Smurfit Kappa's Q1 profit attributable owners of the parent up 96.8% year-over-year to €65M due to strong performance in Americas business, price improvements in European packaging operations, reduced financing costs; revenue up 2.3% to €1.93B

Elyse Blye

DUBLIN , May 2, 2014 (press release) – 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 the Americas, today announced results for the 3 months ending 31 March 2014. 2014 First Quarter | Key Financial Performance Measures

First Quarter Key points

• Continued EPS growth year-on-year reflecting higher EBITDA and reduced interest expense
• Strong Free Cash Flow in the first quarter supporting committed medium term capital allocation measures
• Return on Capital Employed of 13.8%
• Adoption of the Sicad I rate for our Venezuelan operations in the first quarter
• S&P upgrade to BB+ rating reflecting significantly improved credit metrics
• Proposed final 2013 dividend of 30.75 cent to be paid on 9 May

Performance Review & Outlook

Gary McGann, Smurfit Kappa Group CEO, commented: “In terms of the first quarter, EBITDA growth of 12% and the sharply increased EPS year-on-year reflects a strong underlying performance in our Americas business, price improvements in our European packaging operations, and materially reduced financing costs as a result of the completion of the significantly more attractive financing structure for the Group, most of which has been completed in 2013. This was offset by a number of factors including downtime in our kraftliner operations at a net cost of approximately €8 million and a further €18 million adverse impact arising mainly from the negative currency translation adjustment as a result of the Group’s decision to translate its Venezuelan operations at the Sicad I (‘Complimentary System of Foreign Currency Acquirement’) rate which was VEF 10.7 per US dollar at the end of the first quarter.

In the quarter under review, the Group reported an improved year-on-year EBITDA margin of 13.9% and an increasingly strong Return on Capital Employed of 13.8% further underlining SKG’s progress on achieving optimal returns through continued operating efficiency and judicious capital investment.

European corrugated packaging demand remains reasonable with quarter-on-quarter growth in Western Europe partially offset by lower volumes in Eastern Europe. The first quarter was also impacted by weakening recovered paper costs and an inventory build-up from the year-end, resulting in recycled containerboard price decreases which slowed down corrugated price recovery. SKG is taking approximately 25,000 tonnes of recycled containerboard downtime in the second quarter. Despite the current circumstances SKG’s integrated model has underpinned relatively good earnings development in the quarter.

The Americas business is trending strongly with good earnings progress across most of the markets. The first quarter has delivered a strong underlying financial performance as a result of good demand growth and the successful implementation of price increases in the majority of countries.

Following a number of years of debt paydown, the company has achieved its desired leverage range and is now focused on incremental high return capital projects and accretive acquisitions while sustaining a progressive dividend policy.

To increase the likelihood of success, additional resources have been applied to sourcing suitable acquisitions. The combination of efficient management of our current business and the above mentioned initiatives will deliver earnings growth momentum. In the context of the current economic environment, the Group continues to expect to grow its earnings year-on-year.”

About Smurfit Kappa Group

Smurfit Kappa is one of the leading producers of paper-based packaging in the world, with around 41,000 employees in approximately 350 production sites across 32 countries and with revenue of €8 billion in 2013.

Innovation, service and pro-activity towards customers, using sustainable resources, is our primary focus. This focus is enhanced through being an integrated producer, with our packaging plants sourcing the major part of their raw materials from our own paper mills. We are the European leader in paper-based packaging, operating in 21 countries selling products including corrugated, containerboard, bag-in-box, solidboard and solidboard packaging. We have a growing base in Eastern Europe in many of these product areas. We also have a key position in other product/market segments including graphicboard, MG paper and sack paper. We are the only large-scale pan-regional player in the Americas, operating in 11 countries in total in North, Central and South America.

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.

2014 First Quarter | Performance Overview

The Group has successfully delivered a 2% increase in revenues and a 12% increase in EBITDA in the first quarter year-on-year. This performance was driven by steady European volumes, year-on-year box price increases and a strong underlying performance in the Americas. While there has been a good start to the year, the expected macroeconomic uplift in Europe has not yet happened. In addition, the approximately 40,000 tonnes of technical downtime in the European kraftliner system and the adoption of the Sicad I exchange rate for the Group’s Venezuelan operations negatively impacted on results in the first quarter.

The Group delivered steady European box volume progression during the quarter, with volumes returning to the strong levels reported in the first quarter of 2013. While SKG has no operations in Ukraine, volumes in Eastern Europe were negatively affected by political unrest in that region. However, Eastern Europe comprises only 8% of Group volumes.

European box price increases of 2% have been achieved year-on-year following a strong pricing environment for recycled containerboard in 2013. However, it has proven difficult to progress further price recovery as the momentum in recycled containerboard pricing slowed in the quarter.

The Group’s primary raw material, Old Corrugated Containers (‘OCC’), has seen price decreases of €5 per tonne to the end of April. However, pricing of OCC is expected to increase in the medium term as slowly recovering global economies bolster demand. Recycled containerboard pricing will benefit from this upward cost pressure while inventory levels will reduce as a result of improving demand. In the year to date recycled containerboard prices have decreased by approximately €25 per tonne.

Following some substitution into high quality recycled containerboard in 2013 the European kraftliner market has become more stable. However, at this time conditions are not strong enough to justify the price increase that was sought in April. Demand is currently reasonable, supported by the regulatory requirement for virgin fibre packaging in the food and agriculture sectors, and the inability of recycled grades to fully match kraftliner in terms of strength and print quality. Kraftliner remains a fundamental component of the sustainable fibre system. SKG’s strong position as the European market leader with approximately 1.6 million tonnes of production per annum provides SKG with a strategic advantage and offers diversification, security of supply and potential for higher returns through the cycle.

As noted in its fourth quarter results release the Group has been assessing the most appropriate rate at which to consolidate its Venezuelan operations. The Group has concluded that the Sicad I rate is the most appropriate rate to consolidate its Venezuelan operations and has adopted that rate as at 31 March 2014. The Sicad I rate as at 31 March 2014 was VEF 10.7 per US dollar. The application of the Sicad I rate has resulted in a reduction in the Group’s net assets of approximately €172 million and its cash balances of €69 million. During the quarter the underlying Venezuelan operations continued to operate well with some volume growth in the business.

The overall Americas segment continues to perform strongly with average volume growth of 3% year-on-year, which will strengthen as the year progresses. The Group’s Colombian business had a strong quarter with a 10% increase in corrugated volumes year-on-year and solid price recovery as the local economy returned to growth. The Group will complete the acquisition of a local corrugated packaging business “Corrumed” in the second quarter. Similarly, Mexico’s improving economy drove a 3% increase in SKG’s underlying volumes. In spite of a 23% devaluation of the Argentinian Peso, the Group’s operations in the country performed better year-on-year with improved cost and price efficiencies. Smurfit Kappa Orange County (‘SKOC’) reported a 22% increase in EBITDA year-on-year due to strong volume growth of 7% at improved price levels and the further flow of integration benefits to the business.

Reflecting SKG’s continued focus on cash, the Group’s working capital to sales ratio was 7.3% in the first quarter 2014. This compares favourably to a quarter one average of 9.3% between 2008 and 2013. The Group’s net debt to EBITDA ratio at 2.3 times remains well within the target range of between two to three times and the average debt maturity profile at 4.9 years provides security of funding at historically low rates.

Supported by a robust integrated business model, an increasingly innovative market offering, an enhanced capital structure and proven financial discipline, the Group expects to deliver strong free cash flow generation, which will provide SKG with the capacity to deliver long-term value for shareholders through 2014 and beyond.

2014 First Quarter | Financial Performance

At €1,932 million, revenue was 2% higher year-on-year in the first quarter of 2014 with an increase of €43 million from €1,889 million in 2013. Underlying revenue increased by €139 million compared to the same period last year, with 2014 revenue including acquisitions of €7 million offset by net negative currency movements and hyperinflation adjustments of €103 million.

The Group’s first quarter EBITDA of €269 million, was €28 million higher than the first quarter of 2013, a 12% increase. Allowing for net currency movements and hyperinflation adjustments of €17 million and the contribution from recent acquisitions, the underlying year-on-year increase was €44 million. The negative currency movements arose mainly in Venezuela as a result of the change to the Sicad I rate.

Exceptional charges of €9 million in the first quarter’s 2014 operating profit related to losses on the translation of non-Bolivar denominated payables in Venezuela following the change to the Sicad I rate. Exceptional charges of €13 million were included in the first quarter’s 2013 operating profit, €12 million of which related to losses on the translation of non-Bolivar denominated payables following the official devaluation of the Venezuelan Bolivar in February 2013. The remainder of the exceptional charges in 2013 related to additional SKOC reorganisation costs.

The Group’s basic EPS increased by 100% in the first quarter of 2014 to 28.8 cent compared to 14.4 cent in 2013. This was primarily driven by an improved EBITDA performance coupled with lower costs of financing year-on-year. On a pre-exceptional basis, SKG’s EPS for the first quarter of 2014 increased to 30.8 cent compared to 19.8 cent in the same period in 2013, a 56% increase year-on-year.

2014 First Quarter | Free Cash Flow

The Group reported a free cash inflow of €59 million in the first quarter of 2014, compared to an outflow of €23 million in the first quarter of 2013. This improvement of €82 million was primarily driven by higher EBITDA, lower cash interest and a lower working capital outflow in the quarter.

Capital expenditure of €66 million in the first quarter of 2014 equated to 71% of depreciation, compared to 76% in the first quarter of 2013. For the full year 2014, the Group will maintain its underlying capital expenditure at 100% of depreciation with additional expenditure of approximately €50 million per annum for three years on short payback projects. As previously announced, this additional expenditure will provide incremental EBITDA in excess of €70 million per annum exiting 2016.

In the first quarter there was a working capital outflow of €57 million, compared to €98 million in the same period of 2013. This reflects the benefits of the Group’s consistent focus on working capital discipline and the development of integrated inventory and distribution management systems across its global network of facilities. The Group reported a working capital to sales ratio of 7.3% in the first quarter of 2014, compared to 9.3% for the first quarter of 2013.

Cash interest of €39 million in the first quarter of 2014 was €15 million lower than the first quarter of 2013, reflecting the significantly reduced financing costs secured through multiple refinancing transactions in 2012 and 2013.

Tax payments of €26 million in the first quarter of 2014 were €10 million higher than in the same period of 2013 primarily due to higher cash tax payments in the Americas.

2014 First Quarter | Capital Structure

The Group’s first quarter net debt remained largely unchanged compared with the prior period, rising €19 million to €2,640 million. This increase is net of the reduction of €69 million in cash balances as a result of the adoption of the Sicad I exchange rate. It reflects steady operational performance and consistent cash flow management. The decrease of €231 million year-on-year reflects SKG’s significant debt paydown in the last twelve months, further strengthening the Group’s gearing which is now increasingly robust relative to its peers. At the end of the quarter the Group’s net debt to EBITDA ratio was 2.3 times comfortably within its objective of remaining within two to three times EBITDA through the cycle.

On 28 February, S&P upgraded the Group’s credit rating to BB+ from BB. This reflected the Group’s consistently strong operating performance and materially improved credit metrics. The Group’s capital structure is within its stated range and supports its growth objectives. The Group continues to maintain an active approach to capital structure management with the objective of accessing the market at the most opportune times to achieve long-term interest cost reductions and diversification of funding.

The Group’s average debt maturity profile at the end of March 2014 was 4.9 years, compared to 5.6 years at the end of the first quarter 2013. In spite of the redemption of the 2017 €500 million bond in November 2013 the Group’s cash balances remain strong, with undrawn credit facilities of approximately €482 million and approximately €440 million of cash on its balance sheet at the end of the first quarter.

Cost Take-out Programme

The Group announced the initiation of a further €100 million cost take-out programme for 2014 as part of its full year results in February 2014. This programme, as in prior years, is aimed at tackling inflationary pressures in the business’ core cost areas such as raw materials usage, energy efficiency and labour costs. Ancillary projects such as facility lay-out, process design and waste management are also undertaken to identify and minimise overheads where possible.

In the first quarter of 2014, SKG has delivered €32 million of cost take-out initiatives and is pleased to confirm its full year expectation of €100 million.

2014 First Quarter | Commercial Offering and Innovation

SKG has developed a future-thinking, commercial approach to innovation, collaborating with customers to create new market opportunities.

SKG brings its customers the best of its experience, including excellence and expertise from within the packaging industry but also fresh perspectives from backgrounds as diverse as aeronautical engineering and computer game design. The Group has more than 750 designers, hundreds of technical staff, engineers and project managers across 32 countries, and its comprehensive range of bespoke Innotools gives its customers direct access to shared information to inspire new packaging solutions. The Group’s InnoBook contains more than 5,500 of its most successful designs and is growing daily.

SKG roots its creative innovations in the science and experience of how packaging behaves in the supply chain and in the marketplace. Analysing more than 15 million packages globally each year, the Group provides its customers with unrivalled data to make informed decisions. SKG’s facilities test and evaluate every part of the packaging lifecycle, integral to its drive to ensure defect-free production. Within the Group’s corrugated operations all quality feedback is collected and assessed via a fully integrated application called ZOOM! and boxes are camera-inspected during production using innovative Vision technology.

SKG uses the science of virtual reality to replicate the shopper environment and bring new packaging designs to store faster and more effectively than ever before. The Group’s 3D Store Visualiser allows customers to create a real-life shopper experience, viewing the proposed designs in a virtual store. Earlier this year the Group launched an exclusive partnership with “Eyesee”, which has developed unique tracking technology to test hundreds of customers’ visual reactions to new packaging designs online. Within weeks the Group is able to test new packaging within retail environments created in the 3D Store Visualiser with representative groups of shoppers, analysing product appeal, consistency and emotional response. Combining science and creativity in this way allows SKG to make it right before making it real, optimising its total consumer impact before formal launch, and ultimately saving customers time and money through innovation.

SKG’s largest customers are supporting its drive to revolutionise packaging development within the industry, working together to create more innovative, sustainable and cost-effective solutions, to the benefit of their business, their brands and their customers.

Sustainability

SKG sees sustainability as a key business driver providing challenges and business opportunities. It is therefore one of its key platforms for differentiation in a competitive market. In 2013 the Group again broadened its commitment to, and delivered proof of, its dedication to sustainability by continuing to invest in the environment, adding measurable long-term commitments to its existing commitments and by achieving two of its existing long-term commitments several years ahead of schedule.

The Group’s 2014 Sustainability Report will be published in June 2014 and will be available on the Group’s website at www.smurfitkappa.com.

2014 First Quarter | Regional Performance Review

Europe

The Group’s European business reported a 12% year-on-year increase in EBITDA to €199 million in the first quarter, reflecting improved pricing across both containerboard and corrugated operations. The improved performance is evident in the segment’s EBITDA margin which increased to 13.2% in the first quarter 2014 from 12.2% in the same period in 2013. This result was achieved in spite of approximately 40,000 tonnes of maintenance downtime being taken in the Group’s kraftliner operations in the quarter, with an approximate net impact on EBITDA of €8 million.

European corrugated prices increased by 1% during the quarter, bringing total increases achieved as part of the current corrugated price recovery initiative to 2%. Following evidence of containerboard pricing weakness in the first quarter, the previously stated target of 5% became more difficult to achieve in spite of steady demand throughout the period.

Following a prolonged period of stability through 2013 European OCC prices have shown some recent signs of weakening with a decrease of €5 per tonne in April. Chinese demand for imports of recovered fibre has decreased by 5% year-on-year in the first quarter of 2014. However, total imports rose by 4% in March year-on-year and in excess of five million tonnes of containerboard capacity will be added in China over the course of the year, which will require incremental imports of recovered fibre due to insufficient domestic supplies. Demand for OCC in Europe remains good, and the US is becoming an increasingly large consumer of OCC with a number of recycled facilities coming on line or being announced in the last twelve months.

The Group’s recycled containerboard operations operated very well in the first quarter benefiting from strong uptime, stable recovered paper costs and higher sales prices. However, the industry began to experience pricing weakness in March and April of an aggregated €25 per tonne. This was due to relatively high inventory levels caused by increased production at the mills over the Christmas / New Year period and the impact in the market of the introduction of new capacity in the first quarter.

In kraftliner, the steady decline in pricing abated in March 2014 when prices stabilised. Demand conditions were not strong enough to achieve the announced price increase of €50 per tonne from 1 April. However, prices are stable at current levels. The strong market fundamentals in the grade remain unchanged with steady demand complemented by a European market structurally short by over one million tonnes per annum. The recently announced conversion of Stora Enso’s Varkaus mill to kraftliner will not impact the market until 2016. Despite consistent speculation to the contrary, US imports to Europe were down by 20% year-on-year for the last twelve months and this has contributed to the maintenance of a solid market for the grade in the year to date.

Markets for the Group’s European sack paper improved in the quarter, with volume growth year-on-year. The Group’s Machine Glazed (‘MG’) paper mill in Spain also experienced good growth, and SKG is announcing an expansion of its MG capacity in this mill, replacing a 60,000 tonne containerboard machine with 30,000 tonnes of new MG capacity, building on its existing leading market position in this attractive specialty grade. The Group’s bag-in-box operations are also continuing to experience strong volume growth, and are on track to begin operating a new €28 million bag and tap facility in Spain by the third quarter of 2014 in order to respond to continuing demand growth.

The Americas

In the first quarter, the Americas underlying performance was strong with average volume growth of 3% and generally good pricing dynamics across the region. The segment reported EBITDA of €75 million during the period, a 13% increase year-on-year, and macro environments are improving in the Group’s main markets of Colombia, Mexico and the US. Compared to the fourth quarter 2013, EBITDA has decreased by 24% primarily due to the adoption of the Sicad I rate for translation of the Group’s Venezuelan operations. This rate is expected to vary over time in line with the published rate.

The Colombian economy is performing well in 2014 with local industries regaining competitiveness as the currency weakened throughout the first quarter. SKG’s operations have benefited as a result, with a 10% improvement in corrugated volumes year-on-year and solid pricing progression compensating for some price weakness in the second half of 2013. Furthermore, the country’s cost take-out programme and recent capital expenditure projects are proceeding to plan, with a threefold increase in cost take-out year-on-year and key capital projects performing in line with expectations.

The Argentinian market remains challenging, with a 23% devaluation in the first quarter impacting earnings while inflation in the country is having a detrimental impact on consumer spending. However, against that backdrop the Group’s operations are performing well with cost and pricing efficiencies mitigating the impact of the devaluation and relatively high inflation.

The Group’s Mexican operations delivered a 4% year-on-year improvement in EBITDA following higher volumes and prices in the quarter. Underlying corrugated volumes increased by 3% year-on-year and containerboard pricing is steady at the higher rate achieved in the fourth quarter 2013. Mexican operations were negatively impacted by higher energy costs as a result of poor weather conditions in the US. However, this was offset by a small land sale and improved cost take-out action.

SKG’s underlying Venezuelan operations are performing well in spite of a continuing difficult operating environment, and relations with the Government authorities are making some positive progress. Corrugated volumes have progressed well year-on-year and cost reduction actions are supporting earnings performance.

SKOC has continued to perform strongly in 2014 with a 22% year-on-year increase in EBITDA. Corrugated volumes in the Mexican business improved sharply, up 20% in the period, while the US business has continued to focus on the “bottom-slicing” of lower margin sheet and box volumes. The 305,000 ton mill in Forney, Texas was hindered somewhat by the impact of the extreme cold weather on operating efficiency in January. However, it benefited from favourable OCC pricing.

The America’s segment provides important geographic diversity to the Group’s operations and remains a key target for acquisitions as SKG seeks to grow its earnings and exposure to these higher growth markets.

Summary Cash Flow

Summary cash flows⁽¹⁾ for the first quarter are set out in the following table.

Capital Resources

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

At 31 March 2014, Smurfit Kappa Treasury Funding Limited had outstanding US$292.3 million 7.50% senior debentures due 2025. The Group had outstanding €138.4 million and STG£60.7 variable funding notes issued under the €250 million accounts receivable securitisation programme maturing in November 2015, together with €175 million variable funding notes issued under the €175 million accounts receivable securitisation programme maturing in April 2018.

Smurfit Kappa Acquisitions had outstanding €200 million 5.125% senior notes due 2018, US$300 million 4.875% senior notes due 2018, €500 million 7.75% senior notes due 2019, €400 million 4.125% senior notes due 2020 and €250 million senior floating rate notes due 2020. Smurfit Kappa Acquisitions and certain subsidiaries are also party to a senior credit facility. At 31 March 2014, the Group’s senior credit facility comprised term drawings of €700.9 million and US$64.4 million under the amortising Term A facility maturing in 2018. In addition, as at 31 March 2014, the facility included a €625 million revolving credit facility of which €125 million was drawn in revolver loans with a further €18 million in operational facilities including letters of credit drawn under various ancillary facilities.

The following table provides the range of interest rates as of 31 March 2014 for each of the drawings under the various senior credit facility term loans.

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

On 24 July 2013, the Group successfully completed a new five-year unsecured €1,375 million refinancing of its senior credit facility comprising a €750 million term loan with a current margin of 2.00% and a €625 million revolving credit facility with a current margin of 1.75%. The term loan is repayable €125 million on 24 July 2016, €125 million 24 July 2017 with the balance of €500 million repayable on the maturity date. In connection with the refinancing, the collateral securing the obligations under the Group’s various outstanding senior notes and debentures was also released and the senior notes and debentures are therefore now unsecured. The new unsecured senior credit facility is supported by substantially the same guarantee arrangements as the old senior credit facility. The existing senior notes and debentures likewise continue to have substantially similar guarantee arrangements as supported those instruments prior to the refinancing.

In addition, on 3 July 2013, the Group put in place a new five-year trade receivables securitisation programme of up to €175 million utilising the Group’s receivables in Austria, Belgium, Italy and the Netherlands. The programme, which has been arranged by Rabobank and carries a margin of 1.70%, complements the Group’s existing €250 million securitisation programme.

On 4 November 2013, the Group completed the redemption of its €500 million 7.25% senior notes due 2017, utilising cash and existing credit facilities arranged as part of the senior credit facility and trade receivables securitisation transactions.

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 March 2014, the Group had fixed an average of 68% of its interest cost on borrowings over the following twelve months.

The Group’s fixed rate debt comprised mainly €500 million 7.75% senior notes due 2019, €200 million 5.125% senior notes due 2018, US$300 million 4.875% senior notes due 2018 (US$50 million swapped to floating), €400 million 4.125% senior notes due 2020 and US$292.3 million 7.50% senior debentures due 2025. In addition the Group also had €899 million in interest rate swaps with maturity dates ranging from April 2014 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 interest rates for these borrowings increase by one percent, the Group’s interest expense would increase, and income before taxes would decrease, by approximately €11 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 key business risks are identified by the senior management team. 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 its 2013 annual report which is available on its website www.smurfitkappa.com.

The principal risks and uncertainties remain substantially the same for the near term except for the following:

• The Group is exposed to currency exchange rate fluctuations and in addition, to exchange controls in Venezuela. Currently, Venezuela operates a number of alternative exchange mechanisms, the official rate (VEF 6.3 per US dollar) (‘Official rate’), Sicad I and Sicad II. Contrary to general market expectations, in January 2014 the Government announced that it would not be devaluing the Official rate but access to the Official rate would only be available to certain priority sectors. Those not in these priority sectors would access dollars through the Complimentary System of Foreign Currency Acquirement (‘Sicad’). The Group is awaiting clarification on whether it will be part of the priority sector, the non-priority sector or both sectors. The most recent Sicad I rate is VEF 10.0 per US dollar and it is expected that this rate is likely to vary over time. As set out on page 27 the Group has changed the rate at which it consolidates its Venezuelan operations (‘SKCV’) from the Official rate to the Sicad I rate as at 31 March 2014 (VEF 10.7 per US dollar). In March 2014 a new foreign exchange trading platform began operation (Sicad II) which permits foreign exchange barter transactions in the private sector with the most recent Sicad II rate being VEF 50.0 per US dollar and this rate is also likely to vary over time. In this multiple foreign exchange rate system there is a risk that the Sicad I rate will devalue further resulting in re-measurement of the local currency denominated net monetary assets and the local earnings and increase the cost of importing goods required to run the business.
• The Venezuelan government have also announced that companies can only seek price increases if they have clearance that their margins are within certain guidelines. SKCV is operating within these guidelines. There is a risk that if SKCV cannot implement price increases in a timely manner to cover the cost of its increasing raw material and labour costs as a result of inflation and the devaluing currency it would have an adverse effect on its results of operations. In this volatile environment the Group continues to closely monitor developments, assess evolving business risks and actively manage its investments.

Consolidated Income Statement – First Quarter

Consolidated Statement of Comprehensive Income – First Quarter

Consolidated Balance Sheet

Consolidated Statement of Changes in Equity

Consolidated Statement of Cash Flows

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 and graphicboard. The Company is a public limited company whose shares are publicly traded. It is incorporated and tax resident in Ireland. The address of its registered office is Beech Hill, Clonskeagh, Dublin 4, Ireland.

2. Basis of Preparation

The consolidated financial statements of the Group are prepared in accordance with International Financial Reporting Standards (‘IFRS’) issued by the International Accounting Standards Board (‘IASB’) and adopted by the European Union (‘EU’); and, in accordance with Irish law.

The financial information presented in this report has been prepared to comply with the requirement to publish an ‘Interim management statement’ for the first quarter, in accordance with the Transparency Regulations. The Transparency Regulations do not require Interim management statements to be prepared in accordance with International Accounting Standard 34 – ‘Interim Financial Information’ (‘IAS 34’). Accordingly the Group has not prepared this financial information in accordance with IAS 34.

The financial information has been prepared in accordance with the Group’s accounting policies. Full details of the accounting policies adopted by the Group are contained in the financial statements included in the Group’s Annual Report for the year ended 31 December 2013 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 2013.

There are a number of changes to IFRS issued and effective from 1 January 2014 which include IFRS 10, Consolidated Financial Statements, IFRS 11, Joint Arrangements, IFRS 12, Disclosure of Interests in Other Entities, IAS 27, Separate Financial Statements, and IAS 28, Investments in Associates and Joint Ventures. They do not have an effect on the condensed interim Group financial information included in this report.

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

The condensed interim Group financial information does not constitute full group accounts within the meaning of Regulation 40(1) of the European Communities (Companies: Group Accounts) Regulations, 1992 of Ireland insofar as such group accounts would have to comply with all of the disclosure and other requirements of those Regulations. Full Group accounts for the year ended 31 December 2013 will be filed with the Irish Registrar of Companies in due course. The audit report on those Group accounts was unqualified.

3. Segmental Analyses

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

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

3. Segmental Analyses (continued)

Segment profit is measured based on earnings before interest, tax, depreciation, amortisation and share-based payment expense (‘EBITDA before exceptional items’).

4. Exceptional Items

Exceptional items charged within operating profit in the first quarter of 2014 amounted to €9 million and related to losses on the translation of non-Bolivar denominated payables following the Group’s decision to translate its Venezuelan operations at the Sicad I rate. The translation loss reflected the higher cost to its Venezuelan operations of discharging these payables.

Exceptional finance income in the first quarter of 2014 comprised a gain of €5 million in Venezuela on the retranslation of the US dollar denominated intra-group loans to the Sicad I rate.

Exceptional items charged within operating profit in the first quarter of 2013 amounted to €13 million, over €12 million of which related to losses on the translation of non-Bolivar denominated payables following the devaluation of the Venezuelan Bolivar in February of that year. The translation loss reflected the higher cost to the Group’s Venezuelan operations of discharging these payables. The remainder of less than €1 million was in respect of SKOC reorganisation and restructuring costs.

Exceptional finance costs in the first quarter of 2013 comprised an offsetting charge of €6 million in respect of the accelerated amortisation of deferred debt issue costs and a gain of €6 million in Venezuela on the value of US dollar denominated intra-group loans, following the devaluation of the Bolivar. The accelerated amortisation of deferred debt issue costs arose from the repayment of part of the senior credit facility.

5. Finance Cost and Income

6. Income Tax Expense

Income tax expense recognised in the Consolidated Income Statement

Income tax recognised in the Consolidated Statement of Comprehensive Income

The €14 million increase in the income tax expense compared to 2013 is predominately explained by an increase in earnings and a change to the geographical mix of those earnings, as well as by a non-reoccurring tax benefit in Italy in 2013.

There is no income tax expense associated with exceptional items in 2014, compared to a €1 million credit in 2013.

7. Employee Benefits – Defined Benefit Plans

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

Included in cost of sales, distribution costs and administrative expenses is a defined benefit cost of €13 million (2013: €13 million). Net interest cost on net pension liability of €7 million (2013: €7 million) is included in finance costs in the Consolidated Income Statement.

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

The employee benefits provision has increased from €713 million at 31 December 2013 to €716 million at 31 March 2014.

8. Earnings Per Share

Basic

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

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.

Pre-exceptional

9. Dividends

The Board has recommended a final dividend of 30.75 cent per share for 2013 payable on 9 May 2014 subject to the approval of the shareholders at the AGM.

10. Property, Plant and Equipment

11. Net Movement in Working Capital

12. Analysis of Net Debt

13. Other Reserves

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

14. Venezuela

Hyperinflation

As discussed more fully in the 2013 annual report, Venezuela became hyperinflationary during 2009 when its cumulative inflation rate for the past three years exceeded 100%. As a result, the Group applied the hyperinflationary accounting requirements of IAS 29 – Financial Reporting in Hyperinflationary Economies to its Venezuelan operations at 31 December 2009 and for all subsequent accounting periods.

The index used to reflect current values is derived from a combination of Banco Central de Venezuela’s National Consumer Price Index from its initial publication in December 2007 and the Consumer Price Index for the metropolitan area of Caracas for earlier periods. The level of and movement in the price index at March 2014 and 2013 are as follows:

As a result of the entries recorded in respect of hyperinflationary accounting under IFRS, the Consolidated Income Statement is impacted as follows: Revenue €37 million decrease (2013: €8 million decrease), pre-exceptional EBITDA €5 million decrease (2013: €4 million decrease) and profit after taxation €18 million decrease (2013: €15 million decrease). In 2014, a net monetary loss of €10 million (2013: €6 million loss) was recorded in the Consolidated Income Statement. The impact on the Group’s net assets and its total equity is an increase of €13 million (2013: €14 million increase).

Exchange Control and Devaluation

As a result of Venezuela operating a number of alternative currency exchange mechanisms (CENCOEX (formerly known as CADIVI), Sicad I and Sicad II) the Group has been assessing the appropriate rate at which to consolidate the results of its Venezuelan operations. With the introduction of Sicad I and Sicad II, Venezuela has now become a multiple rate foreign exchange system with three different official rates. One, the official CENCOEX rate of VEF 6.3 per US dollar (‘Official rate’) is a fixed rate for basic/essential goods. The two remaining rates are variable, Sicad I for goods excluded from CENCOEX and the Sicad II rate for SMEs and private individuals.

As a result of the January announcements by the Venezuelan government that there will be no official devaluation for at least two years, Sicad I is now intended to offer an alternative currency exchange mechanism to foreign firms operating in Venezuela.

The Group believes that Sicad I is the more appropriate rate for accounting and consolidation. On this basis, in accordance with IFRS, the financial statements of the Group’s operations in Venezuela were translated using the prevailing Sicad I rate of VEF 10.7 per US dollar and the closing euro/US dollar rate of €1 / US$1.38. The change from the Official rate of VEF 6.3 to VEF 10.7 (the rate prevailing at the end of the quarter) reduced the Group’s cash by approximately €69 million and its net assets by €172 million.

Control

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

The Group continues to control operations in Venezuela and, as a result, continues to consolidate all of the results and net assets of these operations at the period end in accordance with the requirement of IAS 27.

In 2014, the Group’s operations in Venezuela represented approximately 4% (2013: 5%) of its total assets and 11% (2013: 14%) of its net assets. In addition, cumulative foreign translation losses arising on its net investment in these operations amounting to €539 million (2013: €330 million) are included in the foreign exchange translation reserve.

15. Restatement of Prior Periods

IFRS 3, Business Combinations

As required under IFRS 3, Business Combinations, the Consolidated Balance Sheet at 31 March 2013 has been restated for final adjustments to the provisional fair values of the SKOC acquisition on 30 November 2012. The effects on previously reported financial information are shown in the table below.

Impact on Financial Statements

Supplementary Financial Information

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

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