Half-year Report

Half-year Report

27 July 2016: Smurfit Kappa Group plc (‘SKG’ or ‘the Group’) today announced results for the 3 months and 6 months ending 30 June 2016.

2016 Second Quarter & First Half | Key Financial Performance Measures

1) Additional information in relation to these Alternative Performance Measures (‘APMs’) is set out in Supplementary Financial Information on page 36.

2) EBITDA before exceptional items and share-based payment expense is denoted by EBITDA throughout the remainder of the management commentary for ease of reference.

Second Quarter & Half Year Key Points

• Group corrugated packaging growth of 5% in the first half - solid organic volume growth
• EBITDA growth of 8% in the first half of the year - improved EBITDA margin of 14.6%
• Improved ROCE of 15.4%
• Interim dividend increased by 10% to 22 cent per share
• Kraftliner price increases implemented in July in European markets

Performance Review and Outlook

Tony Smurfit, Group CEO, commented: “We are pleased to deliver a strong first half result with EBITDA growth of 8% to €593 million. This result reflects the strength of our team; our portfolio of geographically diverse operations; and, our integrated business model delivering a strong ROCE of 15.4%.

“In Europe, we have delivered an improved earnings performance in the first half, with organic box volume growth of 2% and a relatively stable pricing environment in local currency terms. This result has been achieved despite higher than expected OCC costs, while negatively impacting our margin in the short-term, should provide a solid underpin to containerboard pricing and, in turn, box prices.

“In the Americas we have sustained our strong volume growth. Pricing initiatives across the region have helped offset some of the negative currency impact in the first half and we expect to implement price increases through the second half of the year.

“The Group’s proven ability to drive strong free cash flows supports our strategic agenda. We continue to focus on operational efficiency and expanding our geographic reach. Our leverage multiple has reduced to 2.5 times net debt to EBITDA in advance of our more cash generative second half of the year. The Board’s confidence in the strength of, and prospects for our business, is reflected in a 10 per cent increase in our interim dividend.

“Against a backdrop of higher than expected input costs, more pronounced currency volatility and a greater degree of macroeconomic risk, we expect to have a good year with earnings growth for 2016.

“SKG is well positioned for growth and business development. We are a clear market leader, in a growth industry, with a continuously improving business model. SKG continues to build balance sheet strength which increases the range of strategic and financial options open to us.”

About Smurfit Kappa

Smurfit Kappa is one of the leading providers of paper-based packaging solutions in the world, with around 45,000 employees in approximately 370 production sites across 34 countries and with revenue of €8.1 billion in 2015. We are located in 21 countries in Europe, and 13 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.

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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.

2016 Second Quarter & First Half | Performance Overview

The Group’s strong earnings performance in the first half reflects the strength of our portfolio of geographically diverse operations and our integrated business model which continues to deliver strong return on capital employed (‘ROCE’) performance. SKG is a market leader in corrugated packaging in Europe and across the Americas, operating in a growth industry, within which the Group is well positioned to drive continued earnings growth. An effective capital structure with strong free cash flow characteristics will continue to build balance sheet strength and, in turn, our opportunity set.

In the first half the Group delivered an 8% increase in EBITDA year-on-year, and for the second quarter delivered a 10% increase in EBITDA year-on-year. SKG also reported ROCE of 15.4% and positive free cash flow in the first half reflecting our consistent focus on capital management and the benefit of incremental earnings from our programme of capital investment.

In Europe, the Group’s corrugated packaging operations reported a solid first half with a 2% year-on-year increase in organic box volumes, and sequentially flat corrugated pricing. Good demand growth and increased pricing for Old Corrugated Containers (‘OCC’), which will have a negative impact on margin in the near-term, are expected to continue to provide a solid underpin to containerboard and corrugated pricing for the remainder of the year.

In the first half of 2016, OCC prices were 13% higher year-on-year and are expected to remain at a high level through the remainder of the year. SKG consumes approximately 4.3 million tonnes of OCC per annum in Europe.

In recycled containerboard, after some weakness in the early part of the year pricing has now stabilised. Margins in this grade have diminished as a result of the OCC price increases. However stock levels have reduced due to improved demand for corrugated across Europe. The Group remains a significant buyer of over 600,000 tonnes per annum of recycled containerboard while also being the largest producer in Europe with close to 3 million tonnes of production. We continue to invest in our containerboard system to ensure we have the most effective, low cost operations in this grade.

Demand for kraftliner remains robust and we have achieved a €20 per tonne increase in kraftliner pricing in the North-West European market in July and have announced an additional increase of £40 per tonne in kraftliner pricing in the UK for implementation in August. SKG’s 1.6 million tonnes of kraftliner production per annum is a distinct competitive advantage for the Group in providing corrugated customers with a complete product offering, while maintaining a net long position of 500,000 tonnes per annum in the grade.

In the Americas, the Group’s operations delivered a strong result in the first half with corrugated volume growth of 23% and an EBITDA margin of over 16%. Organic volume growth in the first half was over 3% year-on-year (excluding Venezuela). Our North American business performed well although our Californian business remains somewhat challenging. Mexico had a very strong first half with volume growth of 6% offsetting a weak currency. Colombia and our Central American and Caribbean operations performed in line with expectations with currency affecting translated earnings. Our businesses in Brazil operated well in volume terms with an above market growth of 4%. However, we were impacted by significantly higher recovered fibre costs. In Argentina there was a slowdown in the first half of 2016 as the new President implemented market reforms which are likely to benefit the country and demand longer term. The Venezuelan business remains very challenging. Volumes have contracted considerably although local management continue to perform well within a difficult environment. The country represents less than 1% of Group EBITDA.

The delivery of a positive free cash flow result despite a working capital outflow and increased capital expenditure, illustrates the significantly strengthened position of the Group today. The Group’s leverage multiple, at 2.5 times net debt to EBITDA, is expected to continue to reduce as EBITDA from acquisitions incrementally contribute over the course of the year and the Group continues to generate strong free cash flows in the generally more cash generative second half of the year.

2016 Second Quarter & First Half | Financial Performance

Revenue was 1% higher year-on-year for both the second quarter and the first half of 2016. Revenue in the first half was €4,049 million compared to €3,996 million reported in the first half of 2015. However, with the contribution from acquisitions offsetting some of the negative currency movements and the absence of the solidboard operations in the first half, the underlying¹ increase in revenue was €109 million or 3%.

Driven by quarter-on-quarter growth in 2016, EBITDA increased by 8% in the first half, to €593 million from €551 million in 2015, with an underlying move of 9% as the negative impact of currencies was offset in part by the positive impact of net acquisitions.

Operating profit before exceptional items in the first half of 2016 was €390 million compared to €348 million for the same period in 2015, an increase of 12%.

In the first half of 2016 there were no exceptional items charged within operating profit. In the first half of 2015, exceptional items charged within operating profit amounted to €46 million. The majority of the 2015 charge was represented by the further impairment of the solidboard operations held for sale of €6 million reported within cost of sales, and €36 million, reported within other operating expenses, relating to the higher cost to the Venezuelan operations of discharging their non-Bolivar denominated payables following the adoption of the Simadi rate in March 2015.

Net finance costs before exceptional items for the first half 2016 amounted to €91 million compared to €70 million in the same period 2015, with increases in both cash and non-cash interest. Cash interest costs were €13 million higher reflecting the higher level of net debt following our acquisition activity in 2015 and early 2016. The acquisitions in Brazil, which were partly funded in local currency, resulted in a slight increase in our average rate of interest.

In the first half of 2016 the Group reported exceptional finance income of €12 million, which was recorded in the second quarter, in relation to the profit on the sale of our shareholding in the Swedish company IL Recycling. In the first half of 2015 exceptional finance income of €11 million represented the gain in Venezuela on their US dollar denominated intra-group loans as a result of our adoption of the Simadi rate. This gain was partly offset by an exceptional finance cost of €2 million. This represented the accelerated amortisation of the issue costs relating to the debt within our senior credit facility which was paid down with the proceeds of the €250 million bond issue in February 2015.

Including the Group’s share of associates’ profit of €1 million, profit before income tax was €312 million for the half year 2016 compared to €243 million in 2015.

The Group reported an income tax expense of €97 million for the first half of 2016 compared to €73 million for the same period in 2015.

Basic EPS for the first half was 90.8 cent which is 24% higher than the 73.2 cent earned in the same period of 2015. The second quarter basic EPS was 52.0 cent against 42.3 cent in the second quarter of 2015, a 23% improvement. On a pre-exceptional basis, EPS for the second quarter was 5% higher at 46.9 cent compared to 44.6 cent in the second quarter of 2015, while EPS for the first half was 3% lower year-on-year at 85.6 cent compared to 88.7 cent in 2015.

2016 Second Quarter & First Half | Free Cash Flow

In the first half of 2016, the Group reported a free cash inflow of €35 million, compared to an inflow of €74 million in the first half of 2015. Although the Group reported higher EBITDA year-on-year, the reduction in free cash flow was primarily a result of an €83 million increase in outflows for working capital and capital expenditure. Exceptional items of €35 million in the first half of 2015, predominantly associated with the Venezuelan exchange rate change, did not reoccur in 2016.

Capital expenditure of €211 million in the first half of 2016 equated to 109% of depreciation, compared to 95% in the first half of 2015. On a full year basis and as part of the final year of our three-year ‘Quick-Win’ programme capital expenditure is expected to be broadly in line with 2015 levels.

The working capital outflow in the first half was €161 million, compared to €120 million in 2015. At the end of June, working capital amounted to €697 million and represented 8.5% of sales, compared to 6.6% at the end of December and 8.0% at June 2015. Working capital levels remain a key focus for the Group and have been substantially reduced in recent years through consistent monitoring and review. We would expect working capital as a percentage of sales to return to its usual level by year-end.

Cash interest in the six months to June 2016 was €72 million, €13 million higher than in the same period of 2015. This increase was due to the cost of financing our Brazilian acquisitions in December 2015, part of which was funded in local currency where interest rates are relatively high. On a full year basis, cash interest is expected to increase by approximately €20 million to €143 million.

Tax payments in the first half of 2016 of €71 million were €7 million higher than in the same period of 2015, mainly due to higher profitability and acquisitions. The Americas was €7 million higher and Europe was neutral on a net basis.

¹ Underlying move throughout this interim report excludes acquisitions, disposals, currency and hyperinflation movements where applicable.

2016 Second Quarter & First Half | Capital Structure

The Group’s net debt increased by €73 million to €3,121 million at the end of the second quarter of 2016 against a 2015 year end net debt of €3,048 million. This is primarily due to dividend payments in the second quarter of 2016 which totalled €115 million. Net debt to EBITDA at 2.5 times at the end of the quarter remained well within the stated guidance of 2.0 to 3.0 times. Strong cash generation in the second half of the year is expected to reduce the leverage position. The Group remains committed to the preservation of its Ba1/BB+/BB+ credit rating.

At 30 June 2016 the Group’s average interest rate was 4.2%, slightly higher year-on-year as a result of the local currency Brazilian debt associated with the acquisitions of INPA and Paema in December 2015. The Group’s diversified funding base and long dated maturity profile (4.1 years) provide a stable funding outlook. In terms of liquidity, the Group held cash on the balance sheet of €299 million at the end of the quarter which was further supplemented by available commitments under its revolving credit facility of approximately €613 million.

The Group has a stable financing base with a long-term and well spread maturity profile. The Group’s credit rating of Ba1/BB+/BB+ contributes to a lower cost of capital and access to the widest range of financing options available. These positions were achieved as a result of the Group’s consistent ability to generate strong free cash flows together with active management of its debt portfolio. The strength of the Group’s capital base together with consistent delivery of strong free cash flows provides a solid and cost effective support to the Group’s growth agenda over the medium-term.

Listing Arrangements and Admission to FTSE Indices

Following the Group's transfer of its primary listing to the London Stock Exchange, during the second quarter SKG was admitted as a constituent of the FTSE250 and FTSE All Share Indices.

Dividends

The Board will increase the 2016 interim dividend by 10% to 22 cent per share. It is proposed to pay the interim dividend on 28 October 2016 to shareholders registered at the close of business on 30 September 2016.

2016 Second Quarter & First Half | Operating Efficiency

Commercial Offering and Innovation

During the quarter the Group continued to lead the way with industry awards across Europe and recognition by major customers. As further proof of the success of our industry leading innovation, Nestlé has recognised the Group with their European “Out of the Box” supplier of the year award for the second year running.

In July, the Group received two awards at the PART awards in Moscow winning first and second prizes in the ‘Alcoholic Beverage’ category. Smurfit Kappa in Norway and Denmark have both recently won a Scanstar 2016 Packaging Award – awards which are organised by the Scandinavian Packaging Association, a body incorporating the national packaging organisations of Denmark, Finland, Iceland, Norway and Sweden.

As part of its ongoing differentiation initiative, Smurfit Kappa has continued to advance its communication and reputation among new audiences across multiple channels. The Group recently embarked on a number of targeted marketing campaigns showcasing Smurfit Kappa’s industry-leading sustainability credentials and building awareness of its unique ShelfSmart process, particularly within the fast moving consumer goods (‘FMCG’) sector. The Group’s marketing and communications activity has developed on a number of fronts, resulting in a strong brand presence highlighting expertise, and some firsts in the area of marketing within the sector. This has been underpinned by ongoing recognition of the Group’s innovation, expertise and leadership by customers and trade groups.

Sustainability

The Group published its ninth Sustainable Development Report in June 2016, outlining the progress made by the Group against the five strategic key sustainability priorities.

The full 2015 Sustainability Report is available at smurfitkappa.com

Cost Take-out Programme

In recognition of the requirement to continuously drive cost efficiencies to partially offset inflationary pressures, the Group has had a formal cost take-out programme in place each year since 2008. The programme has consistently provided a solid support to maintaining operating efficiency despite steady increases in both direct and indirect costs.

The Group announced a cost take-out target of €75 million for the full year 2016 and expects to deliver on this commitment with €31 million achieved in the first half.

Enhanced Capital Expenditure Programme

The Group is in the third and final year of its three-year programme of ‘Quick Win’ capital expenditure. As previously guided, EBITDA benefits are expected to lag expenditure with a €25 million EBITDA uplift in 2016 and a further €33 million benefit in 2017 to complete the €75 million of incremental EBITDA derived from the programme. As part of its full year 2015 results the Group confirmed €17 million of the Group’s 2015 EBITDA was associated with the programme to date.

2016 Second Quarter & First Half | Regional Performance Reviews

Europe

The Group’s European operations delivered an improved EBITDA margin in the second quarter of 2016 of 15.9% against 14.1% in the same period in 2015. EBITDA increased by €28 million in the second quarter of 2016 against the same period in 2015. Allowing for currency movements, the underlying increase in European earnings was €30 million. For the first half of 2016 the EBITDA margin was 14.8% against 13.6% in the first half of 2015, with strong volume growth and solid pricing supporting the result.

Total corrugated volumes increased by 2% in the second quarter of 2016 against the second quarter of 2015 with organic box volume growth of 2%. In the six months to June 2016 total corrugated volumes were up over 1%. This was made up of solid 2% organic box volume growth which was offset by the reduction in the more commodity-like sheet volume of 7%.

Corrugated pricing has remained sequentially flat in the second quarter of 2016 versus the first quarter of 2016, with pricing for the first half of 2016 marginally up on the same period in 2015. Good demand growth and increased pricing for OCC, which will have a negative impact on margin in the near-term, are expected to continue to provide a solid underpin to containerboard and corrugated pricing for the remainder of the year.

Recovered paper prices have continued to move upwards throughout the second quarter, with prices up 10% in the second quarter of 2016 against the same period in 2015. Market indices have reported a €9 per tonne increase in OCC year to date 2016. This increase, from an already high level, has been driven by strong domestic demand levels in Europe and good overseas demand. Chinese imports of OCC are up 9% in the five months to May 2016.

Demand for kraftliner remains strong with internal demand in the second quarter of 2016 up 6% against the same period of 2015. Following the successful implementation of the first step of the kraftliner price increase in North-Western Europe and the sharp movement in the value of Sterling versus the euro, the Group announced a price increase of £40 per tonne for brown and white kraftliner in the UK effective for all deliveries from mid-August. The increase is supported by continued strong demand for these grades in Europe and recovers some of the recent softening of price in the grade. The Group remains approximately 500,000 tonnes long on kraftliner in a European market that is a net importer of the grade.

The Americas

The Group’s Americas segment has reported EBITDA in the second quarter of 2016 of €73 million compared to €72 million in the second quarter of 2015. For the first half of 2016 the result was an EBITDA of €154 million, an 11% increase year-on-year despite significant currency headwinds. This was achieved as a result of our acquisitions in 2015, a generally good operational performance across the region and continuing price increases.

EBITDA margins in the second quarter of 2016 were 15.6% against 15.9% in the second quarter of 2015 and 17.0% in the first quarter of 2016. The EBITDA margin contraction in the second quarter of 2016 compared to the first quarter of 2016 is attributable to a number of factors. These include the annual shut in our Cali Mill which impacted the second quarter by approximately US$3 million. OCC pricing in Brazil also contributed to the margin reduction with a 23% increase in OCC in local currency in the second quarter against the first quarter and a year to date increase of close to 50%.

Organic corrugated volumes excluding Venezuela were up 3% for both the second quarter and the half year position against the same periods in 2015. The Americas continues to provide a geographically diversified source of resilient earnings growth. The delivery of organic and acquisitive growth in this region remains a key strategic objective of the Group. Continued diversification in the Americas will further strengthen the Group’s overall risk profile whilst providing attractive growth opportunities in emerging markets.

With the exception of Mexico, currencies stabilised during the second quarter, whilst still providing a headwind year-on-year. Currencies had a negative impact in the region of approximately €10 million for the second quarter against the same period 2015. The currency impact was offset in part by the positive contributions of acquisitions in the region and robust pricing initiatives in most markets.

The Group’s Pan American sales volumes continue to grow, up 4% for the first half of the year and up 7% when excluding Venezuela. This increase in volumes further amplifies the effectiveness of SKG’s pan-regional offering to large blue-chip companies, looking for a packaging partner who understands their business and can offer industry leading market insights, delivered with industry leading operational excellence.

The Mexican business continues to grow well with corrugated volumes up 6% for the second quarter of 2016 against the second quarter of 2015 and continuing the country’s solid start to the year. Volume growth was principally derived from the produce and food sectors. Corrugated pricing in the region was up in local currency due to the implementation of price increases which will continue into the second half of the year. The previously announced project to increase capacity at the Los Reyes mill near Mexico City by 100,000 tonnes per annum is expected to be completed in February 2017.

In Colombia corrugated volumes increased by 6% in the second quarter of 2016 against the same period in 2015. Currency challenges have been offset in part by extensive cost take-out programmes and price increases. OCC prices continue to rise with reduced availability of imported OCC which has been impacted by the devaluation of the Colombian peso. After a successful box price increase in the fourth quarter of 2015, continued price increases are being implemented in the second half of 2016.

The North American business expanded through the acquisition of three corrugated businesses in the first quarter of 2016 with the region remaining a key growth market for the Group. Operational challenges in the Group’s Californian operations continued in the second quarter of 2016. However, most other operations in this region performed well.

The Group’s operations in Argentina are continuing to perform well in a challenging environment. The new government in Argentina has introduced some reforms in the local economy which has caused some reduced activity in the second quarter with higher inflation. Economic recovery is expected from the third quarter of 2016 which should in turn drive volume growth into 2017. In Chile, the Group’s operations have improved margins and in turn improved EBITDA year-on-year for the second quarter and first half of 2016.

The integration of the Group’s recent acquisitions in Brazil continues to progress well. The Group’s volumes increased 4% in a corrugated market that is contracting as the government implements some national reforms to re-balance the economy. Price increases have been implemented in the first half with further increases being implemented in the second half to offset significantly higher raw material costs and currency headwinds.

The political and macroeconomic environment in Venezuela continues to deteriorate in 2016. Venezuela represented less than 1% of group EBITDA in the first half of 2016. Driven by resilient local management and locally sourced raw materials the Group’s operations continue to operate well within a very difficult environment.

Brexit

The UK recently voted to leave the European Union. SKG operates a UK based business that is broadly self-sufficient with UK mills and UK corrugated plants servicing the local economy. Any effect on SKG will principally be as a result of the withdrawal having a knock-on impact on UK/European GDP and confidence.

(1) The summary cash flow is prepared on a different basis to the Condensed Consolidated Statement of Cash Flows under IFRS (‘IFRS cash flow’) and as such the reconciling items between EBITDA and decrease/increase in net debt may differ to amounts presented in the IFRS cash flow. The principal differences are as follows:

(a) The summary cash flow details movements in net debt. The IFRS cash flow details movements in cash and cash equivalents.

(b) Free cash flow reconciles to cash generated from operations in the IFRS cash flow as shown in the table on the next page. The main adjustments are in respect of cash interest, capital expenditure, tax payments and the sale of fixed assets and businesses.

(c) The IFRS cash flow has different sub-headings to those used in the summary cash flow.

• Current provisions in the summary cash flow are included within change in employee benefits and other provisions in the IFRS cash flow.
• Capital expenditure (net of change in capital creditors) in the summary cash flow includes additions to intangible assets which is shown separately in the IFRS cash flow.
• Other in the summary cash flow includes changes in employee benefits and other provisions (excluding current provisions), amortisation of capital grants, receipt of capital grants and dividends received from associates which are shown separately in the IFRS cash flow.

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 30 June 2016, Smurfit Kappa Treasury Funding Limited had outstanding US$292.3 million 7.50% senior debentures due 2025. The Group had outstanding €162.2 million and STG£63.9 million variable funding notes issued under the €240 million accounts receivable securitisation programme maturing in June 2019, 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, €400 million 4.125% senior notes due 2020, €250 million senior floating rate notes due 2020, €500 million 3.25% senior notes due 2021 and €250 million 2.75% senior notes due 2025. Smurfit Kappa Acquisitions and certain subsidiaries are also party to a senior credit facility. At 30 June 2016, the Group’s senior credit facility comprised term drawings of €572.6 million, US$55.2 million and STG£100 million under the amortising Term A facility maturing in 2020. In addition, as at 30 June 2016, the facility included a €625 million revolving credit facility 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 as at 30 June 2016 for each of the drawings under the various senior credit facility loans.

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

Following acquisitions of over €380 million in 2015, including the Brazilian acquisitions in December, the Group increased the term loan under its senior credit facility by €250 million, from €500 million to €750 million on 5 February 2016. The terms applicable to the increase, including margin, amortisation profile and maturity date are the same as the existing Term A loan. The proceeds were substantially applied to reduce drawings under the revolving credit facility, thereby further improving the Group’s liquidity.

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 30 June 2016, the Group had fixed an average of 66% of its interest cost on borrowings over the following twelve months.

The Group’s fixed rate debt comprised €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, €500 million 3.25% senior notes due 2021, €250 million 2.75% senior notes due 2025 and US$292.3 million 7.50% senior debentures due 2025. In addition the Group had €349 million in interest rate swaps with maturity dates ranging from October 2018 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 increase by one percent, the Group’s interest expense would increase, and income before taxes would decrease, by approximately €13 million over the following twelve months. Interest income on the Group’s cash balances would increase by approximately €3 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 2015 annual report on pages 16-17. The annual report is available on our website smurfitkappa.com. The principal risks and uncertainties for the remaining six months of the financial year are summarised below.

• If the current economic climate were to deteriorate, especially following Brexit, and result in an increased 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 following Brexit, it could adversely affect the Group’s financial position and results of 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.
• 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 systems.
• The Group is exposed to potential risks in relation to the current political situation in Venezuela.

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

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

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

Notes to the Condensed Consolidated Interim 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 tax resident in Ireland. The address of its registered office is Beech Hill, Clonskeagh, Dublin 4, D04 N2R2, Ireland.

2. Basis of Preparation and Accounting Policies

The condensed consolidated interim financial statements included in this report have been prepared in accordance with the Transparency (Directive 2004/109/EC) Regulations 2007, the related Transparency Rules of the Central Bank of Ireland and with International Accounting Standard 34, Interim Financial Reporting (‘IAS 34’) as adopted by the European Union. Certain quarterly information and the balance sheet as at 30 June 2015 have been included in this report; this information is supplementary and not required by IAS 34. This report should be read in conjunction with the consolidated financial statements for the year ended 31 December 2015 included in the Group’s 2015 annual report 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 condensed consolidated interim financial statements are consistent with those described and applied in the annual report for the financial year ended 31 December 2015. There are no new IFRS standards effective from 1 January 2016 which have a material effect on the condensed consolidated interim financial information included in this report.

The Group is a highly integrated manufacturer of paper-based packaging products with leading market positions, quality assets and broad geographic reach. The financial position of the Group, its cash generation, capital resources and liquidity continue to provide a stable financing platform. Having made enquiries, the Directors have a reasonable expectation that the Company, and the Group as a whole, have adequate resources to continue in operational existence for the foreseeable future. For this reason, they continue to adopt the going concern basis in preparing the condensed consolidated interim financial statements.

The condensed consolidated interim financial statements include all adjustments that management considers necessary for a fair presentation of such financial information. All such adjustments are of a normal recurring nature. Certain tables in this interim statement may not add precisely due to rounding.

The Group’s auditors have not audited or reviewed the condensed consolidated interim financial statements contained in this report.

The condensed consolidated interim financial statements presented do not constitute full statutory accounts. Full statutory accounts for the year ended 31 December 2015 will be filed with the Irish Registrar of Companies in due course. The audit report on those statutory accounts was unqualified.

3. Segmental Analyses

The Group has determined 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 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 United States. Inter-segment revenue is not material. No operating segments have been aggregated for disclosure purposes.

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

3. Segmental Analyses (continued)

4. Exceptional Items

The exceptional finance income in 2016 related to the gain of €12 million on the sale of our shareholding in the Swedish company, IL Recycling, in the second quarter.

Exceptional items charged within operating profit in the first six months of 2015 amounted to €46 million, €36 million of which represented the higher cost to the Venezuelan operations of discharging their non-Bolivar denominated payables following our adoption of the Simadi rate. The remaining €10 million related to the solidboard operations in Europe.

Exceptional finance income of €11 million in the first six months of 2015 represented the gain in Venezuela on their US dollar denominated intra-group loans as a result of our adoption of the Simadi rate. This gain was partly offset by an exceptional finance cost of €2 million. This represented the accelerated amortisation of the issue costs relating to the debt within our senior credit facility which was paid down with the proceeds of the €250 million bond issue in February 2015.

5. Finance Costs and Income

6. Income Tax Expense

The tax expense in 2016 is €24 million higher than in the comparable period in 2015 primarily due to an increase in earnings. The tax expense is higher in Europe by approximately €17 million and higher in the Americas by €7 million. The movement in deferred tax arises from the reversal of timing differences including the use of tax losses. The tax expense includes a €1 million tax credit on exceptional items in 2015. There is a nil tax effect on exceptional items in 2016.

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 €4 million (2015: €20 million). Net interest cost on net pension liability of €11 million (2015: €10 million) is included in finance costs in the Condensed Consolidated Income Statement.

The gain on curtailment of €12 million in 2016 relates to a change to the top-up compensation plan in the Netherlands from defined benefit to defined contribution.

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

The employee benefits provision has increased from €818 million at 31 December 2015 to €906 million at 30 June 2016, mainly as a result of lower Eurozone and Sterling corporate bond yields which have decreased the discount rates in the Eurozone and Sterling area.

8. Earnings per Share

Basic

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

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 2007 Share Incentive Plan and deferred shares held in trust under the Deferred Annual Bonus Plan.

Pre-exceptional

9. Dividends

During the period, the final dividend for 2015 of 48 cent per share was paid to the holders of ordinary shares. The Board has decided to pay an interim dividend of 22 cent per share for 2016 and it is proposed to pay this dividend on 28 October 2016 to all ordinary shareholders on the share register at the close of business on 30 September 2016.

10. Property, Plant and Equipment

11. Net Movement in Working Capital

12. Analysis of Net Debt

13. Other Reserves

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

14. Fair Value Hierarchy

The following table presents the Group’s financial assets and liabilities that are measured at fair value at 30 June 2016:

The following table presents the Group’s financial assets and liabilities that are measured at fair value at 31 December 2015:

The fair value of the level 2 derivative financial instruments set out above has been measured using observable market inputs as defined under IFRS 13, Fair Value Measurement. All are plain derivative instruments, valued with reference to observable foreign exchange rates, interest rates or broker prices. There have been no transfers between level 1 and level 2 during the period. The Group uses discounted cash flow analysis for various available-for-sale financial assets that are not traded in active markets.

The following table presents the changes in the level 3 instruments for the period: