packaging solutions Annual Report 2013 mission Design: Anup Champaneri and Richard Gannon at Smurfi t Kappa Chelmsford, united Kingdom CONTENTS 2 Group profi le 63 independent auditors’ 3 2013 financial report performance Overview 66 Consolidated income 4 Group Operations statement 6 Chairman’s statement 67 Consolidated statement of Comprehensive income 10 Chief Executive’s review 68 Consolidated Balance sheet 12 Business model 69 Company Balance sheet 13 strategy 70 Consolidated statement 16 Operations review of Changes in Equity 22 finance review 71 Company statement of 32 sustainability Changes in Equity 34 Board of Directors 72 Consolidated statement 38 Corporate Governance of Cash flows statement 73 Company statement 43 Directors’ report of Cash flows 45 audit Committee report 74 notes to the Consolidated 48 remuneration report financial statements 61 nomination Committee 130 shareholder information report 62 statement of Directors’ responsibilities mission the smurfi t kappa Group strives to be a customer-oriented, market-led company where the satisfaction of customers, the personal development of employees, and respect for local communities and the environment are seen as being inseparable from the aim of creating value for the shareholders. Group profile 38 229 mills (27 produce Converting containerboard) plants We employ We operate in We own We own 41,000 Countries 103,000 21 in Europe 51 30 people worldwide recovered Other production Hectares of Countries in fibre facilities/wood facilities Latin american 11 the americas procurement forest plantations Smurfit Kappa Group plc (‘SKG plc’ or County (‘SKoC’). SKoC, formerly the corrugated market is a localised ‘the Company’) and its subsidiaries orange County Container Group, was market and corrugated box plants need (together ‘SKG’ or ‘the Group’) is one acquired on 30 november 2012. to be close to customers (generally no of the world’s largest integrated more than 250 to 300 kilometres), due the Group operates in 21 countries in manufacturers of paper-based to the relatively high cost of transporting europe and is the european leader in packaging products, with operations the product. approximately 60% of the corrugated packaging, containerboard, in europe and the americas. It Group’s corrugated customers are in solidboard, and solidboard packaging manufactures, distributes and sells the fast moving consumer goods with key positions in several other containerboard, corrugated containers (‘FMCG’) sector, comprising food, packaging and paper market segments and other paper-based packaging beverage, and household consumables, and a growing base in eastern europe. products such as solidboard, the remainder being split across a wide We also have two bag-in-box facilities, graphicboard and bag-in-box. range of different industries. located in Canada and argentina, which the Group has two reporting segments, are managed as part of the Group’s In 2013, the Group’s europe and europe and the americas. the europe european operations. the Group americas segments accounted for segment, which is highly integrated, operates in 11 countries in the americas approximately 75% and 25% of revenue includes a system of mills and plants and is the only large-scale pan-regional respectively. that primarily produces a full line of producer of containerboard and at the date of this report, the Group containerboard that is converted into corrugated containers in latin america. owns 38 mills (27 of which produce corrugated containers. In addition to In terms of world market positions, the containerboard), 229 converting plants other types of paper, such as solidboard Group is the second largest producer (most of which convert containerboard and sack kraft paper, and paper-based of corrugated packaging. into corrugated boxes), 49 recovered packaging, such as solidboard packaging Given the high degree of integration fibre facilities and two wood and folding cartons, this segment between the mills and its conversion procurement operations (which includes the Group’s bag-in-box plants, particularly in terms of together provide raw material for the operations. the americas segment containerboard, the Group’s end Group’s mills) and 30 other production comprises all the Group’s forestry, customers are primarily in the facilities carrying on other related paper, corrugated, paper sack and corrugated packaging market, which activities. In addition, the Group owns folding carton activities in a number of uses the packaging for product approximately 103,000 hectares of latin american countries and all the protection and product marketing forest plantations in latin america. operations of Smurfit Kappa orange and merchandising purposes. 2 smurfit kappa | annual report 2013 2013 Financial performance overview World market position for the production of 7,957 1,107 2 corrugated packaging 7,335 1,016 European market position in corrugated packaging, 2013 containerboard, solidboard 1 and solidboard packaging 2012* Revenue EBITDA before (€ million) exceptional items and share-based payment expense (‘EBITDA’) (€ million) 13.8% 13.9% 630 643 319 365 294 282 EBITDA margin Operating profit Profit before Free cash flow (€ million) income tax (€ million) (€ million) 114.5 2,792 2.7x 106.9 104.1 2,621 2.4x 82.2 Net debt Net debt to Basic earnings Pre-exceptional (€ million) EBITDA per share (cent) basic earnings per share (cent) * Comparative figures reflect the restatement to employee benefits under the revision of IAS 19, Employee Benefits, as set out in Note 32 in the Notes to the Consolidated Financial Statements. smurfit kappa | annual report 2013 3 Group operations the americas OpEratiOns Virgin Mills 2 recycled paper and Board Mills 10 Corrugated 33 Cartons 3 paper Sacks 5 recovered Fibre 33 other 4 saLEs Volumes (million tonnes) Containerboard 1.1 other paper & Board 0.3 Corrugated 1.0 VIrGIn MIllS ReCyCled MIllS CorruGated CartonS Paper Sacks BaG-In-Box ReCoVered FIBre ForeStry 4 smurfit kappa | annual report 2013 Europe OpEratiOns Virgin Mills 5 recycled Containerboard Mills 13 other recycled paper and Board Mills 8 Corrugated 158 Cartons and Solidboard packaging 9 recovered Fibre 16 other 49 saLEs Sales Volumes (million tonnes) Kraftliner 1.6 recycled Containerboard 2.9 other paper & Board 1.1 Corrugated 4.2 Solidboard packaging 0.3 VIrGIn MIllS ReCyCled MIllS CorruGated CartonS and SolIdBoard paCKaGInG BaG-In-Box ReCoVered FIBre smurfit kappa | annual report 2013 5 Chairman’s Statement Year in review the Group is pleased to announce a full year eBItda performance of over €1.1 billion and a return on capital employed of over 13%. With a weaker though improving year-on-year performance in europe, the americas has been a strong source of earnings growth in 2013 and continues to provide the Group with geographic diversity and exposure to higher growth markets. during 2013 the Group has completed its main fi nancial restructuring activity moving from being a leveraged company to achieving a corporate credit profi le. as a consequence, the profi le of the Group has fundamentally changed and the progress made off ers the company a wider range of strategic and fi nancial options. on behalf of the Board, I would like to acknowledge the on-going commitment of all of our employees in contributing to the signifi cant progress made during the year. Governance and Board Mr Moloney, the recently retired Ceo of the Board and Management of SKG Glanbia plc, brings significant experience support the highest standards of of international markets and we believe Corporate Governance and ethical he will make a valuable contribution to business conduct. We believe that the Board and the continuing Corporate Governance is not just a development of SKG. matter for the Board but that a culture as reported last year, Mr Christopher of high standards of governance must McGowan retired from the Board at the be promoted from the top and fostered 2013 annual General Meeting (‘aGM’). throughout the whole organisation. We would like to sincerely thank him for We believe that governance is about his support and contribution to the ensuring that 1) we have the right Group during his ten years as a director strategy to deliver for our shareholders and to offer him our best wishes for the and other stakeholders, 2) the executive future. team is leading and managing effectively to reach our strategic goals and in doing Operational visits so they are held accountable and at the In July, the Board travelled to Colombia same time are fairly remunerated and and visited our Cali, Bogota and Medellin 3) the risks to the Group are managed operations as well as our Forestry and mitigated and that appropriate operations in restrepo. the Board was controls are in place at all levels of the also pleased to visit el Caracolí on the organisation. the key principles and outskirts of Cali, an early childhood practices designed to achieve these development centre created by the standards are set out in the Corporate Fundación Smurfit Cartón de Colombia Governance Statement. I would like to in close cooperation with other thank all of the directors for their foundations in the country. In october, continued support and contribution to the Board visited our townsend Hook mill the development and effectiveness of site in the uK to view progress on the the workings of the Board and its various building to accommodate the 250,000 Committees during the year. tonnes refurbished paper machine which is expected to come on-stream in early Directors 2015. these visits are extremely valuable during 2013, we were pleased to in giving the members of the Board a announce that Mr John Moloney was deeper first-hand understanding of co-opted to the Board as an the strength and extent of our local independent non-executive director. businesses, their strategic positioning, Liam O’maHOnY 6 CHaIrMan and the dedication and enterprise of environment. I am very pleased to 30.75 cent, a 50% increase on last year, our teams at all levels throughout the acknowledge the third party recognition reflecting confidence in the business.