Final Results

Final Results

Smurfit Kappa Group PLC

2010 Fourth Quarter Results

Smurfit Kappa Group plc (“SKG” or the “Group”), one of the world’s largest integrated manufacturers of paper-based packaging products, with operations in Europe and Latin America, today announced results for the 3 months and 12 months ending 31 December 2010.

2010 Fourth Quarter & Full Year | Key Financial Performance Measures

€ m   FY 2010   FY 2009   Change   Q4 2010   Q4 2009   Change   Q3 2010   Change
               
Revenue €6,677 €6,057 10% €1,749 €1,541 14% €1,702 3%
 
EBITDA before Exceptional Items

and Share-based Payments (1)

€904 €741 22% €257 €186 38% €243 6%
 
EBITDA Margin 13.5% 12.2% - 14.7% 12.1% - 14.3% -
 
Operating Profit €409 €267 53% €115 €51 126% €143 (19%)
 
Basic Earnings Per Share (€ cts) 22.9 (55.8) - 23.3 (41.6) - 16.9 38%
 
Return on Capital Employed (2) 9.9% 6.6% - - - - - -
 
Free Cash Flow (3) €82 €172 (53%) €23 €29 (20%) €128 (82%)
                                 
                                 
Net Debt €3,110 €3,052 2% €3,123 0%
 
Net Debt to EBITDA (LTM)               3.4x   4.1x   -   3.7x   -
 

(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 net income for the period to EBITDA before exceptional items and share-based payment expense is set out on page 30.

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

(3) Free cash flow is set out on page 9. The IFRS cash flow is set out on page 16.

Highlights

  • EBITDA growth of 22% for full year 2010. Quarter four EBITDA margin of 14.7%
  • Net debt to EBITDA ratio reduced from 4.1x to 3.4x in 2010
  • Strong performance highlights the benefits of the integrated model and focus on operating efficiency
  • Good demand and input cost pressure underpin continued pricing momentum in 2011

Performance Review & Outlook

Gary McGann, Smurfit Kappa Group CEO commented: “The Group is pleased to report a 22% growth in EBITDA for 2010 and a reduction of its net debt to EBITDA ratio to 3.4x. Further meaningful progress on de-leveraging is expected in 2011.

Despite continued input cost pressure in the fourth quarter, the Group’s improved earnings and EBITDA margin of 14.7% primarily reflect an ongoing focus on driving operating efficiency, better than expected demand in the period, and further progress on pricing recovery, both in Europe and in Latin America.

Current business conditions support continued price recovery with input costs rising and demand remaining strong. Industry inventory levels remain at a satisfactory level and the supply outlook is favourable. These factors, together with SKG’s ongoing cost control initiatives, should deliver further performance improvement and earnings growth in 2011.

In that context, the Group currently expects its free cash flow generation to be materially stronger in 2011, which should translate into significant debt paydown, and enhance the available range of strategic and financial options.”

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 good base in Eastern Europe 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  

Bertrand Paulet

Smurfit Kappa Group

Tel: +353 1 202 71 80

E-mail: ir@smurfitkappa.com

FD K Capital Source

Tel: +353 1 663 36 80

E-mail: smurfitkappa@kcapitalsource.com

 

2010 Fourth Quarter & Full Year | Performance Overview

Despite significant input cost pressure, SKG’s improved EBITDA margin of 13.5% for the full year 2010 primarily reflects the progress in its European packaging business performance, which benefited from healthier demand levels and from over 16% corrugated pricing recovery from the low point in September 2009 to the end of 2010.

In 2010, the Group also continued to actively manage its cost base, with €94 million of cost take-out benefits delivered in the year, thereby offsetting some of the input costs increases. Overall, from 2008 to 2010, SKG has delivered €306 million of cost take-out benefits, which should contribute to the delivery of structurally higher EBITDA margins compared to previous cycles.

SKG’s sustained financial performance also reflects a continuing focus on providing customers with innovative, sustainable and cost efficient paper-based packaging solutions. The Group is uniquely equipped to provide industry leading customer service, supported by its unrivalled geographical footprint, design capabilities and extensive product offering. SKG will continue to invest to meet and exceed customers’ requirements.

SKG’s performance also reflects the continued strong contribution of its Latin American operations, as underlined by the higher EBITDA margin of 17.8% for 2010. The Group’s Latin American corrugated deliveries grew at 7% in 2010, and in the fourth quarter, price recovery in most Latin American countries supported the delivery of a 19.9% EBITDA margin in the region.

While the Group’s energy costs were broadly stable in 2010, raw material costs were significantly higher. In 2010, recovered paper prices more than doubled compared to 2009 levels, while wood costs were 13% higher on average. In the fourth quarter and early in 2011, SKG experienced continued upward pressure in almost all its costs.

This cost dynamic combined with the ongoing satisfactory market balance, allowed SKG to successfully implement a number of containerboard price increases in 2010, and to announce a further recycled containerboard increase of €60 per tonne for February 2011. In viewing the supply demand balance in the containerboard market, it is worth bearing in mind that no new recycled containerboard machine is expected in Europe before 2012.

The higher containerboard pricing environment in turn generates major pressure on the Group’s corrugated business, which resulted in a continuing requirement to pursue corrugated pricing recovery through 2010. Additional corrugated price increases are required in 2011 to compensate for the higher input costs, and in order to restore appropriate levels of returns in SKG’s business.

The Group’s free cash flow generation of €82 million in 2010 was lower than in 2009, largely reflecting a move towards more sustainable levels of capital expenditure, and increased absolute working capital levels due to higher raw materials and end-product prices year-on-year. Despite the positive free cash flow generation, SKG’s net debt increased by €58 million in 2010, primarily reflecting the acquisition of Mondi’s corrugated assets in the UK and adverse currency impacts.

From a leverage perspective, the 22% growth in EBITDA in the full year supported a reduction of the Group’s net debt to EBITDA ratio to 3.4x at the end of 2010, compared to 4.1x at the end of 2009. The Group currently expects to deliver further meaningful de-leveraging in 2011, as a result of materially stronger cash flow generation and continued earnings progress.

2010 Fourth Quarter | Financial Performance

At €1,749 million for the fourth quarter of 2010, sales revenue was €208 million higher than in the same period last year. Allowing for the net negative impact of currency and hyperinflation accounting of €4 million and for the negative impact of €2 million relating to acquisitions net of disposals, revenue increased by €214 million year-on-year, the equivalent of approximately 14%.

Compared to the third quarter of 2010, sales revenue in the fourth quarter was 3%, or €47 million higher. However, when allowing for the net positive impact of currency, hyperinflation accounting and disposals, the underlying move was an increase of €37 million, the equivalent of 2%.

At €257 million, EBITDA in the fourth quarter of 2010 was €71 million higher than the fourth quarter of 2009, the equivalent of 38%. A €4 million negative impact from currency and hyperinflation accounting was offset by a €4 million benefit from the asset swap and the closure or disposal of loss making operations. Compared to the third quarter of 2010, EBITDA showed an underlying increase of €10 million in the fourth quarter, the equivalent of 4%.

Exceptional items charged within operating profit in the fourth quarter of 2010 primarily related to the disposal of the Group’s Polish paper sack plant and of Rol Pin, SKG’s loss-making wood products operation in France.

2010 Full Year | Financial performance

Revenue of €6,677 million in the full year 2010 represented a 10% increase on 2009. The net impact of currency, hyperinflation accounting and acquisitions net of disposals and closures was negligible.

EBITDA of €904 million in 2010 was €163 million, or 22% higher than in 2009. Currency and hyperinflation accounting decreased comparable EBITDA by €12 million, while the asset swap and the closure or disposal of loss making operations added €12 million. As a result, the underlying increase in EBITDA was also €163 million.

Exceptional charges within operating profit in 2010 amounted to €81 million, of which approximately €41 million related to the Mondi asset swap completed in May, while €23 million primarily related to the disposal of SKG’s Polish paper sack plant and of Rol Pin. The balance of €17 million related to the loss on US dollar denominated net trading balances in our Venezuelan operations as a result of the devaluation of the Venezuelan currency in January and associated hyperinflationary adjustments.

Exceptional items of €58 million were charged within operating profit in 2009, and mainly related to the closure of the Group’s Sturovo mill in Slovakia.

Operating profit after exceptional items of €409 million increased by 53% compared to last year, reflecting an increase in EBITDA.

Net finance costs after exceptional items of €308 million were €10 million lower than last year, mainly due to the exceptional items arising in 2009. Exceptional finance costs of €22 million arose in 2009 following the early pay down of debt from the proceeds of the November bond issue, while the exceptional finance income of €8 million related to the gain on the Group’s debt buy-back.

The profit before tax of €103 million compared to a loss before tax of €52 million last year.

2010 Fourth Quarter & Full Year | Free Cash Flow

In 2010, SKG’s free cash flow generation amounted to €82 million, compared to €172 million in 2009. While EBITDA was €163 million higher, the Group’s lower cash generation in 2010 primarily resulted from an increase in absolute working capital levels of €92 million, reflecting the impact of higher raw materials and end-product prices year-on-year.

The Group continues to effectively manage working capital, as underlined through its working capital to annualised sales ratio of 8.4% at December 2010, compared to 8.7% at September 2010. Through the cycle, the Group expects to maintain its year-end working capital to sales ratio between 8% and 9%.

In the fourth quarter of 2010, free cash flow of €23 million was €6 million lower than in the comparable period in 2009. While EBITDA was €71 million higher year-on-year, it was offset by the much higher level of capital expenditure, which had been signalled in the Group’s third quarter results’ press release. As mentioned, for timing and phasing reasons, capital expenditure in the first nine months at 53% of depreciation was below target levels, resulting in the high quarter four expenditure.

Overall, capital expenditure of €274 million for the full year 2010 equated to 75% of depreciation. In 2011, SKG expects to increase its capital expenditure back towards more sustainable levels of approximately 90% of depreciation.

Cash interest of €259 million in 2010 was €34 million higher year-on-year, reflecting an increased average interest cost as a result of the changes in the Group’s capital structure in 2009. SKG’s annual cash interest is expected to reduce somewhat into 2011, reflecting a lower average net debt and the reduction in bank debt margin being triggered as a result of the Group’s progressive leverage reduction.

Cash tax of €82 million in 2010 was €13 million lower than in the prior year, primarily reflecting the absence of approximately €20 million of non recurring items that arose in 2009, somewhat offset by higher underlying cash tax payments reflecting the Group’s improved earnings.

In 2011, the Group currently expects to deliver materially stronger free cash flow generation than in 2010, primarily supported by higher earnings and lower cash interest, somewhat offset by higher capital expenditure.

2010 Fourth Quarter & Full Year | Capital Structure

Despite a positive free cash flow generation of €82 million, in 2010 the Group’s net debt increased by €58 million to €3,110 million, the equivalent of a 2% increase. This primarily reflects the €56 million cash outflow relating to the asset swap with Mondi in quarter two (including €2 million of net cash disposed), and €58 million of adverse currency movements.

The negative currency movement in 2010 resulted from the relative weakening of the euro against the US dollar during the year, together with approximately €27 million of a reduction in the value of the Group’s cash balances in Venezuela following the devaluation of the Bolivar in January 2010.

At the end of December 2010, the Group’s net debt to EBITDA ratio reduced to 3.4x from 4.1x at the end of December 2009 and 3.7x at the end of September 2010. The Group’s strategic priority for 2011 remains one of maximising free cash flow generation for debt paydown.

In November 2010, the Group successfully completed a €250 million five year trade receivables securitisation programme. Proceeds were primarily used to refinance the Group’s existing €210 million securitisation programme which had a September 2011 maturity.

The completion of this five year securitisation programme further extends the Group’s long-term debt maturity profile and contributes to the diversity of its funding sources, thereby further enhancing its financial flexibility. Overall, the Group has an average debt maturity of 5.3 years, and no material debt maturities before December 2013.

Furthermore, SKG maintains a strong liquidity position, with approximately €500 million of cash on its balance sheet at the end of December 2010, and committed credit facilities of approximately €525 million.

2010 Fourth Quarter & Full year | Operating efficiency

Early in 2008, the Group initiated a cost take-out programme to further strengthen the competitiveness of its operations. In the full year 2008, the programme delivered €72 million of sustainable cost savings, and a further €140 million was delivered in 2009.

In 2010 the Group generated a further €94 million of savings, including €20 million in the fourth quarter. This brings the 3-year achievement to €306 million over the 2008-2010 period. SKG’s efficient cost base is a significant contributor to its strong and sustained relative margin performance, and should allow the Group to deliver higher returns.

Following the completion of its 3-year cost take-out programme, the Group has introduced a new 2-year initiative, with a target to generate €150 million of cost savings by the end of 2012.

Through the cycle, SKG will continue to focus on enhancing its cost efficiency, through selective capital investments, plant restructuring and closures, and internal benchmarking. In that context, SKG is currently considering a number of options to further enhance the competitiveness of its recycled mill system.

2010 Fourth Quarter & Full Year | Performance Review

Packaging: Europe

Demand for SKG’s corrugated packaging solutions was buoyant in the fourth quarter of 2010. As a result, and despite tougher comparators year-on-year, SKG’s underlying corrugated volumes in quarter four were 4% higher than in the fourth quarter of 2009. Demand was particularly strong in Germany, Benelux and the UK. Including the acquisition of Mondi’s operations in the UK in May 2010, fourth quarter corrugated volumes were 7% higher.

For 2010 as a whole, the Group’s underlying corrugated volumes were 4% higher than in 2009, reflecting a continued steady recovery of demand throughout the year. Again, when including the acquisition of Mondi’s UK operations, volumes were 6% higher year-on-year in 2010. Demand in January 2011 continues to be strong.

Despite the significant increase in input costs throughout 2010, the progressive improvement in the European Packaging EBITDA margin from 12.4% in quarter one to 15.2% in quarter four highlights the ongoing benefits of SKG’s efficient cost structure, its strong asset base, price recovery, and focus on customer service and product innovation. In general, the Group’s 2010 financial performance demonstrates the significant operational exposure of its business to the economic recovery.

On the cost side, SKG’s average recovered fibre prices of approximately €120 per tonne in 2010 almost doubled compared to 2009 levels. In the fourth quarter of 2010, input cost pressure intensified further compared to the third quarter, with an approximately 5% increase in recovered fibre, and a double digit increase in wood costs.

The availability of recovered fibre has become an increasing concern for the containerboard industry in 2010, in particular in Central and Eastern Europe where competition for fibre is intense following the introduction of new containerboard capacity. On a positive note however, lower availability and higher prices for fibre is significantly increasing the barriers to entry for new capacity, which could prove to be beneficial for the medium term supply outlook of the industry.

In that context, SKG is favourably positioned, with 35% of its containerboard capacity using virgin (wood) fibre, and with the majority of its recycled mills located in Western Europe, where the Group has a well structured recovered fibre supply network, including its own collection facilities and long-standing contracts with local suppliers.

Higher input costs, combined with adequate supply demand balance in Europe throughout 2010 supported a strong containerboard pricing recovery from the totally uneconomic price levels that prevailed in 2009. Public market indices have reported a total of €195 per tonne price increase for recycled containerboard from September 2009 to December 2010 (the equivalent of an 85% increase).

Early in 2011, recovered fibre prices have increased further, while energy and other input costs are also rising sharply. Combined with continued good demand, this has necessitated SKG announcing a further price increase of €60 per tonne, effective February 2011.

On the kraftliner side, public market indices had reported a 65% price increase from September 2009 to the end of 2010. However, higher US imports in quarter four generated some pressure on European kraftliner prices, and a 3% price adjustment was reported in January. In general, the outlook for kraftliner remains positive, supported by healthy global demand, and indications of a price increase in the US.

These higher containerboard prices have generated significant pressure on the earnings of corrugated producers, which has led to a necessary material pick-up in corrugated prices throughout 2010. In that context, SKG’s corrugated pricing has increased by over 16% from the low point in 2009 to the end of December 2010. The Group remains on track to achieve its 20% price recovery target by the end of the first quarter of 2011 in order to compensate for the containerboard price hikes implemented to date.

The additional recycled containerboard price increase announced for February 2011 will require further corrugated pricing recovery in the later part of 2011. As is normal, it will take up to six months to fully offset higher containerboard prices through corrugated price recovery.

Latin America

Latin America remains one of the world’s stronger growing markets, as demonstrated through the 7% year-on-year corrugated volume increase experienced within SKG’s business in 2010. The region continues to be a significant contributor to the Group’s performance, with an EBITDA of €200 million in 2010 (22% of the Group’s total), and a margin of 17.8%.

In the fourth quarter of 2010, SKG’s Latin American EBITDA margin of 19.9% primarily reflects the benefits of price improvements in Mexico and Argentina. Despite higher prices and a 3% growth in corrugated volumes compared to quarter four 2009, SKG’s Latin American sales revenue in the fourth quarter was 1% lower year-on-year, reflecting the Venezuelan currency devaluation in January 2010.

Demand for the Group’s products in Mexico increased by 10% on average in 2010, although fourth quarter demand was somewhat softer than in the first nine months of the year. Raw material and electricity costs rose significantly throughout the year, but were largely offset by the successful implementation of two corrugated price increases. Early in 2011, Mexican demand is healthy and costs are relatively stable.

SKG’s Colombian EBITDA was materially higher in 2010 compared to 2009, primarily reflecting the Group’s continued cost reduction actions, and a generally low inflation rate in the country. After a relatively slow start to the year, the recovery in the Colombian economy accelerated from the second quarter of 2010, allowing SKG’s corrugated volumes to increase by 11% year-on-year for the full year. Deliveries in the fourth quarter were particularly strong with 14% growth.

In Argentina, the recovered fibre market remains under significant pressure. The consequent cost increase together with 14% end-market demand growth in 2010 has underpinned substantial containerboard and corrugated price increases, which allowed the Group to deliver materially higher EBITDA year-on-year.

In the challenging Venezuelan market, the Group’s corrugated deliveries in 2010 declined by 7%. Continuing high inflation in the country was partly offset by SKG’s ongoing efforts to enhance its operating efficiency.

Despite some country-specific challenges from time to time, the Group believes that the geographic diversity of its business in the region, together with the proven ability of its management team in driving the business and growing its earnings, will continue to deliver a strong performance through the cycle.

Venezuela

The nationalisation of foreign owned companies by the Venezuelan government intensified in the latter part of 2010 and would suggest that the risk of similar such action against SKG's business in Venezuela has heightened. Market value compensation is either negotiated or arbitrated under applicable treaties in these cases. However, the amount and timing of such compensation is necessarily uncertain.

Our intention is to continue to operate a viable and sustainable business in Venezuela. SKG is fully committed to maintaining its operations in order to ensure the ongoing supply of products and services to its customers, to protect the interests and wellbeing of its employees and to safeguard the company’s investments.

In 2010 SKG's business in Venezuela represented approximately 4% of the Group's revenue, 7% of its EBITDA and 5% of its total assets.

Specialties: Europe

The Group’s Specialties EBITDA of €63 million in 2010 was 11% lower than in 2009, primarily reflecting the significant impact of higher recovered fibre costs on SKG’s fibre intense solidboard business. The lower performance of the solidboard division was somewhat offset by an improved EBITDA from SKG’s bag-in-box operations.

In the traditionally weak fourth quarter for the Specialties business, the improvement in EBITDA margin to 8.1% in 2010 compared to 5.0% in 2009 in part reflects the divestment of the Group’s loss-making sack converting operations in May 2010. Furthermore, demand for SKG’s solidboard products was robust in the quarter, and positive trends are being sustained into the new year.

Following a successful board price increase of €50 per tonne in the first half of 2010, SKG implemented another €50 per tonne increase during the fourth quarter. Consequently, solidboard packaging prices are expected to rise meaningfully in 2011, which will support an earnings recovery in that business.

Summary Cash Flows
 
Summary cash flows for the fourth quarter and twelve months are set out in the following table.
  3 months to   3 months to   12 months to   12 months to
31-Dec-10 31-Dec-09 31-Dec-10 31-Dec-09
€m   €m   €m   €m
Pre-exceptional EBITDA 257 186 904 741
Exceptional Items (1) (7) (17) (10)
Cash interest expense (63) (64) (259) (225)
Working capital change (9) (21) (92) 65
Current provisions (3) - (24) (14)
Capital expenditure (137) (68) (274) (229)
Change in capital creditors 16 26 (28) (19)
Sale of fixed assets 4 - 6 4
Tax paid (28) (16) (82) (95)
Other (13) (7) (52) (46)
             
Free cash flow 23 29 82 172
 
Share issues 6 - 9 -
Gain on debt buy-back - - - 9
Sale of businesses and investments (4) - (13) -
Purchase of investments (1) (9) (47) (9)
Derivative termination payments (1) (3) (3) (4)
Dividends (1) (3) (5) (7)
             
Net cash inflow 22 14 23 161
 
Net cash acquired/disposed (1) - (3) -
Deferred debt issue costs amortised (5) (26) (20) (43)
Currency translation adjustments (3) (6) (58) 15
             
(Increase)/decrease in net debt 13   (18)   (58)   133

(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 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.

  12 months to   12 months to
31-Dec-10 31-Dec-09
      €m   €m
Free cash flow 82 172
 
Add back: Cash interest 259 225
Capital expenditure (net of change in capital creditors) 302 248
Tax payments 82 95
Less: Sale of fixed assets (6) (4)
Profit on sale of assets and businesses – non exceptional (12) (6)
Receipt of capital grants (in “Other” per summary cash flow) (3) (3)
Dividends received from associates (in “Other” per summary cash flow) (1)   (1)
Cash generated from operations 703   726
 

Capital Resources

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

At 31 December 2010 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 €152.5 million variable funding notes issued under the new €250 million accounts receivable securitisation program maturing in November 2015.

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 €164 million amortising A Tranche maturing in 2012, an €816 million B Tranche maturing in 2013 and an €814 million C Tranche maturing in 2014. In addition, as at 31 December 2010, the facility included a €525 million revolving credit facility of which there was €1.1 million drawn under facilities supported by letters of credit.

The following table provides the range of interest rates as of 31 December 2010 for each of the drawings under the various Senior Credit Facility term loans.

BORROWING ARRANGEMENT   CURRENCY   INTEREST RATE
 
Term Loan A EUR 3.804% - 3.819%
Term Loan B EUR 3.929% - 4.156%
USD 3.415%
Term Loan C EUR 4.179% - 4.399%
USD 3.665%
 

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 31 December 2010 the Group had fixed an average of 76% of its interest cost on borrowings over the following twelve months.

Our fixed rate debt comprised mainly €500 million 7.25% senior secured notes due 2017, €500 million 7.75% senior secured notes due 2019, €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 €1,110 million in interest rate swaps with maturity dates ranging from April 2012 to July 2014.

Our earnings are affected by changes in short-term interest rates as a result of our floating rate borrowings. If LIBOR interest rates for these borrowings increase by one percent, our interest expense would increase, and income before taxes would decrease, by approximately €10 million over the following twelve months. Interest income on our cash balances would increase by approximately €5 million assuming a one percent increase in interest rates earned on such balances over the following twelve months.

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

Group Income Statement – Twelve Months

  Unaudited   Audited
12 months to 31-Dec-10 12 months to 31-Dec-09
Pre-exceptional 2010   Exceptional 2010   Total 2010 Pre-exceptional 2009   Exceptional 2009   Total 2009
    €m   €m   €m   €m   €m   €m
Continuing operations
Revenue 6,677 - 6,677 6,057 - 6,057
Cost of sales (4,825)   -   (4,825) (4,370)   (33)   (4,403)
Gross profit 1,852 - 1,852 1,687 (33) 1,654
Distribution costs (546) - (546) (515) - (515)
Administrative expenses (838) (17) (855) (850) - (850)
Other operating income 22 - 22 3 - 3
Other operating expenses -   (64)   (64) -   (25)   (25)
Operating profit 490 (81) 409 325 (58) 267
Finance costs (431) - (431) (410) (22) (432)
Finance income 123 - 123 106 8 114
Share of associates’ profit /(loss) (after tax) 2   -   2 (1)   -   (1)
Profit/(loss) before income tax 184   (81) 103 20   (72) (52)
Income tax expense (45) (55)
Profit/(loss) for the financial year 58 (107)
 
Attributable to:
Owners of the Parent 50 (122)
Non-controlling interests 8 15
Profit/(loss) for the financial year 58 (107)
 
Earnings per share:        
Basic earnings/(loss) per share (cent per share) 22.9 (55.8)
Diluted earnings/(loss) per share (cent per share) 22.5 (55.8)
 

Group Income Statement – Fourth Quarter

  Unaudited   Unaudited
3 months to 31-Dec-10 3 months to 31-Dec-09
Pre-exceptional 2010   Exceptional 2010   Total 2010 Pre-exceptional 2009   Exceptional 2009   Total 2009
    €m   €m   €m   €m   €m   €m
Continuing operations
Revenue 1,749 - 1,749 1,541 - 1,541
Cost of sales (1,269)   -   (1,269) (1,143)   -   (1,143)
Gross profit 480 - 480 398 - 398
Distribution costs (136) - (136) (131) - (131)
Administrative expenses (207) (1) (208) (209) - (209)
Other operating income 3 - 3 1 - 1
Other operating expenses -   (24)   (24) -   (8)   (8)
Operating profit 140 (25) 115 59 (8) 51
Finance costs (98) - (98) (110) (22) (132)
Finance income 31 - 31 19 - 19
Share of associates profit /(loss)(after tax) 1   -   1 (1)   -   (1)
Profit/(loss) before income tax 74   (25) 49 (33)   (30) (63)
Income tax expense 8 (25)
Profit/(loss) for the financial period 57 (88)
 
Attributable to:
Owners of the Parent 51 (91)
Non-controlling interests 6 3
Profit/(loss) for the financial period 57 (88)
       
Earnings per share:
Basic earnings/(loss) per share (cent per share) 23.3 (41.6)
Diluted earnings/(loss) per share (cent per share) 22.9 (41.6)
 

Group Statement of Comprehensive Income

  Unaudited   Audited
12 months to 12 months to
31-Dec-10 31-Dec-09
    €m   €m
 
Profit/(loss) for the financial year 58 (107)
 
Other comprehensive income:
Foreign currency translation adjustments (53) 45
Defined benefit pension plans:
- Actuarial gain/(loss) including payroll tax 33 (158)
- Movement in deferred tax (8) 43
Effective portion of changes in fair value of cash flow hedges:
- Movement out of reserve 19 11
- New fair value adjustments into reserve (20) (30)
- Movement in deferred tax -   2
Total other comprehensive income (29)   (87)
     
Comprehensive income and expense for the financial year 29   (194)
 
Attributable to:
Owners of the Parent 25 (214)
Non-controlling interests 4   20
29   (194)
 

Group Balance Sheet

  Unaudited   Audited
31-Dec-10 31-Dec-09
    €m   €m
Assets
 
Non-current assets
Property, plant and equipment 3,008 3,066
Goodwill and intangible assets 2,209 2,222
Available-for-sale financial assets 32 32
Investment in associates 16 13
Biological assets 88 91
Trade and other receivables 5 4
Derivative financial instruments 2 -
Deferred income tax assets 134   280
5,494   5,708
Current assets
Inventories 638 586
Biological assets 7 8
Trade and other receivables 1,292 1,105
Derivative financial instruments 8 3
Restricted cash 7 43
Cash and cash equivalents 495   601
2,447 2,346
Non-current assets held for sale -   4
Total assets 7,941   8,058
 
Equity
Capital and reserves attributable to the equity owners of the Parent
Equity share capital - -
Capital and other reserves 2,315 2,345
Retained earnings (552)   (669)
Total equity attributable to equity owners of the Parent 1,763 1,676
Non-controlling interests 173   179
Total equity 1,936   1,855
 
Liabilities
Non-current liabilities
Borrowings 3,470 3,563
Employee benefits 595 653
Derivative financial instruments 101 80
Deferred income tax liabilities 206 325
Non-current income tax liabilities 9 15
Provisions for liabilities and charges 49 44
Capital grants 14 13
Other payables 7   3
4,451   4,696
Current liabilities
Borrowings 142 133
Trade and other payables 1,351 1,211
Current income tax liabilities 5 28
Derivative financial instruments 27 90
Provisions for liabilities and charges 29   45
1,554   1,507
Total liabilities 6,005   6,203
Total equity and liabilities 7,941   8,058
 

Group Statement of Changes in Equity

   

Capital and other reserves

       
Equity share capital Share premium   Reverse acquisition reserve   Cash flow hedging reserve   Foreign currency translation reserve   Reserve for share-based payment Retained earnings Total equity attributable to owners of the Parent Non-controlling interests Total equity
Unaudited   €m   €m   €m   €m   €m   €m   €m   €m   €m   €m
At 1 January 2010 - 1,928 575 (44) (174) 60 (669) 1,676 179 1,855
Shares issued - 9 - - - - - 9 - 9
Total comprehensive income and expense - - - (1) (50) - 76 25 4 29
Hyperinflation adjustment - - - - - - 40 40 6 46
Dividends paid to non-controlling interests - - - - - - - - (5) (5)
Purchase of non-controlling interests - - - - - - - - (2) (2)
Share-based payment - - - - - 4 - 4 - 4
Other movements -   -   -   -   8   -   1   9   (9)   -
At 31 December 2010 -   1,937   575   (45)   (216)   64   (552)   1,763   173   1,936
 
Audited
At 1 January 2009 - 1,928 575 (27) (203) 57 (679) 1,651 145 1,796
Total comprehensive income and expense - - - (17) 40 - (237) (214) 20 (194)
Hyperinflation adjustment - - - - (11) - 247 236 21 257
Dividends paid to non-controlling interests - - - - - - - - (7) (7)
Share-based payment -   -   -   -   -   3   -   3   -   3
At 31 December 2009 -   1,928   575   (44)   (174)   60   (669)   1,676   179   1,855
 

Group Cash Flow Statement

  Unaudited   Audited
12 months to 12 months to
31-Dec-10 31-Dec-09
    €m   €m
Cash flows from operating activities
Profit/(loss) for the financial year 58 (107)
Adjustment for
Income tax expense 45 55
Loss/(profit) on sale of assets and businesses 44 (6)
Amortisation of capital grants (1) (3)
Impairment of property, plant and equipment - 33
Equity settled share-based payment transactions 4 3
Amortisation of intangible assets 46 47
Share of (profit)/loss of associates (2) 1
Depreciation charge 343 355
Net finance costs 308 318
Change in inventories (79) 48
Change in biological assets 21 11
Change in trade and other receivables (187) 111
Change in trade and other payables 177 (94)
Change in provisions (22) 2
Change in employee benefits (56) (54)
Other 4   6
Cash generated from operations 703 726
Interest paid (263) (230)
Income taxes paid:
Irish corporation tax paid (5) (16)
Overseas corporation tax (net of tax refunds) paid (77)   (79)
Net cash inflow from operating activities 358   401
 
Cash flows from investing activities
Interest received 5 11
Mondi asset swap (58) -
Business disposals (11) -
Purchase of property, plant and equipment and biological assets (297) (237)
Purchase of intangible assets (5) (11)
Receipt of capital grants 3 3
Decrease/(increase) in restricted cash 36 (24)
Disposal of property, plant and equipment 18 10
Dividends received from associates 1 1
Purchase of non-controlling interests (2) -
Deferred consideration 8   (9)
Net cash outflow from investing activities (302)   (256)
 
Cash flow from financing activities
Proceeds from issue of new ordinary shares 9 -
Proceeds from bond issuance - 988
Increase in interest-bearing borrowings 152 -
Repayment of finance lease liabilities (16) (14)
Repayment of interest-bearing borrowings (285) (1,162)
Derivative termination payments (3) (4)
Deferred debt issue costs (5) (58)
Dividends paid to non-controlling interests (5)   (7)
Net cash outflow from financing activities (153)   (257)
Decrease in cash and cash equivalents (97)   (112)
 
Reconciliation of opening to closing cash and cash equivalents
Cash and cash equivalents at 1 January 587 683
Currency translation adjustment (9) 16
Decrease in cash and cash equivalents (97)   (112)
Cash and cash equivalents at 31 December 481   587
 

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 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”) 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 has been prepared in accordance with the Listing Rules of the Irish Stock Exchange and 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 2009 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 2009 with the exception of the standards described below.

IAS 27, Consolidated and Separate Financial Statements, as revised requires the effects of all transactions with non-controlling interests to be recorded in equity if there is no change in control. These transactions will no longer result in goodwill or gains and losses. The revised standard also specifies the accounting when control is lost with any remaining interest in the entity remeasured to fair value, and a gain or loss recognised in profit or loss. The Group has applied IAS 27 as revised prospectively to transactions with non-controlling interests from 1 January 2010. Adoption of IAS 27 did not have a material effect on the Group Financial Statements.

IFRS 3, Business Combinations, as revised continues to apply the acquisition method in accounting for business combinations but with some significant changes. For example, all payments to purchase a business must be recorded at fair value at the acquisition date with contingent payments classified as debt and subsequently remeasured through the income statement. There is a choice, on an acquisition by acquisition basis, to measure any non-controlling interest in the acquiree either at fair value or at the non-controlling interest’s proportionate share of the acquiree’s net assets. All acquisition related costs are expensed. The Group has adopted revised IFRS 3 with effect from 1 January 2010. It applies to business combinations after that date. Adoption of IFRS 3 did not have a material effect on the Group Financial Statements.

In addition, the following new standards, amendments and interpretations became effective in 2010, however, they either do not have an effect on the Group Financial Statements or they are not currently relevant for the Group:

  • IFRS 2 (Amendment) – Group Cash-settled Share-based Payment Transactions
  • IAS 39 (Amendment) – Eligible Hedged Items, Financial Instruments: Recognition and Measurement
  • IFRIC 17 – Distributions of Non-cash Assets to Owners
  • IFRIC 18 – Transfers of Assets from Customers

The following new or amended standards will become effective for the Group from 1 January 2011. They do not have an effect on the financial information contained in this report and will be more fully discussed in our annual report for 2010.

IFRS 9, Financial Instruments. The IASB is in the process of replacing IAS 39, Financial Instruments: Recognition and Measurement. IFRS 9, which is effective for the Group from 1 January 2013, represents the first phase of this project. It addresses classification and measurement of financial assets only. It replaces the multiple classification models in IAS 39 with two classification categories, namely amortised cost and fair value. Classification under IFRS 9 is determined by the business model for managing financial assets and the contractual characteristics of the financial assets. It removes the requirement to separate embedded derivatives from financial asset hosts. It also removes the cost exemption for unquoted equities. EU endorsement of this standard has been postponed pending the issuance of further chapters such as financial liabilities and impairment. It is likely to affect the Group’s accounting for its financial assets. Subject to EU endorsement the Group will apply IFRS 9 from 1 January 2013.

In developing IFRS the IASB follows a due process handbook which allows for a fast track annual improvements process. Under this process amendments are made to existing IFRSs to clarify guidance and wording, or to correct for relatively minor unintended consequences, conflicts or oversights. These amendments do not usually have a material effect. A number of annual improvements to IFRSs are effective for 2010 or will be effective in 2011, however, none of these had or is expected to have a material effect on the Group Financial Statements.

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

The financial information presented in this preliminary release does not constitute ‘full group accounts’ under Regulation 40(1) of the European Communities (Companies: Group Accounts) Regulations, 1992 of Ireland insofar as such group accounts would have to comply with all of the disclosure and other requirements of those Regulations. The preliminary release was approved by the Board of Directors. The annual report and accounts will be approved by the Board of Directors and reported on by the auditors in due course. The annual accounts reported on by the auditors will not contain quarterly information. Accordingly, the financial information is unaudited. Full Group accounts for the year ended 31 December 2009 received an unqualified audit report and have been filed with the Irish Registrar of Companies.

3. Segmental Analyses

The Group has identified three operating segments on the basis of which performance is assessed and resources are allocated: 1) Packaging Europe, 2) Specialties Europe and 3) Latin America.

The Packaging segment is highly integrated. It includes a system of mills and plants that produces a full line of containerboard that is converted into corrugated containers. The Specialties segment comprises activities dedicated to the needs of specific and sometimes niche markets. These include bag-in-box and solidboard. 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 (pre-exceptional EBITDA). 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.

  12 months to 31-Dec-10   12 months to 31-Dec-09
Packaging

Europe

  Specialties

Europe

  Latin America   Total Packaging

Europe

  Specialties

Europe

  Latin America   Total
    €m   €m   €m   €m   €m   €m   €m   €m
Revenue and Results
Third party revenue 4,803   755   1,119   6,677 4,241   771   1,045   6,057
 
EBITDA before exceptional items 668 63 200 931 505 71 193 769
Segment exceptional items (18)   (46)   (17)   (81) (25)   -   -   (25)
EBITDA after exceptional items 650   17   183 850 480   71   193 744
 
Unallocated centre costs (27) (28)
Share-based payment expense (4) (3)
Depreciation and depletion (net) (364) (366)
Amortisation (46) (47)
Impairment of assets - (33)
Share of associates’ profit/(loss) after tax 2 (1)
Finance costs (431) (432)
Finance income 123 114
Profit/(loss) before income tax 103 (52)
Income tax expense (45) (55)
Profit/(loss) for the financial year 58 (107)
 
Assets
Segment assets 5,346 679 1,268 7,293 5,122 732 1,321 7,175
Investment in associates 3   -   13 16 2   -   11 13
Group centre assets 632 870
Total assets 7,941 8,058
 
  3 months to 31-Dec-10   3 months to 31-Dec-09
Packaging

Europe

  Specialties

Europe

  Latin America   Total Packaging

Europe

  Specialties

Europe

  Latin America   Total
    €m   €m   €m   €m   €m   €m   €m   €m
Revenue and Results
Third party revenue 1,272   181   296   1,749 1,061   182   298   1,541
 
EBITDA before exceptional items 193 15 59 267 129 9 52 190
Segment exceptional items (17)   (7)   (1)   (25) (8)   -   -   (8)
EBITDA after exceptional items 176   8   58 242 121   9   52 182
 
Unallocated centre costs (10) (4)
Share-based payment expense (1) (1)
Depreciation and depletion (net) (104) (114)
Amortisation (12) (12)
Share of associates’ profit/(loss) after tax 1 (1)
Finance costs (98) (132)
Finance income 31 19
Profit/(loss) before income tax 49 (63)
Income tax expense 8 (25)
Profit/(loss) for the financial period 57 (88)
 

4. Other Operating Income

Other operating income includes insurance proceeds of €21 million in respect of the failure of a turbo generator in the Group's mill in San Felipe, Venezuela. The costs of the breakdown are included in the appropriate cost headings within operating profit.

5. Exceptional Items

  12 months to   12 months to
The following items are regarded as exceptional in nature: 31-Dec-10 31-Dec-09
    €m   €m
 
Currency trading loss on Venezuelan Bolivar devaluation 17 -
Mondi asset swap 41 -
Disposal of operations 22 -
Reorganisation and restructuring costs 1 25
Impairment of property, plant and equipment -   33
Total exceptional items included in operating costs 81   58
 
Exceptional items included in finance income - (8)
Exceptional items included in finance costs -   22
Exceptional items included in net finance cost -   14
 

As noted in the Group’s Financial Statements for 2009, the Venezuelan government announced the devaluation of its currency, the Bolivar Fuerte (“VEF”), on 8 January 2010. The official exchange rate generally applicable to SKG was changed from VEF 2.15 per U.S. dollar to VEF 4.3 per U.S. dollar. A currency translation loss of €14 million arose in quarter one from the effect of retranslation of the U.S. dollar denominated net payables of its Venezuelan operations. A further €3 million of hyperinflationary adjustments in relation to this, arose during the remainder of the year and are included within operating profit.

During the second quarter an asset swap agreement was completed with the Mondi Group (“Mondi”). As a result of this, three corrugated plants in the UK were acquired and the Group’s Western European sack converting operations were disposed. The transaction generated an exceptional loss of €41 million.

Disposal of operations includes the Polish paper sack plant which was sold to Mondi in the fourth quarter. The transaction generated an exceptional loss of €6 million. Also included is the disposal of our Rol Pin business in France, a wood products operation which took place in the fourth quarter. Exceptional costs as a result of this transaction amounted to €16 million.

More information on the above transactions are contained in Note 14 - Acquisitions and Disposals.

The reorganisation and restructuring costs in 2009 related to the closure of the semi-chemical fluting mill in Sturovo, Slovakia and the rationalisation of our Cork corrugated plant in Ireland and our Rol Pin business in France.

The impairment of property, plant and equipment in 2009 related entirely to the Sturovo mill in Slovakia.

The exceptional finance income of €8 million in 2009 related to the gain on the Group’s debt buy-back. In February 2009, the Group launched an auction process to buy-back up to €100 million of its Senior bank debt. In total, just over €100 million of offers were received, of which €43 million were accepted at an average discount of 24% to par.

The exceptional costs of €22 million in 2009 arose following our use of proceeds from the 2017 and 2019 bond issuance to pay down debt. These costs fully comprised the non-cash accelerated amortisation of debt costs arising on the pay down of the debt.

6. Finance Costs and Income

  12 months to   12 months to
31-Dec-10 31-Dec-09
    €m   €m
Finance costs
Interest payable on bank loans and overdrafts 148 187
Interest payable on finance leases and hire purchase contracts 3 5
Interest payable on other borrowings 133 65
Finance costs associated with debt restructuring - 22
Other finance costs - 2
Foreign currency translation loss on debt 38 13
Fair value loss on derivatives not designated as hedges - 34
Interest cost on employee benefit plan liabilities 101 96
Net monetary loss – hyperinflation 8   8
Total finance cost 431   432
 
Finance income
Other interest receivable (5) (11)
Foreign currency translation gain on debt (7) (24)
Gain on debt buy-back - (8)
Fair value gain on commodity derivatives not designated as hedges (2) (3)
Fair value gain on derivatives not designated as hedges (38) -
Expected return on employee benefit plan assets (71)   (68)
Total finance income (123)   (114)
 
Net finance cost 308   318
 

7. Income Tax Expense

Income tax expense recognised in the Group Income Statement

  12 months to   12 months to
31-Dec-10 31-Dec-09
    €m   €m
Current taxation:
Europe 36 36
Latin America 28   34
64 70
Deferred taxation (19)   (15)
Income tax expense 45   55
 
Current tax is analysed as follows:
Ireland 4 7
Foreign 60   63
64   70

Income tax recognised in the Group Statement of Comprehensive Income

  12 months to   12 months to
31-Dec-10 31-Dec-09
    €m   €m
Arising on actuarial gains/losses on defined benefit plans 8 (43)
Arising on qualifying derivative cash flow hedges -   (2)
8   (45)
 

8. Employee Post Retirement Schemes – Defined Benefit Expense

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

  12 Months to   12 Months to
31-Dec-10 31-Dec-09
    €m   €m
 
Current service cost 29 40
Past service cost (1) 6
(Gain) on settlements and curtailments (2) (4)
Actuarial (gains) arising on long-term employee benefits other than defined benefit plans -   (1)
26   41
 
Expected return on plan assets (71) (68)
Interest cost on plan liabilities 101   96
Net financial expense 30   28
Defined benefit expense 56   69
 

Included in cost of sales, distribution costs, administrative expenses and other operating expenses is a defined benefit expense of €26 million for the year (2009: €41 million). Expected Return on Plan Assets of €71 million (2009: €68 million) is included in Finance Income and Interest Cost on Plan Liabilities of €101 million (2009: €96 million) is included in Finance Costs in the Group Income Statement.

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

  31-Dec-10   31-Dec-09
    €m   €m
Present value of funded or partially funded obligations (1,548) (1,447)
Fair value of plan assets 1,357   1,208
Deficit in funded or partially funded plans (191) (239)
Present value of wholly unfunded obligations (404)   (414)
Net employee benefit liabilities (595)   (653)
 

The employee benefits provision has decreased from €653 million at 31 December 2009 to €595 million at 31 December 2010. The reduction in provision was mainly as a result of asset returns being higher than expected over the year.

9. Earnings Per Share

Basic

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

  3 Months to   3 Months to   12 months to   12 months to
31-Dec-10 31-Dec-09 31-Dec-10 31-Dec-09
    €m   €m   €m   €m
Profit/(loss) attributable to equity owners of the Parent 51 (91) 50 (122)
 
Weighted average number of ordinary shares in issue (million) 219 218 219 218
 
Basic earnings/(loss) per share (cent per share) 23.3   (41.6)   22.9   (55.8)
 

Diluted

Diluted earnings per share is calculated by adjusting the weighted average number of ordinary shares outstanding to assume conversion of all dilutive potential ordinary shares which comprise convertible shares issued under the Management Equity Plans.

  3 Months to   3 Months to   12 months to   12 months to
31-Dec-10 31-Dec-09 31-Dec-10 31-Dec-09
    €m   €m   €m   €m
Profit/(loss) attributable to equity owners of the Parent 51 (91) 50 (122)
 
Weighted average number of ordinary shares in issue (million) 219 218 219 218
Potential dilutive ordinary shares assumed 4   -   4   -
Diluted weighted average ordinary shares 223   218   223   218
 
Diluted earnings/(loss) per share (cent per share) 22.9   (41.6)   22.5   (55.8)
 

At 31 December 2009 there were 328,135 potential ordinary shares in issue that could dilute EPS in the future, but these were not included in the computation of diluted EPS because they would have the effect of reducing the loss per share. Accordingly there is no difference between basic and diluted loss per share in 2009.

10. Property, Plant and Equipment

  Land and buildings   Plant and equipment   Total
    €m   €m   €m
Year ended 31 December 2010
Opening net book amount 1,151 1,915 3,066
Reclassification 25 (25) -
Additions 5 249 254
Acquisitions 10 21 31
Depreciation charge for the year (50) (293) (343)
Retirements and disposals (11) (7) (18)
Foreign currency translation adjustment (18) 2 (16)
Hyperinflation adjustment 16   18   34
 
At 31 December 2010 1,128   1,880   3,008
 
Year ended 31 December 2009
Opening net book amount 1,108 1,930 3,038
Reclassification 16 (18) (2)
Additions 4 199 203
Depreciation charge for the year (57) (298) (355)
Impairment losses recognised in the Group Income Statement (13) (20) (33)
Retirements and disposals (3) (2) (5)
Foreign currency translation adjustment 13 28 41
Hyperinflation adjustment 83   96   179
At 31 December 2009 1,151   1,915   3,066
 

11. Share-based Payment

Share-based payment expense recognised in the Group Income Statement

  12 months to   12 months to
31-Dec-10 31-Dec-09
    €m   €m
 
Charge arising from fair value calculated at grant date 4   3

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 vested on the first, second and third anniversaries respectively of the IPO. 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”). The 2007 SIP was amended in May 2009. 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 €0.001 per share. On satisfaction of specified performance criteria the new class B and new class 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 average market value of an ordinary share for the three dealing days immediately prior to the date that 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. The performance period for the new class B and new class C convertible shares is three financial years. The awards made in 2007 lapsed in 2010 and ceased to be capable of conversion to D convertible shares. The awards made in 2008 will lapse in 2011 and will cease to be capable of conversion to D convertible shares.

The new class B and new class C convertible shares issued during and from 2009 are subject to a performance condition based on the Company’s total shareholder return over the three-year period relative to the total shareholder return of a peer group of companies (“TSR Condition”). Under that condition, 30% of the new class B and class C convertible shares will convert into D convertible shares if the Company’s total shareholder return is at the median performance level and 100% will convert if the Company’s total shareholder return is at or greater than the upper quartile of the peer group. A sliding scale will apply for performance between the median and upper quartiles. However, notwithstanding that the TSR condition applicable to any such award may have been satisfied, the Compensation Committee retains an overriding discretion to disallow the vesting of the award, in full or in part, if, in its opinion the Company's underlying financial performance or total shareholder return (or both) has been unsatisfactory during the performance period.

A combined summary of the activity under the 2002 Plan, as amended, and the 2007 SIP, as amended for the year from 1 January 2010 to 31 December 2010 is presented below.

  Number of convertible shares

000’s

 
At 1 January 2010 16,954
Forfeited in the year (260)
Lapsed in the year (2,347)
Granted in the year 2,604
Exercised in the year (2,004)
At 31 December 2010 14,947
 

At 31 December 2010, 7,663,087 shares were exercisable under the 2002 Plan, as amended. The weighted average exercise price for these shares at 31 December 2010 was €4.54. The weighted average remaining contractual life of the awards issued under the 2002 Plan, as amended, at 31 December 2010 was 2.1 years.

The weighted average exercise price for the new B and new C convertible shares upon vesting at 31 December 2010 was €6.57. The weighted average remaining contractual life of the awards issued under the 2007 SIP, as amended, at 31 December 2010 was 8.4 years. No shares were exercisable at December 2010 or December 2009.

12. Analysis of Net Debt

  31-Dec-10   31-Dec-09
    €m   €m
Senior credit facility
Revolving credit facility (1) – interest at relevant interbank rate + 3% on RCF1 and +3.25% on RCF2 (8) (8) (13)
Tranche A term loan(2a)—interest at relevant interbank rate + 3%(8) 164 219
Tranche B term loan(2b)—interest at relevant interbank rate + 3.125%(8) 816 809
Tranche C term loan(2c)—interest at relevant interbank rate + 3.375%(8) 814 808
Yankee bonds (including accrued interest)(3) 219 203
Bank loans and overdrafts/(cash) (427) (565)
Receivables securitisation variable funding notes 2015 (4) 149   208
1,727 1,669
2015 cash pay subordinated notes (including accrued interest)(5) 370 358
2017 senior secured notes (including accrued interest) (6) 488 485
2019 senior secured notes (including accrued interest) (7) 490   488
Net debt before finance leases 3,075 3,000
Finance leases 26   41
Net debt including leases – Smurfit Kappa Funding plc 3,101 3,041
Balance of revolving credit facility reclassified to debtors 9   13
Total debt after reclassification – Smurfit Kappa Funding plc 3,110 3,054
Net (cash) in parents of Smurfit Kappa Funding plc -   (2)
Net Debt including leases – Smurfit Kappa Group plc 3,110   3,052

(1) Revolving credit facility of €525 million split into RCF1 and RCF2 of €152 million and €373 million (available under the senior credit facility) to be repaid in full in 2012 and 2013 respectively. (Revolver loans - nil, drawn under ancillary facilities and facilities supported by letters of credit - €1.1 million)

(2a) Term loan A due to be repaid in certain instalments up to 2012

(2b) Term loan B due to be repaid in full in 2013

(2c) Term loan C due to be repaid in full in 2014

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

(4) Receivables securitisation variable funding notes maturing November 2015

(5) €217.5 million 7.75% senior subordinated notes due 2015 and $200 million 7.75% senior subordinated notes due 2015

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

(7) €500 million 7.75% senior secured notes due 2019

(8) The margins applicable to the Senior Credit Facility are determined as follows:

Debt/EBITDA ratio   Tranche A and RCF1   Tranche B   Tranche C   RCF2
 
Greater than 4.0 : 1 3.25% 3.375% 3.625% 3.50%
 
4.0 : 1 or less but more than 3.5 : 1 3.00% 3.125% 3.375% 3.25%
 
3.5 : 1 or less but more than 3.0 : 1 2.75% 3.125% 3.375% 3.00%
 
3.0 : 1 or less 2.50% 3.125% 3.375% 2.75%
 

13. Venezuela

Hyperinflation

As discussed more fully in the 2009 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 to its Venezuelan operations at 31 December 2009 and for the year ended 31 December 2010. The hyperinflationary adjustments for the year ended 31 December 2009 were recorded in the fourth quarter of 2009.

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 for the years 2010 and 2009 are as follows:

    31-Dec-10   31-Dec-09
Index at year end   208.2   163.7
Movement in year   27.2%   25.1%
 

As a result of the entries recorded in respect of hyperinflationary accounting under IFRS, the 2010 Group Income Statement is impacted as follows: Sales €32 million increase (2009: €34 million increase), EBITDA €7 million decrease (2009: €1 million decrease) and profit after taxation €33 million decrease (2009: €34 million decrease). In 2010, a net monetary loss of €8 million (2009: €8 million loss) was recorded in the Group Income Statement.

Devaluation

As noted in the 2009 annual report, the Venezuelan government announced the devaluation of its currency, the Bolivar Fuerte (“VEF”), on 8 January 2010. The official exchange rate generally applicable to SKG was changed from VEF 2.15 per U.S. dollar to VEF 4.3 per U.S. dollar. For 2010 a loss of €17 million arises from the effect of retranslation of the U.S. dollar denominated net payables of its Venezuelan operations and associated hyperinflationary adjustments, which is included within operating profit. In addition, the Group recorded a reduction in net assets of €223 million in relation to these operations, which is reflected in the Group Statement of Comprehensive Income as a part of foreign currency translation adjustments.

14. Acquisitions and Disposals

Mondi Asset Swap

On 4 May 2010, the Group completed an asset swap agreement with Mondi Group (“Mondi”). This agreement resulted in the Group acquiring Mondi’s corrugated operations in the UK while Mondi acquired the Group’s Western European sack converting operations. The total cash cost of the asset swap for the Group was €58 million, €2 million of which was deferred until 2011. The cash cost includes €2 million of net cash disposed.

Acquisition of Mondi’s UK Corrugated Assets

The acquisition of Mondi’s UK corrugated operations, comprised three corrugated box plants. The three facilities reported a combined 2009 full year EBITDA of €8 million and a profit before tax of €2 million.

Fair value amounts equate to net book values acquired with the exception of non-current assets, with the book value of land and buildings being reduced by €2 million following a fair value exercise. The book values of other asset and liabilities were deemed to be valid based on due diligence carried out prior to the transaction.

  Fair values
€m
 
Total non current assets 32
Inventories 4
Trade and other receivables 20
Cash and cash equivalents 2
Total non current liabilities (2)
Trade and other payables (17)
Provisions for liabilities and charges (1)
Net assets acquired 38
Goodwill 7
Consideration 45
 

Disposal of SKG’s Western European Sack Converting Assets

The disposal of the Western European sack converting operations, comprised four plants in France, three in Spain, and one in Italy, as well as a number of sales offices. In 2009, these operations reported an EBITDA loss of €4 million and a loss before tax of €13 million.

Other Disposals

On 30 October 2010, the Group sold its French wood products operation, Rol Pin. The cash cost of the disposal was €14 million, with payments of €10 million deferred until 2011. On 31 December 2010, the Group sold its Polish paper sack plant to Mondi for a consideration of €3 million with payment deferred until 2011.

Supplemental Financial Information

Reconciliation of net income to EBITDA, before exceptional items & share-based payment expense
       
3 months to 3 months to 12 months to 12 months to
31-Dec-10 31-Dec-09 31-Dec-10 31-Dec-09
    €m   €m   €m   €m
 
Profit/(loss) for the financial period 57 (88) 58 (107)
Income tax expense (8) 25 45 55
Currency trading loss on Venezuelan Bolivar devaluation 1 - 17 -
Mondi asset swap and disposal of other operations 23 - 63 -
Reorganisation and restructuring costs 1 8 1 25
Impairment of property, plant and equipment - - - 33
Share of associates' operating (profit)/loss (1) 1 (2) 1
Net finance costs 67 113 308 318
Share-based payment expense 1 1 4 3
Depreciation, depletion (net) and amortisation 116   126   410   413
EBITDA before exceptional items and share-based payment expense 257   186   904   741
 

Supplemental Historical Financial Information

€m   Q4, 2009   FY, 2009   Q1, 2010   Q2, 2010   Q3, 2010   Q4, 2010
           
Group and third party revenue 2,380 9,207 2,435 2,740 2,761 2,833
Third party revenue 1,541 6,057 1,530 1,696 1,702 1,749
EBITDA before exceptional items and share-based payment expense 186 741 184 221 243 257
EBITDA margin 12.1% 12.2% 12.0% 13.0% 14.3% 14.7%
Operating profit 51 267 73 77 143 115
Profit/(loss) before tax (63) (52) (3) (5) 63 49
Free cash flow 29 172 (58) (12) 128 23
 
Basic earnings/(loss) per share (cent per share) (41.6) (55.8) (7.0) (10.3) 16.9 23.3
Weighted average number of shares used in EPS calculation (million) 218 218 218 218 218 219
Net debt 3,052 3,052 3,162 3,291 3,123 3,110
Net debt to EBITDA (LTM) 4.1 4.1 4.2 4.2 3.7 3.4
 

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