ANNUAL REPORT 2011 CONTENTS 2 2011 Financial Performance Overview 3 Group Profile 7 Chairman’s Statement 11 Chief Executive’s Review 13 Strategy 15 Operations Review 23 Finance Review 33 Sustainability 36 Board of Directors 38 Corporate Governance Statement 49 Directors’ Report 52 Remuneration Report 61 Statement of Directors’ Responsibilities 62 Independent Auditors’ Report 64 Group Income Statement 65 Group Statement of Comprehensive Income 66 Group Balance Sheet 68 Company Balance Sheet 69 Group Statement of Changes in Equity 71 Company Statement of Changes in Equity 72 Group Cash Flow Statement 74 Company Cash Flow Statement 75 Notes to the Consolidated Financial Statements 160 Shareholder Information WE CREATE INNOVATIVE PACKAGING SOLUTIONS Smurfit Kappa prides itself on its ability to work closely with its customers, both large and small, to develop innovative packaging solutions that enable our customers to be successful in their respective markets by ensuring that our products are cost competitive, fit for purpose, sustainable and offer effective presentation of our customers’ goods. The Group’s Research and Development Centre in Hoogeveen, the Netherlands, deploys state of the art design and testing facilities to enable our significant expertise to be used in developing the most suitable solution for any packaging challenge. As a result, our extensive product portfolio ranges from basic corrugated containers through to high-end packaging using high quality printing techniques. As part of the drive towards a more sustainable world, we continually promote the use of paper-based alternatives to plastics and other non-recyclable materials. One of our key product offerings is striking point-of-sale and shelf-ready displays which offer key advantages in terms of minimal use of resources combined with efficient transportation and excellent promotional opportunities for our customers’ products. In this Annual Report, we show just a small sample of the types of packaging solutions that we have successfully developed in close cooperation with our extensive customer base, both local and multinational. 2011 FINAncIAL PeRfoRMAnce OVERVIEW 2011 2010 €m €m Revenue 7,357 6,677 EBITDA before exceptional items and 1,015 904 2 share-based payment expense (‘EBITDA’) EBITDA margin 13.8% 13.5% 2011 T R EPO Operating profit 590 409 R L A NNU Profit before income tax 299 103 A Free cash flow 394 82 Net debt 2,752 3,110 Net debt to EBITDA 2.7x 3.4x SMURFIT KAPPA GROUP SMURFIT KAPPA Basic earnings per share (cent) 93.0 22.9 Pre-exceptional earnings per share (cent) 100.1 59.4 Debt paydown and net debt to EBITDA ratio evolution Net debt (€m) Net debt/EBITDA 3,110 3,061 3,003 3.4 2,921 3.2 3.0 2,752 2.8 2.7 DEC 10 MAR 11 JUN 11 SEP 11 DEC 11 GROUP PROFILE SKG at a Glance Smurfit Kappa Group plc (‘SKG’ or the ‘Group’) is one of the world’s largest integrated manufacturers of paper-based packaging products, with operations in Europe and Latin America. It manufactures, distributes and sells containerboard, corrugated containers and other paper- based packaging products such as solidboard, graphicboard and bag-in-box. During 2011, the Group reorganised the management of its European businesses by operationally 3 merging those of the former Specialties Europe segment into its existing Packaging Europe GROUP SMURFIT KAPPA segment. As a result, the Group now has two segments, Europe and Latin America. The Europe segment, which is highly integrated, includes a system of mills and plants that primarily produces a full line of containerboard that is converted into corrugated containers. The Latin America segment comprises the Group’s forestry, paper, corrugated, paper sack and A folding carton activities in the region. NNU A L R The Group operates in 21 countries in Europe and is the European leader in corrugated EPO packaging, containerboard, solidboard, and solidboard packaging with key positions in several R T other packaging and paper market segments. The Group also has a growing base in Eastern 2011 Europe, a bag-in-box plant in Canada and operates in nine countries in Latin America where it is the only pan-regional operator. In terms of world market positions, the Group is the second largest producer of corrugated packaging. Given the high degree of integration between the mills and its conversion plants, particularly in terms of containerboard, the Group’s end customers are primarily in the corrugated packaging market, which uses the packaging for product protection and product merchandising purposes. The corrugated market is a localised market and corrugated box plants need to be close to customers (generally no more than 250 to 300 kilometres), due to the relatively high cost of transporting the product. Approximately 60% of the Group’s corrugated customers are in the fast moving consumer goods (‘FMCG’) sector (comprising food, beverage, and household consumables), the remainder being split across a wide range of different industries. In 2011, the Group’s Europe and Latin America segments accounted for approximately 82% and 18% of revenue respectively. At the date of this report, the Group owns 37 mills (26 of which produce containerboard), 226 converting plants (most of which convert containerboard into corrugated boxes), 40 recovered fibre facilities (which provide raw material for the Group’s mills) and 28 other production facilities carrying on other related activities. In addition, the Group owns approximately 104,000 hectares of forest plantations in Latin America. LATIN AMERICAN OPERATIONS Virgin Mills (2) Recycled Paper and Board Mills (9) Corrugated (27) Cartons (3) Paper Sacks (5) Recovered Fibre (24) Other (1) Virgin Mills Recycled Mills Corrugated 4 Cartons Paper Sacks 2011 T R Bag-in-box EPO R L Recovered Fibre A NNU Forestry A SMURFIT KAPPA GROUP SMURFIT KAPPA PACKAGING EUROPE LATIN AMERICA Sales Volumes (million tonnes) Sales Volumes (million tonnes) Kraftliner 1.4 Containerboard 0.7 Recycled Containerboard 2.9 Other Paper & Board 0.4 Other Paper & Board 1.1 Corrugated 0.7 Corrugated 4.2 Solidboard Packaging 0.3 LATIN AMERICAN EUROPEAN OPERATIONS OPERATIONS Virgin Mills (2) Virgin Mills (5) Recycled Paper and Board Mills (9) Recycled Containerboard Mills (13) Corrugated (27) Other Recycled Paper and Board Mills (8) Cartons (3) Corrugated (162) Paper Sacks (5) Cartons and Solidboard Packaging (9) Recovered Fibre (24) Recovered Fibre (16) Other (1) Other (47) Virgin Mills Virgin Mills Recycled Mills Recycled Mills Corrugated Corrugated Cartons Cartons and Solidboard 5 Packaging GROUP SMURFIT KAPPA Paper Sacks Bag-in-box Bag-in-box Recovered Fibre Recovered Fibre Forestry A NNU A L R EPO R T 2011 MISSION The Smurfit 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. CUSTOMER FOCUSED INNOVATION CHAIRMAN’S STATEMENT “Significant progress against every key financial measure.” Liam O’Mahony CHAIRMAN 7 Year in Review for our shareholders and stakeholders, 2) the GROUP SMURFIT KAPPA executive team is leading and managing effectively The Group is pleased to deliver EBITDA growth of to reach our strategic goals and in doing so they 12% to €1,015 million, pre-exceptional EPS growth are held accountable and at the same time are of 69% to €1.00, free cash flow generation of fairly remunerated and 3) that the risks to the Group €394 million and a decrease in our net debt to are managed and mitigated and that appropriate €2.75 billion resulting in a reduction in our net debt A controls are in place at all levels of the organisation. NNU to EBITDA ratio to 2.7x. Compared to 2010, Europe The key principles and practices designed to achieve A L EBITDA grew by 11% and Latin America EBITDA R these standards are set out in the Corporate EPO by 19%. These results were achieved against the R Governance statement. T backdrop of significantly higher input costs in 2011 2011 and the progressive weakening of economic The Code recommends that, apart from the fundamentals in Europe in the second half which led Chairman, at least half of the Board of Directors to a decline in packaging demand. The results reflect of a listed company should comprise non-executive the strength and efficiency of the Group’s integrated directors determined by the Board to be independent. model in all market conditions. On behalf of the Since our Listing in 2007 we have appointed six Board, I would like to acknowledge the on-going independent Directors and with the retirement of commitment of all of our employees in contributing two shareholder nominees at the forthcoming Annual to the significant progress made during the year General Meeting (‘AGM’), the Company will comply against every key financial measure. with the Code recommendation on Board Governance and Board independence. The Board and Management of SKG support I would like to thank all of the Directors for their the highest standards of Corporate Governance on-going support and their contributions to the and ethical business conduct. It is our view that development and effectiveness of the workings Corporate Governance is not just a matter for of the Board and its various Committees during the Board but that a culture of high standards the year. of governance must be promoted from the top and must be fostered throughout the whole organisation. We believe governance is about ensuring 1) we have the right strategy to deliver Smurfit Kappa Swisswell came up with a highly sustainable ‘end-to-end’ packaging concept for the launch of a tea capsule system called SPECIAL T by Nestlé. The tea capsules are filled at Nestlé’s production plant in Orbe, Switzerland.