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Final Results

DUBLIN--(BUSINESSWIRE)--

13 February: Smurfit Kappa Group plc (‘SKG’ or ‘the Group’) today announced results for the full year ending 31 December 2018.

 

2018 Full Year | Key Financial Performance Measures

 
€m   FY
2018
  FY
2017
  Change   H2
2018
  H2
2017
  Change   H1
2018
  Change

H2 v H1

Revenue €8,946 €8,562 4 % €4,518 €4,329 4 % €4,428 2 %

EBITDA 1

€1,545 €1,240 25 % €821 €671 22 % €724 13 %
EBITDA Margin 1 17.3 % 14.5 % 18.2 % 15.5 % 16.4 %
Pre-exceptional Operating Profit €1,105 €820 35 % €576 €462 25 % €529 9 %
Pre-exceptional Profit before Income Tax €938 €601 56 % €485 €354 37 % €453 7 %
Pre-exceptional Basic EPS (cent) 1 292.2 185.3 58 % 151.5 110.3 37 % 140.7 8 %
Free Cash Flow 1 €494 €307 61 % €346 €261 33 % €148 134 %
Return on Capital Employed 1   19.3 %   15.0 %                   18.1 %    
                                 
Net Debt 1 €3,122 €2,805 11 % €2,871 9 %
Net Debt to EBITDA (LTM) 1   2.0x   2.3x                   2.1x    
 

Key Points

  • Record performance across key measures
    • Revenue growth of 4%, with an underlying2 increase of over 7%
    • EBITDA of €1,545 million, a 25% improvement. Group EBITDA margin of 17.3%
    • Pre-exceptional basic EPS up 58%
    • Strong free cash flow of €494 million, an increase of 61%
    • ROCE of 19.3%
    • Net debt to EBITDA ratio of 2.0x
  • Significant acquisition activity with acquisitions in France, the Netherlands and Serbia
  • Refinancing of senior credit facility and bond issuance of €1 billion
  • Proposed final dividend increase of 12% to 72.2 cent per share

Performance Review and Outlook

Tony Smurfit, Group CEO, commented:

“Our 2018 performance demonstrates the Group’s transformation of recent years, which is delivering progressively superior returns. This creates the platform for success in 2019 and beyond. The Group delivered on or exceeded its key measures. This reflects our market-leading positions, our innovation capability and investment decisions. Above all else, it reflects an unrelenting focus on delivering value to our customer base, a performance-led culture and the quality of our people. EBITDA of €1,545 million is materially better than 2017, representing a 25% increase, with a corresponding EBITDA margin of 17.3%.

_______________

1 Additional information in relation to these Alternative Performance Measures (‘APMs’) is set out in Supplementary Financial Information on page 33.

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

“Our European business performed very strongly in 2018 with underlying revenue growth of 7%. This was driven by a combination of demand growth, input cost recovery and the benefits of our investment programme.

“The Americas region had underlying revenue growth of 8% and our business continued to improve as the year progressed with particularly strong performances in our major markets of Mexico and Colombia. Across the region, we have seen progress in input cost recovery, demand growth and, as with our European business, the benefits of our investment plans.

“The Group has made significant progress on its Medium-Term Plan since its announcement in February 2018, together with continued expansion of its geographic reach, including acquisitions in France, the Netherlands and Serbia. These acquisitions are well positioned in their respective markets and offer great opportunities for future growth, adding three paper machines and four converting sites to the Group’s operational footprint.

“The Group is proud to support and develop the many Corporate Social Responsibility initiatives in the countries in which we operate. Such initiatives are consistent with our long-term commitment to support and develop programmes that benefit our communities, and form an integral part of our corporate values. The year also marked a significant shift in consumer awareness as to the benefits of renewable, recyclable and biodegradable paper-based packaging as against less environmentally friendly materials. As the leader in our field, we launched our ‘Better Planet Packaging’ initiative, which will progressively promote our products and allow us to leverage our unique applications to capitalise on this opportunity and help us deliver a more sustainable world.

“After almost 65 years of successfully operating in Venezuela, due to the continuing actions and interference of the Government of Venezuela the Group deconsolidated its Venezuelan operations in August 2018. The Group has initiated international arbitration proceedings to protect the interests of its stakeholders and seek compensation from the Government of Venezuela for its unlawful actions.

“While we are always conscious of macro-economic risk, SKG is very well positioned to capitalise on industry opportunities and to deliver consistently excellent performance for all stakeholders. The current year has started positively, and together with the continued development of sustainable packaging, e-commerce and other demand drivers, SKG has an exciting future.

“Reflecting its confidence in the strength of and prospects for our business, the Board is recommending a 12% increase in the final dividend to 72.2 cent per share.”

About Smurfit Kappa

Smurfit Kappa, a FTSE 100 company, is one of the leading providers of paper-based packaging solutions in the world, with around 45,000 employees in over 350 production sites across 34 countries and with revenue of €8.9 billion in 2018. We are located in 22 countries in Europe, and 12 in the Americas. We are the only large-scale pan-regional player in Latin America.

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

Our products, which are 100% renewable and produced sustainably, improve the environmental footprint of our customers.

smurfitkappa.com

Check out our microsite: openthefuture.info

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

Forward Looking Statements

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

 
Contacts
 

Garrett Quinn

Smurfit Kappa

T: +353 1 202 71 80

E: ir@smurfitkappa.com

 

 

Melanie Farrell

FTI Consulting

T: +353 765 08 00

E: smurfitkappa@fticonsulting.com

 

2018 Full Year | Performance Overview

In 2018 the Group reported its strongest ever result with EBITDA of €1,545 million and an EBITDA margin of 17.3%.

The European business delivered an underlying increase in revenue of 7% in 2018, driven by volume growth and continued input cost recovery. Together with the benefits of our capital spend programme this delivered a full year EBITDA of €1,267 million, a year-on-year increase of 33%. EBITDA margin for the year was 18.3% compared to 14.9% in 2017.

Box volumes grew by 2% in the year with notable performances in France, Portugal, Russia, Scandinavia, Spain and Eastern Europe. The Group also prioritised input cost recovery during the year which impacted corrugated demand in certain countries.

Input cost recovery in corrugated pricing continued into the second half of 2018 and was at the upper end of our expectations as we finished the year.

In 2018, the price of recovered fibre in our European business was down 27% year-on-year, broadly returning to long term average price levels. The Group expects recovered fibre prices in the region to remain stable in the short term and to trend upwards in the longer term.

The European pricing for both testliner and kraftliner were relatively stable through 2018. With market increases for both grades in the first quarter, prices for recycled containerboard reduced in the fourth quarter ending the year flat with kraftliner up for the same period.

During 2018, the Group completed a number of acquisitions. In July, the Group acquired Reparenco in the Netherlands, securing the Group’s medium-term European recycled containerboard requirements through the acquisition of an independently owned mill system. In the fourth quarter, the Group announced its entry into Serbia with the acquisition of the FHB containerboard mill and the Avala Ada corrugated plant. This acquisition builds on our Greek acquisition in 2017, which is located in the North East of Greece and services the Balkan region. Finally, in the fourth quarter the Group completed the acquisitions of two corrugated plants and an erecting centre in France, further strengthening the Group’s market presence in the North West of the country.

In the latter part of the year, the Group commenced a cost reduction programme across our operations. These actions will help reduce our fixed labour costs, the benefits of which are in addition to those outlined in our Medium-Term Plan.

The Americas segment reported a year-on-year increase in EBITDA of 2% to €317 million. The EBITDA margin in the Americas continues to recover and increased to 15.7% from 14.4% in 2017. Underlying revenue growth for the year was 8%, driven by volume growth of 2% and price recovery initiatives following on from the significant containerboard price increases incurred through 2017 and 2018.

For the year, 85% of the region’s earnings was delivered by Colombia, Mexico and the USA. The combined EBITDA margin for these three countries was up approximately 230 basis points year-on-year as the countries grew corrugated volumes, recovered input costs and progressed investments.

In Colombia, corrugated volumes were up 7% for the year together with corrugated price recovery. Strong performances in the FMCG and flower sectors drove the growth while we saw acceleration in agriculture related volumes through the latter part of the year. The country also benefited from the continued ramp-up of the Papelsa Mill expansion project where we expect continued improvement into 2019.

In Mexico, we saw significant improvement on both an absolute EBITDA and EBITDA margin basis. The Group saw positive volume growth for the country with a strong performance in the legacy business through the year and a strong fourth quarter for the border region. The region has benefited from the continued ramp-up of the Los Reyes Mill investment, which on top of providing incremental containerboard for integration, also provides lightweight containerboard capacity to enhance the delivery of performance packaging to our customers.

In the US, our margins and profitability improved as we progressed through 2018 with a step up in the second half both year-on-year and sequentially. Further corrugated price recovery coupled with the exceptional performance of our Texas Mill were the chief contributors to this improvement. Our box volumes were lower due to some rationalisation projects in our operations in California but showed some good growth in the second half.

Our Brazilian business continues to perform in line with expectations with good volume growth in the second half. The Group’s Argentinean business had a strong year from a volume growth perspective despite the country being impacted by inflationary pressures.

As communicated in September, due to the continuing actions and interference of the Government of Venezuela, the Group was no longer able to exercise control over the business of Smurfit Kappa Carton de Venezuela and so confirmed the deconsolidation of the Group’s Venezuelan operations in the third quarter. On 3 December 2018, Smurfit Kappa submitted a Request for Arbitration with the World Bank’s International Centre for Settlement of Investment Disputes (‘ICSID’) against the Bolivarian Republic of Venezuela (the ICSID Arbitration). In the submission, we are seeking compensation for the seizure of the Group’s Venezuelan Business by the Venezuelan Government as well as for other arbitrary, inconsistent and disproportionate State measures that have destroyed the value of our investments in Venezuela.

The Group reported a free cash flow of €494 million in 2018 compared to €307 million in 2017, an increase of 61%. In June 2018, SKG issued a €600 million bond at a rate of 2.875% and in January 2019, the Group successfully priced a €400 million add-on offering to the June 2018 issue at a price of 100.75 giving a yield of 2.756%. Also in January 2019, the Group signed and completed a new 5-year €1,350 million revolving credit facility (‘RCF’) with 21 of its existing relationship banks. The new RCF refinances the Group’s existing senior credit facility which was due to mature in March 2020. The average maturity profile of the Group’s debt (including the effect of our latest financing activity) now stands at 4.6 years with an average interest rate of 3.7%. Net debt to EBITDA was 2.0x at the year-end. The Group remains well positioned within its Ba1/BB+/BB+ credit rating.

The Group made significant progress in its Medium-Term Plan during the year with over €450 million of projects approved. The acquisition of Reparenco in the Netherlands in July represented an early and significant achievement in our plan, which is in addition to the capital expenditure progress.

2018 Full year | Financial Performance

Revenue for the full year was €8,946 million, up 4% on the same period last year, or 7% on an underlying basis. Revenue in Europe was up 8%, driven by volume growth along with progressive input cost recovery. On an underlying basis, revenue in Europe was up 7%. Revenue in the Americas was down 6%, predominantly due to currency and the deconsolidation of the Venezuelan operations, on an underlying basis revenue growth in the Americas was 8% for the year.

EBITDA for the full year was €1,545 million, 25% ahead of 2017, with higher earnings in Europe and the Americas partly offset by higher Group centre costs.

Exceptional items charged within operating profit in 2018 amounted to €66 million. €28 million related to reorganisation and restructuring costs in Europe, €18 million related to the defence from the unsolicited approach by International Paper, €11 million to the loss on disposal of the Baden operations in Germany and €9 million was due to the UK High Court ruling on equalisation of guaranteed minimum pensions (‘GMP’) in the UK.

Exceptional items charged within operating profit in 2017 amounted to €23 million. €12 million related to reorganisation and restructuring costs in the Americas and €11 million related to impairment charges on property, plant and equipment in Europe and the Americas.

Exceptional finance costs charged in 2018 amounted to €6 million relating to the fee payable to the bondholders to secure their consent to the Group’s move from quarterly to semi-annual reporting and the interest cost on the early termination of certain US dollar/euro swaps.

The exceptional finance cost of €2 million in 2017 represented the accelerated amortisation of issue costs relating to the debt within our senior credit facility, which was paid down with the proceeds of the €500 million bond issue in January 2017.

Net pre-exceptional finance costs at €167 million were €52 million lower than in 2017, primarily as a result of a decrease in non-cash costs, with a positive swing of €35 million from a net currency translation loss on debt of €13 million in 2017 to a net gain of €22 million in 2018 as well as a decrease of €12 million in the hyperinflation related net monetary loss. Cash interest at €155 million, including the exceptional finance costs of €6 million, was €3 million lower than in 2017 reflecting the benefits of prior-year refinancing.

With the combination of a €285 million increase in pre-exceptional operating profit and the €52 million decrease in net finance costs, the pre-exceptional profit before income tax of €938 million was €337 million higher than in 2017. The higher exceptional items, specifically the €1.3 billion non-cash charge relating to the deconsolidation of Venezuela, resulted in a loss before income tax of €404 million compared to a profit of €576 million in 2017. As stated in our third quarter 2018 trading update the non-cash exceptional charge related to currency recycling in the Consolidated Income Statement has a corresponding credit of €1.2 billion to the Consolidated Statement of Comprehensive Income and in turn has no impact on the net assets or total equity of the Group.

The income tax expense was €235 million compared to €153 million in 2017, with the increase of €82 million in the expense largely reflecting moves in profitability and non-recurring tax credits.

The resulting loss for the financial year was €639 million compared to a profit of €423 million in 2017. Excluding the exceptional items (and the related tax charges / credits), the after tax profit for 2018 would be €696 million.

Basic EPS for the full year of 2018 was (273.7) cent, compared to a positive 177.2 cent earned in the same period of 2017. On a pre-exceptional basis, EPS was 292.2 cent for the full year, 58% higher than the 185.3 cent in 2017.

2018 Full Year | Free Cash Flow

Free cash flow in 2018 was €494 million compared to €307 million in 2017, an increase of €187 million. The increase in EBITDA was partly offset by an increase of €103 million in capital outflows and by higher tax payments. The outflow relating to exceptional items was also higher in 2018 while the working capital outflow and the net outflow for other (mainly retirement benefits and hyperinflationary adjustments) were both lower.

The working capital outflow in 2018 was €94 million compared to €112 million in 2017. The outflow in 2018 was the combination of an increase in debtors and stocks, partly offset by an increase in creditors. These increases reflect the combination of volume growth, higher European selling prices and lower OCC costs. Working capital amounted to €683 million at December 2018, representing 7.5% of annualised revenue compared to 7.3% at December 2017.

Capital expenditure in 2018 amounted to €574 million, equating to 138% of depreciation, compared to €430 million or 109% of depreciation in 2017. The higher level of expenditure was in line with the Medium-Term Plan, with 2018 being the first year of our accelerated investment programme.

Cash interest of €155 million in 2018 included the exceptional finance costs of €6 million. Excluding these amounts, our cash interest amounted to €149 million in 2018 compared to €158 million in 2017. The year-on-year decrease reflects mainly lower average interest rates, partly as a result of the pay down in mid-June of the relatively higher cost 2018 senior notes.

Tax payments of €193 million in 2018 were €39 million higher than in 2017. This is predominantly due to higher profitability.

2018 Full Year | Capital Structure

Net debt was €3,122 million at the end of December, resulting in a net debt to EBITDA ratio of 2.0x compared to 2.3x at the end of 2017. The Group’s balance sheet continues to provide considerable financial strategic flexibility, subject to the stated leverage range of 1.75x to 2.5x through the cycle and SKG’s Ba1/BB+/BB+ credit rating.

In line with the Group’s ongoing credit strategy of further extending maturity profiles, diversifying funding sources and increasing liquidity the Group has undertaken a number of actions in 2018 and January 2019. In June 2018, SKG issued a €600 million bond at a rate of 2.875%, and in January 2019, the Group successfully priced a €400 million add-on offering to the June 2018 issue at a price of 100.75 giving a yield of 2.756%. Also in January 2019, the Group signed and completed a new 5-year €1,350 million RCF with 21 of its existing relationship banks. The new RCF refinances the Group’s existing senior credit facility which was due to mature in March 2020.

At 31 December 2018 (proforma for our January 2019 financing activity), the Group’s average interest rate was 3.7% compared to 4.1% at 31 December 2017. The Group’s diversified funding base and long dated maturity profile of 4.6 years (proforma for our new revolver and €400 million note issuance) provide a stable funding outlook. In terms of liquidity, the Group held cash balances of €417 million at the end of the year, which was further supplemented by available commitments under its new RCF of approximately €930 million.

2018 Full Year | Dividend

The Group views its dividend as an important component of its investment thesis and a way to directly transfer value creation within the business to shareholders. For the year 2018, the Board is recommending a final dividend of 72.2 cent per share, a 12% increase year-on-year. Combined with an interim dividend of 25.4 cent per share paid in October 2018, this will bring the total dividend to 97.6 cent, an 11% increase year-on-year.

It is proposed to pay the final dividend on 10 May 2019 to all ordinary shareholders on the share register at the close of business on 12 April 2019.

2018 Full Year | Commercial Offering and Innovation

In the third quarter, the Group launched ‘Better Plant Packaging’ a multi-faceted initiative comprising innovative product design, extensive research and development and collaboration with existing and new partners. ‘Better Planet Packaging’ builds on the Group’s industry leading sustainability credentials and business applications to help our customers, both existing and prospective, with their challenge of finding more sustainable packaging and merchandising solutions. Brand owners and retailers have made their plans and goals clear, and this is to move away from unsustainable packaging materials. ‘Better Planet Packaging’ positions Smurfit Kappa to lead in this mega-trend.

During 2018, the Group was recognised with over 52 national or international awards for packaging innovation, sustainability, design and print. The awards stretched across 11 countries and two continents including Argentina, Colombia, the Czech Republic, France, Germany, Ireland, the Netherlands, Poland, Russia, Switzerland and the UK.

2018 Full Year | Sustainability

SKG continues to feature at the top of independent sustainability accreditations with an ‘A’ rating from MSCI, a Gold rating with EcoVadis and the highest score in the sector (out of 31 corporates) with Sustainalytics. The company continues to be part of the ‘FTSE4GOOD’, ‘Ethibel’ and ‘STOXX Global ESG leader’ sustainability indices.

During 2018, the Group launched its 11th sustainability report with significant progress made in its sustainability goals reaching targets in many cases well ahead of the deadline. Building on these achievements the Group rolled out an ambitious new set of goals in October, please click on hyperlink for more details. October 2018 - Increased Sustainability Targets

 
Summary Cash Flow
 
Summary cash flows for the second half and full year are set out in the following table.
 
  H2 2018   H2 2017   FY 2018   FY 2017
    €m   €m   €m   €m
EBITDA 821 671 1,545 1,240
Exceptional items (12) (12) (29) (12)
Cash interest expense (74) (78) (155) (158)
Working capital change 55 13 (94) (112)
Current provisions 2 1 (1) (2)
Capital expenditure (369) (253) (574) (430)
Change in capital creditors 39 22 13 (28)
Tax paid (104) (77) (193) (154)
Sale of property, plant and equipment 4 2 4 5
Other   (16)   (28)   (22)   (42)
Free cash flow 346 261 494 307
 
Share issues - - - 1
Purchase of own shares (net) - 1 (10) (10)
Sale of businesses and investments 3 - (8) 5
Deconsolidation of Venezuela (17) - (17) -
Purchase of businesses and investments (500) (53) (516) (63)
Dividends (64) (57) (219) (195)
Derivative termination (payments)/receipts   -   (5)   17   (6)
Net cash (outflow)/inflow (232) 147 (259) 39
 
Net debt acquired (3) (6) (3) (6)
Deferred debt issue costs amortised (5) (5) (10) (12)
Currency translation adjustment   (11)   44   (45)   115
(Increase)/decrease in net debt   (251)   180   (317)   136
 

Funding and Liquidity

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

At 31 December 2018, Smurfit Kappa Treasury Funding Limited had outstanding US$292.3 million 7.50% senior debentures due 2025. The Group had outstanding €94.2 million and STG£77.2 million variable funding notes issued under the €230 million accounts receivable securitisation programme maturing in June 2023, together with €50 million variable funding notes issued under the €200 million accounts receivable securitisation programme maturing in February 2022.

Smurfit Kappa Acquisitions had outstanding €400 million 4.125% senior notes due 2020, €250 million senior floating rate notes due 2020, €500 million 3.25% senior notes due 2021, €500 million 2.375% senior notes due 2024, €250 million 2.75% senior notes due 2025 and €600 million 2.875% senior notes due 2026. Smurfit Kappa Acquisitions and certain subsidiaries are also party to a senior credit facility. At 31 December 2018, the Group’s senior credit facility comprised term drawings of €252.3 million, US$57.4 million and STG£94.6 million under the amortising Term A facility maturing in 2020. In addition, at 31 December 2018, the facility included an €845 million RCF of which €6 million was drawn in revolver loans, with a further €6 million in operational facilities including letters of credit drawn under various ancillary facilities.

The following table provides the range of interest rates at 31 December 2018 for each of the drawings under the various senior credit facility loans.

   

Borrowing Arrangement

Currency

Interest Rate

 
Term A Facility EUR 0.982% - 1.034%
USD 3.872%
GBP 2.081%
 
Revolving Credit Facility EUR 0.732%
 

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

In March 2018, the Group repaid €82 million of amortising Term A Facility borrowings under the terms of the senior credit facility.

In June 2018, the Group amended its €240 million receivables securitisation programme, which utilises the Group’s receivables in France, Germany and the UK, reducing the facility to €230 million, extending the maturity from 2019 to 2023 and reducing the variable funding notes margin from 1.4% to 1.2%.

In June 2018, the Group completed the redemption of its €200 million 5.125% senior notes due 2018 and US$300 million 4.875% senior notes due 2018. The Group funded the redemption by drawing on its revolving credit and securitisation facilities.

In June 2018, the Group issued €600 million of 7.5 year euro denominated senior notes at a coupon of 2.875%. The net proceeds of the offering were used in July 2018 to fund the Reparenco acquisition and reduce borrowings under the RCF.

In November 2018, the Group increased its €175 million receivables securitisation programme, which utilises the Group’s receivables in Austria, Belgium, Italy and the Netherlands, to €200 million.

In January 2019, the Group successfully priced a €400 million add-on offering to the June 2018 €600 million 2.875% bond issue at a price of 100.75 giving a yield of 2.756%. Also in January 2019, the Group signed and completed a new 5-year €1,350 million RCF with 21 of its existing relationship banks. The new RCF refinances the Group’s existing senior credit facility which was due to mature in March 2020.

Market Risk and Risk Management Policies

The Group is exposed to the impact of interest rate changes and foreign currency fluctuations due to its investing and funding activities and its operations in different foreign currencies. Interest rate risk exposure is managed by achieving an appropriate balance of fixed and variable rate funding. As at 31 December 2018, the Group had fixed an average of 79% (86% proforma for our treasury refinancing transactions undertaken in January 2019) of its interest cost on borrowings over the following twelve months.

The Group’s fixed rate debt comprised €400 million 4.125% senior notes due 2020, €500 million 3.25% senior notes due 2021, €500 million 2.375% senior notes due 2024, €250 million 2.75% senior notes due 2025, US$292.3 million 7.50% senior debentures due 2025 and €600 million 2.875% senior notes due 2026. In addition, the Group had €224 million in interest rate swaps converting variable rate borrowings to fixed rate with maturity dates ranging from January 2019 to January 2021.

The Group’s earnings are affected by changes in short-term interest rates as a result of its floating rate borrowings. If LIBOR/EURIBOR interest rates for these borrowings increased by one percent, the Group’s interest expense would increase, and income before taxes would decrease, by approximately €6 million over the following twelve months. Interest income on the Group’s cash balances would increase by approximately €4 million assuming a one percent increase in interest rates earned on such balances over the following twelve months.

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

Principal Risks and Uncertainties

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

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

The principal risks and uncertainties faced by the Group were outlined in our 2017 Annual Report on pages 36-41. The Annual Report is available on our website smurfitkappa.com. The principal risks and uncertainties for the financial year are summarised below.

  • If the current economic climate were to deteriorate, especially as a result of Brexit or changes in free trade agreements, and result in an economic slowdown which was sustained over any significant length of time, or the sovereign debt crisis (including its impact on the euro) were to re-emerge or exacerbate as a result of Brexit or changes in free trade agreements, it could adversely affect the Group's financial position and results of the operations.
  • The cyclical nature of the packaging industry could result in overcapacity and consequently threaten the Group’s pricing structure.
  • If operations at any of the Group’s facilities (in particular its key mills) were interrupted for any significant length of time it could adversely affect the Group’s financial position and results of operations.
  • Price fluctuations in raw materials and energy costs could adversely affect the Group’s manufacturing costs.
  • The Group is exposed to currency exchange rate fluctuations.
  • The Group may not be able to attract and retain suitably qualified employees as required for its business.
  • Failure to maintain good health and safety practices may have an adverse effect on the Group’s business.
  • The Group is subject to a growing number of environmental laws and regulations, and the cost of compliance or the failure to comply with current and future laws and regulations may negatively affect the Group’s business.
  • The Group is subject to anti-trust and similar legislation in the jurisdictions in which it operates.
  • The Group, similar to other large global companies, is susceptible to cyber-attacks with the threat to the confidentiality, integrity and availability of data in its systems.

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

 

Consolidated Income Statement

For the Financial Year Ended 31 December 2018
   
2018 2017
Unaudited Audited

Pre-
exceptional

  Exceptional   Total

Pre-
exceptional

  Exceptional   Total
    €m   €m   €m   €m   €m   €m
Revenue 8,946 - 8,946 8,562 - 8,562
Cost of sales (5,989)   -   (5,989)   (5,997)   (11)   (6,008)
Gross profit 2,957 - 2,957 2,565 (11) 2,554
Distribution costs (705) - (705) (667) - (667)
Administrative expenses (1,147) - (1,147) (1,078) - (1,078)
Other operating expenses -   (66)   (66)   -   (12)   (12)
Operating profit 1,105 (66) 1,039 820 (23) 797
Finance costs (214) (6) (220) (248) (2) (250)
Finance income 47 - 47 29 - 29
Deconsolidation of Venezuela -   (1,270)   (1,270)   -   -   -

(Loss)/profit before income
tax

938   (1,342) (404) 601   (25) 576
Income tax expense (235) (153)
(Loss)/profit for the financial year (639) 423
 
Attributable to:
Owners of the parent (646) 417
Non-controlling interests 7 6
(Loss)/profit for the financial year (639) 423
 
Earnings per share
Basic earnings per share - cent (273.7) 177.2
Diluted earnings per share - cent (273.7) 175.8
 
 

Consolidated Statement of Comprehensive Income

For the Financial Year Ended 31 December 2018

   
2018 2017
Unaudited Audited
    €m   €m
 
(Loss)/profit for the financial year (639)   423
 
Other comprehensive income:
Items that may be subsequently reclassified to profit or loss
Foreign currency translation adjustments:
- Arising in the financial year (201) (215)
- Recycled to Consolidated Income Statement on deconsolidation of Venezuela 1,196 -
 
Effective portion of changes in fair value of cash flow hedges:
- Movement out of reserve 11 8
- New fair value adjustments into reserve (6) (3)
 
Changes in fair value of cost of hedging:
- Movement out of reserve (1) -
- New fair value adjustments into reserve 2   -
1,001 (210)
Items which will not be subsequently reclassified to profit or loss
Defined benefit pension plans:
- Actuarial loss (6) (9)
- Movement in deferred tax -   1
(6) (8)
     
Total other comprehensive income/(expense) 995   (218)
 
Total comprehensive income for the financial year 356   205
 
Attributable to:
Owners of the parent 370 225
Non-controlling interests (14)   (20)
Total comprehensive income for the financial year 356   205
 
 
Consolidated Balance Sheet

At 31 December 2018

   
2018 2017
Unaudited Audited
    €m   €m
ASSETS
Non-current assets
Property, plant and equipment 3,613 3,242
Goodwill and intangible assets 2,590 2,427
Other investments 20 21
Investment in associates 14 13
Biological assets 100 110
Other receivables 40 27
Derivative financial instruments 8 3
Deferred income tax assets 153   200
6,538   6,043
Current assets
Inventories 847 838
Biological assets 11 11
Trade and other receivables 1,667 1,558
Derivative financial instruments 13 16
Restricted cash 10 9
Cash and cash equivalents 407   530
2,955   2,962
Total assets 9,493   9,005
 
EQUITY
Capital and reserves attributable to owners of the parent
Equity share capital - -
Share premium 1,984 1,984
Other reserves 355 (678)
Retained earnings 420   1,202
Total equity attributable to owners of the parent 2,759 2,508
Non-controlling interests 131   151
Total equity 2,890   2,659
 
LIABILITIES
Non-current liabilities
Borrowings 3,372 2,671
Employee benefits 804 848
Derivative financial instruments 17 26
Deferred income tax liabilities 173 148
Non-current income tax liabilities 36 33
Provisions for liabilities 47 62
Capital grants 18 19
Other payables 14   17
4,481   3,824
Current liabilities
Borrowings 167 673
Trade and other payables 1,871 1,779
Current income tax liabilities 24 37
Derivative financial instruments 10 10
Provisions for liabilities 50   23
2,122   2,522
Total liabilities 6,603   6,346
Total equity and liabilities 9,493   9,005
 
 
Consolidated Statement of Changes in Equity

For the Financial Year Ended 31 December 2018

 
  Attributable to owners of the parent  

Equity
share
capital

 

Share
premium

 

Other
reserves(1)

 

Retained
earnings

 

Total

 

Non-
controlling

interests

Total
equity

    €m   €m   €m   €m   €m   €m   €m
Unaudited
At 1 January 2018 - 1,984 (678) 1,202 2,508 151 2,659
 
(Loss)/profit for the financial year - - - (646) (646) 7 (639)
Other comprehensive income

Foreign currency translation
adjustments

- - 1,015 - 1,015 (20) 995
Defined benefit pension plans - - - (5) (5) (1) (6)

Effective portion of changes in fair
value of cash flow hedges

- - 5 - 5 - 5

Changes in fair value of cost of
hedging

-   -   1   -   1   -   1

Total comprehensive
income/(expense) for the
financial year

-   -   1,021   (651)   370   (14)   356
 

Purchase of non-controlling
interests

- - - (5) (5) (3) (8)
Hyperinflation adjustment - - - 87 87 10 97
Dividends paid - - - (213) (213) (6) (219)
Share-based payment - - 22 - 22 - 22

Net shares acquired by SKG
Employee Trust

- - (10) - (10) - (10)
Venezuela deconsolidation -   -   -   -   -   (7)   (7)
At 31 December 2018 -   1,984   355   420   2,759   131   2,890
 
Audited
At 1 January 2017 - 1,983 (507) 853 2,329 174 2,503
 
Profit for the financial year - - - 417 417 6 423
Other comprehensive income

Foreign currency translation
adjustments

- - (189) - (189) (26) (215)
Defined benefit pension plans - - - (8) (8) - (8)

Effective portion of changes in fair
value of cash flow hedges

-   -   5   -   5   -   5

Total comprehensive
(expense)/income for the
financial year

-   -   (184)   409   225   (20)   205
 
Shares issued - 1 - - 1 - 1

Purchase of non-controlling
interests

- - - - - (15) (15)
Hyperinflation adjustment - - - 131 131 16 147
Dividends paid - - - (191) (191) (4) (195)
Share-based payment - - 23 - 23 - 23

Net shares acquired by SKG
Employee Trust

-   -   (10)   -   (10)   -   (10)
At 31 December 2017 -   1,984   (678)   1,202   2,508   151   2,659
 

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

 
Consolidated Statement of Cash Flows

For the Financial Year Ended 31 December 2018

   
2018 2017
Unaudited Audited
    €m   €m
Cash flows from operating activities
(Loss)/profit before income tax (404) 576
 
Net finance costs 173 221
Depreciation charge 379 360
Impairment of assets - 11
Amortisation of intangible assets 40 40
Amortisation of capital grants (2) (2)
Equity settled share-based payment expense 22 23
Profit on sale of property, plant and equipment (3) (9)
Loss on disposal of businesses 11 -
Deconsolidation of Venezuela – exceptional items 1,270 -
Net movement in working capital (93) (110)
Change in biological assets (3) (4)
Change in employee benefits and other provisions (26) (54)
Other (primarily hyperinflation adjustments) 29   6
Cash generated from operations 1,393 1,058
Interest paid (167) (161)
Income taxes paid:
Irish corporation tax paid (10) (14)
Overseas corporation tax (net of tax refunds) paid (183)   (140)
Net cash inflow from operating activities 1,033   743
 
Cash flows from investing activities
Interest received 4 3
Business disposals (8) 4
Deconsolidation of Venezuela (17) -
Additions to property, plant and equipment and biological assets (528) (442)
Additions to intangible assets (25) (16)
Receipt of capital grants 2 4
Increase in restricted cash (1) (2)
Disposal of property, plant and equipment 7 14
Disposal of associates - 1
Dividends received from associates - 1
Purchase of subsidiaries (482) (49)
Deferred consideration paid (1)   (3)
Net cash outflow from investing activities (1,049)   (485)
 
Cash flows from financing activities
Proceeds from issue of new ordinary shares - 1
Proceeds from bond issue 600 500
Purchase of own shares (net) (10) (10)
Purchase of non-controlling interests (16) (7)
Increase/(decrease) in other interest-bearing borrowings 94 (78)
Repayment of finance leases (2) (2)
Repayment of borrowings (525) (366)
Derivative termination receipts/(payments) 17 (6)
Deferred debt issue costs paid (9) (10)
Dividends paid to shareholders (213) (191)
Dividends paid to non-controlling interests (6)   (4)
Net cash outflow from financing activities (70)   (173)
(Decrease)/increase in cash and cash equivalents (86)   85
 
Reconciliation of opening to closing cash and cash equivalents
Cash and cash equivalents at 1 January 503 402
Currency translation adjustment (27) 16
(Decrease)/increase in cash and cash equivalents (86)   85
Cash and cash equivalents at 31 December 390   503
 

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

Selected Explanatory Notes to the Consolidated Financial Statements

1. General Information

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

2. Basis of Preparation and Accounting Policies

Basis of preparation

The Consolidated Financial Statements of the Group are prepared in accordance with International Financial Reporting Standards (‘IFRS’) issued by the International Accounting Standards Board (‘IASB’) as adopted by the European Union (‘EU’); and those parts of the Companies Act 2014 applicable to companies reporting under IFRS.

The financial information in this report 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 Consolidated Financial Statements included in the Group’s Annual Report for the year ended 31 December 2017 which is available on the Group’s website; smurfitkappa.com. The accounting policies and methods of computation and presentation adopted in the preparation of the Group financial information are consistent with those described and applied in the Annual Report for the year ended 31 December 2017 with the exception of IFRS 9, Financial Instruments and IFRS 15, Revenue from Contracts with Customers which are described below. A number of other changes to IFRS became effective in 2018, however they did not have a material effect on the financial information included in this report.

New and amended standards and interpretations effective during 2018

Financial instruments

IFRS 9, Financial Instruments, is the standard which replaces IAS 39, Financial Instruments: Recognition and Measurement. The Standard addresses the classification, measurement and derecognition of financial assets and liabilities, introduces new rules for hedge accounting and a new impairment model for financial assets. The Group has adopted IFRS 9 from 1 January 2018, with the practical expedients permitted under the standard. Comparatives for 2017 have not been restated.

The impact of adopting IFRS 9 on our Consolidated Financial Statements was not material for the Group and there was no adjustment to retained earnings on application at 1 January 2018.

Classification and measurement

IFRS 9 largely retains the existing requirements in IAS 39 for the classification and measurement of financial liabilities. However, it eliminates the previous IAS 39 categories for financial assets of held-to-maturity, loans and receivables and available-for-sale. Under IFRS 9, on initial recognition, a financial asset is classified as measured at amortised cost, or fair value through other comprehensive income (‘FVOCI’), or fair value through profit or loss (‘FVPL’). The classification is based on the business model for managing the financial assets and the contractual terms of the cash flows.

2. Basis of Preparation and Accounting Policies (continued)

The table below details the original measurement categories under IAS 39 and the new measurement categories under IFRS 9 for each class of the Group's financial assets and financial liabilities at 1 January 2018.

       

Original classification
under IAS 39

New classification
under IFRS 9

Original
carrying
amount under
IAS 39

New carrying
amount
under IFRS 9

 
            €m   €m
Financial assets
Equity instruments Available-for-sale FVOCI 10 10

Listed and unlisted
debt instruments

Available-for-sale FVPL 11 11

Derivative financial
instruments - non-
qualifying hedges

FVPL FVPL 5 5

Derivative financial
instruments -
qualifying hedges

Derivatives used for hedging Derivatives used for hedging 14 14

Trade and other
receivables

Loans and receivables Amortised cost 1,474 1,474

Cash and cash
equivalents

Loans and receivables Amortised cost 530 530
Restricted cash   Loans and receivables   Amortised cost   9   9
Financial liabilities
Borrowings Other financial liabilities Other financial liabilities 3,344 3,344

Derivative financial
instruments - non-
qualifying hedges

FVPL FVPL 2 2

Derivative financial
instruments -
qualifying hedges

Derivatives used for hedging Derivatives used for hedging 34 34

Trade and other
payables

  Other financial liabilities   Other financial liabilities   1,432   1,432
 

The financial assets held by the Group include equity and debt instruments which were previously classified as available-for-sale. Under IFRS 9, the Group will continue to measure all equity instruments at FVOCI. However, gains or losses realised on the sale of financial assets at FVOCI will no longer be transferred to profit or loss on sale, but instead will be reclassified within equity from the FVOCI reserve to retained earnings. €1 million was reclassified from the available-for-sale reserve to the FVOCI reserve on 1 January 2018. Listed and unlisted debt instruments which were previously classified as available-for-sale are now classified as FVPL as the cash flows do not represent solely payments of principal and interest.

Refinancing

IFRS 9 requires that when a financial liability measured at amortised cost is modified without being derecognised, a gain or loss should be recognised in the income statement. This change in accounting policy did not have a material impact on the Group’s financial results.

2. Basis of Preparation and Accounting Policies (continued)

Hedge accounting

The Group has elected to adopt the new general hedge accounting model in IFRS 9. The new hedge accounting rules align the accounting for hedging instruments more closely with the Group’s risk management practices and provides greater scope to apply hedge accounting. The Group’s hedge documentation has been reworked in line with the new standard and all current hedge relationships qualify as continuing hedges upon the adoption of IFRS 9. Under IFRS 9, when designating a foreign exchange derivative contract as a hedging instrument, the currency basis spread can be excluded and accounted for separately through other comprehensive income as a cost of hedging, being recognised in the income statement at the same time as the hedged item affects profit or loss. Accounting for foreign currency basis spreads as a cost of hedging has been applied prospectively, without restating comparatives. Costs of hedging pertaining to our foreign currency derivatives at the date of transition of €2 million were reclassified to the cost of hedging reserve on 1 January 2018.

Impairment of financial assets

IFRS 9 has introduced a new impairment model which requires the recognition of impairment provisions based on expected credit losses rather than incurred credit losses as was the case under IAS 39. It applies to financial assets classified at amortised cost, debt instruments measured at FVOCI, contract assets under IFRS 15, Revenue from Contracts with Customers, lease receivables, loan commitments and certain financial guarantee contracts. For trade receivables, the Group applies the IFRS 9 simplified approach to measure expected credit losses which uses a lifetime expected loss allowance. The change in impairment methodology as a result of implementing IFRS 9 did not have a material impact on the Group’s financial results.

Revenue recognition

IFRS 15, Revenue from Contracts with Customers, replaces IAS 18, Revenue and IAS 11, Construction Contracts and related interpretations. IFRS 15 establishes a five-step model for reporting the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. IFRS 15 specifies how and when revenue should be recognised as well as requiring enhanced disclosures. The core principle of the standard requires an entity to recognise revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration that it expects to be entitled to in exchange for transferring those goods or services to the customer. Revenue is recognised when an identified performance obligation has been met and the customer can direct the use of and obtain substantially all the remaining benefits from a good or service as a result of obtaining control of that good or service. The Group has adopted IFRS 15 from 1 January 2018, using the modified retrospective approach and has not restated comparatives for 2017.

The Group used the five-step model to develop an impact assessment framework to assess the impact of IFRS 15 on the Group’s revenue transactions. The results of our IFRS 15 assessment framework and contract reviews indicated that the impact of applying IFRS 15 on our Consolidated Financial Statements was not material for the Group and there was no adjustment to retained earnings on application of the new rules at 1 January 2018.

The adoption of IFRS 15 has had no material impact on the principles applied by the Group for reporting the nature, amount and timing of revenue recognition. Contracts with customers can be readily identified throughout the Group and include a single performance obligation to sell containerboard, corrugated containers and other paper-based packaging products. Revenue is recognised when control of the goods is transferred to the customer, which for the Group is at a point in time when delivery to the customer has taken place according to the terms of sale.

New and amended standards and interpretations issued but not yet effective or early adopted

Leases

IFRS 16, Leases issued in January 2016 by the IASB replaces IAS 17, Leases and related interpretations. IFRS 16 sets out the principles for the recognition, measurement, presentation and disclosure of leases for both the lessee and the lessor. For lessees, IFRS 16 eliminates the classification of leases as either operating leases or finance leases and introduces a single lessee accounting model with some exemptions for short-term and low-value leases. The lessee recognises a right-of-use asset representing its right to use the underlying asset and a lease liability representing its obligation to make lease payments. It also includes an election which permits a lessee not to separate non-lease components (e.g. maintenance) from lease components and instead capitalise both the lease cost and associated non-lease cost. For lessors, IFRS 16 substantially carried forward the accounting requirement in IAS 17.

2. Basis of Preparation and Accounting Policies (continued)

Impact - leases in which the Group is a lessee

The standard will primarily affect the accounting for the Group’s operating leases. The application of IFRS 16 will result in the recognition of additional assets and liabilities in the Consolidated Balance Sheet and in the Consolidated Income Statement it will replace the straight-line operating lease expense with a depreciation charge for the right-of-use asset and an interest expense onnull