3rd Quarter Results

Smurfit Kappa Group PLC 2008 Q3 Results Smurfit Kappa Group plc Notes to the Consolidated Financial Statements (continued) 2008 Third Quarter Results Interim Management Report 12 November, 2008: 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 Latin America, today announced results for the 3 months and 9 months ending 30 September, 2008. 2008 Third Quarter & First Nine Months | Key Financial Performance Measures -0- *T EUR m YTD 2008 YTD 2007 Change Q3 2008 Q3 2007 Change Q2 2008 Change -------------------------- -------- -------- -------- -------- -------- -------- -------- -------- Revenue EUR EUR EUR EUR EUR 5,431 5,454 - 1,753 1,829 (4%) 1,846 (5%) EBITDA before Exceptionals and Share-based Payments EUR 745 EUR 789 EUR 231 EUR 275 EUR 257 (1) (6%) (16%) (10%) EBITDA Margin 13.7% 14.5% - 13.2% 15.1% - 13.9% - Basic Earnings Per Share (cent per share) 73.5 23.5 n/a 16.8 38.6 (56%) 38.3 (56%) Free Cash Flow (2) EUR 226 EUR 113 100% EUR 149 EUR 150 (1%) EUR 76 96% -------------------------- -------- -------- -------- -------- -------- -------- -------- -------- -------------------------- -------- -------- -------- -------- -------- -------- -------- -------- Net Debt EUR EUR EUR 3,192 3,448 (7%) 3,285 (3%) Net Debt to EBITDA (LTM) 3.1x 3.3x 3.1x -------------------------- -------- -------- -------- -------- -------- -------- -------- -------- *T (1) EBITDA before exceptional items and share-based payments is denoted by EBITDA throughout the remainder of the management commentary for ease of reference. A reconciliation of net profit/ (loss) for the period to EBITDA before exceptional items and share-based payments is set out on page 25. (2) Free cash flow is set out on page 7. The IFRS cash flow is set out on page 13. Performance Review & Outlook Gary McGann, Smurfit Kappa Group CEO, commented: 'The Group is pleased to report a strong free cash flow performance of EUR 226 million in the first nine months of 2008, double the levels of the corresponding period in 2007. Net debt was significantly reduced over the period. This positive outcome primarily reflects the benefits of the Group's integrated model, the resilience of its downstream corrugated business, the superior profitability of its growing Latin American operations and its leading Kraftliner presence across Europe, a market positively influenced by the recent strengthening of the US$. In the current credit market environment, the Group continues to benefit from its low cost of financing and long term debt profile with no material maturity in the next four years. The Group also benefits from strong liquidity, with approximately EUR 730 million of cash on its balance sheet and unused committed credit lines of approximately EUR 600 million. As indicated since its first quarter 2008 report, the Group expects conditions to remain challenging for the remainder of the year, characterised by the slowdown in corrugated demand and pressure on pricing. Against that backdrop, the Group is pleased to confirm that it remains on target to deliver the expected level of financial performance in 2008. While declining interest rates, a stronger dollar, further capacity rationalisation decisions and increased financing risk for the announced new capacity are potentially positive factors as we look forward, nonetheless the Group expects a continuation of tough operating conditions for 2009. In that context, to further increase its cash flow generation capability and to maximise its debt paydown through the cycle, the Group will progressively reduce its capital expenditure from current levels.' About Smurfit Kappa Group Smurfit Kappa Group is a world leader in paper-based packaging with operations in Europe and Latin America. Smurfit Kappa Group operates in 22 countries in Europe and is the European leader in containerboard, solid board, corrugated and solid board packaging and has a key position in several other packaging and paper market segments, including graphic board, sack paper and paper sacks. Smurfit Kappa Group also has a growing presence in Eastern Europe. Smurfit Kappa Group operates in 9 countries in Latin America and is the only pan-regional operator. 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. -0- *T Contacts Information Smurfit Kappa Group +353 1 202 7000 ir@smurfitkappa.com ------------------------------- Beech Hill, Clonskeagh Dublin 4, Ireland K Capital Source +353 1 631 5500 smurfitkappa@kcapitalsource.com ------------------------------- *T 2008 Third Quarter & First Nine Months | Performance Overview In a tough operating environment, the Group continues to generate strong free cash flow. The Group's free cash flow generation of EUR 226 million in the first nine months of 2008 doubled compared to the same period in 2007. This performance reflects the Group's reduced debt servicing costs, tight working capital control and continued efficient management of its capital expenditure. As a result of its strong financial management, the Group reduced its net debt by EUR 212 million over the first nine months of the year, a 6% reduction. The Group's net debt to EBITDA was reduced from 3.2x at the end of December 2007 to 3.1x at the end of September 2008, giving it continuing significant headroom compared to its actual covenant level of 4.85x at the end of the third quarter. The Group's EBITDA of EUR 231 million in the third quarter of 2008 primarily reflects the resilience of its European corrugated business. The Group also continued to benefit from the sustained strong contribution of its Latin American operations. These positive achievements were offset by weakening conditions within the Group's recycled containerboard system, where materially lower prices combined with higher input costs generated significant margin compression. Following the sharp containerboard price decline of the second quarter of 2008, prices have somewhat stabilised since August. While the Group's overall containerboard system remains competitive in the current trading environment, higher cost producers are likely to be facing severe financial pressure. As a result, downtime across the market has increased in the third quarter, and some permanent capacity closures have been announced. The Group's Kraftliner business was adversely impacted by pricing pressure in the first nine months of the year. This has now stabilised and market conditions are improved following the strengthening of the US$. Price increase initiatives are currently meeting with some success in certain regions. In Latin America, despite slowing demand in many markets, our operations continued to perform well, reflecting the Group's strong positioning across the region. Earnings as reported for the nine months were negatively impacted by the relative strength of the euro against the local currencies during 2008 although the weakening of the euro in the third quarter positively impacted the contribution of Latin America to the overall Group earnings. 2008 First Nine months | Financial performance Revenue of EUR 5.4 billion in the first nine months of 2008 was flat compared to the same period in 2007. However, allowing for the negative impact of currency of EUR 91 million and net disposals and closures of EUR 28 million, revenue shows an underlying increase of EUR 96 million, the equivalent of almost 2%. EBITDA of EUR 745 million in the first nine months of 2008 was EUR 44 million, or 6% lower than in the comparable period in 2007, mainly reflecting the margin pressure experienced in the Group's containerboard system, primarily in the third quarter, offset by synergies and cost take-out. Allowing for the impact of currency, net disposals and closures, the underlying EBITDA decrease would have been EUR 32 million, the equivalent of 4%. 2008 Third Quarter | Financial performance Revenue of EUR 1,753 million in the third quarter of 2008 represents a 4% decrease, or EUR 76 million, compared with revenue of EUR 1,829 million in the third quarter of 2007. Allowing for the negative impact of currency of EUR 31 million offset by net acquisitions, disposals and closures of EUR 2 million, revenue shows an underlying decrease of EUR 47 million, the equivalent of 3%. At EUR 231 million for the third quarter, EBITDA was EUR 44 million lower than in the same period last year. This includes a negative currency impact of EUR 5 million. On a comparable basis, EBITDA was lower by EUR 39 million, the equivalent of 14% year-on-year. Compared to the second quarter of 2008, EBITDA decreased by EUR 26 million in the third quarter, the equivalent of 10%. Excluding the impact of currency, disposals and closures, EBITDA decreased by EUR 28 million, the equivalent of 11% quarter-on-quarter. 2008 Third Quarter & First Nine Months | Capital Structure & Debt Reduction In 2008, the Group continues to concentrate on free cash flow generation and further net debt reduction. At the end of September 2008, the Group's net debt was below EUR 3.2 billion, down from over EUR 3.4 billion at the end of September 2007, a reduction of EUR 255 million, the equivalent of 7%. In the third quarter, the Group's net debt decreased by EUR 93 million, or 3%, reflecting the strong free cash flow of the business in the period. In the first nine months of the year, the Group's net debt reduction of EUR 212 million includes the EUR 55 million of proceeds for the sale of its 40% associate shareholding in Duropack AG Group in May and payment of EUR 35 million in respect of its final dividend for 2007. In April, the Group's debt rating was upgraded by both Standard & Poor's and Fitch to 'BB' from 'BB-' (BB minus), with a 'Stable' outlook. In addition, in June Moody's upgraded its outlook for SKG to 'Positive' from 'Stable'. These upgrades reflect the Group's sustained focus on operating efficiency, cash flow generation, debt reduction and a strong overall debt profile. In the current environment, the Group continues to benefit from its low cost of financing and long term debt profile, with no material maturity in the next four years. In addition, the Group benefits from strong liquidity, with approximately EUR 730 million of cash on its balance sheet at the end of September 2008, and unused committed credit lines of approximately EUR 600 million maturing in December 2012. The Group is continuing to operate well within its covenants, and is very focused on sustaining its strong free cash flow generation and net debt reduction through the cycle, as can be seen from its current performance and its pre-emptive capex reduction actions. 2008 Third Quarter & First Nine Months | Cash Flow Free cash flow of EUR 226 million for the first nine months of 2008 doubled compared to the same period in 2007. While pre-exceptional EBITDA was lower, the significant improvement in cash flow primarily reflects lower cash interest and actively managed capital expenditure, together with the positive impact of working capital inflow. Capital expenditure during the first nine months of 2008 was approximately EUR 202 million, which equates to 77% of depreciation, and compares with EUR 228 million in the first nine months of 2007. Part of the capex reduction represents timing, but the lower expenditure reflects the Group's flexibility and clear focus on maximising cash flow generation and de-leveraging in the current and expected challenging operating environment. Cash interest of EUR 182 million in the first nine months of the year was 15% lower than in the same period in 2007, reflecting the debt reduction following the Group's IPO in March 2007, and the subsequent attractive debt repricing in July 2007. Working capital decreased by EUR 9 million in the first nine months of 2008, reflecting the Group's tight working capital control. As a percentage of annualised net sales revenue, working capital of EUR 674 million at September 2008 represented 9.6%, compared to 10.4% at June 2008 and 9.5% at September 2007. 2008 Third Quarter & First Nine Months | Performance Review Packaging: Europe Reflecting the overall slowing economic environment in Europe, the Group's corrugated volumes in the nine months to September decreased by almost 2% year-on-year. This decrease was broadly in line with the trend seen in the first half of 2008. In the third quarter, while volumes in August were very slow across Europe, corrugated shipments in July and September were generally flat year-on-year, benefiting from the Group's unique pan-European offering and its customer base primarily in the food and beverage sector. The lower level of demand across the market led to a continued inventory overhang of recycled containerboard despite ongoing industry market downtime, which generated strong downward pricing momentum for that grade in Europe between March and July. Prices remained reasonably stable in August and September. As recycled containerboard prices were decreasing, the Group faced higher average year-on-year input costs in the first nine months of the year, primarily for energy, labour and raw material. However, after peaking in March, OCC prices dropped by EUR 20 in the second quarter, helped by lower buying demand from Asia. With Chinese producers having now delayed capacity expansion plans, and with European demand slowing, OCC prices are under significant downward pressure in the fourth quarter. With inventory levels across the industry remaining high, the price increase announced in October for recycled containerboard has not succeeded. While the decrease in OCC prices reduced the magnitude of the margin compression for all industry players, the Group estimates that a significant number of paper mills are at breakeven or loss making at current price levels. This is reflected in the increasing number of capacity reduction announcements. By comparison, the Group's overall containerboard system remains competitive in the current environment supported by its lower cost base, optimised integrated corrugated plant network and unrelenting focus on cost reduction. The Group continues to take market related downtime to avoid an increase in its containerboard inventory levels, and to maintain its working capital at the lowest level in the industry. In the first nine months of the year, the Group has taken 65,000 tonnes of its previously announced 80,000 tonnes downtime plan, with the remainder to be taken before the end of the year. In addition, the Group is now planning a further 80,000 tonnes of downtime for the fourth quarter. In effect, the Group will have reduced its annual recycled containerboard production by over 200,000 tonnes in 2008 (approximately 6.5% of its capacity) through the permanent closure of its Valladolid mill in Spain and market downtime. Against that backdrop, the Group's relatively strong EBITDA outcome of EUR 231 million in the third quarter reflects the benefits of its integrated model, supported by the sustained performance of its downstream corrugated business. Although under further downward pressure, the Group's corrugated pricing held-up relatively well in the third quarter, declining by less than 1.5% from the peak. The Group's performance was also supported by its leading position in Kraftliner across Europe. Kraftliner currently benefits from positive catalysts such as demand growth of 2% in Europe in the first nine months of the year, and the strengthening US$ reducing the competitiveness of imports from North America. As a result, price increase initiatives are meeting with some success in certain regions. On the input cost side of Kraftliner, the increase in wood costs in Scandinavia is easing somewhat, as capacity closures from Finnish fine paper producers positively impact conditions for wood supply. Furthermore, the Group's wood needs are well spread between Sweden, France and Austria, with the latter two regions benefiting from more competitive wood prices, which contribute to the continued profitability of the Group's Kraftliner business. Packaging: Latin America While market conditions vary from country to country, our operations in Latin America continued to perform well in the first nine months of the year, reflecting the Group's strong positioning in the region. Although the regional EBITDA in euro terms was negatively impacted by the relative strength of the euro in the first half, the euro weakened in the third quarter, thereby increasing the contribution of the Latin American operations to the overall Group. In the first nine months of 2008, the Group's corrugated volumes in Latin America were 3% lower than in the previous year, primarily reflecting the slowing overall demand environment in Mexico and Colombia and the farmers' strike in Argentina. While the Group's profitability in Mexico was negatively affected by weaker demand and higher input costs in the first nine months of the year, further price increases contributed to somewhat contain the margin compression. In September, on the back of the July price increase in the US, the Group implemented a further $60 price increase for containerboard and boxes in Mexico. The Group's Colombian operations continued to benefit from positive pricing momentum, which compensated for higher input costs. Our sack business in the region performed strongly in the nine months of the year, supported by further volume growth and healthy pricing. The Group's profitability in Argentina and Venezuela was well ahead of last year, reflecting price improvements across all grades despite the challenging local conditions. Specialties: Europe After a relatively positive performance in the first half of the year, profitability of the specialties division came under downward pressure in the third quarter, as demand was lower, especially for sacks, while higher input costs continued to impact the Group's solidboard business. In the first nine months of the year however, the specialties division continued to report positive EBITDA growth year-on-year. Demand for sack paper, which was positive in the first half of the year driven by overseas demand, fell sharply in the third quarter following the widespread collapse in the construction industry. Pricing and volumes for sack paper are currently under significant downward pressure. While the outlook for this grade is challenging, the sack division represented no more than 2% of the Group's EBITDA in the first nine months of 2008. In the solidboard-packaging business, the Group benefited from a stable pricing environment across Europe in the first nine months of the year, and some volume increase in the Benelux, its main market, following the bankruptcy of a local competitor. In the third quarter, the Group's solidboard mills continued to be negatively impacted by higher energy and recovered paper costs however. The Group's bag-in-box business suffered from lower than expected demand over the summer, but the trend is improving entering the fourth quarter. The recently acquired Spanish Plasticos operation continued to perform well in the third quarter, and the Group also is seeing good progress in the Russian bag operation which commenced production in March this year. Cost Take-Out programme To further strengthen the competitiveness of its operations in increasingly challenging times, the Group initiated a three year cost take out programme in 2008. It is targeted to deliver at least EUR 60 million in 2008, with further delivery of up to EUR 100 million by 2010. This new programme follows on the achievement of EUR 180 million of synergies between 2005 and 2008, and reflects the Group's anticipation of challenging economic times and the need for a relentless focus on cost efficiency and total system optimisation. Summary Cash Flows -0- *T Summary cash flows for the third quarter and nine months are set out in the following table. *T -0- *T 3 months to 3 months to 9 months to 9 months to 30-Sept-08 30-Sept-07 30-Sept-08 30-Sept-07 EUR Million EUR Million EUR Million EUR Million ------------- ------------- ------------- ------------- Pre-exceptional EBITDA 231 275 745 789 Exceptional items (4) (11) (4) (25) Cash interest (60) (62) (182) (213) Working capital change 92 56 9 (42) Current provisions - (8) (23) (69) Capital expenditure (74) (81) (202) (228) Change in capital creditors 3 2 (16) (46) Sale of fixed assets 1 4 4 22 Tax paid (28) (20) (58) (45) Other (12) (5) (47) (30) ------------- ------------- ------------- ------------- Free cash flow 149 150 226 113 Shares issued through IPO, net of costs - (2) - 1,435 Refinancing costs - (5) - (79) Sale of businesses and investments - 3 56 11 Investments (15) - (15) (3) Derivative termination payments 3 (9) - (23) Dividends (1) - (41) (6) ------------- ------------- ------------- ------------- Total surplus 136 137 226 1,448 Net debt disposed - - - 1 Deferred debt issue costs amortised (3) (6) (11) (43) Non-cash interest accrued - - - (12) Currency translation adjustments (40) 26 (3) 40 ------------- ------------- ------------- ------------- Decrease in net borrowing 93 157 212 1,434 ------------- ------------- ------------- ------------- *T (1) The summary cash flow is prepared on a different basis to the cash flow statement under IFRS. The principal difference is that the summary cash flow details movements in net borrowing while the IFRS cash flow details movement 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. -0- *T 9 months to 9 months to 30-Sept-08 30-Sept-07 EUR Million EUR Million ---------------------------- --------------------------------------- ------------- ------------- Free cash flow 226 113 Add back: Cash interest 182 213 Capital expenditure 202 228 Change in capital creditors 16 46 Tax payments 58 45 Less: Sale of fixed assets (4) (22) Receipt/repayment of capital grants (in 'Other') (2) 1 Dividends from associates (in 'Other') (4) (3) ---------------------------- --------------------------------------- ------------- ------------- Cash flow generated from operations 674 621 -------------------------------------------------------------------- ------------- ------------- *T Capital Resources The Group's primary sources of liquidity are cash flow from operations and borrowings under the revolving credit and restructuring facilities. The Group's primary uses of cash are for debt service and capital expenditure. At 30 September, 2008 Smurfit Kappa Funding plc ('SK Funding') had outstanding EUR 217.5 million 7.75% senior subordinated notes due 2015 and US$200 million 7.75% senior subordinated notes due 2015. In addition Smurfit Kappa Treasury Funding Limited had outstanding US$292.3 million 7.50% senior debentures due 2025 and the Group had outstanding EUR 210.0 million floating rate notes issued under an accounts receivable securitisation program maturing in 2011. Smurfit Kappa Acquisitions and certain subsidiaries are party to a Senior Credit Facility. The senior credit facility comprises a EUR 398 million amortising A Tranche maturing in 2012, a EUR 1,192 million B Tranche maturing in 2013 and a EUR 1,191 million C Tranche maturing in 2014. In addition, as at 30 September, 2008, the facility included EUR 875 million in committed lines including a EUR 600 million revolving credit facility of which, apart from EUR 17.8 million in letters of credit issued in support of other liabilities, there were no drawings or amounts borrowed under ancillary facilities or facilities supported by letters of credit, and a EUR 275 million restructuring facility of which EUR 227 million was borrowed. The following table provides the range of interest rates as of 30 September, 2008 for each of the drawings under the various Senior Credit Facility term loans. -0- *T BORROWING ARRANGEMENT CURRENCY INTEREST RATE Restructuring Facility EUR 6.03% - 6.33% Term Loan A EUR 6.02% - 6.62% Term Loan B EUR 6.39% - 7.00% USD 4.66% Term Loan C EUR 6.64% - 7.27% USD 4.91% *T Borrowings under the revolving credit facility are available to fund the Group's working capital requirements, capital expenditures and other general corporate purposes and will terminate in December 2012. 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. At 30 September, 2008 the Group had fixed an average of 57% of its interest cost on borrowings over the following twelve months. Our fixed rate debt comprised mainly EUR 217.5 million 7.75% senior subordinated notes due 2015, US$200.0 million 7.75% senior subordinated notes due 2015 and US$292.3 million 7.50% senior debentures due 2025. In addition the Group also has EUR 1,980 million in interest rate swaps with maturity dates ranging from October 2008 to January 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 EUR 19 million over the following twelve months. Interest income on our cash balances would increase by approximately EUR 7 million assuming a one percent increase in interest rates earned on such balances over the following twelve months. The Group uses foreign currency borrowings, currency swaps, options and forward contracts in the management of its foreign currency exposures. Group Income Statement - Nine Months -0- *T Unaudited Unaudited ---------------------------------------- --------------------------------------- 9 Months to 30-Sept-08 9 Months to 30-Sept-07 Pre- Exceptional Total 2008 Pre- Exceptional Total 2007 Exceptional 2008 Exceptional 2007 2008 2007 EUR '000 EUR '000 EUR '000 EUR '000 EUR '000 EUR '000 ---------------------- -------------- ------------ ------------ ------------- ------------ ------------ Revenue 5,431,319 - 5,431,319 5,453,862 - 5,453,862 Cost of sales (3,865,985) (10,950) (3,876,935) (3,894,212) (6,075) (3,900,287) -------------- ------------ ------------ ------------- ------------ ------------ Gross profit 1,565,334 (10,950) 1,554,384 1,559,650 (6,075) 1,553,575 Distribution costs (440,822) - (440,822) (443,616) - (443,616) Administrative expenses (683,073) - (683,073) (690,714) - (690,714) Other operating income 1,264 - 1,264 47,585 7,538 55,123 Other operating expenses - (17,318) (17,318) - (38,642) (38,642) -------------- ------------ ------------ ------------- ------------ ------------ Operating profit 442,703 (28,268) 414,435 472,905 (37,179) 435,726 Finance costs (327,337) - (327,337) (377,423) (109,970) (487,393) Finance income 123,112 - 123,112 148,192 - 148,192 Loss on disposal of associate - (6,905) (6,905) - - - Share of associates' profit (after tax) 2,746 - 2,746 9,744 - 9,744 -------------- ------------ ------------ ------------- ------------ ------------ Profit before income tax 241,224 (35,173) 206,051 253,418 (147,149) 106,269 Income tax expense (27,080) (49,060) -------------- ------------ ------------ ------------- ------------ ------------ Profit for the financial period 178,971 57,209 ============== ============ ============ ============= ============ ============ Attributable to: Equity holders of the Company 160,315 45,003 Minority interest 18,656 12,206 ------------ ------------- ------------ ------------ Profit for the financial period 178,971 57,209 ============ ============= ============ ============ Earnings per share: Basic earnings per share (cent per share) 73.5 23.5 ============ ============ Diluted earnings per share (cent per share) 73.4 22.4 ============ ============ *T Group Income Statement - Third Quarter -0- *T Unaudited Unaudited --------------------------------------- -------------------------------------- 3 Months to 30-Sept-08 3 Months to 30-Sept-07 Pre- Pre- Exceptional Exceptional Exceptional Exceptional 2008 2008 Total 2008 2007 2007 Total 2007 EUR '000 EUR '000 EUR '000 EUR '000 EUR '000 EUR '000 ----------------------- ------------- ------------ ------------ ------------- ------------ ----------- Revenue 1,753,313 - 1,753,313 1,829,123 - 1,829,123 Cost of sales (1,258,262) - (1,258,262) (1,299,684) (1,413) (1,301,097) ------------- ------------ ------------ ------------- ------------ ----------- Gross profit 495,051 - 495,051 529,439 (1,413) 528,026 Distribution costs (144,766) - (144,766) (145,375) - (145,375) Administrative expenses (219,679) - (219,679) (222,488) - (222,488) Other operating income 419 - 419 11,349 1,668 13,017 Other operating expenses - - - - (2,073) (2,073) ------------- ------------ ------------ ------------- ------------ ----------- Operating profit 131,025 - 131,025 172,925 (1,818) 171,107 Finance costs (86,353) - (86,353) (123,769) (6,734) (130,503) Finance income 16,161 - 16,161 61,690 - 61,690 Share of associates' profit (after tax) 195 - 195 3,505 - 3,505 ------------- ------------ ------------ ------------- ------------ ----------- Profit before income tax 61,028 - 61,028 114,351 (8,552) 105,799 Income tax expense (12,168) (16,732) ------------- ------------ ------------ ------------- ------------ ----------- Profit for the financial period 48,860 89,067 ============= ============ ============ ============= ============ =========== Attributable to: Equity holders of the Company 36,712 84,098 Minority interest 12,148 4,969 ------------ ----------- Profit for the financial period 48,860 89,067 ============ =========== Earnings per share: Basic earnings per share (cent per share) 16.8 38.6 ============ =========== Diluted earnings per share (cent per share) 16.6 37.5 ============ =========== *T Group Statement of Recognised Income and Expense -0- *T Unaudited Unaudited -------------- -------------- 9 months to 9 months to 30-Sept-08 30-Sept-07 EUR '000 EUR '000 Restated --------------------------------------------------------------- -------------- -------------- Items of income and expense recognised directly within equity: Foreign currency translation adjustments (16,123) (37,199) Defined benefit pension schemes - Actuarial (loss)/gain (36,639) 73,616 - Movement in deferred tax 7,275 (18,998) Effective portion of changes in fair value of cash flow hedges: - movement out of reserve (11,517) (6,735) - new fair value adjustments into reserve 9,685 5,885 Net change in fair value of available-for-sale financial assets (412) 610 -------------- -------------- Net income and expense recognised directly within equity (47,731) 17,179 Profit for the financial period 178,971 57,209 -------------- -------------- Total recognised income and expense for the financial period 131,240 74,388 ============== ============== Attributable to: Equity holders of the Company 108,595 63,041 Minority interest 22,645 11,347 -------------- -------------- 131,240 74,388 ============== ============== Effects of changes in accounting policy: Attributable to: (189) Equity holders of the Company - -------------- Minority interest (189) ============== *T Group Balance Sheet -0- *T Unaudited Unaudited Audited ------------ ---------- ---------- 30-Sept-08 30-Sept-07 31-Dec-07 EUR '000 EUR '000 EUR '000 Restated Restated ---------------------------------------------------------- ------------ ---------- ---------- Assets Non-current assets Property, plant and equipment 3,149,715 3,295,493 3,251,479 Goodwill and intangible assets 2,376,778 2,437,528 2,416,785 Biological assets 77,958 76,150 74,758 Investment in associates 15,876 79,173 79,307 Available-for-sale financial assets 42,878 43,436 43,511 Trade and other receivables 4,695 4,533 6,716 Derivative financial instruments 5,795 6,953 4,301 Deferred income tax assets 361,908 301,174 340,875 ------------ ---------- ---------- 6,035,603 6,244,440 6,217,732 ------------ ---------- ---------- Current assets Inventories 685,818 696,788 682,169 Biological assets 6,901 6,813 6,862 Trade and other receivables 1,403,328 1,468,294 1,379,105 Derivative financial instruments 25,411 25,895 28,261 Restricted cash 19,548 14,984 13,096 Cash and cash equivalents 708,952 403,716 401,622 ------------ ---------- ---------- 2,849,958 2,616,490 2,511,115 Non-current assets held for sale 10,960 5,000 15,999 ------------ ---------- ---------- Total assets 8,896,521 8,865,930 8,744,846 ============ ========== ========== Equity Capital and reserves attributable to the equity holders of the Company Equity share capital 229 229 228 Capital and other reserves 2,524,278 2,575,425 2,538,047 Retained earnings (390,175) (564,252) (486,126) ------------ ---------- ---------- Total equity attributable to equity holders of the Company 2,134,332 2,011,402 2,052,149 Minority interest 140,013 141,488 137,443 ------------ ---------- ---------- Total equity 2,274,345 2,152,890 2,189,592 ============ ========== ========== Liabilities Non-current liabilities Borrowings 3,782,871 3,708,989 3,667,618 Deferred income - 1,960 - Employee benefits 490,252 478,843 482,497 Derivative financial instruments 1,821 - - Deferred income tax liabilities 502,769 535,816 530,102 Non-current taxes payable 24,989 6,485 19,704 Provisions for liabilities and charges 60,332 82,931 77,698 Capital grants 14,223 12,647 14,176 Other payables 4,244 - 8,535 ------------ ---------- ---------- 4,881,501 4,827,671 4,800,330 ------------ ---------- ---------- Current liabilities Borrowings 137,989 157,474 150,976 Trade and other payables 1,420,282 1,477,360 1,402,687 Current income tax liabilities 29,456 65,438 25,650 Derivative financial instruments 103,915 128,869 121,058 Provisions for liabilities and charges 49,033 56,228 54,553 ------------ ---------- ---------- 1,740,675 1,885,369 1,754,924 ------------ ---------- ---------- Total liabilities 6,622,176 6,713,040 6,555,254 ------------ ---------- ---------- Total equity and liabilities 8,896,521 8,865,930 8,744,846 ============ ========== ========== *T Group Cash Flow Statement -0- *T Unaudited Unaudited ----------- ----------- 9 months to 9 months to 30-Sept-08 30-Sept-07 EUR '000 EUR '000 -------------------------------------------------------------- ----------- ----------- Cash flows from operating activities Profit for the financial period 178,971 57,209 Adjustment for Income tax expense 27,080 49,060 Profit on sale of assets and businesses - continuing operations - (7,538) Amortisation of capital grants (1,263) (1,129) Impairment of property, plant and equipment 10,950 6,075 Equity settled share-based payment transactions 8,430 21,353 Amortisation of intangible assets 33,240 31,824 Share of profit of associates & loss on disposal of associate 4,159 (9,744) Depreciation charge 257,011 261,565 Net finance costs 204,225 339,201 Change in inventories (6,332) (78,501) Change in biological assets 4,078 1,433 Change in trade and other receivables (15,405) (143,856) Change in trade and other payables 30,287 180,420 Change in provisions (24,660) (53,026) Change in employee benefits (33,457) (33,811) Foreign currency translation adjustments (3,746) 402 ----------- ----------- Cash generated from operations 673,568 620,937 Interest paid (205,333) (323,812) Income taxes paid: Irish corporation tax paid (10,560) (1,652) Overseas corporation tax (net of tax refunds) paid (47,209) (42,945) ----------- ----------- Net cash inflow from operating activities 410,466 252,528 ----------- ----------- Cash flows from investing activities Interest received 27,496 18,228 Business disposals 1,154 10,547 Purchase of property, plant & equipment and biological assets (211,648) (270,756) Purchase of intangible assets (6,446) - Receipt/(repayment) of capital grants 1,353 (62) Purchase of available-for-sale financial assets (6) (5) Increase in restricted cash (6,453) (4,667) Disposal of property, plant and equipment 4,244 22,114 Disposal of investments 217 17 Dividends received from associates 4,433 3,366 Disposals of associates 54,969 893 Purchase of subsidiaries and minorities (15,100) (3,181) Deferred and contingent acquisition consideration paid - (14) ----------- ----------- Net cash outflow from investing activities (145,787) (223,520) ----------- ----------- Cash flows from financing activities Proceeds from issue of new ordinary shares 158 1,495,255 Costs associated with issuing new shares - (60,242) Increase /(decrease) in interest-bearing borrowings 109,359 (1,350,408) Repayment of finance lease liabilities (10,997) (16,650) Derivative termination payments 27 (23,205) Deferred debt issue costs - (8,213) Dividends paid to shareholders (35,000) - Dividends paid to minority interests (5,833) (6,437) ----------- ----------- Net cash inflow from financing activities 57,714 30,100 ----------- ----------- Increase in cash and cash equivalents 322,393 59,108 =========== =========== Reconciliation of opening to closing cash and cash equivalents Cash and cash equivalents at 1 January 375,390 321,494 Currency translation adjustment (477) (3,142) Increase in cash and cash equivalents 322,393 59,108 ----------- ----------- Cash and cash equivalents at 30 September 697,306 377,460 =========== =========== *T 1. General information Smurfit Kappa Group plc ('SKG plc') ('the Company') and its subsidiaries (together 'the Group') manufacture, distribute and sell containerboard, corrugated containers and other paper-based packaging products such as solidboard and graphicboard. The Company is a public limited company incorporated and tax resident in Ireland with its registered office at Beech Hill, Clonskeagh, Dublin 4, Ireland. On 14 March, 2007 SKG plc completed an IPO with the placing to institutional investors of 78,787,879 new ordinary shares. This offering, together with the issue of an additional 11,818,181 ordinary shares, generated gross proceeds of EUR 1,495 million. The additional shares were issued on admission by Deutsche Bank acting as stabilising manager under an over-allocation option and represent the permitted maximum 15% of the total number of shares in the IPO. The issue proceeds, net of costs, were used to repay certain debt obligations of the Group and to repay the shareholder PIK note issued in connection with the Group's 2005 acquisition of Kappa Packaging. Trading in the shares on the Irish Stock Exchange and the London Stock Exchange commenced on 20 March, 2007. 2. Basis of Preparation The 2007 consolidated financial statements of SKG plc have been prepared in accordance with International Financial Reporting Standards ('IFRS') as adopted by the European Union ('EU'), International Financial Reporting Interpretations Committee ('IFRIC') interpretations as adopted by the EU, and with those parts of the Companies Acts applicable to companies reporting under IFRS. IFRS is comprised of standards and interpretations approved by the International Accounting Standards Board (IASB) and International Accounting Standards and interpretations approved by the predecessor International Accounting Standards Committee that have been subsequently approved by the IASB and remain in effect. The financial information presented in this report has been prepared to comply with the requirement to publish an 'Interim management statement' for the third quarter, in accordance with the Transparency Regulations which were signed into Irish law on 13 June, 2007. 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 on a consistent basis with the Group's accounting policies with the exception of the application of IFRIC 14. 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 2007 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 applied in the annual report for the financial year ended 31 December, 2007 and are described in those financial statements; with the exception of the application of IFRIC 14. The Group adopted IFRIC 14, 'IAS19 - The limit on a defined benefit asset, minimum funding requirements and their interaction' from 1 January, 2008. IFRIC 14 provides general guidance on how to assess the limit in IAS 19 Employee Benefits, on the amount of a surplus that can be recognised as an asset. It also explains how the pension's asset or liability may be affected when there is a statutory or contractual minimum funding requirement. The Group has applied IFRIC 14 from 1 January, 2008. On adoption, in accordance with IFRIC 14, the Group defined benefit pension liability increased by approximately EUR 1,533,000 with an increase of EUR 460,000 in deferred income tax assets. The resulting effect on equity of EUR 1,073,000 is shown as an adjustment to the opening balance of retained earnings. In addition to IFRIC 14, the following new standards, amendments to standards or interpretations are mandatory for the first time for the financial year beginning 1 January, 2008, but are not currently relevant to the group: • IFRIC 12, Service concession arrangements • IFRIC 13, Customer Loyalty Programmes The financial information includes all adjustments that management considers necessary for a fair presentation of such financial information. All such adjustments are of a normal recurring nature. The financial information presented 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, 2007 have been filed with the Irish Registrar of Companies. The audit report on those group accounts was unqualified. The Group's auditors have not reviewed the financial information contained in this report. 3. Segmental Analyses -0- *T 9 months to 30-Sept-08 9 months to 30-Sept-07 Packaging Specialties Total Packaging Specialties Total EUR '000 EUR '000 EUR '000 EUR '000 EUR '000 EUR '000 ----------------------- ----------- ----------- ----------- ----------- ----------- ----------- Third party revenue EUR EUR EUR EUR (external) 4,700,762 EUR 730,557 5,431,319 4,734,419 EUR 719,443 5,453,862 =========== =========== =========== =========== =========== =========== Segment results-pre exceptional items 426,735 46,213 472,948 466,410 44,122 510,532 Exceptional items (28,268) - (28,268) (20,642) (6,215) (26,857) ----------- ----------- ----------- ----------- ----------- ----------- 398,467 46,213 444,680 445,768 37,907 483,675 Unallocated centre costs-pre exceptional items (30,245) (37,627) Group centre exceptional items - (10,322) ----------- ----------- Operating profit 414,435 435,726 Share of associates' profit (after tax) 2,746 - 2,746 9,744 - 9,744 Loss on disposal of associate (6,905) - (6,905) - - - Finance costs (327,337) (487,393) Finance income 123,112 148,192 ----------- ----------- Profit before income tax 206,051 106,269 =========== =========== *T -0- *T 3 months to 30-Sept-08 3 months to 30-Sept-07 Packaging Specialties Total Packaging Specialties Total EUR '000 EUR '000 EUR '000 EUR '000 EUR '000 EUR '000 ----------------------- ----------- ----------- ----------- -- ----------- ----------- ----------- Third party revenue EUR EUR EUR EUR (external) 1,510,388 EUR 242,925 1,753,313 1,580,555 EUR 248,568 1,829,123 =========== =========== =========== =========== =========== =========== Segment results-pre exceptional items 123,226 15,219 138,445 164,543 20,317 184,860 Exceptional items - - - (2,643) 1,069 (1,574) ----------- ----------- ----------- ----------- ----------- ----------- 123,226 15,219 138,445 161,900 21,386 183,286 Unallocated centre costs-pre exceptional items (7,420) (11,935) Group centre exceptional items - (244) ----------- ----------- Operating profit 131,025 171,107 Share of associates' profit (after tax) 195 - 195 2,176 1,329 3,505 Finance costs (86,353) (130,503) Finance income 16,161 61,690 ----------- ----------- Profit before income tax 61,028 105,799 =========== =========== *T 4. Exceptional Items -0- *T 9 months to 9 months to The following items are regarded as exceptional in nature: 30-Sept-08 30-Sept-07 EUR '000 EUR '000 ---------------------------------------------------------------------- ------------ ------------ Reorganisation and restructuring costs (17,318) (38,642) Impairment of property, plant and equipment (10,950) (6,075) Net income on sale of assets and operations - 7,538 ------------ ------------ Total exceptional items included in operating costs (28,268) (37,179) ============ ============ ------------------------- Total exceptional items included in finance costs - (109,970 ========================= ------------------------- Loss on disposal of associate (6,905) - ========================= *T The reorganisation and restructuring costs and impairment of property, plant and equipment in 2008, relate entirely to the announced closure of our Valladolid recycled containerboard mill in Spain. The loss on disposal of associate resulted from the sale of the Group's principal associate Duropack AG. The reorganisation and restructuring costs in 2007 include the termination costs on closures of a containerboard mill in France, a cartons plant and a small sheet plant in Ireland and a solid board packaging plant in Norway. In 2007 the impairment charge of EUR 6.1 million resulted mainly from the closure of the containerboard mill in France. Net income on sale of assets and operations in 2007 included gains on the sale of land and buildings in Spain, Italy, the UK and Venezuela. We also sold a small sack plant in Sweden and a small solid board operation in Mexico. Exceptional finance costs of EUR 110 million arose in 2007 following our use of the proceeds from the IPO to pay down debt. These costs comprise refinancing costs of EUR 79 million and the non-cash accelerated amortisation of debt costs of EUR 31 million. 5. Other Operating Income Other operating income in 2007 includes insurance proceeds of EUR 46 million in respect of a fire in the Group's mill in Facture, France. The costs of the fire and related downtime were included in the appropriate cost headings within operating profit. 6. Finance Costs and Finance Income -0- *T 9 Months to 9 Months to 30-Sep-08 30-Sep-07 EUR '000 EUR '000 --------------------------------------------------------------- ---------------- ---------------- Finance costs Interest payable on bank loans and overdrafts 157,166 152,922 Interest payable on finance leases and hire purchase contracts 4,110 4,936 Interest payable on other borrowings 47,411 85,983 Amortisation of deferred debt issue costs 11,318 11,744 Impairment loss on available-for-sale financial assets 1,419 54 Unwinding of discount element of provisions 1,577 121 Foreign currency translation loss on debt 25,551 10,224 Fair value loss on derivatives 1,858 38,220 Interest cost on employee benefit plan liabilities 76,927 73,219 ---------------- ---------------- Total finance cost 327,337 377,423 ---------------- ---------------- Finance income Other interest receivable 27,167 18,230 Foreign currency translation gain on debt 10,704 44,392 Fair value gain on commodity derivatives 55 3,219 Fair value gain on other derivatives 18,740 16,364 Expected return on employee benefit plan assets 66,446 65,987 ---------------- ---------------- Total finance income 123,112 148,192 ---------------- ---------------- Net finance cost 204,225 229,231 ================ ================ *T 7. Income Tax Expense Income tax expense recognised in the Group Income Statement -0- *T 9 Months to 9 Months to 30-Sep-08 30-Sep-07 EUR '000 EUR '000 ---------------------------------------------------------------- --------------- --------------- Current taxation Europe 41,077 48,795 United States and Canada 166 (1,678) Latin America 23,416 24,965 --------------- --------------- 64,659 72,082 Deferred taxation (37,579) (23,022) --------------- --------------- Total income tax expense charged to P&L 27,080 49,060 =============== =============== Current tax is analysed as follows: Ireland 9,457 8,750 Foreign 55,202 63,332 --------------- --------------- 64,659 72,082 =============== =============== *T Income tax recognised directly in equity -0- *T 9 Months to 9 Months to 30-Sep-08 30-Sep-07 EUR '000 EUR '000 ---------------------------------------------------------------- --------------- --------------- Arising on actuarial gains on defined benefit plans (7,275) 18,998 =============== =============== *T A net credit of EUR 1.6 million is included in the 2008 current tax charge for exceptional items. Interim period income tax is accrued based on the estimated 2008 annual effective income tax rate of 20%. The increase in the deferred tax credit for the period ended 30 September 2008 arose primarily due to the recognition of tax losses and movement in other timing differences. 8. Employee Post Retirement Schemes The table below sets out the components of the defined benefit expense for the period: -0- *T 9 Months to 9 Months to 30-Sep-08 30-Sep-07 EUR '000 EUR '000 --------------------------------------------------------------- -------------- -------------- Current service cost 32,011 38,994 Past service cost 936 345 Gain on settlements and curtailments (444) (4,978) Actuarial gains and losses arising on long-term employee benefits other than defined benefit schemes 1,571 (234) -------------- -------------- 34,074 34,127 -------------- -------------- Expected return on scheme assets (66,446) (65,988) Interest cost on scheme liabilities 76,926 72,965 -------------- -------------- Net financial expense 10,480 6,977 -------------- -------------- Defined benefit expense 44,554 41,104 ============== ============== *T Included in cost of sales and distribution and administrative expenses is a total defined benefit expense of EUR 34,074,000 for the first nine months (2007: EUR 34,127,000). Expected Return on Scheme Assets of EUR 66,446,000 for the first nine months (2007: EUR 65,988,000) is included in Finance Income and Interest Cost on Scheme Liabilities of EUR 76,926,000 for the first nine months (2007: EUR 72,965,000) is included in Finance Expense in the Group Income Statement. The amounts recognised in the balance sheet were as follows: -0- *T 30-Sept-08 30-Sept-07 31-Dec-07 EUR '000 EUR '000 EUR '000 ----------------------------------------------- ------------------ -------------- ------------- Present value of funded obligations (1,355,641) (1,489,482) (1,498,547) Fair value of plan assets 1,238,848 1,418,191 1,411,223 Present value of unfunded obligations (373,459) (407,552) (395,173) ------------------ -------------- ------------- Liability in the balance sheet (490,252) (478,843) (482,497) ================== ============== ============= *T The adoption of IFRIC 14, 'IAS19 - The limit on a defined benefit asset, minimum funding requirements and their interaction' resulted in the following adjustments to the comparative figures: -0- *T 30-Sept-07 31-Dec-07 EUR '000 EUR '000 ------------------------------------------------------------------------------ -------------- Liability in the balance sheet - As previously stated 478,293 480,964 Impact of adoption of IFRIC 14 550 1,533 -------------------- -------------- Liability in the balance sheet - restated 478,843 482,497 ==================== ============== *T The above impact of the adoption of IFRIC 14 is reflected as a movement in the Statement of Recognised Income and Expense. The employee benefits provision has increased from EUR 432 million at 30 June 2008 to EUR 490 million at 30 September 2008. The rise in provision was mainly as a result of asset losses of some EUR 67 million over the quarter. 9. Earnings Per Share Basic Basic earnings per share is calculated by dividing the profit or loss attributable to equity holders of the Company by the weighted average number of ordinary shares in issue during the year. -0- *T 9 Months 3 Months to 3 Months to 9 Months to to 30-Sept-08 30-Sept-07 30-Sept-08 30-Sept-07 ------------------------------------------------- ----------- ----------- ----------- ---------- Profit attributable to equity holders of the Company (EUR '000) 36,712 84,098 160,315 45,003 Weighted average number of ordinary shares in issue ('000) (1) 218,023 217,768 218,013 191,528 Basic earnings per share (cent per share) 16.8 38.6 73.5 23.5 =========== =========== =========== ========== *T 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 Plan. -0- *T 9 Months 3 Months to 3 Months to 9 Months to to 30-Sept-08 30-Sept-07 30-Sept-08 30-Sept-07 ------------------------------------------------- ----------- ----------- ----------- ---------- Profit attributable to equity holders of the Company (EUR '000) 36,712 84,098 160,315 45,003 Weighted average number of ordinary shares in issue ('000) (1) 218,023 217,768 218,013 191,528 Potential dilutive ordinary shares assumed 2,847 6,672 329 9,167 ----------- ----------- ----------- ---------- Diluted weighted average ordinary shares 220,870 224,440 218,342 200,695 ----------- ----------- ----------- ---------- Diluted earnings per share (cent per share) 16.6 37.5 73.4 22.4 =========== =========== =========== ========== *T (1) Average of ordinary shares in issue pre and post the IPO. Ordinary shares in issue at 30 September 2008 amounted to 218,022,794. 10. Dividends In May, the final dividend for 2007 of 16.05 cent per share was paid to the holders of ordinary shares. In October an interim dividend for 2008 of 16.05 cent per share was paid to the holders of ordinary shares. 11. Property, Plant and Equipment -0- *T Land and Plant and Buildings Equipment Total EUR '000 EUR '000 EUR '000 -------------------------------------------------- -------------- ---------------- -------------- Nine months ended 30 September 2008 Opening net book amount 1,176,694 2,074,785 3,251,479 Reclassification 12,330 (12,330) - Additions 5,457 180,528 185,985 Depreciation charge for the period (36,990) (220,021) (257,011) Impairment losses recognised in profit and loss (1,233) (9,717) (10,950) Retirements and disposals (1,642) (3,243) (4,885) Foreign currency translation adjustment (2,178) (12,725) (14,903) -------------- ---------------- -------------- At 30 September 2008 1,152,438 1,997,277 3,149,715 ============== ================ ============== *T 11. Property, Plant and Equipment - (continued) -0- *T Land and Plant and Buildings Equipment Total EUR '000 EUR '000 EUR '000 -------------------------------------------------- -------------- ---------------- -------------- Year ended 31 December 2007 Opening net book amount 1,215,877 2,166,104 3,381,981 Reclassification 34,382 (34,941) (559) Acquisitions 772 6,783 7,555 Additions 14,547 288,742 303,289 Transfer to assets held for sale (9,123) (1,026) (10,149) Depreciation charge for the year (51,406) (305,819) (357,225) Impairment losses recognised in profit and loss (225) (6,208) (6,433) Retirements and disposals (10,703) (7,934) (18,637) Foreign currency translation adjustment (17,427) (30,916) (48,343) -------------- ---------------- -------------- At 31 December 2007 1,176,694 2,074,785 3,251,479 ============== ================ ============== *T 12. Investment in Associates -0- *T 9 Months to 12 Months to 30-Sept-08 31-Dec-2007 EUR '000 EUR '000 ------------------------------------------------------------------- -------------- -------------- At 1 January 79,307 76,668 Share of (loss)/profit for the period (4,159) 12,513 Dividends received from associates (4,433) (3,617) Disposals (54,973) (3,810) Transfer to subsidiaries - (2,000) Reclassification - 631 Foreign currency translation adjustment 134 (1,078) -------------- -------------- At 30 September EUR 15,876 EUR 79,307 ============== ============== *T 13. Share-based Payment In March 2007 upon the IPO becoming effective, all of the then class A, E, F and H convertible shares and 80% of the class B convertible shares vested and were converted into D convertible shares. The class C, class G and 20% of the class B convertible shares did not vest and were re-designated as A1, A2 and A3 convertible shares. The A1, A2 and A3 convertible shares automatically convert on a one-to-one basis into D convertible shares on the first, second and third anniversaries respectively of the IPO, provided their holder remains an employee of the Group at the relevant anniversary. The D convertible shares resulting from these conversions are convertible on a one-to-one basis into ordinary shares, at the instance of the holder, upon the payment by the holder of the agreed conversion price. The life of the D convertible shares arising from the vesting of these new classes of convertible share ends on 20 March, 2014. The plans provide for equity settlement only, no cash settlement alternative is available. In March 2007, SKG plc adopted the 2007 Share Incentive Plan (the '2007 SIP'). Incentive awards under the 2007 SIP are in the form of New Class B and New Class C convertible shares issued in equal proportions to participants at a nominal value of EUR 0.001 per share. On satisfaction of specified performance criteria the New B and New C convertible shares will automatically convert on a one-to-one basis into D convertible shares. The D convertibles may be converted by the holder into ordinary shares upon payment of the agreed conversion price. The conversion price for each D convertible share is the market value of an ordinary share on the date the participant was invited to subscribe less the nominal subscription price. Each award has a life of ten years from the date of issuance of the New Class B and New Class C convertible shares. 13. Share-based Payment - (continued) As of 30 September 2008, SKG plc had a total of 15,310,509 convertible shares in issue in total, 10,114,029 under the 2002 Plan, as amended and 5,196,480 under the 2007 SIP. A summary of the activity under the 2002 Plan, as amended, for the period from 31 December, 2007 to 30 September, 2008 is presented below. -0- *T Shares 000's Class of Convertible shares ------------------------------------------------------- D A1 A2 A3 Total ------------------------------------------ ----------- --------- --------- --------- ------------- Balance December 2007 8,399.8 583.7 583.7 583.6 10,150.8 ------------------------------------------ ----------- --------- --------- --------- ------------- Vested into D 599.7 (583.7) (8.0) (8.0) - Converted into Ordinary shares (36.8) - - - (36.8) Balance September 2008 8,962.7 - 575.7 575.6 10,114.0 Exercisable September 2008 8,962.7 - - - 8,962.7 ------------------------------------------ ----------- --------- --------- --------- ------------- *T The exercise price for all D convertible shares other than those derived from Class H convertibles at 30 September, 2008 was EUR 4.28. The exercise price for D convertible shares derived from Class H convertibles was EUR 5.69 at 30 September, 2008. The weighted average remaining contractual life of all the awards issued under the 2002 Plan, as amended, at 30 September, 2008 was 4.24 years. A summary of the activity under the 2007 SIP, for the period from 31 December, 2007 to 30 September, 2008 is presented below: -0- *T Shares 000's Class of Convertible shares ------------------------------------------------------------ New B New C Total Balance December 2007 1,374.6 1,374.6 2,749.2 Exercisable December 2007 - - - March 2008 Allotted 1,223.6 1,223.6 2,447.3 Balance September 2008 2,598.2 2,598.2 5,196.5 Exercisable September 2008 - - - *T As at 30 September, 2008 the weighted average exercise price for all New B and New C convertible shares upon conversion would be EUR 13.68. The weighted average remaining contractual life of all the awards issued under the 2007 SIP at 30 September, 2008 was 9.03 years. 14. Reconciliation of Movements in Total Equity -0- *T Attributable to equity Minority Total equity holders interests of the Company EUR '000 EUR '000 EUR '000 ------------------------------------------------ --------------- --------------- --------------- 31 December 2007, as previously reported 2,053,222 137,443 2,190,665 Adjustment in respect of the implementation of IFRIC 14(1) (1,073) - (1,073) --------------- --------------- --------------- 31 December 2007, as adjusted 2,052,149 137,443 2,189,592 Total recognised income and expense 108,595 22,645 131,240 Share premium on shares issued 158 - 158 Share-based payment expense 8,430 - 8,430 Purchase of minorities - (14,242) (14,242) Dividend paid to shareholders (35,000) - (35,000) Dividends paid to minorities - (5,833) (5,833) --------------- --------------- --------------- At 30 September 2008 2,134,332 140,013 2,274,345 =============== =============== =============== 1 January 2007, as previously reported 495,178 136,343 631,521 Adjustment in respect of the implementation of IFRIC 14 (197) - (197) ----------------------------------------------- 1 January 2007, as adjusted 494,981 136,343 631,324 Total recognised gains and losses 99,430 8,337 107,767 Shares issued 1,432,997 - 1,432,997 Share-based payment expense 24,741 - 24,741 Purchase of minorities - (1,462) (1,462) Dividends paid to minorities - (5,775) (5,775) ----------------------------------------------- At 31 December 2007 2,052,149 (137,443) 2,189,592 =============================================== *T (1) IFRIC 14 provides guidance on how to assess the limit in IAS 19 Employee Benefits, on the amount of a surplus that can be recognised as an asset. It also explains how the pension's asset or liability may be affected when there is a statutory or contractual minimum funding requirement. The Group has applied IFRIC 14 from 1 January 2008. On adoption, in accordance with IFRIC 14, the Group defined benefit pension liability increased by EUR 1,533,000 with an increase of EUR 460,000 in deferred income tax assets. The resulting effect on equity of EUR 1,073,000 is shown as an adjustment to the opening balance of retained earnings on 1 January 2008, with a corresponding reduction of EUR 197,000 at 1 January 2007. 15. Analysis of Net Debt -0- *T 30-Sept-08 31-Dec-07 EUR '000 EUR '000 ------------------------------------------------------------------------ ----------- ----------- Senior credit facility: Revolving credit facility(1) - interest at relevant interbank rate + 1.5% (9,106) (10,746) Restructuring facility(2) - interest at relevant interbank rate + 1.5% until conversion to Term Loan 227,000 103,200 Tranche A Term loan(3a) - interest at relevant interbank rate + 1.5% 397,642 422,214 Tranche B Term loan(3b) - interest at relevant interbank rate + 1.875% 1,191,857 1,187,045 Tranche C Term loan(3c) - interest at relevant interbank rate + 2.125% 1,190,619 1,186,147 Yankee bonds (including accrued interest)(4) 208,380 198,674 Bank loans and overdrafts/(cash) (603,882) (324,946) 2011 Receivables securitisation floating rate notes (including accrued interest)(5) 206,633 205,815 ----------- ----------- 2,809,143 2,967,403 2015 Cash pay subordinated notes (including accrued interest) (6) 350,855 352,985 ----------- ----------- Net debt before finance leases 3,159,998 3,320,388 Finance leases 60,573 72,786 ----------- ----------- Net debt including leases - Smurfit Kappa Funding plc 3,220,571 3,393,174 Balance of revolving credit facility reclassified to debtors 9,106 10,746 ----------- ----------- Net debt after reclassification - Smurfit Kappa Funding plc 3,229,677 3,403,920 Net (cash) in parents of Smurfit Kappa Funding plc (37,317) (44) ----------- ----------- Net Debt including leases - Smurfit Kappa Group plc 3,192,360 3,403,876 =========== =========== *T -0- *T (1) Revolving credit facility of EUR 600 million (available under the senior credit facility) to be repaid in full in 2012 (Revolver Loans = Nil, drawn under ancillary facilities and facilities supported by letters of credit - Nil, letters of credit issued in support of other liabilities-EUR 17.8 million) (2) Restructuring credit facility of EUR 275 million (available under the senior credit facility) (3a) Term Loan A due to be repaid in certain instalments up to 2012 (3b) Term Loan B due to be repaid in full in 2013 (3c) Term Loan C due to be repaid in full in 2014 (4) 7.50% senior debentures due 2025 of $292.3 million (5) Receivables securitisation floating rate notes mature September 2011 (6) EUR 217.5 million 7.75% senior subordinated notes due 2015 and US$200.0 million 7.75% senior subordinated notes due 2015 *T Supplemental Financial Information -0- *T Reconciliation of net income to EBITDA, before exceptional items & share-based payment expense 9 months to 9 months to 3 months to 3 months to 30-Sept-08 30-Sept -07 30-Sept-08 30-Sept -07 EUR '000 EUR '000 EUR '000 EUR '000 -------------------------------------------- ------------ ------------- ------------ -------------- Profit for the financial period 160,315 45,003 36,712 84,098 Equity minority interests 18,656 12,206 12,148 4,969 Income tax expense 27,080 49,060 12,168 16,732 Share of associates' operating income (2,746) (9,744) (195) (3,505) Profit on sale of assets and operations -subsidiaries - (7,538) - (1,668) Loss on disposal of associates 6,905 - - - Reorganisation and restructuring costs 17,318 38,642 - 2,073 Impairment of fixed assets 10,950 6,075 - 1,413 Total net interest 204,225 339,201 70,192 68,813 Share-based payment expense 8,430 21,353 2,380 4,457 Depreciation, depletion (net) and amortisation 294,329 294,822 97,880 98,006 ------------ ------------- ------------ -------------- EBITDA before exceptional items and share- based payment expense 745,462 789,080 231,285 275,388 ------------ ------------- ------------ -------------- *T -0- *T EUR Million Q2, 2007 Q3, 2007 Q4, 2007 FY 2007 Q1, 2008 Q2, 2008 Q3, 2008 -------------------------------- --------- --------- --------- --------- --------- --------- --------- Group and third party revenue 2,650 2,689 2,656 10,624 2,702 2,713 2,570 Third party revenue 1,831 1,829 1,818 7,272 1,832 1,846 1,753 EBITDA before exceptional items and share-based payment expense 260 275 275 1,064 257 257 231 EBITDA margin 14.2% 15.1% 15.1% 14.6% 14.0% 13.9% 13.2% Operating profit 134 171 126 562 127 156 131 Profit before tax 43 106 64 170 62 83 61 Free cash flow 3 150 73 186 1 76 149 Basic earnings per share (cent per share) 14.4 38.6 46.9 74.3 18.4 38.3 16.8 Weighted average number of shares used in EPS calculation 217,702 217,768 217,952 198,188 217,994 218,022 218,023 Net debt 3,605 3,448 3,404 3,404 3,373 3,285 3,192 Net debt to EBITDA (LTM) 3.62 3.30 3.20 3.20 3.16 3.09 3.13 *T

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