3rd Quarter Results

3rd Quarter Results

Smurfit Kappa Group PLC

2012 Third Quarter Results

7 November 2012: Smurfit Kappa Group plc (‘SKG’ or the ‘Group’) today announced results for the 3 months and 9 months ending 30 September 2012.

2012 Third Quarter & First Nine Months | Key Financial Performance Measures

€m   YTD 2012   YTD 2011   change   Q3 2012   Q3 2011   change   Q2 2012   change
               
Revenue €5,510 €5,538 - €1,830 €1,868 (2%) €1,857 (1%)
 
EBITDA before Exceptional Items and Share-based Payment (1) €780 €771 1% €280 €264 6% €255 10%
 
EBITDA Margin 14.2% 13.9% - 15.3% 14.1% - 13.7% -
 
Operating Profit before Exceptional Items €486 €477 2% €181 €162 12% €156 16%
 
Profit before Income Tax €295 €221 33% €105 €85 24% €85 24%
 
Basic EPS (cent) 84.9 53.5 59% 33.4 22.2 50% 24.5 36%
 
Pre-exceptional EPS (cent) 73.1 69.7 5% 33.4 22.2 50% 24.5 36%
 
Return on Capital Employed 12.7% 12.5% - 12.2% -
 
Free Cash Flow (2) €164 €195 (16%) €118 €117 - €63 87%
                                 
                                 
Net Debt €2,640 €2,921 (10%) €2,785 (5%)
 
Net Debt to EBITDA (LTM)               2.6x   2.8x   -   2.8x   -
 

(1) EBITDA before exceptional items and share-based payment expense is denoted by EBITDA throughout the remainder of the management commentary for ease of reference. A reconciliation of profit for the period to EBITDA before exceptional items and share-based payment expense is set out on page 28.

(2) Free cash flow is set out on page 8. The IFRS cash flow is set out on page 17.

Highlights

  • Strong EBITDA outcome of €280 million in the third quarter
  • Industry-leading EBITDA margins reflecting SKG’s continued focus on innovative packaging, cost and operating efficiency
  • Two successful bond offerings totalling €690 million resulting in reduced debt servicing costs, improved debt maturity profile and further diversification of funding sources
  • Acquisition of Orange County Container Group for US$340 million at 5.1x 2012 EBITDA post synergies
  • Expect year-end EBITDA in line with 2011

Performance Review and Outlook

Gary McGann, Smurfit Kappa Group CEO, commented: “SKG is pleased to report a strong EBITDA outcome of €280 million in the third quarter of 2012. This performance reflects the strength of the Group’s integrated model and the benefits of its operating efficiency in a generally soft macroeconomic environment. Our differentiated European offering and extensive market footprint has underpinned a strong performance in the period. Following a number of one-off items in the first half of the year, our Latin American operations improved their overall profitability in the third quarter, and continue to provide important diversity and growth opportunities for SKG.

In challenging markets, activity level was satisfactory as a result of our continued focus on our corrugated customers by supporting their marketing efforts, providing innovative packaging solutions and optimising costs throughout their supply chains.

Our business also continues to benefit from the value and contribution of our market leading kraftliner mill system. This grade achieved a price increase of €50 per tonne during the quarter, bringing kraftliner price increases to €90 per tonne over the last two quarters. In recycled containerboard, we announced a €100 per tonne price increase which has been partially implemented to date. With recovered paper costs on a long term upward trend, we will need further price increases to restore economic margins.

Against a range of strategic, financial and operating measures, SKG is also pleased to report meaningful progress in the year to date. The continued strength of our operating performance has delivered a net debt reduction of €483 million in the last two years with our Net Debt/EBITDA ratio down to 2.58x at the end of September 2012.

In September, we completed two consecutive bond offerings which reduces future interest costs, extends our debt maturity profile and further diversifies our funding sources.

We recently announced our agreement to acquire Orange County Container Group, delivering immediate earnings growth for SKG upon completion, and significantly strengthening our existing position in the high growth region of northern Mexico.

These actions, which give us a debt profile appropriate to the industry and the economies in which we operate, together with the recent increase in the share freefloat to 92% following the placements by the private equity holders, have combined to address a number of issues of previous concern to the equity market.

Despite macroeconomic pressure we continue to expect full year EBITDA in line with that achieved in 2011. The range of steps we have undertaken in our business positions SKG for performance and growth, and our objective is to continue to deliver a quality earnings stream with industry leading EBITDA margins. The consistent quality of our earnings, together with the relentless focus on cash flow, will enable us to maintain an appropriate debt level and a sustained and progressive dividend policy, whilst continuing to target accretive acquisitions to enhance growth.”

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 21 countries in Europe and is the European leader in containerboard, solidboard, corrugated and solidboard packaging and has a key position in several other packaging and paper market segments, including graphicboard and sack paper. Smurfit Kappa Group also has a growing base in Eastern Europe, a bag-in-box facility in Canada and operates in 9 countries in Latin America where it 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.

Contacts  
 

Seamus Murphy

Smurfit Kappa Group

 

Tel: +353 1 202 71 80

E-mail: ir@smurfitkappa.com

 

FTI Consulting

 

Tel: +353 1 663 36 80

E-mail: smurfitkappa@fticonsulting.com

2012 Third Quarter & First Nine Months | Performance Overview

The Group reported revenue of €5,510 million for the nine months to September, down marginally year on year. However, third quarter EBITDA of €280 million, an increase of 6% year on year, reflects SKG’s robust operational performance despite a worsening macroeconomic environment. Increased EBITDA margins were due to a combination of continued cost take-out and lower fibre costs, underpinned by the strengths of its integrated model. In July, the Group’s kraftliner mill in France was forced to temporarily cease production following the collapse of a black liquor tank. Adjusting for the impact of lost revenue in this mill, SKG’s margin would have been approximately 14.0% for the nine months compared to the reported 14.2%.

The Group has an established track record of strong free cash flow generation and is reporting free cash flow of €118 million in the quarter, a result in line with previous years. Net debt reduction of €112 million achieved in the nine months to September 2012 reflects the Group’s focus on debt pay-down as a means of unlocking value for equity holders. The Group remains firmly committed to its stated objective of maintaining leverage below 3.0x through the cycle.

European box volumes for the year to date remained broadly unchanged over the same period in 2011, and continue to show resilience across the region. SKG has maintained its core focus on margins over volumes, a strategy which continues to impact on sheet sales which were down 8% in the third quarter. This reduction in sheet sales (which make up 14% of corrugated sales) has impacted on total corrugated volumes which remain 2% below 2011 levels.

The Group’s corrugated pricing for the third quarter remained flat, supported by stabilising recovered fibre costs and rising paper prices. As a result of significant shifts in expectations in recent years, its packaging products are increasingly being viewed as merchandising aids and a marketing medium with increased use of colour, complexity of design and more prominence given to shelf ready packaging. SKG is seen in the marketplace as partners to its customers, driving constant innovation and maintaining a service culture dedicated to their needs.

During the quarter, SKG announced and implemented a €50 per tonne price increase for brown kraftliner. This brings the total price increase achieved over the last two quarters to €90 per tonne, and is indicative of the current tight supply environment in Europe and the quality of the grade. US exports to Europe continue to be at lower levels than 2011 and stability in the European market, where the top five producers make up 93%, continues to provide a favourable outlook for SKG, producer of 1.6 million tonnes annually and the market leader in the grade.

The partial implementation of the announced €100 per tonne price increase has gone some way to addressing the unsustainable spreads in recycled containerboard. However, we will need further price increases to return earnings from these grades to a long-term sustainable economic level, given the upward trend in almost all input costs. Recovered fibre prices stabilised in the quarter, with August and September flat month on month and some evidence of upward momentum in October, indicative of an increase in international demand.

Latin American margins for the quarter were 17.5%, trending more in line with their long term average, thereby contributing strongly to the overall performance of the Group. Increased quarter on quarter sales revenue was further aided by a relative weakening in the euro. Mexico and Colombia have performed strongly in EBITDA terms over the first nine months, and both Venezuela and Argentina are up quarter on quarter, primarily due to the absence of a number of one-off items that occurred in quarter two.

As a result of its robust operational performance and sustained debt pay down SKG is now in a position to take advantage of hitherto unavailable opportunities. Two bond offerings totalling €690 million were completed during the quarter with the effect of reducing the Group’s future annual interest costs by €10 million and materially improving SKG’s debt maturity profile and further diversifying its funding sources. The first bond comprised US Dollar and euro tranches at interest rates of 4.875% and 5.125% respectively, and matures in 2018. The second bond, in the form of a floating rate note of €250 million, matures in 2020 and was issued at Euribor +3.5%.

In September, SKG announced its acquisition of Orange County Container Group for US$340 million which will be funded from existing cash resources. The transaction will deliver EBITDA and EPS growth and is expected to be immediately earnings accretive upon completion. Initially identified synergy benefits total US$14 million, and at a multiple of 5.1x 2012 EBITDA the deal is expected to return double SKG’s cost of capital.

As a result of a number of significant share transactions during the quarter, SKG’s freefloat currently stands at 92% of issued share capital.

2012 Third Quarter | Financial Performance

At €1,830 million, sales revenue in the third quarter of 2012 was 1% lower than the €1,857 million reported in the second quarter. Comparable sales decreased by €69 million compared to the third quarter of 2011, with revenue boosted by a net €24 million from currency movements and hyperinflationary adjustments, reflecting the relative weakness of the euro, and by €7 million from acquisitions.

The Group’s pre-exceptional EBITDA for the third quarter of 2012 was €280 million, 6% higher than the third quarter of 2011, mainly reflecting earnings growth in Europe. EBITDA increased by €25 million when compared to the second quarter of 2012.

Earnings per share was 33.4 cent for the quarter to September 2012 (2011: 22.2 cent). There were no exceptional items in the third quarter of 2012 or 2011.

2012 First Nine Months | Financial Performance

Revenue for the nine months fell marginally from €5,538 million in 2011 to €5,510 million in 2012. As was the case in the quarter, revenue was boosted by €77 million in positive currency movements and hyperinflationary adjustments and €23 million from acquisitions net of disposals, resulting in a decrease in comparable sales by €128 million year-on-year.

At €780 million, the Group’s EBITDA for the nine months to September 2012 was over 1% higher than 2011’s €771 million. However, allowing for the positive impact of currency movements, hyperinflationary adjustments, acquisitions and closures, the underlying move was a decrease of €8 million in EBITDA.

The exceptional gains of €28 million included within operating profit arose in the first quarter. The gains were made up of €10 million from the sale of land at SKG’s former Valladolid mill in Spain and €18 million relating to the disposal of a company in Slovakia. This gain primarily relates to the reclassification (under IFRS) of the cumulative translation differences from the Group Statement of Comprehensive Income to the Group Income Statement. Exceptional charges of €36 million within operating profit in 2011 related almost entirely to the closure of its Nanterre mill.

Earnings per share was 84.9 cent for the nine months 2012 (2011: 53.5 cent). Adjusting for the exceptional gain in 2012 of €28 million (2011: exceptional charge of €36 million), pre-exceptional EPS was 73.1 cent (2011: 69.7 cent).

2012 Third Quarter & First Nine Months | Free Cash Flow

Free cash flow amounted to €118 million in the third quarter of 2012 compared to €117 million in 2011. Although EBITDA was €16 million higher in 2012 and capital outflows (capital expenditure plus the change in capital creditors) were lower, the benefit was largely offset by a reduced working capital inflow and by higher tax payments. For the nine months to September 2012, free cash flow was €164 million compared to €195 million in 2011. The year-on-year decrease of €31 million was driven mainly by higher capital outflows and higher tax payments, which more than offset the €9 million increase in EBITDA.

Following an increase of €97 million in the first half of 2012, working capital decreased by €6 million in the third quarter. The outflow for the nine months to September 2012 was therefore €91 million. This was mainly due to an increase in debtors which was partly offset by an increase in trade and other creditors. Working capital amounted to €656 million at September 2012, representing 9.0% of annualised sales revenue compared to 8.9% at September 2011. Management maintain a continued strong focus on cash management at all points of the year.

Capital expenditure amounted to €180 million in 2012 and equated to 69% of depreciation, compared to €196 million and 75% in the first nine months of 2011. For the full year, SKG’s capital expenditure is expected to amount to approximately 90% of depreciation, slightly ahead of the 2011 level.

Cash interest at €180 million for the nine months to September 2012 was €3 million lower than in 2011, mainly reflecting reduced debt levels.

At €82 million in the first nine months of 2012, tax payments were €35 million higher than in 2011. This increase was primarily driven by legislative changes in Europe and higher cash tax payments in Latin America due to significantly higher profits generated in 2011 compared to 2010.

2012 Third Quarter & First Nine Months | Capital Structure

The Group’s net debt reduced by a further €112 million to €2,640 million in the first nine months, resulting in a net debt to EBITDA ratio of 2.58x at the end of September comfortably within our stated objective of remaining below 3.0x throughout the cycle. Over the last two years, SKG has persevered in its deleveraging efforts with €483 million of net debt reduction. Consistently strong earnings and free cash flow management sustained this reduction throughout the period despite challenging macro conditions.

In the first six months of 2012, the Group undertook amendments to its senior credit facility which extended the debt maturity profile, increased its flexibility to refinance and included the prepayment of €330 million of the senior credit facility from cash on its balance sheet. This was achieved with the support of over 98% of lenders. Following this success, the Group completed two bond offerings in the third quarter. The first bond was issued in two tranches, US$300 million at 4.875% and €200 million at 5.125%, both with a maturity of six years. The second offering, in the form of a floating rate note of €250 million, had a coupon of Euribor +3.5% and a maturity of eight years.

The Group’s refinancing activity during the quarter will reduce its interest cost by approximately €10 million per annum, extend the average maturity profile to 5.7 years (from 4.4 years in December 2011) and further diversify its funding sources. At the end of the third quarter, SKG maintained a strong liquidity position, with €1,230 million of cash on its balance sheet (including cash proceeds from the September bond issues held pending debt paydown), and undrawn committed credit facilities of €525 million. Of this total, approximately €600 million is derived from the proceeds of its September refinancing activity which is being applied during the fourth quarter to fully prepay its 2015 7.75% subordinated notes and part prepay its senior credit facility.

SKG has now established itself in the debt capital markets as a crossover corporate credit, with leverage being maintained comfortably within stated targets and a well-balanced debt maturity profile with over 90% of maturities in 2016 and beyond. The Group also benefits from a diversified funding base with an increased bond content in its debt portfolio and strong liquidity reinforcing its financial flexibility.

2012 Third Quarter & First Nine Months | Operating efficiency

Commercial offering, innovation and sustainability

SKG is the market leader in the European packaging market with an unrivalled product and service offering, the widest geographical coverage, an unparalleled product range and an experienced Pan-European Sales team. The Group’s diversified and demanding customer base ensures that innovation is at the forefront of its agenda, and its state of the art research & development facilities focus on understanding, measuring and improving performance throughout the supply chain. SKG’s Operational Excellence teams ensure its operational standards of excellence are applied throughout the Group.

SKG is consistently recognised in the market as a driver of product development and was formally recognised during the quarter with a number of prizes across a range of associations. In July the Group won five prizes and three gold prizes at the European Flexographic Industry Association Awards for its designs. The products, ranging from vintage single malt whisky boxes to Retail Ready Packaging solutions for rice, displayed SKG’s capabilities in designing innovative, high quality, multi-coloured and practical products across a wide breadth of industries.

The Group’s Bag-in-box division has also received recognition for its new Pouch-Up product winning the World Packaging Organisation’s Starpack award in September. The Pouch-Up was chosen for its design, the performance of the film, its ease of use, and its low carbon footprint.

The value that the Group supplies to its customers is not confined to its packaging solutions alone. SKG also works with its customers to drive value throughout its supply chain by way of increased operational efficiencies and benchmarking their product across a range of measures. For some of its larger pan-European customers, the Group commits itself to specific cost take-out targets, which it has an established track record of meeting and exceeding. Benchmarking is carried out on two levels; between the customers’ various products throughout different regions to ensure optimal and uniform product delivery and; between the customers’ products and the wider market segment on the basis of cost and consumer appeal.

In order to support the Group’s packaging customers a number of significant investments were completed during the quarter with a specific focus on the higher growth sectors and regions. A €12 million investment in the Group’s Bag-in-box operations in France and Italy was finalised adding significantly to current tap and bag production capacity along with a new R&D laboratory. A further €3 million was spent on a four colour flexo folder gluer in Brühl, to service its German market.

Investments in the Group’s paper system focus on increasing efficiencies within its operations. SKG increased the energy capacity of its Nervion mill by 40% with the completion of a €20 million investment project on energy generation from biomass. The project will significantly reduce fossil CO2 emissions as well as improving the mill’s profitability. In Venezuela, the Group concluded three energy projects totalling approximately €3 million to ensure energy self-sufficiency and other cost reductions.

Cost Take-out Programme

The Group’s consistently strong margins, despite inflationary effects on input costs and stable pricing, is indicative of the emphasis on operating efficiencies within SKG. The cost take-out programme is based on a detailed, bottom-up approach and focuses all levels of management on the key cost areas of raw materials, wages & salaries and energy, amongst others.

The Group has delivered €164 million in savings over the last 21 months with €20 million in the third quarter of 2012. Prior to this a similar three year programme (2008 – 2010) saved €306 million.

2012 Third Quarter & First Nine Months | Performance Review

Europe

European EBITDA increased by 4% year on year in the first nine months to €644 million, in spite of a reduction in revenue over the same period. Continued savings as a result of cost take-out initiatives, in combination with lower fibre costs were the main drivers behind the improved margins. Paper price and other input cost increases during the period underpinned corrugated pricing which remained relatively unchanged.

Total corrugated volumes for Europe experienced another quarter of broad stability whilst declining by 1% in the first nine months compared to 2011. The principal cause of the decline in volumes continues to be loss of sheet volumes due to SKG’s strategic focus on price over volume. European box volumes have remained broadly flat for the nine months to September, and have declined by less than 1% when comparing the third quarter of 2012 to 2011. Eastern European countries performed well throughout the period however with 3% growth in the Polish box market.

The recent successful implementation of the full €50 per tonne price increase for kraftliner underscores the tight supply/demand dynamics currently prevalent for the grade. The closure of significant capacity in Europe during the second quarter and the successful price increase of US$50 per tonne in the US will ensure a continued tight supply environment for this grade in Europe in the medium term. US kraft imports to Europe reduced by 14% year on year for the eight months to August. Wood costs trended downwards throughout the quarter.

SKG’s Facture kraftliner mill re-commenced production during the quarter after a seven week shut down. The 520,000 tonne mill was forced to temporarily close due to a black liquor spill in July. The event is not expected to materially affect results for 2012.

Recycled containerboard prices, under pressure during the second quarter and early into the third quarter due to declining recovered paper prices, achieved a €30 per tonne price increase in September. This was required as the spreads between recovered paper and testliner prices had retreated to an economically unsustainable level, almost €80 per tonne off their 2007 peak. Further testliner price increases will be necessary as it is widely acknowledged that recovered paper prices will trend upwards due to global containerboard capacity growth and recovered fibre supply constraints. There is already some minor evidence of this upward movement visible in October.

The Group continues to actively manage its energy costs, with third quarter costs remaining in line with the third quarter of 2011.

Latin America

Latin America reported revenue of €1,032 million in the first nine months, representing 19% of the Group’s overall revenue. EBITDA of €160 million in the period was 10% lower than in 2011, primarily reflecting somewhat lower demand and a number of one-off events in the first half of the year. As anticipated, margins have significantly improved on a sequential basis and, at 17.5% in the third quarter, the region’s margin has returned to its normalised range of 16% - 21%. This recovery was due to the absence of one-offs, continued pricing progress throughout the region and focused cost take-out actions.

The Group’s Mexican EBITDA increased by 6% year-on-year in dollar terms in the first nine months, illustrating the benefits of capital investment and the Group’s internal cost take-out efforts. The success of the paper price increase in the US is expected to provide a boost to pricing initiatives in the domestic Mexican market.

In Argentina, in an increasingly challenging economic environment, quarter on quarter volume performance improved by 4%. However, lengthy strike actions in one of its packaging plants in the first half have caused Argentina’s corrugated volumes to be materially lower in 2012 year to date.

Similarly, SKG’s Venezuelan business has improved sequential quarterly volumes by 17%. This was achieved as a direct result of the absence of a number of items affecting production in the second quarter, which included scheduled mill downtime and some industrial relations issues. Continued inflationary pressure continues to be offset by operating efficiency measures.

In Colombia, stable corrugated demand and continued progress on pricing delivered an improved EBITDA outcome in the first nine months. Reduced interest rates in the country maintained stable exchange rates for the period.

The region’s return to its historically consistent and robust margin levels affirm SKG’s belief that the Latin American business is integral to the long term strategic goals of the Group providing geographic diversity and opportunities for future growth.

Summary Cash Flow(1)
 
Summary cash flows for the third quarter and nine months are set out in the following table.
  3 months to   3 months to   9 months to   9 months to
30-Sep-12 30-Sep-11 30-Sep-12 30-Sep-11
€m   €m   €m   €m
Pre-exceptional EBITDA 280 264 780 771
Exceptional items - (5) - (5)
Cash interest expense (60) (61) (180) (183)
Working capital change 6 28 (91) (91)
Current provisions (2) (1) (8) (7)
Capital expenditure (54) (80) (180) (196)
Change in capital creditors (8) 9 (37) (6)
Tax paid (35) (25) (82) (47)
Sale of fixed assets 2 1 13 2
Other (11)   (13)   (51)   (43)
Free cash flow 118 117 164 195
 
Share issues 8 - 13 8
Ordinary shares purchased - own shares - - (13) -
Sale of businesses and investments - - 1 (4)
Purchase of investments - - (7) (1)
Dividends (1) (1) (38) (4)
Derivative termination payments -   -   (1)   (1)
Net cash inflow 125 116 119 193
 
Net cash acquired/disposed 1 - 1 -
Deferred debt issue costs amortised (4) (4) (14) (12)
Currency translation adjustments 23   (30)   6   8
Decrease in net debt 145   82   112   189
 

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

    9 months to   9 months to
30-Sep-12 30-Sep-11
        €m   €m
Free cash flow 164 195
 
Add back: Cash interest 180 183
Capital expenditure (net of change in capital creditors) 217 202
Tax payments 82 47
Less: Sale of fixed assets (13) (2)
Profit on sale of assets and businesses – non exceptional (4) (7)
Receipt of capital grants (in “Other”) - (1)
Dividends received from associates (in “Other”) (1) (1)
Non-cash financing activities (12)   (4)
Cash generated from operations 613   612
 

Capital Resources

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

At 30 September 2012 Smurfit Kappa Funding plc had outstanding €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 €202 million variable funding notes issued under the €250 million accounts receivable securitisation program maturing in November 2015.

Smurfit Kappa Acquisitions had outstanding €200 million 5.125% senior secured notes due 2018, US$300 million 4.875% senior secured notes due 2018 and €250 million senior secured floating rate notes due 2020. In addition, Smurfit Kappa Acquisitions had outstanding €500 million 7.25% senior secured notes due 2017 and €500 million 7.75% senior secured notes due 2019. Smurfit Kappa Acquisitions and certain subsidiaries are also party to a senior credit facility. The senior credit facility comprises a €649 million Tranche B maturing in 2016 and a €673 million Tranche C maturing in 2017. In addition, as at 30 September 2012, the facility includes a €525 million revolving credit facility of which there was €0.3 million drawn under facilities supported by letters of credit.

The following table provides the range of interest rates as of 30 September 2012 for each of the drawings under the various senior credit facility term loans.

BORROWING ARRANGEMENT   CURRENCY   INTEREST RATE
 
Term Loan B EUR

3.741% – 4.270%

USD

 

4.085%

 
Term Loan C EUR 3.967% – 4.520%
USD 4.335%
 

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

Market Risk and Risk Management Policies

The Group is exposed to the impact of interest rate changes and foreign currency fluctuations due to its investing and funding activities and its operations in different foreign currencies. Interest rate risk exposure is managed by achieving an appropriate balance of fixed and variable rate funding. At 30 September 2012 the Group had fixed an average of 75% of its interest cost on borrowings over the following twelve months.

The Group’s fixed rate debt comprised mainly €500 million 7.25% senior secured notes due 2017, €500 million 7.75% senior secured notes due 2019, €200 million 5.125% senior secured notes due 2018, US$300 million 4.875% senior secured notes due 2018 (US$50 million swapped to floating), €217.5 million 7.75% senior subordinated notes due 2015, US$200 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 €1,010 million in interest rate swaps with maturity dates ranging from October 2012 to July 2014.

The Group’s earnings are affected by changes in short-term interest rates as a result of its floating rate borrowings. If LIBOR interest rates for these borrowings increase by one percent, the Group’s interest expense would increase, and income before taxes would decrease, by approximately €10 million over the following twelve months. Interest income on its cash balances would increase by approximately €6 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

  Unaudited   Unaudited
9 months to 30-Sep-12 9 months to 30-Sep-11
Pre-exceptional 2012   Exceptional 2012   Total 2012 Pre-exceptional 2011   Exceptional 2011   Total 2011
    €m   €m   €m   €m   €m   €m
Revenue 5,510 - 5,510 5,538 - 5,538
Cost of sales (3,917)   -   (3,917) (3,979)   (13)   (3,992)
Gross profit 1,593 - 1,593 1,559 (13) 1,546
Distribution costs (434) - (434) (416) - (416)
Administrative expenses (698) - (698) (668) - (668)
Other operating income 25 28 53 2 - 2
Other operating expenses -   -   - -   (23)   (23)
Operating profit 486 28 514 477 (36) 441
Finance costs (292) - (292) (296) - (296)
Finance income 71 - 71 72 - 72
Profit on disposal of associate - - - 2 - 2
Share of associates’ profit (after tax) 2   -   2 2   -   2
Profit before income tax 267   28 295 257   (36) 221
Income tax expense (98) (98)
 
Profit for the financial period 197

 

123
 
Attributable to:
Owners of the Parent 189 119
Non-controlling interests 8

4

Profit for the financial period 197 123
 
Earnings per share
Basic earnings per share - cent 84.9 53.5
Diluted earnings per share - cent 83.1 52.6
 

Group Income Statement – Third Quarter

  Unaudited   Unaudited
3 months to 30-Sep-12 3 months to 30-Sep-11
Pre-exceptional 2012   Exceptional 2012   Total 2012 Pre-exceptional 2011   Exceptional 2011   Total 2011
    €m   €m   €m   €m   €m   €m
Revenue 1,830 - 1,830 1,868 - 1,868
Cost of sales (1,294)   -   (1,294) (1,342)   -   (1,342)
Gross profit 536 - 536 526 - 526
Distribution costs (144) - (144) (134) - (134)
Administrative expenses (235) - (235) (231) - (231)
Other operating income 24   -   24 1   -   1
Operating profit 181 - 181 162 - 162
Finance costs (96) - (96) (100) - (100)
Finance income 20 - 20 22 - 22
Share of associates’ profit (after tax) -   -   - 1   -   1
Profit before income tax 105   - 105 85   - 85
Income tax expense (25) (30)
 
Profit for the financial period 80 55
 
Attributable to:
Owners of the Parent 75 50
Non-controlling interests 5 5
Profit for the financial period 80 55
 
Earnings per share
Basic earnings per share - cent 33.4 22.2
Diluted earnings per share - cent 32.7 22.0
 

Group Statement of Comprehensive Income – Nine Months

  Unaudited   Unaudited
9 months to   9 months to
30-Sep-12 30-Sep-11
    €m   €m
 
Profit for the financial period 197 123
 
Other comprehensive income:
Foreign currency translation adjustments:
- Arising in the period 91 (53)
- Currency translation adjustment recycled to Group Income Statement on disposal (17) -
Defined benefit pension plans including payroll tax:
- Actuarial loss (145) (13)
- Movement in deferred tax 24 1
Effective portion of changes in fair value of cash flow hedges:
- Movement out of reserve 17 16
- New fair value adjustments into reserve (6) (10)
- Movement in deferred tax (1)   (1)
Total other comprehensive expense (37)   (60)
 
Total comprehensive income for the financial period 160   63
 
Attributable to:
Owners of the Parent 142 61
Non-controlling interests 18   2
160   63
 

Group Statement of Comprehensive Income – Third Quarter

  Unaudited   Unaudited
3 months to 3 months to
30-Sep-12 30-Sep-11
    €m   €m
 
Profit for the financial period 80 55
 
Other comprehensive income:
Foreign currency translation adjustments 4 1
Defined benefit pension plans including payroll tax:
- Actuarial (loss)/gain (71) 26
- Movement in deferred tax 14 (4)
Effective portion of changes in fair value of cash flow hedges:
- Movement out of reserve 6 5
- New fair value adjustments into reserve (1) (21)
- Movement in deferred tax -   2
Total other comprehensive (expense)/income (48)   9
 
Total comprehensive income for the financial period 32   64
 
Attributable to:
Owners of the Parent 33 57
Non-controlling interests (1)   7
32   64
 

Group Balance Sheet

  Unaudited   Unaudited   Audited
30-Sep-12   30-Sep-11   31-Dec-11
    €m   €m   €m
ASSETS
Non-current assets
Property, plant and equipment 2,958 2,922 2,973
Goodwill and intangible assets 2,253 2,192 2,210
Available-for-sale financial assets 32 32 32
Investment in associates 16 14 14
Biological assets 123 90 114
Trade and other receivables 4 6 5
Derivative financial instruments 7 - 6
Deferred income tax assets 162   91   177
5,555   5,347   5,531
Current assets
Inventories 698 720 690
Biological assets 11 10 10
Trade and other receivables 1,472 1,406 1,326
Derivative financial instruments 9 7 7
Restricted cash 11 11 12
Cash and cash equivalents 1,219   681   845
3,420   2,835   2,890
Total assets 8,975   8,182   8,421
 
EQUITY
Capital and reserves attributable to the owners of the Parent
Equity share capital - - -
Capital and other reserves 2,430 2,288 2,336
Retained earnings (264)   (392)   (341)
Total equity attributable to the owners of the Parent 2,166 1,896 1,995
Non-controlling interests 209   177   191
Total equity 2,375   2,073   2,186
 
LIABILITIES
Non-current liabilities
Borrowings 3,193 3,450 3,450
Employee benefits 775 584 655
Derivative financial instruments 70 92 54
Deferred income tax liabilities 208 179 210
Non-current income tax liabilities 12 8 10
Provisions for liabilities and charges 59 45 55
Capital grants 12 13 13
Other payables 8   7   10
4,337   4,378   4,457
Current liabilities
Borrowings 677 163 159
Trade and other payables 1,518 1,466 1,504
Current income tax liabilities 21 42 36
Derivative financial instruments 35 33 59
Provisions for liabilities and charges 12   27   20
2,263   1,731   1,778
Total liabilities 6,600   6,109   6,235
Total equity and liabilities 8,975   8,182   8,421
 

Group Statement of Changes in Equity

 

 

Capital and other reserves

       
         
Equity share capital Share premium Own

shares

Reverse acquisition reserve Cash flow hedging reserve Foreign currency translation reserve Share-based payment

reserve

Retained earnings Total equity attributable to the owners of the Parent Non-controlling interests Total equity
Unaudited €m   €m   €m   €m   €m   €m   €m   €m   €m   €m   €m
At 1 January 2012 - 1,945 - 575 (35) (228) 79 (341) 1,995 191 2,186
 
Profit for the financial period - - - - - - - 189 189 8 197
Other comprehensive income:
Foreign currency translation adjustments - - - - - 64 - - 64 10 74
Defined benefit pension plans including payroll tax - - - - - - - (121) (121) - (121)
Effective portion of changes in fair value of cash flow hedges -   -   -   -   10   -   -   -   10   -   10
Total comprehensive income for the financial period - - - - 10 64 - 68 142 18 160
 
Shares issued - 13 - - - - - - 13 - 13
Shares acquired by Deferred Share Awards Trust - - (13) - - - - - (13) - (13)
Hyperinflation adjustment - - - - - - - 42 42 5 47
Dividends paid - - - - - - - (33) (33) (5) (38)
Share-based payment -   -   -   -   -   -   20   -   20   -   20
At 30 September 2012 -   1,958   (13)   575   (25)   (164)   99   (264)   2,166   209   2,375
 

Group Statement of Changes in Equity (continued)

    Capital and other reserves        
       
Equity share capital Share premium Reverse acquisition reserve Cash flow hedging reserve Foreign currency translation reserve Share-based payment

reserve

Retained earnings Total equity attributable to the owners of the Parent Non-controlling interests Total equity
Unaudited €m   €m   €m   €m   €m   €m   €m   €m   €m   €m
At 1 January 2011 - 1,937 575 (45) (216) 64 (552) 1,763 173 1,936
 
Profit for the financial period - - - - - - 119 119 4 123
Other comprehensive income:
Foreign currency translation adjustments - - - - (51) - - (51) (2) (53)
Defined benefit pension plans including payroll tax - - - - - - (12) (12) - (12)
Effective portion of changes in fair value of cash flow hedges -   -   -   5   -   -   -   5   -   5
Total comprehensive income/(expense) for the financial period - - - 5 (51) - 107 61 2 63
 
Shares issued - 8 - - - - - 8 - 8
Hyperinflation adjustment - - - - - - 53 53 6 59
Dividends paid - - - - - - - - (4) (4)
Share-based payment -   -   -   -   -   11   -   11   -   11
At 30 September 2011 -   1,945   575   (40)   (267)   75   (392)   1,896   177   2,073
 

Group Cash Flow Statement

  Unaudited   Unaudited
9 months to 9 months to
30-Sep-12 30-Sep-11
    €m   €m
Cash flows from operating activities
Profit for the financial period 197 123
Adjustment for
Income tax expense 98 98
Profit on sale of assets and businesses (29) (5)
Amortisation of capital grants (1) (2)
Impairment of property, plant and equipment - 13
Equity settled share-based payment expense 20 11
Amortisation of intangible assets 15 22
Share of associates’ profit (after tax) (2) (2)
Profit on disposal of associate - (2)
Depreciation charge 243 248
Net finance costs 221 224
Change in inventories 5 (91)
Change in biological assets 16 13
Change in trade and other receivables (123) (137)
Change in trade and other payables 13 135
Change in provisions (13) 2
Change in employee benefits (51) (40)
Foreign currency translation adjustment - 1
Other 4   1
Cash generated from operations 613 612
Interest paid (169) (172)
Income taxes paid:
Overseas corporation tax (net of tax refunds) paid (82)   (47)
Net cash inflow from operating activities 362   393
 
Cash flows from investing activities
Interest received 5 5
Purchase of property, plant and equipment and biological assets (211) (198)
Purchase of intangible assets (5) (3)
Receipt of capital grants - 1
Decrease/(increase) in restricted cash 1 (4)
Disposal of property, plant and equipment 17 9
Disposal of associates - 4
Dividends received from associates 1 1
Purchase of subsidiaries and non-controlling interests (11) (1)
Deferred consideration 5   (8)
Net cash outflow from investing activities (198)   (194)
 
Cash flows from financing activities
Proceeds from issue of new ordinary shares 13 8
Ordinary shares purchased - own shares (13) -
Increase/(decrease) in interest-bearing borrowings 272 (11)
Repayment of finance lease liabilities (6) (7)
Derivative termination payments (1) (1)
Deferred debt issue costs (23) -
Dividends paid to shareholders (33) -
Dividends paid to non-controlling interests (5)   (4)
Net cash inflow/(outflow) from financing activities 204   (15)
Increase in cash and cash equivalents 368   184
 
Reconciliation of opening to closing cash and cash equivalents
Cash and cash equivalents at 1 January 825 481
Currency translation adjustment 9 (3)
Increase in cash and cash equivalents 368   184
Cash and cash equivalents at 30 September 1,202   662
 

1. General Information

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

2. Basis of Preparation

The annual consolidated financial statements of SKG plc are prepared in accordance with International Financial Reporting Standards (‘IFRS’) issued by the International Accounting Standards Board (‘IASB’) and adopted by the European Union (‘EU’); and, in accordance with Irish law. The financial information presented in this report has been prepared to comply with the requirement to publish an ‘Interim management statement’ during the second six months of the financial year, in accordance with the Transparency Regulations. The Transparency Regulations do not require Interim management statements to be prepared in accordance with International Accounting Standard 34 – ‘Interim Financial Information’ (‘IAS 34’). Accordingly the Group has not prepared this financial information in accordance with IAS 34.

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

The condensed interim Group financial information includes all adjustments that management considers necessary for a fair presentation of such financial information. All such adjustments are of a normal recurring nature. Some tables in this interim statement may not add correctly due to rounding.

The condensed interim Group 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 2011 have been filed with the Irish Registrar of Companies. The audit report on those Group accounts was unqualified.

3. Segmental Analyses

With effect from 1 September 2011 the Group reorganised the way in which its European businesses are managed. As part of this reorganisation for commercial reasons, the businesses which previously formed part of the Specialties segment were operationally merged with its existing Packaging Europe segment (now referred to as ‘Europe’) and are now managed on a combined basis to make decisions about the allocation of resources and in assessing performance. After this date, the Group ceased to produce financial information for Specialties as the financial information of all of its plants is now combined with the other Europe segment plants.

As a result, the Group has now two segments on the basis of which performance is assessed and resources are allocated: 1) Europe and 2) Latin America and segmental information is presented below on this basis. Prior year segmental information has been restated to conform to the current year segment presentation.

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 Latin America segment comprises all forestry, paper, corrugated and folding carton activities in a number of Latin American countries. Inter-segment revenue is not material. No operating segments have been aggregated for disclosure purposes.

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

  9 months to 30-Sep-12   9 months to 30-Sep-11
Europe   Latin America   Total Europe   Latin America   Total
    €m   €m   €m   €m   €m   €m
Revenue and Results
Revenue 4,478   1,032   5,510 4,594   944   5,538
 
EBITDA before exceptional items 644 160 804 618 177 795
Segment exceptional items 28   -   28 (23)   -   (23)
EBITDA after exceptional items 672   160 832 595   177 772
 
Unallocated centre costs (24) (24)
Share-based payment expense (20) (11)
Depreciation and depletion (net) (259) (261)
Amortisation (15) (22)
Impairment of assets - (13)
Finance costs (292) (296)
Finance income 71 72
Profit on disposal of associate - 2
Share of associates’ profit (after tax) 2 2
Profit before income tax 295 221
Income tax expense (98) (98)
Profit for the financial period 197 123
 
Assets
Segment assets 6,199 1,626 7,825 6,167 1,387 7,554
Investment in associates 2   14 16 1   13 14
Group centre assets 1,134 614
Total assets 8,975 8,182
 

3. Segmental Analyses (continued)

  3 months to 30-Sep-12   3 months to 30-Sep-11
Europe   Latin America   Total Europe   Latin America   Total
    €m   €m   €m   €m   €m   €m
Revenue and Results
Revenue 1,474   356   1,830 1,530   338   1,868
 
EBITDA before exceptional items 226 63 289 208 66 274
Segment exceptional items -   -   - -   -   -
EBITDA after exceptional items 226   63 289 208   66 274
 
Unallocated centre costs (9) (10)
Share-based payment expense (6) (7)
Depreciation and depletion (net) (88) (87)
Amortisation (5) (8)
Finance costs (96) (100)
Finance income 20 22
Share of associates’ profit (after tax) - 1
Profit before income tax 105 85
Income tax expense (25) (30)
Profit for the financial period 80 55
 

4. Exceptional Items

  9 months to   9 months to
The following items are regarded as exceptional in nature: 30-Sep-12 30-Sep-11
    €m   €m
 
Impairment loss on property, plant and equipment - (13)
Reorganisation and restructuring costs - (23)
Disposal of assets and operations 28   -
Exceptional items included in operating profit 28   (36)
 

Exceptional gains of €28 million in the first nine months comprised €10 million in respect of the sale of land at SKG’s former Valladolid mill in Spain (operation closed in 2008), together with €18 million relating to the disposal of a company in Slovakia. This gain primarily relates to the reclassification (under IFRS) of the cumulative translation differences from the Group Statement of Comprehensive Income to the Group Income Statement.

In June 2011, SKG closed its recycling containerboard mill in Nanterre, France. This resulted in an impairment loss on property, plant and equipment of €13 million and reorganisation and restructuring costs of €22 million. The remaining €1 million of reorganisation and restructuring costs related to the continuing rationalisation of the Group’s corrugated operations in Ireland.

5. Finance Costs and Income

  9 months to   9 months to
30-Sep-12 30-Sep-11
    €m   €m
Finance costs:
Interest payable on bank loans and overdrafts 97 101
Interest payable on finance leases and hire purchase contracts 1 1
Interest payable on other borrowings 102 98
Unwinding discount element of provisions 1 1
Foreign currency translation loss on debt 5 6
Fair value loss on derivatives not designated as hedges 1 5
Interest cost on employee benefit plan liabilities 76 75
Net monetary loss – hyperinflation 9   9
Total finance costs 292   296
 
Finance income:
Other interest receivable (5) (5)
Foreign currency translation gain on debt (4) (8)
Fair value gain on derivatives not designated as hedges (2) (2)
Expected return on employee benefit plan assets (60)   (57)
Total finance income (71)   (72)
Net finance costs 221   224
 

6. Income Tax Expense

Income tax expense recognised in the Group Income Statement

   
 
9 months to 9 months to
30-Sep-12 30-Sep-11
    €m   €m
Current taxation:
Europe 40 31
Latin America 28   56
68 87
Deferred taxation 30   11
Income tax expense 98   98
 
Current tax is analysed as follows:
Ireland 3 3
Foreign 65   84
68   87
 

Income tax recognised in the Group Statement of Comprehensive Income

  9 months to   9 months to
30-Sep-12 30-Sep-11
    €m   €m

Arising on actuarial gains/losses on defined benefit plans including payroll tax

(24) (1)
Arising on qualifying derivative cash flow hedges 1   1
(23)   -
 

Income tax expense of €98 million for the nine months to September 2012 is in line with the previous year.

The increase of €9 million in current taxation in Europe includes the effects of legislative changes and additional tax expense in some countries as a result of increased profit.

The taxation expense in 2011 for Latin America includes a €23 million tax expense arising from the implementation of a new equity tax law in Colombia, effective on 1 January 2011, which although payable over four years, was required to be expensed in quarter one 2011.

The movement in deferred tax relates primarily to the effects of using previously recognised tax losses on improving income, a non-cash write down due to a reduction in tax rates and the non-recurring reduction in tax risk provisions for tax audit matters in 2011.

7. Employee Post Retirement Schemes – Defined Benefit Expense

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

  9 months to   9 months to
30-Sep-12 30-Sep-11
    €m   €m
 
Current service cost 22 20
Past service cost - 2
Gain on curtailment (12)   -
10   22
 
Expected return on plan assets (60) (57)
Interest cost on plan liabilities 76   75
Net financial expense 16   18
Defined benefit expense 26   40
 

Included in cost of sales, distribution costs and administrative expenses is a defined benefit expense of €10 million for the first nine months of 2012 (2011: €22 million). The gain on curtailment of €12 million was due to the restructuring of the UK pension scheme in the second quarter. Expected return on plan assets of €60 million (2011: €57 million) is included in finance income and interest cost on plan liabilities of €76 million (2011: €75 million) is included in finance costs in the Group Income Statement.

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

    30-Sep-12   31-Dec-11
      €m   €m
Present value of funded or partially funded obligations (1,891) (1,715)
Fair value of plan assets 1,587   1,486
Deficit in funded or partially funded plans (304) (229)
Present value of wholly unfunded obligations (471)   (426)
Net employee benefit liabilities (775)   (655)
 

The employee benefits provision has increased from €655 million at 31 December 2011 to €775 million at 30 September 2012. The main reason for this is the increase in liabilities due to the lower Eurozone and Sterling AA Corporate bond yields.

8. Earnings Per Share

Basic

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

  9 months to   9 months to
    30-Sep-12   30-Sep-11
Profit attributable to the owners of the Parent (€ million) 189 119
 
Weighted average number of ordinary shares in issue (million) 223 221
 
Basic earnings per share – cent 84.9   53.5
 

Diluted

Diluted earnings per share is calculated by adjusting the weighted average number of ordinary shares outstanding to assume conversion of all dilutive potential ordinary shares which comprise convertible shares issued under the management equity plans and matching shares issued under the Deferred Annual Bonus Plan.

  9 months to   9 months to
    30-Sep-12   30-Sep-11
Profit attributable to the owners of the Parent (€ million) 189 119
 
Weighted average number of ordinary shares in issue (million) 223 221
Dilutive potential ordinary shares assumed (million) 5   4
Diluted weighted average ordinary shares (million) 228   225
 
Diluted earnings per share – cent 83.1   52.6
 

Pre-exceptional

  9 months to   9 months to
    30-Sep-12   30-Sep-11
Profit attributable to the owners of the Parent (€ million) 189 119
Exceptional items included in operating profit (Note 4) (€ million) (28) 36
Taxation on exceptional items (€ million) 2   -
Pre-exceptional profit attributable to the owners of the Parent (€ million) 163   155
 
Weighted average number of ordinary shares in issue (million) 223 221
 
Pre-exceptional earnings per share – cent 73.1   69.7
 

9. Dividends

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

10. Property, Plant and Equipment

 

Land and

buildings

 

Plant and

equipment

  Total
    €m   €m   €m
Nine months ended 30 September 2012
Opening net book amount 1,115 1,858 2,973
Reclassification 8 (12) (4)
Additions 11 148 159
Acquisitions 1 1 2
Depreciation charge for the period (36) (207) (243)
Retirements and disposals (5) (1) (6)
Hyperinflation adjustment 11 11 22
Foreign currency translation adjustment 20   35   55
At 30 September 2012 1,125   1,833   2,958
 
Year ended 31 December 2011
Opening net book amount 1,128 1,880 3,008
Reclassification 19 (25) (6)
Additions 4 282 286
Acquisitions 2 7 9
Depreciation charge for the year (50) (296) (346)
Impairments (5) (10) (15)
Retirements and disposals (2) (1) (3)
Hyperinflation adjustment 21 23 44
Foreign currency translation adjustment (2)   (2)   (4)
At 31 December 2011 1,115   1,858   2,973
 

11. Analysis of Net Debt

  30-Sep-12   31-Dec-11
    €m   €m
Senior credit facility
Revolving credit facility(1) – interest at relevant interbank rate + 3.25% on RCF(10) (8) (6)
Tranche A term loan(2a) – interest at relevant interbank rate + 2.5% - 94
Tranche B term loan(2b) – interest at relevant interbank rate + 3.625%(10) 649 822
Tranche C term loan(2c) – interest at relevant interbank rate + 3.875%(10) 673 819
US Yankee bonds (including accrued interest) (3) 231 226
Bank loans and overdrafts 70 71
Cash (1,230) (857)
2015 receivables securitisation variable funding notes(4) 199 206
2015 cash pay subordinated notes (including accrued interest) (5) 370 376
2017 senior secured notes (including accrued interest)(6) 501 490
2018 senior secured notes (including accrued interest) (7) 422 -
2019 senior secured notes (including accrued interest)(8) 502 492
2020 senior secured floating rate notes (including accrued interest) (9) 245   -
Net debt before finance leases 2,624 2,733
Finance leases 8   13
Net debt including leases 2,632 2,746
Balance of revolving credit facility reclassified to debtors 8   6
Net debt after reclassification 2,640   2,752
 

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

(Revolver loans - nil, drawn under ancillary facilities and facilities supported by letters of credit – €0.3 million)

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

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

€47.5 million prepaid in September 2012. €101.2 million to be prepaid in Q4 2012.

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

€30.8 million prepaid in September 2012. €120.5 million to be prepaid in Q4 2012.

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

(4) Receivables securitisation variable funding notes due 2015

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

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

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

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

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

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

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

The increase in the Group’s cash position during the third quarter reflects the issuance of €200 million 5.125% senior secured notes due 2018, US$300 million 4.875% senior secured notes due 2018 and €250 million senior secured floating rate notes due 2020 in September 2012. The net proceeds of these bond issues were used to repay the subordinated notes due 2015 in full and to partially repay the tranche B and tranche C term loans. This follows the voluntary early debt repayment of €330 million made in the second quarter.

12. Venezuela

Hyperinflation

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

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

        30-Sep-12       30-Sep-11
Index at period end       296.1       250.9
Movement in period       11.5%       20.5%
 

As a result of the entries recorded in respect of hyperinflationary accounting under IFRS, the Group Income Statement is impacted as follows: Revenue €10 million increase (2011: €34 million increase), pre-exceptional EBITDA €4 million decrease (2011: €3 million increase) and profit after taxation €31 million decrease (2011: €24 million decrease). In 2012, a net monetary loss of €9 million (2011: €9 million loss) was recorded in the Group Income Statement. The impact on the Group’s net assets and total equity is an increase of €17 million (2011: €32 million increase).

Supplemental Financial Information

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

Reconciliation of Profit to EBITDA

  3 months to   3 months to   9 months to   9 months to
30-Sep-12 30-Sep-11 30-Sep-12 30-Sep-11
    €m   €m   €m   €m
 
Profit for the financial period 80 55 197 123
Income tax expense 25 30 98 98
Impairment loss on property, plant and equipment - - - 13
Reorganisation and restructuring costs - - - 23
Disposal of assets and operations - - (28) -
Profit on disposal of associate - - - (2)
Share of associates’ profit (after tax) - (1) (2) (2)
Net finance costs 76 78 221 224
Share-based payment expense 6 7 20 11
Depreciation, depletion (net) and amortisation 93   95   274   283
EBITDA 280   264   780   771
 
Supplemental Historical Financial Information
€m   Q3, 2011   Q4, 2011   FY, 2011   Q1, 2012   Q2, 2012   Q3, 2012
           
Group and third party revenue 3,109 2,919 12,108 2,950 3,050 2,944
Third party revenue 1,868 1,819 7,357 1,823 1,857 1,830
EBITDA 264 245 1,015 246 255 280
EBITDA margin 14.1% 13.4% 13.8% 13.5% 13.7% 15.3%
Operating profit 162 149 590 177 156 181
Profit before income tax 85 77 299 105 85 105
Free cash flow 117 199 394 (16) 63 118
Basic earnings per share - cent 22.2 39.4 93.0 27.1 24.5 33.4
Weighted average number of shares used in EPS calculation (million) 222 222 222 222 223 223
Net debt 2,921 2,752 2,752 2,775 2,785 2,640
Net debt to EBITDA (LTM) 2.84 2.71 2.71 2.73 2.76 2.58
 

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