) (9)
Overseas corporation tax (net of tax refunds) paid (71)   (62)
Net cash inflow from operating activities 262   244
 
Cash flows from investing activities
Interest received 1 2
Business disposals 4 -
Additions to property, plant and equipment and biological assets (222) (213)
Additions to intangible assets (5) (6)
Receipt of capital grants - 1
Disposal of available-for-sale financial assets 1 13
Increase in restricted cash (1) (5)
Disposal of property, plant and equipment 9 5
Dividends received from associates - 1
Purchase of subsidiaries and non-controlling interests (9) (32)
Deferred consideration paid (1)   (9)
Net cash outflow from investing activities (223)   (243)
 
Cash flows from financing activities
Proceeds from issue of new ordinary shares 1 -
Proceeds from bond issue 500 -
Proceeds from other debt issues - 250
Purchase of own shares (11) (10)
Increase in other interest-bearing borrowings 4 35
Repayment of finance leases (1) (1)
Repayment of borrowings (366) (169)
Derivative termination payments (1) -
Deferred debt issue costs paid (9) (2)
Dividends paid to shareholders (136) (113)
Dividends paid to non-controlling interests (2)   (2)
Net cash outflow from financing activities (21)   (12)
Increase/(decrease) in cash and cash equivalents 18   (11)
 
Reconciliation of opening to closing cash and cash equivalents
Cash and cash equivalents at 1 January 402 263
Currency translation adjustment 8 22
Increase/(decrease) in cash and cash equivalents 18   (11)
Cash and cash equivalents at 30 June 428   274
 

An analysis of the net movement in working capital is provided in Note 11.

Notes to the Condensed Consolidated Interim Financial Statements

1. General Information

Smurfit Kappa Group plc (‘SKG plc’ or ‘the Company’) and its subsidiaries (together ‘SKG’ or ‘the Group’) manufacture, distribute and sell containerboard, corrugated containers and other paper-based packaging products such as solidboard, graphicboard and bag-in-box. The Company is a public limited company whose shares are publicly traded. It is incorporated and domiciled in Ireland. The address of its registered office is Beech Hill, Clonskeagh, Dublin 4, D04 N2R2, Ireland.

2. Basis of Preparation and Accounting Policies

The condensed consolidated interim financial statements included in this report have been prepared in accordance with the Transparency (Directive 2004/109/EC) Regulations 2007, the related Transparency Rules of the Central Bank of Ireland and with International Accounting Standard 34, Interim Financial Reporting (‘IAS 34’) as adopted by the European Union. Certain quarterly information and the balance sheet as at 30 June 2016 have been included in this report; this information is supplementary and not required by IAS 34. This report should be read in conjunction with the consolidated financial statements for the year ended 31 December 2016 included in the Group’s 2016 annual report which is available on the Group’s website; smurfitkappa.com.

The accounting policies and methods of computation and presentation adopted in the preparation of the condensed consolidated interim financial statements are consistent with those described and applied in the annual report for the financial year ended 31 December 2016. There are no new IFRS standards effective from 1 January 2017 which have a material effect on the condensed consolidated interim financial information included in this report.

The IASB has issued a number of new standards which are not yet effective or early adopted by the Group. They do not have an effect on the financial information contained in this report and will be more fully discussed in our annual report for 2017. Those standards which are relevant for the Group are:

2. Basis of Preparation and Accounting Policies (continued)

The Group is a highly integrated manufacturer of paper-based packaging products with leading market positions, quality assets and broad geographic reach. The financial position of the Group, its cash generation, capital resources and liquidity continue to provide a stable financing platform. Having made enquiries, the Directors have a reasonable expectation that the Company, and the Group as a whole, have adequate resources to continue in operational existence for the foreseeable future. For this reason, they continue to adopt the going concern basis in preparing the condensed consolidated interim financial statements.

The condensed consolidated interim financial statements include all adjustments that management considers necessary for a fair presentation of such financial information. All such adjustments are of a normal recurring nature. Certain cumulative amounts in this interim statement may not equate precisely to the sum of the current and previous quarters’ amounts due to rounding.

The Group’s auditors have not audited or reviewed the condensed consolidated interim financial statements contained in this report.

The condensed consolidated interim financial statements presented do not constitute full statutory accounts. Full statutory accounts for the year ended 31 December 2016 will be filed with the Irish Registrar of Companies in due course. The audit report on those statutory accounts was unqualified.

3. Segmental Analyses

The Group has determined operating segments based on the manner in which reports are reviewed by the chief operating decision maker (‘CODM’). The CODM is determined to be the executive management team responsible for assessing performance, allocating resources and making strategic decisions. The Group has identified two operating segments: 1) Europe and 2) The Americas.

The Europe segment is highly integrated. It includes a system of mills and plants that primarily produces a full line of containerboard that is converted into corrugated containers. The Americas segment comprises all forestry, paper, corrugated and folding carton activities in a number of Latin American countries and the United States. Inter-segment revenue is not material. No operating segments have been aggregated for disclosure purposes.

Segment profit is measured based on EBITDA(1)

     
6 months to 30-Jun-17 6 months to 30-Jun-16
Europe  

The
Americas

  Total Europe  

The
Americas

  Total
      €m   €m   €m   €m   €m   €m
Revenue and results
Revenue 3,164   1,069   4,233   3,102   947   4,049
 
EBITDA 439   146 585 460   154 614
 
Unallocated centre costs (16) (21)
Share-based payment expense (8) (10)
Depreciation and depletion (net) (182) (177)
Amortisation (21) (16)
Finance costs (131) (117)
Finance income 18 38
Share of associates’ profit (after tax) - 1
Profit before income tax 245 312
Income tax expense (69) (97)
Profit for the financial period 176 215
 

(1) EBITDA is defined within Alternative Performance Measures set out in Supplementary Financial Information.

3. Segmental Analyses (continued)

     
3 months to 30-Jun-17 3 months to 30-Jun-16
Europe  

The
Americas

  Total Europe  

The
Americas

  Total
      €m   €m   €m   €m   €m   €m
Revenue and results
Revenue 1,601   503   2,104   1,583   466   2,049
 
EBITDA 227   71 298 251   73 324
 
Unallocated centre costs (6) (12)
Share-based payment expense (5) (5)
Depreciation and depletion (net) (87) (88)
Amortisation (10) (8)
Finance costs (68) (56)
Finance income 14 28
Share of associates’ profit (after tax) - 1
Profit before income tax 136 184
Income tax expense (34) (59)
Profit for the financial period 102 125
 

4. Exceptional Items

   
6 months to 6 months to
The following items are regarded as exceptional in nature: 30-Jun-17 30-Jun-16
    €m   €m
 
Exceptional finance costs 2 -
Exceptional finance income -   (12)
Exceptional items included in net finance costs 2   (12)
 

Exceptional finance costs of €2 million in the first quarter of 2017 represented the accelerated amortisation of the issue costs relating to the debt within our senior credit facility which was paid down with the proceeds of January's €500 million bond issue.

The exceptional finance income in 2016 related to the gain of €12 million on the sale of our shareholding in the Swedish company, IL Recycling, in the second quarter.

5. Finance Costs and Income

   
6 months to 6 months to
30-Jun-17 30-Jun-16
    €m   €m
Finance costs:
Interest payable on bank loans and overdrafts 28 26
Interest payable on other borrowings 59 53
Exceptional finance costs associated with debt restructuring 2 -
Foreign currency translation loss on debt 20 11
Fair value loss on derivatives not designated as hedges - 16
Net interest cost on net pension liability 11 11
Net monetary loss-hyperinflation 11   -
Total finance costs 131   117
 
Finance income:
Other interest receivable (1) (2)
Foreign currency translation gain on debt (10) (23)
Exceptional gain on sale of investment - (12)
Fair value gain on derivatives not designated as hedges (7)   (1)
Total finance income (18)   (38)
Net finance costs 113   79
 

6. Income Tax Expense

Income tax expense recognised in the Condensed Consolidated Income Statement

   
6 months to 6 months to
30-Jun-17 30-Jun-16
    €m   €m
Current tax:
Europe 71 55
The Americas 29   31
100 86
Deferred tax (31)   11
Income tax expense 69   97
 
Current tax is analysed as follows:
Ireland 8 7
Foreign 92   79
100   86
 

Income tax recognised in the Condensed Consolidated Statement of Comprehensive Income

     
6 months to 6 months to
30-Jun-17 30-Jun-16
      €m   €m
Arising on defined benefit plans 2   (21)
 

The tax expense in 2017 is €28 million lower than in the comparable period in 2016. This is primarily due to tax effects from lower earnings, foreign currency losses, tax rate reductions and other timing items. The tax expense is approximately €9 million lower in Europe and €19 million lower in the Americas. The increase in current tax is more than offset by a reduction in deferred tax.

The Group’s historic tax losses have now been fully utilised in a number countries and the impact of this, together with other timing items, is included in the increased current tax expense in 2017.

The €42 million reduction in deferred tax includes the effects from the reversal of timing differences on which deferred tax liabilities have been previously been recorded, the recognition of tax benefits on losses and other tax credits which were partly offset by the use of prior period tax losses.

7. Employee Benefits – Defined Benefit Plans

The table below sets out the components of the defined benefit cost for the period:

   
6 months to 6 months to
30-Jun-17 30-Jun-16
    €m   €m
 
Current service cost 13 17
Past service cost - (12)
Gain on settlement - (2)
Actuarial loss arising on other long-term employee benefits - 1
Net interest cost on net pension liability 10   11
Defined benefit cost 23   15
 

Included in cost of sales, distribution costs and administrative expenses is a defined benefit cost of €13 million (2016: €4 million). Net interest cost on net pension liability of €10 million (2016: €11 million) is included in finance costs in the Condensed Consolidated Income Statement.

The amounts recognised in the Condensed Consolidated Balance Sheet were as follows:

   
30-Jun-17 31-Dec-16
    €m   €m
Present value of funded or partially funded obligations (2,251) (2,320)
Fair value of plan assets 1,914   1,953
Deficit in funded or partially funded plans (337) (367)
Present value of wholly unfunded obligations (508)   (517)
Net pension liability (845)   (884)
 

8. Earnings per Share

Basic

Basic earnings per share is calculated by dividing the profit attributable to owners of the parent by the weighted average number of ordinary shares in issue during the period less own shares.

   
6 months to 6 months to
    30-Jun-17   30-Jun-16
Profit attributable to owners of the parent (€ million) 175 212
 
Weighted average number of ordinary shares in issue (million) 235 234
 
Basic earnings per share (cent) 74.3   90.8
 

Diluted

Diluted earnings per share is calculated by adjusting the weighted average number of ordinary shares outstanding to assume conversion of all dilutive potential ordinary shares. These comprise convertible shares issued under the Share Incentive Plan, which were based on performance and the passage of time, and deferred shares held in trust issued under the Deferred Annual Bonus Plan, which are based on the passage of time.

   
6 months to 6 months to
    30-Jun-17   30-Jun-16
Profit attributable to owners of the parent (€ million) 175 212
 
Weighted average number of ordinary shares in issue (million) 235 234
Potential dilutive ordinary shares assumed (million) 2   2
Diluted weighted average ordinary shares (million) 237   236
 
Diluted earnings per share (cent) 73.9   90.0
 

Pre-exceptional

     
6 months to 6 months to
      30-Jun-17   30-Jun-16
Profit attributable to owners of the parent (€ million) 175 212
Exceptional items included in profit before income tax (Note 4) (€ million) 2   (12)
Pre-exceptional profit attributable to owners of the parent (€ million) 177   200
 
Weighted average number of ordinary shares in issue (million) 235 234
 
Pre-exceptional basic earnings per share (cent) 75.0   85.6
 
Diluted weighted average ordinary shares (million) 237 236
 
Pre-exceptional diluted earnings per share (cent) 74.5   84.9
 

9. Dividends

During the period, the final dividend for 2016 of 57.6 cent per share was paid to the holders of ordinary shares. The Board has decided to pay an interim dividend of 23.1 cent per share for 2017 and it is proposed to pay this dividend on 27 October 2017 to all ordinary shareholders on the share register at the close of business on 29 September 2017.

10. Property, Plant and Equipment

       

Land and
buildings

Plant and
equipment

Total
      €m   €m   €m
Six months ended 30 June 2017
Opening net book amount 1,004 2,257 3,261
Reclassifications 32 (32) -
Additions 1 166 167
Acquisitions - 1 1
Depreciation charge (25) (152) (177)
Retirements and disposals (2) - (2)
Hyperinflation adjustment 23 17 40
Foreign currency translation adjustment (36)   (63)   (99)
At 30 June 2017 997   2,194   3,191
 

Year ended 31 December 2016

Opening net book amount 988 2,115 3,103
Reclassifications 42 (43) (1)
Additions 11 465 476
Acquisitions 10 56 66
Depreciation charge (48) (309) (357)
Retirements and disposals (1) (11) (12)
Hyperinflation adjustment 25 21 46
Foreign currency translation adjustment (23)   (37)   (60)
At 31 December 2016 1,004   2,257   3,261
 

11. Net Movement in Working Capital

   
6 months to 6 months to
30-Jun-17 30-Jun-16
    €m   €m
 
Change in inventories (27) (24)
Change in trade and other receivables (181) (171)
Change in trade and other payables 83   34
Net movement in working capital (125)   (161)
 

12. Analysis of Net Debt

     
30-Jun-17 31-Dec-16
      €m   €m
Senior credit facility:
Revolving credit facility(1) – interest at relevant interbank rate + 1.10%(6) 2 1
Term loan facility(2) – interest at relevant interbank rate + 1.35%(6) 480 741
US$292.3 million 7.50% senior debentures due 2025 (including accrued interest) 257 279
Bank loans and overdrafts 139 167
Cash (459) (443)
2019 receivables securitisation variable funding notes 186 182
2022 receivables securitisation variable funding notes (including accrued interest)(3) 4 114
2018 senior notes (including accrued interest)(4) 467 488
€400 million 4.125% senior notes due 2020 (including accrued interest) 404 404
€250 million senior floating rate notes due 2020 (including accrued interest)(5) 250 249
€500 million 3.25% senior notes due 2021 (including accrued interest) 497 496
€500 million 2.375% senior notes due 2024 (including accrued interest) 497 -
€250 million 2.75% senior notes due 2025 (including accrued interest) 249   249
Net debt before finance leases 2,973 2,927
Finance leases 12   14
Net debt including leases 2,985   2,941
 
   
(1)

Revolving credit facility ('RCF') of €845 million (available under the senior credit facility) to be repaid in 2020. The RCF was
increased by €220 million in February 2017. (a) Revolver loans - €6 million, (b) drawn under ancillary facilities and facilities
supported by letters of credit – nil and (c) other operational facilities including letters of credit - €6 million.

 
(2)

Term loan facility due to be repaid in certain instalments from 2018 to 2020. In January and February 2017, the Group prepaid
€260 million of drawings under the term loan facility.

 
(3)

In May 2017, the €175 million receivables securitisation programme was amended and restated, extending the maturity to 2022
and reducing the variable funding notes margin from 1.70% to 1.375%.

 
(4) €200 million 5.125% senior notes due 2018 and US$300 million 4.875% senior notes due 2018.
 
(5) Interest at EURIBOR + 3.5%.
 
(6) The margins applicable under the senior credit facility are determined as follows:
 
        Net debt/EBITDA ratio     RCF     Term Loan Facility
 
Greater than 3.0 : 1 1.85% 2.10%
3.0 : 1 or less but more than 2.5 : 1 1.35% 1.60%
2.5 : 1 or less but more than 2.0 : 1 1.10% 1.35%
2.0 : 1 or less 0.85% 1.10%

13. Other Reserves

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

               

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
 
At 1 January 2017 575 (22) (1,193) 165 (33) 1 (507)

Other comprehensive
income

Foreign currency
translation adjustments

- - (107) - - - (107)

Effective portion of
changes in fair value of
cash flow hedges

-   2   -   -   -   -   2

Total other
comprehensive
income/(expense)

-   2   (107)   -   -   -   (105)
 
Share-based payment - - - 8 - - 8

Shares acquired by SKG
Employee Trust

- - - - (11) - (11)

Shares distributed by SKG
Employee Trust

-   -   -   (10)   10   -   -
At 30 June 2017 575   (20)   (1,300)   163   (34)   1   (615)
 
At 1 January 2016 575 (22) (1,109) 168 (38) 1 (425)

Other comprehensive
income

Foreign currency
translation adjustments

- - (98) - - - (98)

Effective portion of
changes in fair value of
cash flow hedges

-   (1)   -   -   -   -   (1)

Total other
comprehensive expense

-   (1)   (98)   -   -   -   (99)
 
Share-based payment - - - 10 - - 10

Shares acquired by SKG
Employee Trust

- - - - (10) - (10)

Shares distributed by SKG
Employee Trust

-   -   -   (15)   15   -   -
At 30 June 2016 575   (23)   (1,207)   163   (33)   1   (524)
 

14. Fair Value Hierarchy

The following table presents the Group’s financial assets and liabilities that are measured at fair value at 30 June 2017:

       
Level 1 Level 2 Level 3 Total
    €m   €m   €m   €m
Available-for-sale financial assets:
Listed 1 - - 1
Unlisted - 8 12 20
Derivative financial instruments:
Assets at fair value through Condensed Consolidated Income Statement - 7 - 7
Derivatives used for hedging - 21 - 21
Derivative financial instruments:
Liabilities at fair value through Condensed Consolidated Income Statement - (11) - (11)
Derivatives used for hedging -   (27)   -   (27)
1   (2)   12   11
 

The following table presents the Group’s financial assets and liabilities that are measured at fair value at 31 December 2016:

       
Level 1 Level 2 Level 3 Total
    €m   €m   €m   €m
Available-for-sale financial assets:
Listed 1 - - 1
Unlisted - 8 12 20
Derivative financial instruments:
Assets at fair value through Condensed Consolidated Income Statement - 9 - 9
Derivatives used for hedging - 43 - 43
Derivative financial instruments:
Liabilities at fair value through Condensed Consolidated Income Statement - (20) - (20)
Derivatives used for hedging -   (19)   -   (19)
1   21   12   34
 

The fair value of the level 2 derivative financial instruments set out above has been measured using observable market inputs as defined under IFRS 13, Fair Value Measurement. All are plain derivative instruments, valued with reference to observable foreign exchange rates, interest rates or broker prices. There have been no transfers between level 1 and level 2 during the period.

The Group uses discounted cash flow analysis for various available-for-sale financial assets that are not traded in active markets.

There were no material changes in the level 3 instruments for the period.

15. Fair Value

The following table sets out the fair value of the Group's principal financial assets and liabilities. The determination of these fair values is based on the descriptions set out within Note 2 to the consolidated financial statements of the Group’s 2016 annual report.

     
30-Jun-17 31-Dec-16
Carrying value   Fair value Carrying value   Fair value
      €m   €m   €m   €m
 
Trade and other receivables (1) 1,521 1,521 1,415 1,415
Available-for-sale financial assets (2) 21 21 21 21
Cash and cash equivalents (3) 451 451 436 436
Derivative assets (4) 28 28 52 52
Restricted cash 8   8   7   7
2,029   2,029   1,931   1,931
 
Trade and other payables(1) 1,385 1,385 1,392 1,392
Senior credit facility(5) 482 482 742 742
2019 receivables securitisation(3) 186 186 182 182
2022 receivables securitisation(3) 4 4 114 114
Bank overdrafts(3) 139 139 167 167
2025 debentures(6) 257 312 279 330
2018 notes(6) 467 485 488 517
2020 fixed rate notes(6) 404 445 404 446
2020 floating rate notes(6) 250 271 249 270
2021 fixed rate notes(6) 497 541 496 538
2024 fixed rate notes(6) 497 513 - -
2025 fixed rate notes(6) 249   259   249   255
4,817 5,022 4,762 4,953
Finance leases 12   12   14   14
4,829 5,034 4,776 4,967
Derivative liabilities(4) 38   38   39   39
4,867   5,072   4,815   5,006
 
Total net position (2,838)   (3,043)   (2,884)   (3,075)
 
(1)    

The fair value of trade and other receivables and payables is estimated as the present value of future cash flows, discounted at
the market rate of interest at the reporting date.

(2)

The fair value of listed available-for-sale financial assets is determined by reference to their bid price at the reporting date.
Unlisted available-for-sale financial assets are valued using recognised valuation techniques for the underlying security
including discounted cash flows and similar unlisted equity valuation models.

(3)

The carrying amount reported in the Condensed Consolidated Balance Sheet is estimated to approximate to fair value because
of the short-term maturity of these instruments and, in the case of the receivables securitisation, the variable nature of the
facility and repricing dates.

(4)

The fair value of forward foreign currency and energy contracts is based on their listed market price if available. If a listed
market price is not available, then fair value is estimated by discounting the difference between the contractual forward price
and the current forward price for the residual maturity of the contract using a risk-free interest rate (based on government
bonds). The fair value of interest rate swaps is based on discounting estimated future cash flows based on the terms and
maturity of each contract and using market interest rates for a similar instrument at the measurement date.

(5)

The fair value of the senior credit facility is based on the present value of its estimated future cash flows discounted at an
appropriate market discount rate at the balance sheet date.

(6) Fair value is based on broker prices at the balance sheet date.

16. Venezuela

Hyperinflation

As discussed more fully in the 2016 annual report, Venezuela became hyperinflationary during 2009 when its cumulative inflation rate for the past three years exceeded 100%. As a result, the Group applied the hyperinflationary accounting requirements of IAS 29 – Financial Reporting in Hyperinflationary Economies to its Venezuelan operations at 31 December 2009 and for all subsequent accounting periods.

In 2017 and 2016 management engaged an independent expert to determine an estimate of the annual inflation rate. The level of and movement in the price index at June 2017 and 2016 are as follows:

       
      30-Jun-17     30-Jun-16
Index at period-end 44,716.9 5,468.7
Movement in period     300.9%     112.4%
 

As a result of the entries recorded in respect of hyperinflationary accounting under IFRS, the Condensed Consolidated Income Statement is impacted as follows: Revenue €25 million decrease (2016: €8 million decrease), EBITDA €22 million decrease (2016: €4 million decrease) and profit after taxation €27 million decrease (2016: €4 million decrease). In 2017, a net monetary loss of €11 million (2016: €nil) was recorded in the Condensed Consolidated Income Statement. The impact on our net assets and our total equity is an increase of €127 million (2016: €31 million increase).

Exchange Control

The Group consolidates its Venezuelan operations at the variable DICOM rate. The Group believes that DICOM is the most appropriate rate for accounting and consolidation, as it believes that this is the rate at which the Group extracts economic benefit. On this basis, in accordance with IFRS, the financial statements of the Group’s operations in Venezuela were translated at 30 June 2017 using the DICOM rate of VEF 2,640.00 per US dollar and the closing euro/US dollar rate of 1 euro = US$1.1412.

Control

The nationalisation of foreign owned companies or assets by the Venezuelan government remains a risk. Market value compensation is either negotiated or arbitrated under applicable laws or treaties in these cases. However, the amount and timing of such compensation is necessarily uncertain.

The Group continues to control operations in Venezuela and, as a result, continues to consolidate all of the results and net assets of these operations at the period end in accordance with the requirement of IFRS 10.

In 2017, the Group’s operations in Venezuela represented approximately 1.6% (2016: 1.0%) of its EBITDA, 1.4% (2016: 1.0%) of its total assets and 3.3% (2016: 2.2%) of its net assets. Cumulative foreign translation losses arising on its net investment in these operations amounting to €1,072 million (2016: €987 million) are included in the foreign currency translation reserve.

17. Related Party Transactions

Details of related party transactions in respect of the year ended 31 December 2016 are contained in Note 30 to the consolidated financial statements of the Group’s 2016 annual report. The Group continued to enter into transactions in the normal course of business with its associates and other related parties during the period. There were no transactions with related parties in the first half of 2017 or changes to transactions with related parties disclosed in the 2016 consolidated financial statements that had a material effect on the financial position or the performance of the Group.

18. Audit Tendering

In the context of the relevant regulatory requirements, the Group noted in its 2016 Annual Report its intention to conduct an audit tender during 2017. A competitive tender process, overseen by the Group’s Audit Committee (‘GAC’), has recently been undertaken and the Board of Directors has approved GAC’s recommendation for the appointment of KPMG as Group External Auditor for the year ending 31 December 2018 and beyond. The appointment of KPMG will be recommended to shareholders for approval at the 2018 Annual General Meeting.

PricewaterhouseCoopers (‘PwC’), the current Group External Auditor, will continue in its role and audit the Group’s consolidated accounts for the year ending 31 December 2017.

19. Board Approval

This interim report was approved by the Board of Directors on 1 August 2017.

20. Distribution of the Interim Report

This 2017 interim report is available on the Group’s website smurfitkappa.com.

Responsibility Statement in Respect of the Six Months Ended 30 June 2017

The Directors, whose names and functions are listed on pages 56 to 58 in the Group’s 2016 annual report, are responsible for preparing this interim management report and the condensed consolidated interim financial statements in accordance with the Transparency (Directive 2004/109/EC) Regulations 2007, the related Transparency Rules of the Central Bank of Ireland and with IAS 34, Interim Financial Reporting as adopted by the European Union.

The Directors confirm that, to the best of their knowledge:

Signed on behalf of the Board

A. Smurfit, Director and Chief Executive Officer

1 August 2017.

Supplementary Financial Information

Alternative Performance Measures

Certain financial measures set out in this report are not defined under International Financial Reporting Standards (‘IFRS’). An explanation for the use of these Alternative Performance Measures (‘APMs’) is set out within Financial Key Performance Indicators on pages 40-42 of the Group’s 2016 annual report. The key APMs of the Group are set out below.

 
APM Description
 
EBITDA

Earnings before exceptional items, share-based payment
expense, share of associates’ profit (after tax), net finance
costs, income tax expense, depreciation and depletion (net)
and intangible assets amortisation.

EBITDA Margin %

EBITDA

___________ x 100

Revenue

Pre-exceptional Basic EPS (cent)

Profit attributable to owners of the parent, adjusted
for exceptional items included in profit before tax and
income tax on exceptional items

_____________________________________________ x 100

Weighted average number of ordinary shares in
issue

Return on Capital Employed %

Last twelve months (‘LTM’) pre-exceptional operating
profit plus share of associates’ profit (after tax)

___________________________________________ x 100

Average capital employed (where capital employed
is the average of total equity and net debt at the
beginning and end of the period)

Free Cash Flow

Free cash flow is the result of the cash inflows and outflows
from our operating activities, and is before those arising from
acquisition and disposal activities.

 

Free cash flow (APM) and a reconciliation of free cash flow to
cash generated from operations (IFRS measure) are included
in the management commentary. The IFRS cash flow is
included in the Condensed Consolidated Financial Statements.

Net Debt

Net debt is comprised of borrowings net of cash and cash
equivalents and restricted cash.

Net Debt to EBITDA (LTM) times

Net debt

 

 

EBITDA (LTM)

 
         
Reconciliation of Profit to EBITDA
3 months to 3 months to 6 months to 6 months to
30-June-17 30-June-16 30-June-17 30-June-16
      €m   €m   €m   €m
 
Profit for the financial period 102 125 176 215
Income tax expense 34 59 69 97
Share of associates’ profit (after tax) - (1) - (1)
Net finance costs (after exceptional items) 54 28 113 79
Share-based payment expense 5 5 8 10
Depreciation, depletion (net) and amortisation 97   96   203   193
EBITDA 292   312   569   593
 

Return on Capital Employed

       
Q2, 2017 Q2, 2016 Q1, 2017
      €m   €m   €m

Pre-exceptional operating profit plus share of associates’ profit (after
tax) (LTM)

799 823 820
 
Total equity – current period end 2,488 2,252 2,670
Net debt – current period end 2,985   3,121   2,931
Capital employed – current period end 5,473   5,373   5,601
 
Total equity – prior period end 2,252 2,210 2,310
Net debt – prior period end 3,121   3,100   3,029
Capital employed – prior period end 5,373   5,310   5,339
 
Average capital employed 5,423   5,342   5,470
 
Return on capital employed 14.7%   15.4%   15.0%
 
Supplementary Historical Financial Information
             
€m     Q2, 2016   Q3, 2016   Q4, 2016   FY, 2016   Q1, 2017   Q2, 2017
 
Group and third party revenue 3,375 3,424 3,441 13,521 3,573 3,590
Third party revenue 2,049 2,050 2,060 8,159 2,129 2,104
EBITDA 312 323 320 1,236 278 292
EBITDA margin 15.3% 15.7% 15.5% 15.1% 13.0% 13.9%
Operating profit 211 219 206 815 168 190
Profit before income tax 184 187 155 654 109 136
Free cash flow 28 164 104 303 16 30
Basic earnings per share - cent 52.0 56.4 42.3 189.4 31.5 42.8

Weighted average number of shares used in
EPS calculation (million)

234 234 235 235 235 235
Net debt 3,121 2,953 2,941 2,941 2,931 2,985
EBITDA (LTM) 1,224 1,242 1,236 1,236 1,233 1,212
Net debt to EBITDA (LTM) 2.55 2.38 2.38 2.38 2.38 2.46
 

Smurfit Kappa Group PLC

Source: Smurfit Kappa Group PLC


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