Pre-Annual General Meeting Information • Jun 19, 2018
Pre-Annual General Meeting Information
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THIS CIRCULAR AND THE ACCOMPANYING FORM OF PROXY ARE IMPORTANT AND REQUIRE YOUR IMMEDIATE ATTENTION. If you are in any doubt as to the action you should take, you are recommended to seek your own independent financial advice immediately from your stockbroker, bank manager, solicitor, accountant or other independent financial adviser authorised under the Financial Services and Markets Act 2000, as amended, if you are resident in the United Kingdom or, if not, from another appropriately authorised independent financial adviser.
If you sell or otherwise transfer, or have sold or otherwise transferred, all your Ordinary Shares, please forward this Circular, but not the accompanying personalised Form of Proxy, as soon as possible to the purchaser or the transferee, or to the stockbroker, bank or other agent through whom the sale or transfer was effected, for transmission to the purchaser or the transferee. If you sell or have sold or otherwise transferred only part of your holding of Ordinary Shares, you should retain these documents and consult the bank, stockbroker or other agent through whom the sale or transfer was effected.
Any person (including, without limitation, custodians, nominees and trustees) who may have a contractual or legal obligation or may otherwise intend to forward this Circular to any jurisdiction outside the United Kingdom should seek appropriate advice before taking any action. The distribution of this Circular and any accompanying document into jurisdictions other than the United Kingdom may be restricted by law. Any person not in the United Kingdom into whose possession this Circular and any accompanying documents come should inform themselves about and observe any such restrictions. Any failure to comply with these restrictions may constitute a violation of the securities law of any such jurisdiction.
This Circular should be read as a whole. Your attention is drawn to the letter from the Chairman of the Company which is set out in Part I (Letter from the Chairman) of this Circular and which contains a recommendation from the Board that you vote in favour of the Resolution to be proposed at the General Meeting referred to below. Your attention is also drawn to the risk factors which are set out in Part II (Risk Factors) of this Circular.
(a public company incorporated in England and Wales with registered number 01377658)
Notice of a General Meeting of the Company, to be held at Melia White House, Albany Street, London NW1 3UP at 11.00 a.m. on 10 July 2018, is set out at the end of this Circular. Whether or not you intend to be present at the General Meeting, you are asked to complete and return the Form of Proxy in accordance with the instructions printed on it as soon as possible and, in any event, so as to be received by Equiniti Limited, Aspect House, Spencer Road, Lancing, West Sussex BN99 6DA, United Kingdom by no later than 9.00 a.m. on 6 July 2018 (or, in the case of an adjournment, not later than 48 hours (excluding non-business days) before the time fixed for the holding of the adjourned meeting). Shareholders wishing to appoint a proxy online can do so by visiting www.sharevote.co.uk using the Voting ID, Task ID and Shareholder Reference Number printed on the enclosed Form of Proxy. Members who have already registered with the Registrar's online portfolio service Shareview can appoint a proxy by logging into their profile at www.shareview.co.uk using their usual user ID and password. Once logged in, members should click "View" on the "My Investments" page, click on the link to vote and then follow the on-screen instructions. Shareholders that hold their Ordinary Shares in CREST may appoint a proxy by completing and transmitting a CREST Proxy Instruction to Equiniti Limited (CREST Participant ID RA19), so that it is received no later than 9.00 a.m. on 6 July 2018 (or, in the case of an adjournment, not later than 48 hours (excluding non-business days) before the time fixed for the holding of the adjourned meeting). The completion and return of a Form of Proxy (or the electronic appointment of a proxy) will not preclude you from attending and voting in person at the General Meeting or any adjournment of the General Meeting, if you wish to do so and are so entitled.
A summary of the actions to be taken by Shareholders is set out on page 25 of this Circular and in the Notice of General Meeting set out at the end of this Circular.
This Circular is not a prospectus, but a shareholder circular relating to the Acquisition and the Resolution, and it is not intended to and does not constitute or form part of any offer or invitation to purchase, acquire, subscribe for, sell, dispose of or issue, or any solicitation of an offer to sell, dispose of, issue, purchase, acquire or subscribe for, any security. This Circular has been prepared in accordance with the Listing Rules and approved by the FCA.
The information provided in this Circular is provided solely in compliance with the Listing Rules for the purpose of enabling Shareholders to consider the Resolution.
Citigroup Global Markets Limited ("Citi"), which is authorised by the PRA and regulated by the FCA and the PRA in the United Kingdom, is acting solely for the Company and no one else in connection with the Acquisition and will not regard any other person (whether or not a recipient of this document) as a client in relation to the Acquisition and will not be responsible to anyone other than the Company for providing the protections afforded to its clients or for providing advice in relation to the Acquisition or any other matters referred to in this document.
Goldman Sachs International ("Goldman Sachs"), which is authorised by the PRA and regulated by the FCA and the PRA in the United Kingdom, is acting solely for the Company and no one else in connection with the Acquisition and will not regard any other person (whether or not a recipient of this document) as a client in relation to the Acquisition and will not be responsible to anyone other than the Company for providing the protections afforded to its clients or for providing advice in relation to the Acquisition or any other matters referred to in this document.
J. P. Morgan Securities plc ("JPM"), which is authorised by the PRA and regulated by the FCA and the PRA in the United Kingdom, is acting solely for the Company and no one else in connection with the Acquisition and will not regard any other person (whether or not a recipient of this document) as a client in relation to the Acquisition and will not be responsible to anyone other than the Company for providing the protections afforded to its clients or for providing advice in relation to the Acquisition or any other matters referred to in this document.
Save for the responsibilities and liabilities, if any, of each of Citi, Goldman Sachs and JPM under FSMA or the regulatory regime established under FSMA, each of Citi, Goldman Sachs and JPM assumes no responsibility whatsoever and makes no representations or warranties, express or implied, in relation to the contents of this Circular, including its accuracy, completeness or verification or for any other statement made or purported to be made by the Company, or on the Company's behalf, or by Citi, Goldman Sachs or JPM, or on any of their behalf, and nothing contained in this Circular is, or shall be, relied on as a promise or representation in this respect, whether as to the past or the future, in connection with the Company or the Acquisition. Each of Citi, Goldman Sachs and JPM disclaims to the fullest extent permitted by law all and any responsibility and liability whether arising in tort, contract or otherwise which it might otherwise be found to have in respect of this Circular or any such statement.
The information provided in this Circular is provided solely for the purpose of considering the Resolution. Any reproduction or distribution of this Circular, in whole or in part, and any disclosure of its contents or use of any information contained in this Circular for any purpose other than considering the Resolution is prohibited.
No person has been authorised to give any information or make any representations other than those contained in this Circular or incorporated by reference into it and, if given or made, such information or representations must not be relied upon as having been authorised by or on behalf of the Company or Citi, Goldman Sachs or JPM. None of the above take any responsibility or liability for, and can provide no assurance as to the reliability of, other information that you may be given. Subject to the Listing Rules, the Prospectus Rules and the Disclosure Guidance and Transparency Rules, the delivery of this Circular shall not, under any circumstances, create any implication that there has been no change in the affairs of DS Smith plc ("DS Smith", or the "Company") or the Europac Group since the date of this Circular or that the information in this Circular is correct as at any time subsequent to the date of this Circular.
The contents of this Circular and the information incorporated by reference into it should not be construed as legal, business or tax advice. Each Shareholder should consult his, her or its own legal adviser, financial adviser or tax adviser for legal, financial or tax advice respectively.
This Circular is not an offer of securities for sale in the United States and there will be no public offer of securities in the United States. The securities discussed in this Circular have not been and will not be registered under the US Securities Act of 1933, as amended (the "Securities Act") or under any securities laws of any state or other jurisdiction of the United States and may not be offered or sold, directly or indirectly, within the United States, except pursuant to an applicable exemption from, or a transaction not subject to, the registration requirements of the Securities Act and in compliance with any applicable securities laws of any state or other jurisdiction of the United States.
The securities discussed in this Circular have not been approved or disapproved by the US Securities and Exchange Commission, any state securities commission in the United States or any other US regulatory authority, nor have any of the foregoing authorities passed upon or endorsed the merits of the offering of these securities or the accuracy or adequacy of this Circular. Any representation to the contrary is a criminal offence in the United States.
Distribution of this Circular by any recipient may be restricted or prohibited by US law. Recipients are required to inform themselves of, and comply with, all such restrictions or prohibitions.
This Circular is dated 19 June 2018.
| Page | ||
|---|---|---|
| IMPORTANT INFORMATION | 4 | |
| EXPECTED TIMETABLE OF PRINCIPAL EVENTS | 9 | |
| DIRECTORS, COMPANY SECRETARY, REGISTERED OFFICE AND ADVISERS | 10 | |
| PART I | LETTER FROM THE CHAIRMAN | 12 |
| PART II | RISK FACTORS | 27 |
| PART III | PRINCIPAL TERMS AND CONDITIONS OF THE PROPOSED OFFER | 43 |
| PART IV | HISTORICAL FINANCIAL INFORMATION RELATING TO THE EUROPAC GROUP | 50 |
| Section A: HISTORICAL FINANCIAL INFORMATION RELATING TO THE EUROPAC GROUP |
50 | |
| Section B: RECONCILIATION OF THE EUROPAC GROUP'S FINANCIAL INFORMATION TO THE DS SMITH GROUP'S ACCOUNTING POLICIES |
131 | |
| PART V | UNAUDITED PRO FORMA FINANCIAL INFORMATION RELATING TO THE ENLARGED GROUP |
132 |
| Section A: UNAUDITED PRO FORMA INFORMATION RELATING TO THE ENLARGED GROUP |
132 | |
| Section B: ACCOUNTANT'S REPORT ON THE UNAUDITED PRO FORMA FINANCIAL INFORMATION RELATING TO THE ENLARGED GROUP |
138 | |
| PART VI | ADDITIONAL INFORMATION | 140 |
| PART VII | DEFINITIONS AND GLOSSARY | 155 |
| PART VIII | NOTICE OF GENERAL MEETING | 160 |
Certain statements contained in this Circular or incorporated by reference into it constitute, or may be deemed to constitute, "forward-looking statements" with respect to the financial condition, results of operations and business of the DS Smith Group and, upon Completion, the Enlarged Group and certain plans and objectives of the Directors with respect thereto. These forward-looking statements can be identified by the fact that they do not relate only to historical or current facts. Forward-looking statements often use forward-looking terminology including words such as "anticipate", "target", "expect", "estimate", "intend", "aim", "plan", "predict", "projects", "continue", "assume", "goal", "believe", "will", "may", "should", "would", "could" or, in each case, their negative, or other variations thereon or words of similar meaning, which identify certain of these forward-looking statements. Other forward-looking statements can be identified in the context in which the statements are made. In particular, any statements regarding the Company's strategy, plans, objectives, goals and other future events or prospects are forward-looking statements.
An investor should not place undue reliance on forward-looking statements because they involve known and unknown risks, uncertainties and other factors that are in many cases beyond the Company's control. Forward-looking statements are based on assumptions and assessments made by the Directors in light of their experience and their perception of historical trends, current conditions, expected future developments and other factors they believe appropriate. By their nature, forward-looking statements involve risk and uncertainty, including the principal risks and uncertainties facing the business as described in Part II (Risk Factors) of this Circular, because they relate to events and depend on circumstances that will occur in the future. The factors described in the context of such forward-looking statements in this Circular could cause actual results and developments to differ materially from those expressed in or implied by such forwardlooking statements.
The Company cautions investors that forward-looking statements are not guarantees of future performance and that its actual results of operations and financial condition, and the development of the industry in which it operates, may differ materially from those made in or suggested by the forward-looking statements contained in this Circular and/or information incorporated by reference into it. Factors that may cause the Company's actual results to differ materially from those expressed or implied by the forward-looking statements in this Circular include but are not limited to the risks described in Part II (Risk Factors) of this Circular.
Each forward-looking statement speaks only as of the date it was made and is not intended to give any assurances as to future results. Furthermore, forward-looking statements contained in this Circular that are based on past trends or activities should not be taken as a representation that such trends or activities will continue in the future. Except as required by the FSMA, the Listing Rules and/or the Disclosure Guidance and Transparency Rules, none of the Company, Citi, Goldman Sachs and JPM undertakes any obligation to update or revise these forward-looking statements, and will not publicly release any revisions it may make to these forward-looking statements that may result from new information, events or circumstances arising after the date of this Circular. The Company will comply with its obligations to publish updated information as required by the FSMA, the Listing Rules and/or the Disclosure Guidance and Transparency Rules or otherwise by law and/or by any regulatory authority, but assumes no further obligation to publish additional information.
For the avoidance of doubt, nothing in this paragraph 1 (Forward-looking statements) is intended to qualify the working capital statements set out in paragraph 11 (Working Capital) of Part VI (Additional information) of this Circular.
Unless otherwise indicated, references to pounds sterling, sterling, pounds, GBP, pence, p or £ are to the lawful currency of the United Kingdom, references to US dollars, USD or \$ are to the lawful currency of the United States, and references to Euros, EUR or € are to the currency introduced at the start of the third stage of European economic and monetary union pursuant to the Treaty establishing the European Community, as amended.
Unless otherwise specified, the financial information contained in this Circular has been expressed in sterling.
The basis of translation of foreign currency transactions and amounts in the financial information set out in Note 2.7 of the Historical Financial Information relating to the Europac Group in Section A of Part IV (Historical Financial Information relating to the Europac Group) is described in that Part. Unless otherwise stated, information derived from this financial information set out elsewhere in this Circular has been translated on the same basis.
For current EUR amounts, a rate of £1 to EUR 1.148 has been used, and for current USD amounts, a rate of £1 to USD 1.327 has been used, unless otherwise stated in this Circular.
This Circular contains information regarding the DS Smith Group's, the Europac Group's and the Enlarged Group's business and the market in which they operate and compete, which DS Smith has obtained from various third party sources. Where information has been sourced from a third party it has been accurately reproduced and, so far as DS Smith is aware and is able to ascertain from the information published by that third party, no facts have been omitted which would render the reproduced information inaccurate or misleading. Such information has not been audited or independently verified. Where third party information has been used in this Circular, the source of such information has been identified.
Certain data in this Circular, including financial, statistical and operating information, has been rounded. As a result of rounding, the totals of data presented in this Circular may vary slightly from the actual arithmetic totals of such data. Percentages have also been rounded and accordingly may not add to 100 per cent.
Unless otherwise stated:
Unless otherwise indicated, financial information in this Circular relating to the DS Smith Group and the Europac Group has been prepared in accordance with IFRS and in accordance with the accounting policies adopted by DS Smith in preparing its financial statements for the 2018 Financial Year.
In the reporting of financial information, the DS Smith Group has adopted various non-IFRS measures of historical or future financial performance, position or cash flows other than those defined or specified under IFRS.
These measures are not defined by IFRS and therefore may not be directly comparable with other companies' non-IFRS measures, including those in the DS Smith Group's industry.
Non-IFRS measures should be considered in addition to, and are not intended to be a substitute for, or superior to, IFRS measurements.
The DS Smith Group presents reported and adjusted financial information in order to help shareholders better understand the DS Smith Group's operational performance and financial position.
Total reported financial information represents the DS Smith Group's overall performance and financial position, but can contain significant unusual or non-operational items or involve calculations that may obscure understanding of the key trends and position.
Certain non-IFRS performance measures can be, and are, reconciled to information presented in the financial statements. Other financial key performance measures are calculated using information which is not presented in the financial statements and is based on, for example, average twelve month balances or average exchange rates.
The key non-IFRS financial measures used in this Circular include adjusted operating profit, return on sales, adjusted earnings per share and adjusted diluted earnings per share, return on average capital employed, adjusted EBITDA, net debt/EBITDA, cash generated from operations before exceptional cash items, free cash flow, net cash flow, cash conversion, adjusted effective tax rate, dividend cover before amortisation and exceptional items and average working capital to revenue. Further information regarding these measures, including certain reconciliations, can be found at Note 32 on pages 134 to 136 of DS Smith's 2018 Annual Reports and Accounts, which are incorporated by reference into this Circular.
The non-IFRS performance measures of the Europac Group used in this Circular and their calculation methods are as follows:
Consolidated EBITDA (Earnings Before Interest, Tax, Depreciation and Amortisation) is an indicator that that is calculated as the Operating Profit/(Loss) before depreciation and amortisation charges.
EBITDA is calculated as the Operating Profit/(Loss) before depreciation and amortisation charges.
It provides an analysis of the operating profit/(loss) excluding depreciation and amortisation as these variables do not represent cash flows and may vary substantially from company to company depending on accounting policies and the value of the assets.
It is used by management to assess earnings over time, allowing comparison with other companies in the sector. Finally, it is an indicator that is widely used by investors and analysts and by financial institutions.
Consolidated EBITDA for 2017, 2016 and 2015 appears in the Notes to Part IV of the Circular (Historical Financial Information Relating to the Europac Group) – Note 4 (Segment reporting).
Recurring EBITDA is an indicator that measures the company's operating margin deducting interest, taxes, depreciation and amortisation, but without taking into account non-recurring items that by their nature are not assigned to the operations, such as termination payments or gains and (losses) on mergers and acquisitions.
Europac's management uses this indicator as the best reflection of the company's business and one which allows comparison over several years as it is not distorted by one-off, extraordinary or recurring effects.
Recurring EBITDA for 2017, 2016 and 2015 appears in the Notes to Part IV of the Circular (Historical Financial Information Relating to the Europac Group) – Note 4 (Segment reporting) and is named "Operating profit before depreciation/amortisation for the segment".
Consolidated EBITDA for Q1 2018 and Q1 2017 is shown below:
| €'000s | ||||
|---|---|---|---|---|
| Corrugated | ||||
| First quarter 2018 | Paper | Board | Eliminations | Consolidated |
| Net segment revenue | ||||
| external customers other segments |
135,524 31,035 |
99,836 1,813 |
– (32,849) |
235,360 – |
| –––––––––––– | –––––––––––– | –––––––––––– | –––––––––––– | |
| Total | 166,560 | 101,649 | (32,849) | 235,360 |
| Operating profit before depreciation/ amortisation for the segment unassigned profit or loss |
53,035 | (2,898) | – | 50,137 (783) –––––––––––– |
| Consolidated EBITDA Depreciation and amortisation |
49,354 (12,179) –––––––––––– |
|||
| Operating profit Net financial expense Share of profit of equity-accounted investees |
37,174 (2,063) – –––––––––––– |
|||
| Profit before tax from continuing operations |
35,112 –––––––––––––––––––––––– |
|||
| Corporate income tax | (9,908) –––––––––––– |
|||
| Profit for the year from continuing operations |
25,203 –––––––––––––––––––––––– |
| €'000s | ||||
|---|---|---|---|---|
| Corrugated | ||||
| First quarter 2017 | Paper | Board | Eliminations | Consolidated |
| Net segment revenue | ||||
| external customers | 117,575 | 92,496 | – | 210,071 |
| other segments | 21,772 –––––––––––– |
2,222 –––––––––––– |
(23,993) –––––––––––– |
– –––––––––––– |
| Total | 139,347 | 94,717 | (23,993) | 210,071 |
| Operating profit before depreciation/ | ||||
| amortisation for the segment | 25,672 | 3,849 | – | 29,521 |
| unassigned profit or loss | 1,509 –––––––––––– |
|||
| Consolidated EBITDA | 31,030 | |||
| Depreciation and amortisation | (12,411) –––––––––––– |
|||
| Operating profit | 18,620 | |||
| Net financial expense | (2,175) | |||
| Share of profit of equity-accounted investees | 44 | |||
| Profit before tax from | –––––––––––– | |||
| continuing operations | 16,489 | |||
| –––––––––––––––––––––––– | ||||
| Corporate income tax | (5,312) –––––––––––– |
|||
| Profit for the year from | ||||
| continuing operations | 11,176 | |||
| –––––––––––––––––––––––– |
No statement in this Circular is intended as a profit forecast or profit estimate and no statement in this Circular should be interpreted to mean that earnings per Ordinary Share for the current or future financial years would necessarily match or exceed the historical published earnings per Ordinary Share.
Without prejudice to the documents incorporated by reference into this Circular, which will be made available on DS Smith's website (www.dssmith.com), neither the contents of DS Smith's website nor of any website accessible via hyperlinks from DS Smith's website are incorporated into, or form part of, this Circular and Shareholders and prospective investors should not rely on them.
Defined terms are defined and explained in Part VII (Definitions and Glossary) of this Circular.
All references to time in this Circular are, unless otherwise stated, references to time in London, United Kingdom.
Each of the times and dates in the table below is indicative only and may be subject to change. (1)
| Announcement of the Acquisition and the Rights Issue | 4 June 2018 |
|---|---|
| Publication and posting of this Circular and the Forms of Proxy | 19 June 2018 |
| Record date for voting at the General Meeting | 4.30 p.m. on 6 July 2018 |
| Latest time and date for receipt of Forms of Proxy, CREST Proxy Instructions and registration of online votes from Shareholders for the General Meeting |
9.00 a.m. on 6 July 2018 |
| General Meeting | 11.00 a.m. on 10 July 2018 |
| Expected Completion | Fourth quarter of 2018 |
| Long-stop date for Completion | 31 March 2019 |
Notes:
(1) The times and dates set out in the expected timetable of principal events above and mentioned throughout this Circular are indicative only and are subject to change. If any of the above times and/or dates change, the revised times and/or dates will be notified to Shareholders via a Regulatory Information Service and will be available on www.dssmith.com.
| Directors | Gareth Davis (Non-executive Chairman) Miles Roberts (Group Chief Executive) Adrian Marsh (Group Finance Director) Jonathan Nicholls (Senior Independent Director) Christopher Britton (Independent Non-executive Director) Ian Griffiths (Independent Non-executive Director) Kathleen O'Donovan (Independent Non-executive Director) Louise Smalley (Independent Non-executive Director) |
|---|---|
| Company Secretary | Iain Simm |
| Registered Office | DS Smith Plc 350 Euston Road London NW1 3AX |
| Financial Adviser, Sponsor and Joint Underwriter |
J. P. Morgan Securities plc 25 Bank Street Canary Wharf London E14 5JP |
| Lead Financial Adviser and Joint Underwriter |
Goldman Sachs International Peterborough Court 133 Fleet Street London EC4A 2BB |
| Joint Underwriter | Citigroup Global Markets Limited Citigroup Centre 33 Canada Square Canary Wharf London E14 5LB |
| Reporting Accountants | Deloitte LLP 2 New Street Square London EC4A 3BZ |
| Legal Advisers to the Company as to English law |
Slaughter and May One Bunhill Row London EC1Y 8YY |
| Legal Advisers to the Company as to US law |
Sullivan & Cromwell LLP 1 New Fetter Lane London EC4A 1AN |
| Legal Advisers to the Company as to Spanish law |
Pérez-Lorca Paseo de la Castellana, 50 28046 Madrid |
Legal Advisers to the Joint Linklaters LLP Underwriters as to English One Silk Street and US law London
EC2Y 8HQ
Registrar Equiniti Limited Aspect House Spencer Road Lancing West Sussex BN99 6DA
(Incorporated and registered in England and Wales with registered number 01377658)
DS Smith Plc 350 Euston Road London NW1 3AX
Gareth Davis (Non-executive Chairman) Miles Roberts (Group Chief Executive) Adrian Marsh (Group Finance Director) Jonathan Nicholls (Senior Independent Director) Christopher Britton (Independent Non-executive Director) Ian Griffiths (Independent Non-executive Director) Kathleen O'Donovan (Independent Non-executive Director) Louise Smalley (Independent Non-executive Director)
19 June 2018
Dear Shareholder,
On 4 June 2018, DS Smith announced its Proposed Offer for the entire issued share capital of Europac, a leading Western European integrated packaging business for cash consideration of EUR 1,667 million (approximately £1,453 million) (the "Acquisition"). DS Smith will absorb or refinance Europac's outstanding financial indebtedness at Completion. Headroom has been built into the New Debt Facility Agreement to ensure that DS Smith is able to refinance Europac's financial indebtedness, if necessary, including where change of control provisions apply.
The Proposed Offer will be financed through:
The Rights Issue and the New Debt Facility Agreement are described more fully in paragraph 7 of this letter.
DS Smith has received undertakings to accept the Acquisition from a total of 58.97 per cent. of the entire share capital of Europac (the "Acceptance Undertakings"). The Acceptance Undertakings comprise:
duties and to issuing the mandatory board report taking into account the relevant financial and legal advice).
Europac is a leading Western European, integrated packaging business with assets concentrated in the Iberian peninsula and France, operating from 24 locations and having c.2,300 employees.
For the year ended 31 December 2017, Europac had revenues of EUR 868 million (c.£756 million), Consolidated EBITDA of EUR 158 million (c.£138 million) and an EBITDA margin of 18.2 per cent. Europac's operations are split into two divisions (Paper and Packaging). For Financial Year 2017 Europac's Paper/Packaging divisional revenue split was 56 per cent./44 per cent.
Europac operates across the entire paper and packaging value chain including raw materials, paper manufacturing, design, packaging manufacturing and customer logistics. Customers in Spain and Portugal accounted for 53 per cent. of revenue generated and customers in France for 34 per cent. of revenue generated in the year ended 31 December 2017. Europac's Paper division produced approximately 940,000 tonnes of kraftliner and recycled papers and 360,000 tonnes of corrugated packaging in the year ended 31 December 2017. Europac has a diversified customer portfolio, with a strong FMCG agri-food and e-commerce orientation.
DS Smith is a leading multi-national provider of corrugated packaging in Europe and the United States, supported by paper and recycling operations. DS Smith has a growing business with global customers and the Acquisition of Europac further strengthens DS Smith's platform to address these growing customer opportunities.
DS Smith believes that the Acquisition represents an exceptional scale opportunity to build its position in a key packaging growth region. Specifically, DS Smith plans to build upon Europac's high quality, well-invested operational asset base and distribution network on the Iberian peninsula and in France to support Europac's existing customers and DS Smith's multi-national customers, many of whom have operations in these regions.
DS Smith also believes the Acquisition will provide a clear opportunity to develop Europac's packaging assets and to strengthen DS Smith's global supply chain, delivering significant integration benefits, cost synergies and strong financial returns to DS Smith's shareholders.
DS Smith will draw upon its considerable experience in previous integrations to build on Europac's regional market presence and expertise in the management of paper and packaging assets to drive improved performance and realise the combined strength of DS Smith and Europac.
In view of its size, the Acquisition constitutes a Class 1 transaction for the purposes of the Listing Rules, and, therefore, requires the approval of the Shareholders. The Acquisition is conditional on, among other things, such approval being given. Accordingly, a General Meeting of Shareholders has been convened at 11.00 a.m. on 10 July 2018 to be held at Melia White House, Albany Street, London NW1 3UP. The Notice of General Meeting can be found at the end of this Circular.
DS Smith currently intends to seek the delisting of the Europac Shares as soon as practicable following Completion. If the Proposed Offer is accepted by a high number of shareholders, it is currently intended that DS Smith and Europac will apply to the CNMV for authorisation to delist Europac Shares without making a delisting tender offer.
On 4 June 2018, the Company also announced it had initiated a strategic review of DS Smith's Plastics division, in accordance with DS Smith's stated strategy to be the leading supplier of sustainable packaging solutions and increasing focus on the production of high quality, cost effective corrugated packaging. The Company will update investors with regards to this process at the appropriate time.
The Board considers that the Acquisition is in the best interests of DS Smith and its Shareholders as a whole and recommends that Shareholders vote in favour of the Resolution, as each DS Smith Director intends to do (or seeks to procure to be done) in respect of his or her own legal and beneficial holdings of Ordinary Shares.
I am writing to give you further details of the Acquisition, including the background to and reasons for it, to explain why the Board considers it to be in the best interests of the Company and the Shareholders as a whole and to recommend that you vote in favour of the Resolution.
The DS Smith Group's vision is to be the leading global supplier of sustainable packaging solutions. Its goal is to deliver growth through offering comprehensive customer service, high quality products and innovative and sustainable solutions to its customers. To build a successful and sustainable business model that consistently delivers returns above its cost of capital, the DS Smith Group focuses on the following strategic priorities:
Over the last eight years, DS Smith has built a leading position in its core European markets, through acquisitions and growing its existing operations organically. In 2017, with the acquisition of 80 per cent. of Interstate Resources, DS Smith expanded its paper and packaging operations into North America for the first time, to address a significant growth opportunity in the largest single global paper and packaging market and provide broader coverage for its multi-national customer base as well as global customers based within the US market.
DS Smith has maintained a close commercial relationship and built strong dialogue with Europac over many years and the Board now believes that the acquisition of Europac represents an important next step in strengthening its paper and packaging positions in the Iberian Peninsula and France in support of its multinational customers' requirements.
In order to achieve this DS Smith intends to continue to focus on leveraging its innovative packaging solutions strategy across the Enlarged Group's multi-national FMCG and e-commerce orientated customer base.
Since 2010, DS Smith has targeted five medium-term financial criteria that underpin its strategy. The Board believes that the Acquisition is consistent with these medium-term financial criteria and that, following the Acquisition, the Enlarged Group will continue to target these criteria, which are:
Since 2010, DS Smith has transformed both its geographic footprint and customer offering capability. Its major acquisitions during the period comprise:
In addition, DS Smith has acquired smaller corrugated packaging businesses in Spain, Portugal, Greece, the UK and the US, and display businesses in Portugal, Denmark, Turkey and the UK. Together, the acquisitions have created a group which has a leading position across Europe and is increasingly well positioned to serve the growing requirement from large multi-national customers for a limited number of strategic suppliers together with additional innovation and capability to benefit from changing dynamics within the retail environment.
As a result of the acquisitions, DS Smith has driven further value through efficiencies and economies of scale, in particular in the area of procurement. DS Smith has also leveraged the impact of innovation through the roll-out of Impact and PackRight Centres and has been able to roll out programmes for the more efficient and effective manufacture of corrugated packaging.
The acquisition of Europac is consistent with DS Smith's acquisition strategy which has been predominantly focussed on expanding its corrugated paper and packaging footprint and capability in those geographic areas where it was underrepresented.
In addition to the acquisition-led strategy, DS Smith has also taken other significant strategic actions, including:
The Board remains committed to owning certain strategic paper manufacturing assets, as in the case of DS Smith's 2017 acquisition of an 80 per cent. interest in Interstate Resources, Inc. in the United States and the Romanian paper mill at Za˘ rnes,ti as part of the acquisition of EcoPack and EcoPaper. DS Smith will continue to evaluate the Enlarged Group's paper requirements on a commercial basis and the Acquisition will also provide an opportunity for DS Smith to assess the Enlarged Group's paper asset base.
DS Smith plans to build upon the Europac Group's well-invested operational asset base, technology and distribution network in Iberia and France to support the Europac Group's existing customers and DS Smith's multinational customers. DS Smith will draw upon its experience in previous integrations to realise the combined strength of the Enlarged Group.
The Board believes that the Acquisition represents an exceptional scale opportunity to enhance DS Smith's position in one of the largest and fastest growing European fibre-based packaging markets to further accelerate DS Smith's vision to be the leading supplier of sustainable packaging solutions on a broader geographic basis.
The Board believes that the Acquisition has a highly compelling strategic rationale, will create significant value for customers and expects it to create consistent and attractive returns for Shareholders:
DS Smith believes that Western Europe, and the Iberian Peninsula in particular, has clear potential for further development, based on the strong regional demand and momentum from DS Smith and Europac customers for retail-ready packaging initiatives, e-commerce and increased fibre-based packaging efficiency. DS Smith's current Iberian assets have consistently delivered growth ahead of the average of the rest of the DS Smith Group.
Europac is a high quality business centred on the Iberian peninsula, with an attractive growth and margin profile and a leading market presence in a key packaging growth region for DS Smith.
In addition to the opportunities from Europac's existing customer base, the Board believes that there are also clear opportunities to drive additional revenue growth through the strong pull effect for DS Smith's offering and multi-national capabilities from existing customers and the development of relationships with new customers.
The Acquisition is a highly complementary fit with DS Smith's current Western European asset base and builds on the successful acquisitions of Andopack, Lantero, Gopaca and P&I Display in the region and is anticipated to transform the scale and breadth of the Enlarged Group's operations and customer offering in the Iberian peninsula.
Europac has direct exposure to the strong underlying trends driving pan-European market demand including the continued rise of e-commerce, changes in consumption style, customisation and sustainable paper packaging.
DS Smith believes that though Europac is well positioned, it has not capitalised on the strong fundamentals of the pan-European packaging market, and in particular that there is a clear opportunity to develop the performance of Europac's packaging assets, which have been impacted by the shortterm lag effect of significant paper price increases. The Acquisition of Europac enhances DS Smith's Iberian market position and offers substantial growth, margin and customer opportunities.
Europac has a diverse, long-term customer portfolio which is primarily orientated towards value-added packaging segments (e.g. agri-foods, FMCG and e-commerce). The Board believes there is a significant packaging opportunity within the Europac customer base to drive sales by leveraging DS Smith's insight into lightweight, fibre-based packaging and in particular its retail-ready and e-commerce expertise. Europac also shares DS Smith's strong emphasis on design and innovation with both companies successfully employing customer-centric strategic partnership models.
DS Smith intends to apply its significant relevant expertise, drawn from delivering value in previous regional integrations, to improve performance in the Europac packaging division by using DS Smith's insight to drive sales, in particular utilising its retail-ready and e-commerce expertise. DS Smith's strategy of focussing on value-added products and services has also enabled DS Smith to reduce its customers' supply chain costs, increasing the value of DS Smith's products to customers, and simultaneously assisting in the mitigation of raw material inflation.
DS Smith also believes that there is an opportunity to improve the operating efficiencies of Europac's packaging operations. DS Smith's established working practices are described in more detail in paragraph 3.4 below.
DS Smith intends that the combined business will continue to invest in packaging innovation and drive value into all areas of the supply chain and leverage DS Smith's strong track record of delivering value in previous integrations, in order to build on its recent successes to achieve a leading market position in Iberia, with substantial growth and margin potential.
Europac is a well-invested, well-established, vertically integrated packaging company, with a high quality, geographically complementary asset base with dedicated kraftliner production capability.
DS Smith's 2017 acquisition of Interstate Resources, has demonstrated the advantage of global procurement benefits and the Acquisition of Europac will be an important addition to DS Smith's global supply chain capabilities with the addition of production assets in Europe.
The Board remains committed to DS Smith's short paper strategy, while retaining an appropriate level of supply and reflecting the significant historical and future expected growth of packaging production. The Acquisition also provides an opportunity for the Board to assess the paper asset base of the Enlarged Group once Europac is integrated.
DS Smith has a very experienced management team with proven integration expertise based on a strong track record of integrating acquisitions, realising cost synergies from procurement and operational efficiencies and driving revenue growth. DS Smith believes that as a result of its long standing relationship with Europac, knowledge of the market and collaborative due diligence process that it will achieve similar success in respect of the Acquisition of Europac.
The Board believes the Enlarged Group will also, with a broader pan-European and global customer presence, be well positioned to benefit from enhanced revenue growth prospects. The attractive returns delivered by DS Smith's Duropack, Interstate Resources, Lantero, Otor and SCA Packaging acquisitions demonstrate the benefit accruing from functional disciplines (including commercial, procurement, human resources and finance) operating across a broader business.
The Board has developed a clear integration plan with paths to cost synergy achievement and believes that the Acquisition presents significant opportunities for recurring pre-tax cost synergies of approximately EUR 50 million (£44 million) by 30 April 2021.
These cost synergies are expected to be realised through cost reductions, with approximately 70 per cent. through operational efficiencies, including the optimisation of paper uses implementing DS Smith's technology and operational practices at Europac and procurement benefits, and approximately 30 per cent. expected to be through efficiencies at the corporate centre and paper and packaging divisions.
DS Smith estimates one-off cash costs, including both capex required and one-off exceptional items, to implement the integration and deliver these cost synergies of approximately €70 million. Approximately €55 million of the full one-off costs will be incurred largely by the end of the first full financial year. In addition there is expected to be costs of approximately £50 million in relation to the Acquisition and related financing. DS Smith also estimates there will be a potential working capital impact as a result of integrating Europac's paper assets into DS Smith's supply chain.
The estimated cost synergies are contingent on the Acquisition completing, could not be achieved independently and reflect both beneficial elements and relevant costs. The expected cost synergies have been calculated on the basis of the existing procurement and operational structures of DS Smith and Europac.
In assessing the estimate of cost synergies, the Board and management have been aided by their strong track record of integration experience, having completed 19 acquisitions since 2010 including the integration of Otor and SCA Packaging, more recently, Duropack in South-Eastern Europe, Lantero in Spain and in 2017 acquiring 80 per cent. of Interstate Resources Inc. in North America. DS Smith will be assisted and supported in the integration process by an experienced Europac management team.
The above statement of estimated cost synergies relates to future actions and circumstances, which, by their nature involve risks, uncertainties, contingencies and other factors. The figures set out in the preceding paragraphs are unaudited numbers based on management estimates.
The Board believes that the Acquisition will also be financially attractive for Shareholders taking into account the terms of the Acquisition and the expected cost synergies and is consistent with DS Smith's focus on maintaining its medium-term financial targets.
The Acquisition is expected to be accretive to EPS in the first full financial year following Completion2, excluding any benefit other than cost synergies.
The Directors believe that the Acquisition will offer an expected pre-tax return on invested capital above DS Smith's pre-tax weighted average cost of capital in the first full financial year following Completion, using only cost synergies and before exceptional costs and anticipate further EPS growth and pre-tax return on invested capital accretion over the medium-term.
Founded in 1995, Europac is a leading Western European, integrated packaging business. Europac's core business is the manufacture and sale of paper and corrugated board for packaging, and the manufacture of corrugated board packaging. The Europac Group has its headquarters in Spain alongside four paper mills and 14 packaging sites, and five waste management sites across Spain, Portugal and France.
Europac's business model is based on the vertical integration of its paper and packaging divisions. Europac's paper division produces a wide variety of papers and weights, including a significant volume of kraftliner paper – Europac is one of only five companies in Europe to produce this paper. In Financial Year 2017, sales within Europac's paper division grew by approximately 9.9 per cent. driven by paper price rises and strategic positioning in higher value added segments.
1 This should not be construed as a profit forecast or interpreted to mean that the future earnings per share, profits, margins or cashflows of the DS Smith Group will necessarily be greater than the historic published figures.
2 This should not be construed as a profit forecast or interpreted to mean that the future earnings per share, profits, margins or cashflows of the DS Smith Group will necessarily be greater than the historic published figures.
Europac's packaging division is predominantly focused on the agri-food, FMCG and e-commerce sectors and provides a wide variety of packaging solutions including retail-ready, heavy-duty and online packaging. In Financial Year 2017 packaging division sales grew by 6.5 per cent., driven by progress in every geographic market where it is represented, particularly in Spain. The packaging division experienced a short-term lag effect driven by increased paper prices which generated significantly increased raw material costs suppressing profitability.
The Europac Group owns four paper mills and 14 packaging sites which would transform DS Smith's regional capabilities, geographic coverage and market share along with five waste management sites adding to DS Smith's existing recycling operations. These facilities, combined with access to approximately 8,000 hectares of managed forest, allowed Europac's Paper division to produce approximately 940,000 tonnes of kraftliner and recycled papers and 360,000 tonnes of corrugated packaging in the year ended 31 December 2017. Europac's kraftliner paper supply via its Viana do Castelo mill in Portugal will provide an important addition to DS Smith's global supply chain.
On a consolidated basis, over the last three financial years (between Financial Years 2015 and 2017) Europac revenues grew at 3.8 per cent., CAGR and Consolidated EBITDA grew at 19.3 per cent., and CAGR and Consolidated EBITDA margins improved by 440bps to 18.2 per cent.
On a consolidated basis, in Q1 FY18 Europac revenues grew at 12 per cent. against Q1 FY17, Consolidated EBITDA grew at 59.1 per cent. against Q1 FY17, and Consolidated EBITDA margin improved by 620bps to 21.0 per cent.
DS Smith is a leading, vertically integrated international supplier of corrugated packaging. As at 30 April 2018, DS Smith employed approximately 28,500 people across its approximately 200 manufacturing locations and 42 Impact and PackRight Centres, in 37 countries. DS Smith operates six core divisions: UK, Western Europe, DCH and Northern Europe, Central Europe and Italy, North American Paper and Packaging and Plastics. For the 2018 Financial Year, the Group's customer base for its corrugated box products was made up of approximately 68 per cent. FMCG, food and e-commerce.
DS Smith is listed on the main market of the London Stock Exchange and is a member of the FTSE 100 index. As at 1 June 2018, being the latest practicable date prior to the date of the DS Smith Announcement, DS Smith had a market capitalisation of approximately £6.0 billion. In the 2018 Financial Year, DS Smith's sales volumes included 2.9 million tonnes of CCM, 8.0 billion square metres of corrugated board and 5 million tonnes of recycled fibre.
The DS Smith Group's principal operations are designing and manufacturing corrugated packaging. In order to support its packaging operations, the DS Smith Group has recycling operations that collect used paper and corrugated cardboard, from which the DS Smith Group's paper manufacturing facilities make the CCM used in corrugated packaging. The DS Smith Group, through its DS Smith Plastics business, also designs and manufactures certain types of plastic packaging, in particular, the plastic bags and taps for bag-in-box packaging and rigid crates for bottled liquids.
Since 2010, DS Smith has transformed both its geographic footprint and customer offering capability. Its major acquisitions during the period comprise Otor (€247 million), SCA Packaging (€1.6 billion), Duropack (€305 million); Lantero (€190 million); 80 per cent. of Interstate Resources (\$920 million); and EcoPack and EcoPaper (€208 million). Consistent with its strategic goal of increasing size and profitability, DS Smith is continuously seeking further opportunities to expand its scale and improve the quality of its businesses through strategic acquisitions.
For the 2018 Financial Year, DS Smith reported revenue of £5,765 million, adjusted operating profit of £530 million, operating profit after adjusting items of £483 million and profit before income tax and adjusting items of £380 million.
In order for the Proposed Offer to become unconditional, the following conditions precedent must be met:
● the Shareholders must approve the Resolution at the General Meeting;
If the acceptance condition relating to the tendering of acceptances of the Acquisition is fulfilled during the acceptance period for the Proposed Offer, DS Smith intends to delist Europac's shares from their listings on the Madrid and Barcelona stock markets.
If the acceptance condition relating to the tendering of acceptances of the Proposed Offer is not fulfilled during the acceptance period for the Proposed Offer, DS Smith may waive the condition in accordance with Spanish law. As at the Latest Practicable Date, DS Smith's current intention in such an event would be to not waive this condition. DS Smith will undertake in the Offer Document that following the CNMV notifying it of the outcome of the Proposed Offer, DS Smith shall, if applicable, notify the CNMV within one day whether or not it intends to waive this condition.
The conditions of the Proposed Offer are more fully described at page 43 (Principal terms and conditions of the Proposed Offer), below, and within the DS Smith Announcement which is incorporated by reference into this Circular.
DS Smith is proposing to raise approximately £1,000 million (c.€1,148 million) of net proceeds pursuant to the Rights Issue. The Rights Issue is being fully underwritten by the Joint Underwriters, subject to certain customary conditions. The Rights Issue price of 350 pence per New Ordinary Share represents a 36.3 per cent. discount to the closing middle market price of DS Smith of 550 pence per Ordinary Share on 1 June 2018, being the latest practicable date prior to the release of the DS Smith Announcement, and a 30.9 per cent. discount to the theoretical ex-rights price of 507 pence per share to be issued under the Rights Issue, calculated by reference to the closing middle market price on the same basis.
Subject to the fulfilment of, inter alia, the conditions set out below, the Company will offer 293,064,829 New Ordinary Shares to qualifying Shareholders at a price of 350 pence per New Ordinary Share, payable in full on acceptance. The Rights Issue will be offered on the basis of:
held on the Record Date, and so in proportion to any other number of existing Ordinary Shares then held and otherwise on the terms and conditions set out in this document.
Qualifying Non-CREST Shareholders with registered addresses in any of the Excluded Territories will not be sent provisional allotment letters and will not have their CREST stock accounts credited with nil paid rights, except where the Company and the Joint Underwriters are satisfied that such action would not result in the contravention of any registration or other legal or regulatory requirement in such jurisdiction.
Fractions of New Ordinary Shares will not be allotted to any qualifying Shareholders, but will be aggregated and sold in the market for the benefit of DS Smith.
The New Ordinary Shares will, when issued and fully paid, rank pari passu in all respects with the existing Ordinary Shares.
The Rights Issue is conditional, among other things, upon:
(a) the Company having applied to Euroclear for admission of the nil paid rights and fully paid rights to CREST as participating securities, and no notification having been received from Euroclear on or before Admission of the New Ordinary Shares that such admission or facility for holding and settlement has been or is to be refused;
Application will be made for the New Ordinary Shares to be admitted to listing on the premium segment of the Official List and to trading on the London Stock Exchange's main market for listed securities. It is expected that Admission of the New Ordinary Shares will become effective and dealings in the New Ordinary Shares will commence at 8.00 a.m. on 10 July 2018.
The Rights Issue is not conditional on Completion. The Rights Issue may therefore complete while the combination does not. In the event that Admission of the New Ordinary Shares is effected but Completion does not occur, the DS Smith Directors' current intention is that the proceeds of the Rights Issue will be applied to reducing the Company's net indebtedness on a short-term basis while the DS Smith Directors evaluate alternative uses of the funds. If no such uses can be found, the DS Smith Directors will consider how best to return surplus capital to Shareholders. Such a return could carry fiscal costs for certain Shareholders, will have costs for DS Smith and would be subject to applicable securities laws.
The DS Smith Directors, who as at the Latest Practicable Date hold in aggregate 2,140,325 Ordinary Shares, representing 0.21 per cent. of the Company's existing issued ordinary share capital, each intend to take up their rights in full or in part in respect of the New Ordinary Shares to which they are entitled or, where their Ordinary Shares are held in trust or with nominees, such DS Smith Directors intend to recommend that such rights be taken up in full or in part.
On 4 June 2018, DS Smith entered into a €740 million bridge facility agreement (c.£645 million) (the "New Debt Facility Agreement") with Goldman Sachs and J.P. Morgan Securities plc as mandated lead arrangers (the "Arrangers"), Goldman Sachs International Bank and JPMorgan Chase Bank, N.A., London Branch as original lenders (the "Original Lenders"), Goldman Sachs international Bank and J.P. Morgan Securities plc as the CNMV guarantee issuing banks (the "Debt CNMV Guarantee Issuing Banks") and J.P. Morgan Europe Limited as agent (the "Facility Agent").
The New Debt Facility Agreement provides for DS Smith to receive one loan (the "Loan") from the Original Lenders, which may be used to finance the Acquisition, pay related costs and expenses and for refinancing any existing indebtedness of the Target Group. The Loan is available to be drawn until the earlier of: (i) 31 March 2019; (ii) the date on which the Offer lapses or is withdrawn, annulled or declared ineffective; and (iii) the Offer Settlement Date (the "Availability Period"). Drawing the Loan is subject to the satisfaction of customary conditions precedent.
DS Smith is initially required to repay the Loan within one year, although it has four extension options allowing it to extend this repayment date by six months at a time (meaning that the final repayment date could be extended to fall three years after the original date of the date of the New Debt Facility Agreement). The four extension options may be unilaterally exercised by DS Smith except in circumstances where a default has occurred and is continuing under the New Debt Facility Agreement. To the extent that the maturity date of the Loan under the New Debt Facility Agreement could not be extended by DS Smith, DS Smith would look to alternative means to fund the loan repayment, for example, by way of a refinancing.
Pursuant to the New Debt Facility Agreement, the Debt CNMV Guarantee Issuing Banks will, subject to the satisfaction of certain conditions precedent by DS Smith, issue guarantees in favour of the CNMV in a maximum amount equal to the consideration for the Acquisition less the Rights Issue Proceeds (the "Debt CNMV Guarantee"). The CNMV will only be entitled to call upon the Debt CNMV Guarantee where DS Smith fails to fund the consideration for the Acquisition. Where the CNMV calls upon the Debt CNMV Guarantee Issuing Banks would make a payment under a Debt CNMV Guarantee (and in certain other circumstances), DS Smith will be deemed to have drawn down an equivalent amount under the New Debt Facility Agreement.
The New Debt Facility Agreement includes certain mandatory prepayment events, being: (A) illegality; (B) a change of control of DS Smith (if a lender so requests after a certain period of negotiations, and provided that prepayment would not be required until after closing of the Offer); (C) receipt of certain disposal proceeds; and (D) where DS Smith receives proceeds pursuant to a debt financing (subject to certain exceptions) or the Rights Issue (unless the Rights Issue Proceeds have been used towards payment of the Offer Price). DS Smith may also voluntarily prepay the Loan provided it gives five business days' notice and the prepayment is of a minimum of €1,000,000 and provided that no CNMV Guarantee is outstanding. The New Debt Facility Agreement provides that any undrawn part of the lenders' commitments will be automatically cancelled at the end of the Availability Period, and that DS Smith can cancel the commitment of a lender which has defaulted (subject to certain exceptions).
The Loan is unsecured. The New Debt Facility Agreement contains a mechanic for other members of the DS Smith Group to accede as guarantors. The New Debt Facility Agreement contains various customary representations and undertakings (including a financial covenant).
The New Debt Facility Agreement and any non-contractual obligations arising out of or in connection with it are governed by English law.
On 4 June 2018, DS Smith entered into an equity CNMV guarantee agreement (the "Equity CNMV Guarantee Agreement") with Citibank Europe plc, UK Branch, Goldman Sachs International and J.P. Morgan Securities plc as the equity CNMV guarantee issuing banks (the "Equity CNMV Guarantee Issuing Banks").
Pursuant to the Equity CNMV Guarantee Agreement, the Equity CNMV Guarantee Issuing Banks will, subject to the satisfaction of certain conditions precedent by DS Smith, issue guarantees in favour of the CNMV in a maximum amount equal to the Rights Issue Proceeds (the "Equity CNMV Guarantees"). The CNMV will only be entitled to call upon the Equity CNMV Guarantees where DS Smith fails to fund the consideration for the Acquisition. The Company shall be required to place the Rights Issue Proceeds in an account which is subject to certain conditions such that, where the CNMV calls upon the Equity CNMV Guarantee Issuing Banks to make a payment under an Equity CNMV Guarantee (and in certain other circumstances), the Equity CNMV Guarantee Issuing Banks shall have access to such funds.
DS Smith has received Irrevocable Undertakings which are binding in all circumstances from certain members of the Isidro family, including the Executive Chairman, the Executive Vice Chairman and two further Board members of Europac, and two further key shareholders, to accept the Acquisition, in aggregate covering a total of 52,430,671 Europac shares and representing approximately 52.83 per cent. of the entire share capital of Europac on the Latest Practicable Date. In particular, the Irrevocable Undertakings commit all the relevant shareholders to accept the Acquisition in respect of such Europac shares as are held by each of them within the first five stock exchange trading days of the term for acceptance of the Proposed Offer (even in the event of competing takeover bids which offer a consideration higher than the Offer Price). The Irrevocable Undertakings also commit the Isidro family shareholders and other key shareholders to, inter alia, exercise (or, where applicable, procure the exercise of) all rights attaching to their holdings of the Europac shares (or where such shareholders are directors of the Europac Board, to exercise all of their rights and powers in relation to Europac) to support the success of the Acquisition. The Irrevocable Undertakings also contain customary provisions in respect of the shareholders who are also members of the Europac Board, relating to conduct of Europac's business prior to completion, assistance with provision of information and satisfaction of the conditions of the Acquisition.
The terms of the Irrevocable Undertakings are more fully described at page 45 (Irrevocable Undertakings), below.
The Board of Europac has committed that it will not cancel, and will procure acceptance of the Proposed Offer, in respect of all treasury shares held by Europac, which currently number 6,090,000 representing 6.14 per cent. of the entire share capital of Europac, subject to further assessment of the Proposed Offer on the basis of the documentation to be prepared by DS Smith and to be approved by the CNMV, as well as taking into account any advice received from its legal or financial advisers. Such acceptance must be procured by the date on which the Europac board publishes its formal report on the Acquisition, providing that such report expresses a favourable opinion on the Acquisition, there is no higher competing offer and that circumstances have not materially negatively changed by that date.
On 4 June 2018, DS Smith and Europac entered into a break fee agreement ("Break Fee Agreement") pursuant to which:
The Break Fee Agreement contains customary provisions relating to conduct of business prior to completion, assistance with provision of information and satisfaction of the conditions of the Proposed Offer, including agreement by Europac not to modify the share capital of Europac in any way, including by increasing or decreasing the number of issued shares by way of bonus issue or cancellation of treasury stock (subject to fiduciary duties).
The Break Fee Agreement also includes an obligation on Europac to tender all the Europac Shares that Europac holds in treasury by not later than the date when the Europac Board publishes its report on the Proposed Offer, and not to revoke such acceptance, all the above subject to fiduciary duties and to further assessment of the Proposed Offer on the basis of the Prospectus, as well as taking into account any advice received from Europac's legal or financial advisers, and providing that: (i) the report referred to above contains a favourable opinion of the Proposed Offer, (ii) there is no competing offer; and (iii) circumstances have not materially negatively changed.
The Break Fee Agreement has been executed by Mr. Enrique Isidro Rincón in the name and on behalf of Europac, further to the resolutions passed by the Europac Board at a meeting held on 30 May 2018, and by Mr. José Miguel Isidro Rincón, Mr. Enrique Isidro Rincón and Mr. Fernando Isidro Rincón in their capacity as Europac Shareholders.
The Board considers the dividend to be an important component of shareholder returns and, as such, has a policy to deliver a progressive dividend, where dividend cover is between 2.0 and 2.5 times, through the cycle.
The New Ordinary Shares, when issued and fully paid, will rank pari passu in all respects with the Existing Ordinary Shares, including the right to receive dividends, which includes the final dividend for the financial year ended 30 April 2018.
Further details on DS Smith's dividend policy can be found in paragraph 10 of Part VI (Additional Information) of this Circular.
As announced at the pre-close trading update provided on 1 May 2018, DS Smith delivered a strong performance in its financial year to 30 April 2018 with continuing box volume growth, successful ongoing input cost recovery and good momentum in all regions. Since the start of the current financial year, DS Smith Group's performance has continued to be in line with management expectations.
Since the completion of the acquisition of Interstate Resources in August 2017, financial performance of the business has been materially better than the prior year with integration ahead of plan. As a result, DS Smith management have raised cost synergy expectations to an annualised rate of USD 35 million by the third full year of ownership, as previously communicated.
On 9 May 2018, Europac published its consolidated financial statements for the quarter ended 31 March 2018. On a consolidated basis and relative to performance in the first quarter of 2017, Europac's revenues grew 12 per cent. to €235 million, Consolidated EBITDA grew 59 per cent., to €49 million, and Consolidated EBITDA margins improved by 620bps to 21 per cent.
Since 31 March 2018, Europac has continued to trade in line with the expectations of Europac's management.
No changes will be made to the DS Smith Board as a result of the Acquisition, and the DS Smith Board will continue to comprise the Chairman, two Executive Directors (the Group Chief Executive and the Group Finance Director) and an expected six independent Non-Executive Directors. The Board will continue to adhere to the UK Corporate Governance Code.
A side letter has been entered into between DS Smith and Mr. José Miguel Isidro Rincón, Mr. Enrique Isidro Rincón and Mr. Fernando Isidro Rincón, the executive directors of Europac. Subject to the terms of the side letter, the service agreements of the executive directors shall be terminated on completion of the Acquisition.
It is expected that all of the directors of Europac will resign from their offices on completion of the Acquisition.
The Europac Group has high-quality employees and an experienced management team which is expected to contribute further to the success of the Enlarged Group following Completion. The Board intends to respect the existing rights of Europac Group employees.
The organisational structure of the Enlarged Group will be established with the intention of maximising available cost synergies and benefits.
The Directors believe that the Acquisition will:
3 This should not be construed as a profit forecast or interpreted to mean that the future earnings per share, profits, margins or cashflows of the DS Smith Group will necessarily be greater than the historic published figures.
The Directors also believe that, following the Acquisition, performance will be consistent with DS Smith's stated medium-term targets.
The Proposed Offer is conditional upon, among other things, the Shareholders' approval of the Resolution being obtained at the General Meeting. Accordingly, you will find set out at the end of this Circular a Notice of General Meeting convening a General Meeting to be held at 11.00 a.m. on 10 July 2018 at Melia White House, Albany Street, London NW1 3UP.
At the General Meeting, the Resolution will be proposed to approve the Acquisition.
A summary of the Resolution is set out below. The full text of the Resolution is included in the Notice of General Meeting, which is set out in Part VIII of this Circular.
The Resolution will be proposed as an ordinary resolution requiring a simple majority of votes in favour.
The Resolution proposes that the Acquisition, pursuant to the terms and subject to the conditions contained in the offer document to be approved by the CNMV, be approved and the DS Smith Directors be authorised to take all steps and enter into all agreements and arrangements necessary or desirable to implement the Acquisition.
If the Resolution is not passed, the Acquisition will not complete.
Shareholders should be aware that it is possible that the Acquisition could fail to complete. The possibility of the Acquisition failing to complete is explained further in Part III (Principal terms and conditions of the Proposed Offer) of this Circular.
For a discussion of the risks and uncertainties which you should take into account when considering whether to vote in favour of the Resolution, please refer to Part II (Risk Factors) of this Circular.
Outstanding options and awards granted under the Employee Share Plans may be adjusted in accordance with the rules of the relevant Employee Share Plan for any effect the Rights Issue may have on those options and awards. Participants in the Employee Share Plans will be contacted separately with further information on their rights and how their options and awards will be affected by the Rights Issue.
You will find enclosed with this Circular a Form of Proxy for use at the General Meeting. Whether or not you intend to be present at the General Meeting in person, it is important that you complete and return the Form of Proxy in accordance with the instructions printed on it to Equiniti, Aspect House, Spencer Road, Lancing, West Sussex BN99 6DA so as to arrive no later than at 9.00 a.m. on 6 July 2018. Completion and return of the Form of Proxy will not preclude you from attending the General Meeting in person, if you so wish and are entitled.
You may also submit your proxies electronically using your investor code detailed on the Form of Proxy. If you hold shares in CREST, in order for a proxy appointment by means of CREST to be valid, the appropriate CREST message (a "CREST Proxy Instruction") must be properly authenticated in accordance with Euroclear's specification and must contain the information required for such instructions, as described in the CREST Manual. The message must be transmitted so as to be received by the Registrar (ID RA19) by 9.00 a.m. on 6 July 2018. For this purpose, the time of receipt will be taken to be the time (as determined by the timestamp applied to the message by the CREST applications host) from which the Registrar is able to retrieve the message by enquiry to CREST in the manner prescribed by CREST.
Shareholders wishing to appoint a proxy online can do so by visiting www.sharevote.co.uk using the Voting ID, Task ID and Shareholder Reference Number printed on the enclosed Form of Proxy. Members who have already registered with the Registrar's online portfolio service Shareview can appoint a proxy by logging into their profile at www.shareview.co.uk using their usual user ID and password. Once logged in, members should click "View" on the "My Investments" page, click on the link to vote and then follow the on-screen instructions.
Your attention is drawn to the further information set out in Part VI (Additional Information) of this Circular. Shareholders should read the whole of this Circular and not just rely on the summarised information set out in this letter.
The Board considers that the Acquisition and the Resolution are in the best interests of DS Smith and the Shareholders as a whole. Accordingly, the DS Smith Board unanimously recommends that Shareholders vote in favour of the Resolution to be proposed at the General Meeting, as all Directors intend to do (or procure to be done, as the case may be) in respect of their own beneficial shareholdings, which in aggregate amount to 2,140,325 Ordinary Shares, representing approximately 0.21 per cent. of the total number of voting rights in the Company as at the Latest Practicable Date.
Yours faithfully, for and on behalf of DS Smith Plc
Gareth Davis
Chairman
A number of factors affect the operating results, financial condition and prospects of the DS Smith Group and, if the Acquisition is completed, will affect the Enlarged Group. This Part II (Risk Factors) addresses the risks known to DS Smith and the DS Smith Directors which are material risk factors to the Acquisition, will be material new risk factors to the DS Smith Group as a result of the Acquisition, or are existing material risk factors to the DS Smith Group which will be impacted by the Acquisition. However, these should not be regarded as a complete and comprehensive statement of all potential risks and uncertainties. Additional risks and uncertainties currently unknown to DS Smith and the DS Smith Directors, or which DS Smith and the DS Smith Directors currently deem immaterial or deem material to DS Smith but which will not result from or be impacted by the Acquisition, may also have a material adverse effect on the business, financial condition, operating results or prospects of the DS Smith Group and the Enlarged Group. If any or a combination of the following risks materialise, there may be a material adverse effect on the Enlarged Group's business, financial condition, operating results and prospects. In such circumstances, the market price of the Company's Ordinary Shares could decline and Shareholders may lose all or part of their investment. The information given is as of the date of this Circular and, except as required by the FCA, the London Stock Exchange, or any other applicable law, will not be updated. Shareholders should consider carefully the risks and uncertainties described below, together with all other information contained in this Circular.
You should consider carefully the risks and uncertainties described below, together with all other information contained in this Circular (including any information incorporated into this Circular by reference) before deciding whether or how to vote in respect of the Resolution. The risks described below are not set out in any order of priority.
References in this Part II (Risk Factors) to: (i) the acquisition of a company or a business, or an acquired company or business, shall include references to the acquisition of an interest in such business or company; and (ii) the Enlarged Group shall be construed as the DS Smith Group and the Europac Group together if the Acquisition is completed or the DS Smith Group if the Acquisition is not completed, as applicable.
Completion is conditional upon the satisfaction of certain conditions, being: (i) approval of the Acquisition by the Shareholders at a general meeting of the Company; (ii) clearance of the Acquisition under applicable EU competition laws (or to the extent that the EU Commission refers the Acquisition to the competent authorities of one or more Member States, the competition laws of those competent authorities' jurisdictions); and (iii) the tendering in acceptance of the Proposed Offer Europac Shares representing more than 50 per cent. of Europac's entire issued share capital. There can be no assurance that these conditions will be satisfied or waived, if applicable. To the extent that the Acquisition is cleared by the EU Commission (or following referral to the competent authorities of one or more Member States, such competent authorities), there can be no assurance that if a remedy is required in support of that clearance, any such remedy would not have a material adverse effect on the Enlarged Group. Even if all of the conditions to Completion are satisfied, the CNMV authorisation process in relation to the Proposed Offer may take a lengthy period to complete, which could delay the making of the Proposed Offer.
If these conditions are not satisfied or waived, the Acquisition will not take effect, either at all or in the manner currently envisaged. If Completion does not occur, DS Smith would nonetheless be required to pay significant fees and other costs incurred in connection with the Acquisition (which would include financing, financial advisory, legal and accounting fees and expenses). If Completion fails to occur as a result of the Shareholders not approving the Resolution at the General Meeting, DS Smith will be required to pay a fee of EUR 69.357 million under the terms of the Break Fee Agreement (except in certain limited circumstances).
The DS Smith Group has incurred and will incur significant transaction fees and other costs associated with completing the Acquisition, combining operations and seeking to achieve desired synergies. These fees and costs are substantial and include financing, financial advisory, legal and accounting fees and expenses. Additional unanticipated costs may be incurred in the integration of Europac into the Enlarged Group. Although the DS Smith Directors believe that the realisation of efficiencies related to the Acquisition will offset the integration and transaction costs over time, this net benefit may not be achieved in the near term, or at all.
The DS Smith Group is targeting annual run-rate pre-tax cost synergies of approximately EUR 50 million to be achieved by 30 April 2021 from procurement and operational efficiencies resulting from the Acquisition, and the Enlarged Group's financial planning and funding strategies are based in part on realising these synergies. Achieving the advantages of the Acquisition will depend partly on the rapid and efficient management and co-ordination of the activities of the DS Smith Group and the Europac Group, two businesses of considerable size that have functioned independently, with geographically dispersed operations, and with different business cultures and compensation structures. In addition, following the Acquisition, the loss of, or reduction in orders from, any of the Europac Group's largest customer accounts or other significant customer accounts or significant customer disputes regarding shipments, price, quality, or other matters may have a material adverse effect on the expected advantages and other benefits of the Acquisition.
Furthermore, the Acquisition and any uncertainty regarding the effect of the Acquisition could cause disruptions to the businesses of the Enlarged Group. These uncertainties may have a material adverse effect on the Enlarged Group's business and its operations and could cause customers, distributors, other business partners and other parties that have business relationships with the Enlarged Group to defer the consummation of other transactions or other decisions concerning the Enlarged Group's business, or to seek to change existing business relationships with these companies. Any of these factors could prevent the synergy benefits from the Acquisition from materialising, or they may be materially lower than estimated, or may materialise over a longer timeframe. In addition, the costs of funding these synergies may exceed expectations. Such eventualities may have a material adverse effect on the financial position of the Enlarged Group, and, ultimately, the trading price of the Enlarged Group's Ordinary Shares.
Upon Completion, a significant portion of the difference between the purchase price, Europac's net assets at that date and the allocation of costs of the combination to the assets acquired and the liabilities assumed, will be recorded as goodwill. In addition, other intangible assets will be recorded as a result of the purchase price allocation. While the DS Smith Group believes the combination of Europac with DS Smith is strategically and financially compelling, economic, regulatory, competitive, contractual or other factors may result in the Enlarged Group meeting with unexpected difficulties. Furthermore, the business of the Enlarged Group or the synergies expected from the Acquisition may not develop as expected. If any of these factors result in the value of Europac proving to be less than the consideration paid by DS Smith, accounting rules would require that the DS Smith Group reduce the carrying value of that investment and recognise an impairment charge, which would reduce the DS Smith Group's reported assets and statutory earnings, possibly materially, in the year that the impairment charge is recognised.
The future success of the Enlarged Group will in part be dependent upon the successful retention and motivation of key members of the Europac Group's management and staff. Prior to Completion there will be no contractual relationship between DS Smith and Europac management in their role as management. Failure to retain certain individuals may affect the Enlarged Group's ability successfully to manage the Enlarged Group. Any failure to retain certain individuals may have a detrimental effect on the future performance of the Enlarged Group.
1.6 DS Smith will have foreign exchange risk related to the purchase price for the Acquisition The Acquisition will be funded by a combination of the net proceeds of the Rights Issue, the utilisation of the New Debt Facility and existing cash resources. The proceeds of the Rights Issue are denominated in pounds sterling. However, the DS Smith Group may decide to enter into currency hedges in order to limit its total exposure in respect of the Acquisition to adverse currency movements. There could be a period of several months between the date of the Offer and DS Smith's obligation to acquire shares in Europac for which the payment will be made in Euro. During this time, the DS Smith Group will be exposed to foreign exchange risk.
The Acquisition has required, and will continue to require, substantial amounts of both time and focus from the DS Smith Group's management teams, which could divert the attention of those teams from maintaining standards of operation in their respective businesses in the existing DS Smith Group. If the Acquisition is approved, following the Acquisition, the Enlarged Group's management team will also be required to devote significant attention and resources to integrating the Europac Group. There is a risk that the challenges associated with managing the Acquisition will result in the attention of the management teams of the Enlarged Group being diverted to deal with those challenges and that consequently the underlying businesses will not perform in line with expectations.
The Enlarged Group will present its financial statements in pounds sterling and will have a significant portion of Euro-denominated assets, liabilities and earnings as a result of the significant assets and revenues and activities of the Europac Group in the EU. The operational and financial results, as well as the equity of the Enlarged Group, will therefore be more sensitive to fluctuations in the exchange rate of the pound sterling against the Euro than they are currently. There has been a high degree of volatility in exchange rates with the pound sterling since June 2016 when there was a vote to leave the EU in a national referendum, with continued volatility following the UK general election in June 2017. A depreciation of the Euro relative to the pound sterling could have an adverse impact on the consolidated financial condition and results of operations of the Enlarged Group.
The DS Smith Group's and the Europac Group's packaging products are generally sold to manufacturers and other intermediaries in both the consumer goods and industrial sectors. Since the markets for packaging products in many industrialised countries are generally mature, there is a significant degree of correlation between economic growth and demand for packaging products, especially with respect to customers outside the FMCG sector. As a result, the DS Smith Group's and the Europac Group's performance depends to a significant extent on a number of macroeconomic factors which impact consumer and commercial spending, all of which are outside their control and difficult to predict. Factors which impact on disposable consumer income and the level of industrial activity include, among other things, GDP growth, unemployment rates, consumer and business confidence, political, social and industrial unrest, the availability and cost of credit, interest rates, taxation, regulatory changes, commodity (including oil and gas) and utility prices and terrorist attacks. These factors could have a material adverse effect on the Enlarged Group's business, financial condition, results of operations or prospects.
The economic and political environment in the EU has contributed to on-going market uncertainty and a sustained period of low economic growth in Europe, with real GDP growth within the EU staying below 2.5 per cent. since 2008. The economic conditions in the Enlarged Group's markets are difficult to predict and there can be no assurance as to the level of future economic growth, which is a factor affecting the demand for certain of the DS Smith Group's and the Europac Group's products. Accordingly, the demand for certain of the Enlarged Group's products is likely to be adversely affected by a period of slow economic growth, which could have a material adverse effect on the Enlarged Group's business, financial condition, results of operations or prospects.
Uncertainties and instability in global market conditions have also been further affected by the UK's intended departure from the EU. On 29 March 2017, the UK triggered Article 50 of the Lisbon Treaty, formally beginning the negotiations between the UK and the EU with respect to the UK's exit from the EU, currently expected to occur by 29 March 2019. Until these negotiations have concluded however, and possibly for some time after, the impact of the UK's exit from the EU on the UK and the rest of the EU will be unclear. Political and economic uncertainty in the UK and the EU has and may continue to impact the Enlarged Group's operations. The DS Smith Group has significant operations in the UK and throughout the EU. For the 2018 Financial Year, the DS Smith Group's corrugated packaging activities in the UK and in the rest of Europe represented approximately 19 per cent. and 69 per cent., respectively, of the DS Smith Group's revenue. The majority of the Europac Group's activities are in Europe and its functional accounting currency is the Euro, as a majority of its revenue is denominated in Euros. The Enlarged Group's operations may be negatively impacted in the event that the UK's exit from the EU does not maintain parity rights for the UK and EU companies or the current regulatory framework in one or both of those markets is modified. The referendum in the UK has also given rise to calls for the governments of other EU member states to consider withdrawal, which creates further uncertainty as to the regulatory framework existing between European markets.
Recent social and political movements calling for the secession of Catalonia from Spain have impacted, and may continue to impact, the DS Smith Group's and the Enlarged Group's operations. The DS Smith Group has a significant presence within Spain, including six locations within Catalonia. The Europac Group is headquartered in Madrid, with six facilities, being over a quarter of the Europac Group's facilities, being situated in Spain. In particular, Europac operates a packaging factory in Torrelavit, Catalonia. As a result, following the Acquisition, the Enlarged Group would be more exposed to continued economic and political disturbance in the region. Considerable uncertainty exists regarding the outcome of the secession movement in Catalonia, which could result in changes to legislation, policies, and other factors, and such uncertainty remains following the results of the regional elections that took place in Catalonia on December 21, 2017. Continued political uncertainty relating to the secession movement could also affect economic growth in Catalonia, or across Spain more broadly, and this could have a material adverse effect on the Enlarged Group's profitability.
There is continuing uncertainty over the long-term effects of the expansionary monetary and fiscal policies that have been adopted by the central banks and financial authorities of a number of the world's economies, including those of the UK and of the EU. Certain developments may occur from this policy, such as businesses becoming over-leveraged due to the availability of cheaper financing, or the perception that these developments could occur, which may have a material adverse effect on global economic conditions and the stability of global financial markets, and may significantly reduce global market liquidity and restrict the ability of key market participants to operate in certain financial markets.
In the 2018 Financial Year, the DS Smith Group's cost of sales amounted to £2,992 million, the largest component of which was paper, plastics and other raw materials. During the financial year ended 31 December 2017, the Europac Group consumed €427.8 million of raw materials and consumables recognised as cost of goods sold. The Enlarged Group's raw material costs will be subject to variations in supply and demand which result in volatility in their pricing.
The Enlarged Group will continue to be exposed to fluctuations in the cost and availability of raw materials despite their expanded paper manufacturing operations (including those acquired in the Acquisition), since the Enlarged Group will remain a net purchaser of CCM from third-party suppliers. An important driver of recovered paper prices, a raw material used to produce CCM, is the balance of supply and demand for paper products in general. The price of recovered paper is also influenced by overseas demand, principally from China, which is largely driven by economic growth in China, as well as the relative strength of the Euro and the US dollar (which impacts demand from continental Europe and the United States, respectively). This exposure could be increased if there was disruption to the Enlarged Group's recycling operations, which collect and trade waste paper to supply certain of its paper mills. The DS Smith Group achieves this through contracts with major suppliers of waste paper and the collection of waste paper from smaller suppliers through its network of collection depots. Any significant increase in costs or disruption to the Enlarged Group's recycling operations could have a material adverse effect on the operation of the Enlarged Group's paper mills and lead to a material adverse effect on the Enlarged Group's business, financial condition, results of operations or prospects.
In 2017, the Chinese government banned the import of certain recovered paper qualities, as well as limiting import licences for paper manufacturers. As a result, recovered paper supplies across Europe have increased, leading to a corresponding drop in prices within Europe. The impact of this change, which amounts to a structural change in the raw material market, continues to be felt throughout 2018.
A proportion of the DS Smith Group's customer contracts contain price adjustment clauses allowing the DS Smith Group to pass increased raw material costs on to its customers. However, not all of the DS Smith Group's agreements contain these clauses and these clauses may not in all cases be effective in offsetting the DS Smith Group's increased costs. In addition, where the DS Smith Group is able to raise prices there is generally a lag between the time the DS Smith Group's raw material costs increase and the time it realises increased pricing from customers. As a result, margins may be reduced for a period of time until price increases are achieved to recover input cost increases. Any inability to recover input cost increases could have a material adverse effect on the Enlarged Group's business, financial condition, future growth prospects and results of operations.
Each of the DS Smith Group and the Europac Group has significant exposure to the cost of energy. The DS Smith Group's total energy costs were approximately £207 million in the 2018 Financial Year, or approximately 4 per cent. of the DS Smith Group's total operating costs for the period. The Europac Group's energy costs are a component of the Europac Group's other operating expenses for the financial year ended 31 December 2017 which rose 10.1 per cent. against the financial year ended 31 December 2016. The DS Smith Group's and the Europac Group's transportation costs are also impacted by energy costs since a key component of transportation costs relates to the cost of petrol.
The Enlarged Group's energy costs could increase as a result of regulatory changes relating to its compliance with the EU Emission Trading Scheme Directive (the ETS). The DS Smith Group and the Europac Group's European paper mills are subject to the ETS. The paper industry has been granted status as a so-called "carbon leakage" sector, and the DS Smith Group's European mills therefore receive a portion of CO2 emission certificates for free. Even with these certificates, there is considerable risk that in the future the Enlarged Group's costs will significantly increase and will not be recovered through higher prices for the Enlarged Group's end products.
The DS Smith Group seeks to manage the risk of increasing energy costs through its energy procurement group, which aims to reduce the volatility of energy costs and to provide the DS Smith Group with a degree of certainty over future energy costs by hedging energy costs with suppliers and financial institutions. If the Acquisition is completed, the DS Smith Group intends to procure the hedging of energy costs for the Europac Group. However, there can be no certainty that the Enlarged Group's energy cost hedging strategy will continue to manage the impact of energy prices in the future. Volatile and increasing energy prices or a failure in its hedging approach could have a material adverse effect on the Enlarged Group's business, financial condition, results of operations or prospects.
The packaging industry is characterised by commoditisation of products, a high level of price competition and cyclicality, as well as other competitive factors including innovation, design, quality and service. In addition, the packaging industry is also highly fragmented. To the extent that any of the Enlarged Group's competitors are more successful with respect to any key competitive factor either generally or in a particular region, the Enlarged Group's business, results of operations and financial position could be adversely affected. Furthermore, the Group has recently seen competitors in both Europe and the United States convert graphic and newsprint machines into CCM machines, which can reduce the lead time it may take the Group's competitors to increase their production capacity. Such increases in production capacity can also lead to downward pricing pressure. Pricing pressure could also arise from, among other things, limited demand growth and existing overcapacity in a market, price reductions by competitors, the ability of competitors to capitalise on their existing economies of scale and create excess product supply, the consolidation of competitors or customers, the ability of competitors to operate or successfully relocate or open production facilities in countries where production costs are lower than those in which the Enlarged Group operates and the access of competitors to new technology which the Enlarged Group does not possess.
Competition could be intensified due to a major development or breakthrough in packaging technology or materials which would create a substitute for one or more of the Enlarged Group's key product lines, due to companies developing new cost structures (including through consolidation or relocation to countries with lower material and processing costs), due to competitors establishing co-operative relationships or alliances among themselves or with third parties to increase the competitiveness of their products, or through advances in existing fibre technologies or the development of new fibre technologies. To the extent the Enlarged Group's competitors patent any such technologies, the Enlarged Group may be less able to effectively compete with them. With respect to fibre technologies, the packaging and paper industries have traditionally used wood and recycled fibres in its products, but these industries are increasingly exploring alternative fibres to use in packaging and paper products. The Enlarged Group may be unable to anticipate new fibre technology trends or develop improvements to its current fibre technologies and/or offer new fibre technology substitutes to support changes to customer products and services. Furthermore, the success of the Enlarged Group's ability to keep up with fibre technology developments may be affected by the development efforts of its competitors, which may have more financial and other resources to better ascertain technology trends, customer preferences, and changing business expectations or models. These and other competitive pressures may prevent the Enlarged Group from competing successfully against current or future competitors. Such competitive pressures could have a material adverse effect on the Enlarged Group's business, financial condition, results of operations or prospects.
Furthermore, CCM cannot generally be differentiated by producer, and this standardisation has led to intense price competition resulting in the cyclicality historically observed in the market for CCM. This could in turn lead to a reduction in the Enlarged Group's market share as well as lower product prices for its packaging products for which CCM is the principal production input, both of which could reduce the Enlarged Group's revenue and have a material adverse effect on the Enlarged Group. Although the DS Smith Group and the Europac Group have sought to differentiate a number of their products, the DS Smith Group and the Europac Group still face significant pressure to reduce its per unit cost to achieve commercially acceptable returns, including through achieving economies of scale, lower input costs (including raw materials, energy, transport and labour) and increasing efficiency. In circumstances where the Enlarged Group is unable to adjust its cost base comparable to its competition in these markets or sufficiently differentiate its products, pricing pressure could have a material adverse effect on the Enlarged Group's margins and the profitability of the relevant business and its market share.
The paper industry has historically been characterised by a cyclical pattern with periodic overcapacity and resulting pressure on the pricing of packaging products. This cyclicality arises, in part, from the capital intensity of facilities such as paper mills (which generally results in continued production by paper mills as long as paper prices are sufficient to cover their marginal costs), the long lead time between the planning and completion of a new mill and the fact that additions of CCM manufacturing capacity, either by manufacturing sites located within CCM markets or imported into CCM markets by competitors, can be large relative to the overall demand for the product. Consequently, the paper industry has from time to time experienced periods of substantial overcapacity and there can be no assurance that this will not recur. In the absence of sufficient economic growth to generate increased demand or the closure of facilities (either temporarily or permanently) to mitigate the effect, new capacity can cause a period of regional overcapacity which may lead to downward pricing pressure. In periods of overcapacity, industry participants may stop operating certain of their production facilities periodically to reduce inventory levels. The Europac Group's business model is based on vertical integration across each of its businesses – including its paper business. The Enlarged Group would be more sensitive to overcapacity within the paper industry as a result, and in the event that the Enlarged Group reduces or stops production at its mills for any significant length of time whilst its competitors continue production at high levels, the Enlarged Group's sales volumes could be adversely affected without any significant offsetting benefit of improved prices in the market.
These adverse effects could be further exacerbated in the event that producers in certain markets experience overcapacity within their own local and regional markets and seek to increase their level of exports or sales into those markets within which the Enlarged Group operates and do so at pricing levels which are uneconomical for the Enlarged Group. Any of the foregoing could have a material adverse effect on the Enlarged Group's business, financial condition, results of operations or prospects.
The DS Smith Group's vision is to be the leading supplier of sustainable packaging solutions on a broader geographic basis. The Enlarged Group may not be able to implement its growth strategy if its acquisition plans are unsuccessful and it fails to support its Pan-European and multi-national FMCG customers as these companies seek to expand and become more global in their supply chain. Furthermore, the DS Smith Group's Pan-European and multi-national FMCG customers may not increase their purchase of the DS Smith Group's products as the DS Smith Group expands into new geographic markets. A key element of the DS Smith Group's growth strategy is to integrate acquired operations, and the Enlarged Group's ability to realise the expected benefits from future acquisitions depends in large part on its ability to integrate the new operations in a timely and effective manner. There can be no assurance that the Enlarged Group will be successful in implementing its growth strategy, including integrating newly acquired businesses, including the Europac Group.
Furthermore, the Enlarged Group's strategy depends on its ability to identify and acquire suitable assets at desirable prices and in suitable locations. Furthermore, consolidation in certain geographic markets targeted by the Enlarged Group could hinder further growth through acquisitions due to anti-trust or other regulatory restrictions. There can be no assurance that it will be successful in identifying or purchasing suitable assets in the future. If the Enlarged Group fails to make further acquisitions, it may not be able to continue to grow in the long term at the same pace as its Pan-European and multinational FMCG customers or adequately support those customer's needs if they do seek to integrate, expand and become more global in their supply chain. There can be no assurance that it will successfully manage its strategy to grow both organically and by acquisition if there is a sustained material reduction in the demand for the Enlarged Group's products. Additionally, acquisitions and similar arrangements involve a number of risks, including potential disruptions to the DS Smith Group's on-going business and internal environment, potential customer overlap or loss of customers, additional financial costs associated with financing such transactions, potential assumption of liabilities of the acquired business, potential difficulties in recovering any sums from debtors and unexpected tax or litigation liabilities or regulatory requirements. Any difficulties or delays in achieving successful integration of new acquisitions could prevent the Enlarged Group from successfully implementing its growth strategy and could have a material adverse effect on its business, financial condition, results of operations or prospects.
General economic or industry-wide conditions may adversely affect both FMCG and industrial sector growth rates and productive capacities resulting in an increase in raw material and production costs or a decline in volumes or prices. Operational difficulties, key personnel turnover, competition and delays in implementing initiatives or inadequacy of management forecasts in guiding initiatives could also have a materially adverse effect on the Enlarged Group's ability to implement its growth strategy. Underpinning the Enlarged Group's growth strategy is its focus on service and product innovation to capture market share. The Enlarged Group's growth potential depends in large part on its ability to identify and develop new products or new services or uses for existing products that address its customers' unmet needs. However, balancing current growth and investment for the future remains a challenge given the markets in which the DS Smith Group operates. The Enlarged Group's on-going investments in new product introductions and innovations may also exceed corresponding revenue growth. Additionally, the Enlarged Group's research and development investment plans and resources may not be correctly matched between the consumer preferences of its Pan-European and multinational FMCG customers and the markets in which it operates. Failure to invest in the right platforms, product ranges, geographic markets or licensing opportunities to deliver robust innovation and a service pipeline could have a material adverse effect on the Enlarged Group's innovation growth strategy. It is not possible to predict the timing or impact of the introduction of products and innovations from competitors or their possible effect on the Enlarged Group's growth plans.
The inability of the Enlarged Group to implement its growth strategy successfully could have a material adverse effect on the Enlarged Group's business, financial condition, results of operations or prospects.
The DS Smith Group has established certain medium-term targets relating to its consolidated results of operations in the next few years. These medium-term targets relate to the DS Smith Group's organic corrugated box volume growth, return on sales, return on average capital employed, ratio of net debt to EBITDA and cash conversion. See section 2 of Part I (Letter from the Chairman) of this Circular. These targets assume, among other things, resilience and sustainability in the DS Smith Group's business model and the DS Smith Group winning market share in its existing markets and expanding into new markets. The DS Smith Group's ability to achieve its targets will depend upon whether these assumptions are accurate, as well as upon a number of factors outside of its control. These include significant business, economic and competitive uncertainties and contingencies, as well as actions taken by counterparties. These targets have been developed based upon assumptions with respect to future business decisions and conditions that are subject to change, including the DS Smith Group's ability to successfully execute its strategy and product development plan, as well as growth in the markets in which the DS Smith Group operates. As a result, the DS Smith Group's actual results may vary significantly from the targets set out in this Circular, and those variations may have a material adverse effect on the DS Smith Group's business, results of operations, financial condition and prospects.
Changes in customer preferences affect the demand for packaging and paper products in general, and in particular demand for specific grades of packaging and paper products. Some of the most significant changes in customer preferences relating to paper usage have included interest in environmentally friendly products such as recycled packaging. An inability to continue to offer innovative and environmentally friendly products to meet customer needs and a failure to anticipate and satisfy new customer preferences, including those that may develop as a result of advances in fibre technologies, may have a material adverse effect on the Enlarged Group's business, financial condition, results of operations or prospects.
In recent years, online shopping and e-commerce have been a significant growth opportunity for the DS Smith Group's business. Online shopping and e-commerce have increased the demand for packaging due to the requirement for packaging that suitably protects the product through the supply chain and can be re-used for returns, and at the same time markets the product or brand. To the extent that demand in this area decreases or the Enlarged Group does not identify or effectively respond to consumers' trends or preferences in this area, this could have a material adverse effect on the Enlarged Group's investments and/or initiatives aimed at developing the range of packaging products and services that it offers customers to support sales through the full retail spectrum. Any delay or failure of the Enlarged Group to adequately or effectively respond to changing demand, consumer tastes, preferences and shopping patterns could negatively affect the Enlarged Group's relationship with its customers, the demand for the products it sells and the Enlarged Group's market share and overall growth.
The DS Smith Group's main products, including corrugated containers and solid board packaging, and the Europac Group's products compete with other forms of packaging. There can be no assurance that further substitution will not occur in this sector, other sectors or other regions in which the Enlarged Group operates, nor can there be any assurance that future packaging developments and trends will not drive further substitution. Any significant substitution away from paper-based packaging products may have a material adverse effect on the Enlarged Group's business, financial condition, results of operations or prospects.
The Enlarged Group will continue to be exposed to the translation of the results of overseas subsidiaries into its reporting currency, pounds sterling, as well as the impact of currency fluctuations on its commercial transactions denominated in foreign currencies. For the 2018 Financial Year, the impact of foreign exchange translation increased reported revenue by £143 million or 3 per cent. over the year as a whole due to the weakening of the pound sterling against the Euro. Similarly, for the 2017 Financial Year, the impact of foreign exchange translation was £432 million, or 11 per cent. over the year as a whole. The Europac Group's reporting currency is the Euros and its commercial transactions are also primarily in Euros. As a result, if the Acquisition is completed, the Enlarged Group will face increased translation exposure as well as a significant increase in its exposure to the EUR as a result of commercial transactions. Adverse movements in foreign exchange rates relating to foreign currencydenominated assets and liabilities and transactions could have a material adverse effect on the Enlarged Group's business, financial condition, results of operations or prospects.
The success of the DS Smith Group depends, and of the Enlarged Group will continue to depend, on the efforts, abilities, experience and expertise of its executive leadership and senior management teams, and on recruiting, retaining, motivating, effectively communicating with and developing highly skilled and competent people at all levels of the organisation. This includes retaining certain key employees of the Europac Group following the Acquisition (see also "The Enlarged Group may need to rely on certain key management for the successful operation of the Enlarged Group"). There can be strong competition for personnel from other companies and organisations and there may at any time be shortages in the availability of appropriately skilled people at all levels within the Enlarged Group. While the DS Smith Group has employment or service contracts with its key executives and technical personnel, and has in place schemes which provide for share grants (or equivalent cash-based awards) to incentivise key executives and technical personnel and intends to enter into suitable arrangements with key employees of the Europac Group in connection with the Acquisition, it cannot guarantee the retention of such key executives and technical personnel. The failure to retain or recruit additional or substitute senior managers or other key employees for the Enlarged Group could hurt the Enlarged Group's business, financial conditions, operating results or prospects.
Certain parts of the DS Smith Group's and the Europac Group's business are dependent on the availability of skilled and semi-skilled employees. A shortage of labour owing to the Enlarged Group's inability to attract and retain such employees could have a material adverse effect on the Enlarged Group's business, financial condition, operating results or prospects.
As at 30 April 2018, as adjusted to give effect to the Acquisition, the Enlarged Group would have had net debt of approximately £2.31 billion as per Part V (Unaudited pro forma financial information relating to the Enlarged Group) of this Circular.
The Enlarged Group's debt service obligations could have a material adverse effect on the Enlarged Group's operations, including for example:
The Enlarged Group's financing arrangements contain financial and other restrictive covenants that limit the way in which the DS Smith Group operates its business, including, for example, restrictions on, among other things, the DS Smith Group's ability to:
Any of the above may have a material adverse effect on the Enlarged Group's business, financial condition, results of operations or prospects.
The revenues of the DS Smith Group and the Europac Group are dependent on the continued operation of its various manufacturing facilities. Operational risks include fire, floods or other natural disasters, equipment failure (including any failure of the DS Smith Group's information technology systems), failure to comply with applicable regulations and industry standards, raw material supply disruptions, labour force shortages or work stoppages, and events impeding, or increasing the cost of, transporting the DS Smith Group's products.
If the DS Smith Group or the Europac Group is unable to obtain timely replacements for damaged inventory or equipment, or if it is unable to find an acceptable third-party manufacturer as a substitute for the DS Smith Group's or the Europac Group's production facilities damaged by a catastrophic event, then major disruptions to production could result which would have a material adverse effect on the Enlarged Group's business, financial condition, results of operations or prospects. If certain equipment were to fail, the Enlarged Group may need to rely on sourcing products or materials from the open market that it would typically produce, which could increase costs significantly if the repair or replacements took some time to address. The DS Smith Group and the Europac Group carry both property insurance and business interruption insurance, but these may not be sufficient to cover certain damages or lost profits as a result of the disruption to production.
Whilst the manufacturing of certain products can be transferred to other sites or replaced with open market purchases, any disruption of the manufacturing processes could result in delivery delays, interrupt the production or even lead to a full cessation of production. The resulting loss of revenue and the impact on the Enlarged Group's relationships with its customers could be significant and may have a material adverse effect on the Enlarged Group's business, financial condition, results of operations or prospects.
The DS Smith Group's and the Europac Group's businesses require on-going capital investment to expand, maintain and upgrade existing facilities, to develop new facilities and to ensure compliance with new regulatory requirements. For the 2018 Financial Year, the DS Smith Group's gross capital expenditure was £347 million and the DS Smith Group had commitments to incur £56 million of capital expenditures. For the financial year ended 31 December 2017, the Europac Group's capital expenditure was €61.2 million and the Europac Group had commitments to incur €25.5 million of capital expenditures. Capital investment projects carry risks including: failure to complete a project within the prescribed project timetable; failure to complete a project to budget, failure of the project to perform according to prescribed operating specifications following its completion; and unforeseen changes in input costs may mean the business case for any such project is no longer justifiable. The DS Smith Group takes into account and will continue to take into account its working capital requirements in the planning of its current and future capital investment projects and the DS Smith Group is of the opinion that the working capital available to the DS Smith Group, the New Debt Facility, is sufficient for the short-term. If project challenges arise that could impact the availability of funds for capital investment projects, the DS Smith Group's medium-term capital investment projects could be delayed or postponed in order for the DS Smith Group to manage sufficient working capital for its requirements. Such delays or postponement could decrease the growth capital investments undertaken by the DS Smith Group in the medium-term, including to projects aimed at enhancing operational efficiencies, any of which could have a material adverse effect on the Enlarged Group's growth and on its business, financial condition, results of operations or prospects.
The DS Smith Group and the Europac Group are, and the Enlarged Group is expected to continue to be, subject to a wide range of environmental, tax and health and safety laws and regulations in all the jurisdictions in which it operates, including international, national, state and local laws and regulations. These requirements are complex, subject to frequent changes and have tended to become more stringent over time. There can be no assurance that the requirements of such laws and regulations will not change in the future or that the associated cost of compliance will not increase. Such cost increases could have a material adverse effect on the Enlarged Group's business, financial condition, results of operations or prospects.
The DS Smith Group and the Europac Group use, handle, store and dispose of hazardous materials in the course of their operations and production processes and may be subject to fines or clean-up liabilities for contamination at past and present operating sites under statutory regimes. Some environmental laws and regulations impose liability and responsibility on present and former owners, operators or users of facilities and sites for the clean-up of contamination at, or arising from, such facilities, without regard to causation or knowledge of contamination. Investigations in the future may lead to discoveries of contamination that the Enlarged Group is required to remedy or damage that may subject the Enlarged Group to claims. Closure of facilities may trigger compliance requirements that are not applicable to facilities that are operating.
Managing health and safety compliance are key priorities of the DS Smith Group and the Europac Group. In particular, due to the nature of the paper manufacturing process, paper mills tend to be inherently hazardous relative to the other types of facilities that the DS Smith Group and the Europac Group operates. The DS Smith Group currently operates 12 paper mills and if the Acquisition is completed, the Enlarged Group will operate 17 paper mills. The increase in the number of paper mills that the Enlarged Group operates as a result of the Acquisition could increase the degree of health and safety risk.
While the DS Smith Group has procedures to comply with applicable environmental and health and safety requirements, there can be no assurance that the Enlarged Group will be at all times in compliance with such requirements, that the Enlarged Group will not incur material costs or liabilities in connection with such requirements in the future (which costs and liabilities could increase as a result of the Acquisition) or that the Enlarged Group will be able to obtain and maintain all licences, consents or other permits necessary to operate the Enlarged Group's business. Similarly, there can be no assurance that the Enlarged Group will not experience an environmental spill or accident or discover or otherwise become liable for environmental contamination in the future (including such liability for contamination resulting from historical activities relating to properties or businesses that they have sold). Depending on the nature of the spill or accident, its location and the period during which it occurred, such incidents may not be covered by the Enlarged Group's insurance policies, since certain contaminants are typically excluded from insurance coverage available to the Enlarged Group in most of its markets and the Enlarged Group's insurance is subject to certain time limits. The Enlarged Group may incur significant expenditure in connection with the required remediation of past environmental conditions at both facilities that are currently owned and formerly owned including at the additional facilities of the Europac Group to be acquired under the Acquisition, and facilities previously owned by the Europac Group or its predecessors. The Enlarged Group's control mechanisms, on-going programmes and systems, and special initiatives in place for monitoring health and safety compliance may not always be successful in achieving their objectives of requiring all employees to comply with all relevant laws and regulations in the countries in which they operate. The Enlarged Group cannot be certain that employees always adhere to such policies and values. Furthermore, the Enlarged Group cannot completely prevent injury to employees or others, or other harms related to the use, handling, storage and disposal of hazardous material. In the event of future incidents, the Enlarged Group could be liable for any damages that may result, including potentially significant monetary damages for any civil litigation or government proceedings related to a personal injury claim. Failure to comply with environmental or health and safety laws may also damage the Enlarged Group's reputation.
Tax laws and tax rates in the markets in which the DS Smith Group or the Europac Group operates are subject to frequent changes and the Enlarged Group is exposed to the risk of changes in tax legislation and its interpretation, and increases in the rate of corporate and other taxes in the jurisdictions in which the Enlarged Group operates. The costs associated with compliance with these laws and regulations are substantial and possible future laws and regulations or changes to existing laws and regulations (including the imposition of higher taxes) could require the Enlarged Group to incur additional expenses or capital expenditures or result in restrictions on or suspensions of the Enlarged Group's operations. Any such cost increases could have a material adverse effect on the Enlarged Group's business, financial condition, results of operations or prospects.
The cost of compliance with, and any liabilities under, current and future laws and regulations relating to the environment, health and safety or tax laws could have a material adverse effect on the Enlarged Group's business, financial condition, results of operations or prospects.
Interest rate risk is the risk that the Enlarged Group will sustain losses from adverse movements in interest bearing assets and liabilities. As at 30 April 2018, the DS Smith Group had £1.97 billion in interest bearing loans and borrowings of which £106 million of such borrowings had floating-rates, representing 5 per cent. of total interest bearing loans and borrowings. As a result, the DS Smith Group is subject to the effects of interest rate fluctuations on certain of their financing arrangements. Such fluctuations could lead to an increase in the Enlarged Group's cost of funding.
Additionally, certain of the DS Smith Group's debt agreements provide for an interest rate increase in case of a credit rating downgrade. Maintaining an investment grade credit rating is an important element of the DS Smith Group's financial strategy, and a downgrade of the DS Smith Group's rating below investment grade could adversely affect its cost of borrowing, limit its access to the capital markets or result in more restrictive covenants in agreements governing the terms of any future indebtedness that the DS Smith Group may incur. There is a risk that an increase in the DS Smith Group's indebtedness or working capital requirements could result in the DS Smith Group's credit rating being downgraded.
The DS Smith Group and the Europac Group sell and market their products in a number of different jurisdictions. Doing business worldwide requires the DS Smith Group and the Europac Group to comply with the laws and regulations of various jurisdictions, including, without limitation, the United States and the UK. The DS Smith Group's and the Europac Group's international operations are subject to, and the Enlarged Group's international operations will be subject to, anti-corruption laws and regulations and to economic sanctions programmes, including those administered by the United Nations, the EU, the UK and the United States. Anti-bribery laws such as the UK Bribery Act 2010 and similar worldwide anti-corruption laws generally prohibit companies and their intermediaries from making improper payments to public officials for the purpose of obtaining or retaining business. The DS Smith Group's recent expansion, including in developing countries and emerging markets, could increase the risk of such violations in the future. The DS Smith Group relies on its management structure, regulatory and legal resources and effective operation of its compliance programme to direct, manage and monitor the activities of these employees. Despite the DS Smith Group's oversight and compliance programmes, there is a risk that its internal control policies and procedures will not always protect it from deliberate, reckless or inadvertent acts of the Enlarged Group's employees or agents that contravene its compliance policies or violate applicable laws. Violations of anti-corruption laws and regulations or economic sanctions programmes, or allegations of such violations, could disrupt the Enlarged Group's business and result in a material adverse effect on its results of operations or financial condition. Violations of such regulations or programmes or allegations of such violations could also cause reputational harm to the Enlarged Group.
The DS Smith Group and the Europac Group are subject to a variety of anti-trust and similar legislation in the jurisdictions in which they operate. The DS Smith Group may have market positions which may make future significant acquisitions more difficult and may limit their ability to expand by acquisition or merger, if the Enlarged Group wished to do so. See also "The Enlarged Group may be unable to implement its growth strategy successfully".
In addition, the DS Smith Group and the Europac Group are subject to legislation in many of the jurisdictions in which they operate relating to unfair competitive practices and similar behaviour. The Enlarged Group is and may in the future be subject to allegations of, or regulatory investigations or proceedings into, such practices. In the event that such allegations are made or investigations or proceedings initiated (irrespective of merit), the Enlarged Group may be required to devote significant management resources to defend itself against such allegations. In the event that such allegations are proved, the Enlarged Group may be subject to significant fines, any relevant agreements being declared unenforceable, damages awards and other expenses, which could have a material adverse effect on the Enlarged Group's business, financial condition, results of operations or prospects.
The DS Smith Group and the Europac Group maintain business insurance that they consider to be adequate and appropriate for their business and activities. Certain types of risks, such as losses due to natural disasters, riots, acts of war or terrorism are, however, either uninsurable or not economically insurable. In addition, even if a loss is insured, the Enlarged Group may be required to pay a significant deductible on any claim for recovery of such loss prior to the insurer being obliged to reimburse the Enlarged Group for the loss, or the amount of the loss may exceed the Enlarged Group's coverage for the loss. Any uninsured losses could have a material adverse effect on the Enlarged Group's business, financial condition, results of operations or prospects.
The DS Smith Group's and the Europac Group's packaging products, many of which are supplied to the food and beverage industries, may give rise to potentially substantial product liability claims in the event of a failure of the packaging to perform its function when in use or from contamination of the product by its packaging. Further, if any of its products are defective as a result of a failure in the Enlarged Group's quality controls, the Enlarged Group may be subject to product liability claims or may have to engage in a product recall. Any significant damage to the Enlarged Group's reputation and any material claims that arise in these areas could have a material adverse effect on the Enlarged Group's business, financial condition, results of operations or prospects.
The DS Smith Group operates a number of defined benefit pension plans for its employees around the world. The total net deficit of these plans valued under International Accounting Standard 19 was £106 million as at 30 April 2018. As at 30 April 2017 approximately 87 per cent. of the Group's postretirement obligations related to plans in the UK.
The DS Smith Group operates a defined benefit scheme in the UK (the "DS Smith Group Pension Scheme"). The DS Smith Group Pension Scheme was closed to future accrual with effect from 30 April 2011. The most recent actuarial funding valuation was carried out as at 30 April 2016, showing a deficit on the "technical provisions" basis (as defined in the applicable UK legislation) of £184 million. A deficit recovery plan was agreed with the Trustee Board on 28 April 2017. The deficit recovery plan takes into account subsequent experience of the DS Smith Group Pension Scheme's technical provisions against its assets based on updated calculations as at 31 January 2017 which estimated that the shortfall had increased to £205 million. Under the deficit recovery plan the DS Smith Group has agreed to make a contribution of £19.9 million to the DS Smith Group Pension Scheme in the financial year ended 30 April 2018, £18.7 million in the year ended 30 April 2019, £19 million in the year ended 30 April 2020, £19.4 million in the year ended 30 April 2021, £19.8 million in the year ended 30 April 2022, £20.2 million in the year ended 30 April 2023, £20.6 million in the year ended 30 April 2024, £21 million in the year ended 30 April 2025 and £12.5 million in the year ended 30 April 2026 (in respect of May to November 2025).
The deficit of the DS Smith Group Pension Scheme is dependent on the market value of the assets of that plan and on the value placed on its liabilities. If the market value of the assets declines or the value of the liabilities increases, as at the date of an actuarial funding valuation of the DS Smith Group Pension Scheme, the DS Smith Group may be required to increase its contributions to the DS Smith Group Pension Scheme. A variety of factors, including factors outside the DS Smith Group's control, may adversely affect the value of the DS Smith Group Pension Scheme's assets or liabilities, including interest rates, inflation rates, investment performance, exchange rates, life expectancy assumptions, actuarial data and adjustments and regulatory changes. If these or other internal and external factors were to become unfavourable, or more unfavourable than they currently are, the DS Smith Group's required contributions to the DS Smith Group Pension Scheme and the costs and net liabilities associated with the DS Smith Group Pension Scheme could increase substantially. This may have an adverse effect on the DS Smith Group's operational results and cash flow.
The DS Smith Group also operates various local post-retirement and other employee benefit arrangements for overseas operations, as well as a small UK unfunded scheme. The countries where the DS Smith Group operates the most significant defined benefit post-retirement arrangements are France, Belgium, Switzerland, Italy and Germany.
The Europac Group operates defined benefit pension funds in Portugal and defined benefit retirement and long-service bonus schemes in France. As at 31 December 2017, the Portuguese defined benefit pension funds had a total deficit of c.€6.16 million on an International Accounting Standard 19 basis. The French defined benefit retirement and long-service bonus schemes are unfunded and, as at 31 December 2017, represented a total liability of c.€8.85 million.
Overseas defined benefit schemes expose the Enlarged Group to risks such as currency risk, inflation risk, interest rate risk, investment risk and life expectancy risk. Actions taken by the local regulator (where relevant powers exist), or changes to legislation, could result in stronger local funding requirements for pension schemes, which could have a material adverse effect on the Enlarged Group's future cash flow.
If certain statutory requirements are met, the Pensions Regulator has the power to issue contribution notices or financial support directions to the DS Smith Group and/or any associated company. This could potentially extend to any major Shareholders of the DS Smith Group (and, following the Acquisition, the Enlarged Group), subject to the size of their shareholdings and the satisfaction of reasonableness requirements. The Pensions Regulator may require additional contributions to be paid into a pension scheme or additional financial support to be made available in respect of such scheme.
Pensions Regulator enforcement action could have a material adverse impact on the operating results, business prospects or financial condition of the DS Smith Group (and, following the Acquisition, the Enlarged Group). The Pensions Regulator also has powers to set assumptions and contribution levels if the DS Smith Group and the Pension Trustees cannot agree the deficit or contributions following the triennial funding valuation (although this is extremely rare in practice). In cases where the deficit and funding levels are agreed, the Pensions Regulator can still intervene, should it disagree.
As at 30 April 2018, the DS Smith Group had approximately 28,500 employees, and if the Acquisition occurs, the Enlarged Group is expected to have approximately 30,500 employees. Inflationary pressures, changes in applicable laws and regulations or other factors resulting in increased labour costs could have a material adverse effect on the Enlarged Group's business, operating results or financial condition, or prospects.
Future developments in relation to the Enlarged Group's business could adversely affect relations with employees. The DS Smith Group and the Europac Group both have collective agreements in place with national works councils and trade unions. The DS Smith Group also has a collective agreement in place with a European Works Council. If the terms of any collective bargaining agreements entered into change substantially or an acceptable agreement to the Enlarged Group cannot be reached at all when the collective agreements are renewed, the Enlarged Group could face increased labour costs or disruptions as a result of labour union activity in the future. Labour disputes or other problems could lead to a substantial interruption to the Enlarged Group's business and have a material adverse effect on the Enlarged Group's business, financial condition, results of operations or prospects.
The DS Smith Group operates and will continue to operate in many different countries. As a result, the Enlarged Group will be vulnerable to risks related to its international operations, including:
The occurrence of any of the foregoing could have a material adverse effect on the Enlarged Group's earnings as a result of the related delays and/or increased costs in the production and delivery of products.
The DS Smith Group and the Europac Group rely on intellectual property laws to protect their rights to certain aspects of their systems, products and processes including product designs, proprietary technologies, research and concepts. In particular, the DS Smith Group's packaging and plastic business owns hundreds of patents covering the DS Smith Group's designs and products. Furthermore, trademarks and licences and their effective management also play an important role in protecting the DS Smith Group's intellectual property rights. The actions that the Enlarged Group takes to protect its intellectual property and proprietary rights may be inadequate to prevent imitation or unauthorised use. The laws of various countries offer different levels of protection for the DS Smith Group's and the Europac Group's intellectual proprietary rights and there can be no assurance that the Enlarged Group's intellectual property rights will not be challenged, invalidated, misappropriated or circumvented by third parties. Any of these possibilities could have a material adverse effect on the Enlarged Group's business, financial condition, results of operations or prospects.
The DS Smith Group's and the Europac Group's operations rely upon secure information technology systems for data capture, processing, storage and reporting. Despite continuing investment in the DS Smith Group's and the Europac Group's information technology ("IT") security efforts and on-going controls, there can be no assurance that the Enlarged Group's IT systems and the systems of its thirdparty providers will not be subject to cyber-attacks due to the increasing sophistication of cyber-crime, the continuing development of the technology environment and the difficulties in detecting and defending against cyber-attacks in a timely fashion. Network, system, application and data breaches may result in operational disruptions or information misuse including, but not limited to, interruption to systems availability, denial of access and the compromise or failure of applications that are required by the Enlarged Group to conduct its business with both suppliers and customers. Access to internal applications required to plan the Enlarged Group's operations, source materials, manufacture and transport goods and account for orders could be denied or stolen. Theft of intellectual property or trade secrets, and inappropriate disclosure of confidential company, employee, customer or supplier information, could arise from such incidents. Any such disruptions or failure to maintain the integrity of information may result in lost sales, business delays, product development delays or compromised confidential or technical business information, which may harm the Enlarged Group's competitive position and cause reputational damage. This could have a material adverse effect on the Enlarged Group's business, financial condition, results of operations or prospects.
The International Accounting Standards Board and the EU may change the accounting standards that govern the preparation of the Enlarged Group's financial statements. This could materially affect how the Enlarged Group reports its financial condition, results of operations and cash flows. A revised accounting standard may be required to apply retrospectively, resulting in the restatement of prior financial results.
The DS Smith Group and the Europac Group enter into arrangements with third parties, including outsourcing contracts, distribution arrangements and joint ventures with third parties in the normal course of its business and are reliant upon those third parties performing their obligations in accordance with the terms and conditions of the contracts and continuing to participate in such arrangements. These third parties may not fulfil the Enlarged Group's expectations and any failure by such a third party to fulfil these expectations, including as a result of fraud or withdrawal of the relevant service, could cause disruption and result in significant costs associated with sourcing alternative arrangements, among other things, which could have a material adverse effect on the Enlarged Group's financial condition, results of operations and cash flows.
The following is a summary of the principal terms of the Proposed Offer. The information in this Circular in respect of the Proposed Offer is subject to the actual terms and conditions of the Proposed Offer to be set out in the Offer Document. The content of the Offer Document is subject to the prior approval of the relevant Spanish regulator, the CNMV.
As at the Latest Practicable Date, Europac had an issued share capital of 99,237,837 ordinary shares (including 6,090,000 treasury shares) of €2.00 each, being 100 per cent. of the entire issued share capital of Europac. These ordinary shares are represented by book entries and are listed on the stock exchanges of Madrid and Barcelona.
The Offer Document must be filed with the CNMV no later than 5 July 2018. If the DS Smith Board consider it is in the best interests of the Shareholders, the offer contained in the Offer Document may be amended, in particular, in the event of an offer document relating to a competing offer for Europac being filed with the CNMV by a third party. Under Spanish law, the Offer Document must be approved before the Proposed Offer can be made and therefore before the acceptance period can begin.
Once the CNMV has approved the Offer Document, DS Smith has an obligation to publish a detailed advertisement announcing that the CNMV has authorised the Proposed Offer within five business days of the approval. The acceptance period for the Proposed Offer will commence on the date which this advertisement is published.
Under current Spanish takeover rules, the acceptance period (subject to certain limited exceptions) may not be less than one month and, in the absence of a competing offer, may not be greater than two months. In circumstances where there is a competing offer, the acceptance period of any preceding offers will automatically be extended so as to expire as the same time as the acceptance period of the competing offer.
The Proposed Offer is conditional on the approval of the Resolution by the Shareholders.
The Proposed Offer will be conditional on at least 49,618,920 Europac Shares being tendered in acceptance of the Proposed Offer (including the treasury shares currently held by Europac), representing greater than 50 per cent. of Europac's entire share capital. DS Smith has received Acceptance Undertakings, in aggregate covering a total of 58,520,671 Europac Shares, representing 58.97 per cent. of the entire share capital of Europac as at the Latest Practicable Date.
Insofar as the Proposed Offer falls within the scope of the EU Merger Regulation, the Proposed Offer will be conditional on:
(a) the EU Commission taking a decision (or being deemed to have taken a decision) that it shall not initiate proceedings under Article 6(1)(c) of the EU Merger Regulation in relation to the Proposed Offer or any matter arising from it; and
(b) if the EU Commission makes a referral under Article 9(1) of the EU Merger Regulation to the competent authorities of one or more Member States which operate suspensory merger control regimes of the Proposed Offer or any matter arising from it, it being established that the Proposed Offer has been granted substantive approval (or has been deemed to have been granted such approval) in each such Member State (provided that each such approval has an equivalent effect to the decision at a) above.
If the acceptance condition relating to the tendering of acceptances of the Acquisition is fulfilled during the acceptance period for the Proposed Offer, DS Smith intends to delist Europac's shares from their listings on the Madrid and Barcelona stock markets.
If the acceptance condition relating to the tendering of acceptances of the Proposed Offer is not fulfilled during the acceptance period for the Proposed Offer, DS Smith may waive the condition in accordance with Spanish law. As at the Latest Practicable Date, DS Smith's current intention in such an event would be to not waive this condition. DS Smith will undertake in the Offer Document that following the CNMV notifying it of the outcome of the Proposed Offer, DS Smith shall, if applicable, notify the CNMV within one day whether or not it intends to waive this condition.
The Proposed Offer is for the acquisition of the entire issued share capital of Europac for EUR 16.80 in cash per Europac Share, equating to a total of EUR 1,667 million for all of the Europac Shares (the "Offer Price"). Subject to applicable law and regulation, the Proposed Offer will be extended to all Europac Shareholders.
As at the Latest Practicable Date, Europac had a total issued share capital of 99,237,837 ordinary shares (including 6,090,000 treasury shares) of EUR 2.00 each. These ordinary shares are represented by book entries and are listed on the stock exchanges of Madrid and Barcelona.
On 4 June 2018, DS Smith entered into a €740 million bridge facility agreement (the "New Debt Facility Agreement") with Goldman Sachs and J.P. Morgan Securities plc as mandated lead arrangers (the "Arrangers"), Goldman Sachs International Bank and JPMorgan Chase Bank, N.A., London Branch as original lenders (the "Original Lenders"), Goldman Sachs, International Bank and J.P. Morgan Securities plc as the CNMV guarantee issuing banks (the "Debt CNMV Guarantee Issuing Banks") and J.P. Morgan Europe Limited as agent (the "Facility Agent").
The New Debt Facility Agreement provides for DS Smith to receive one loan (the "Loan") from the Original Lenders, which may be used to finance the Acquisition pay related costs and expenses and for refinancing any existing indebtedness of the Target Group. The Loan is available to be drawn until the earlier of: (i) 31 March 2019; (ii) the date on which the Offer lapses or is withdrawn, annulled or declared ineffective; and (iii) the Offer Settlement Date (the "Availability Period"). Drawing the Loan is subject to the satisfaction of customary conditions precedent.
DS Smith is initially required to repay the Loan within one year, although it has four extension options allowing it to extend this repayment date by six months at a time (meaning that the final repayment date could be extended to fall three years after the original date of the date of the New Debt Facility Agreement). The four extension options may be unilaterally exercised by DS Smith except in circumstances where a default has occurred and is continuing under the New Debt Facility Agreement. To the extent that the maturity date of the Loan under the New Debt Facility Agreement could not be extended by DS Smith, DS Smith would look to alternative means to fund the loan repayment, for example, by way of a refinancing.
Pursuant to the New Debt Facility Agreement, the Debt CNMV Guarantee Issuing Banks will, subject to the satisfaction of certain conditions precedent by DS Smith, issue guarantees in favour of the CNMV in a maximum amount equal to the consideration for the Acquisition less the Rights Issue Proceeds (the "Debt CNMV Guarantee"). The CNMV will only be entitled to call upon the Debt CNMV Guarantee where DS Smith fails to fund the consideration for the Acquisition. Where the CNMV calls upon the Debt CNMV Guarantee Issuing Banks to make a payment under a Debt CNMV Guarantee (and in certain other circumstances), DS Smith will be deemed to have drawn down an equivalent amount under the New Debt Facility Agreement.
The New Debt Facility Agreement includes certain mandatory prepayment events, being: (A) illegality; (B) a change of control of DS Smith (if a lender so requests after a certain period of negotiations, and provided that prepayment would not be required until after closing of the Offer); (C) receipt of certain disposal proceeds; and (D) where DS Smith receives proceeds pursuant to a debt financing (subject to certain exceptions) or the Rights Issue (unless the Rights Issue Proceeds have been used towards payment of the Offer Price). DS Smith may also voluntarily prepay the Loan provided it gives five business days' notice and the prepayment is of a minimum of €1,000,000 and provided that no CNMV Guarantee is outstanding. The New Debt Facility Agreement provides that any undrawn part of the lenders' commitments will be automatically cancelled at the end of the Availability Period, and that DS Smith can cancel the commitment of a lender which has defaulted (subject to certain exceptions).
The Loan is unsecured. The New Debt Facility Agreement contains a mechanic for other members of the DS Smith Group to accede as guarantors. The New Debt Facility Agreement contains various customary representations and undertakings (including a financial covenant).
The New Debt Facility Agreement and any non-contractual obligations arising out of or in connection with it are governed by English law.
On 4 June 2018, DS Smith entered into an equity CNMV guarantee agreement (the "Equity CNMV Guarantee Agreement") with Citibank Europe plc, UK Branch, Goldman Sachs, International and J.P. Morgan Securities plc as the equity CNMV guarantee issuing banks (the "Equity CNMV Guarantee Issuing Banks").
Pursuant to the Equity CNMV Guarantee Agreement, the Equity CNMV Guarantee Issuing Banks will, subject to the satisfaction of certain conditions precedent by DS Smith, issue guarantees in favour of the CNMV in a maximum amount equal to the Rights Issue Proceeds (the "Equity CNMV Guarantees"). The CNMV will only be entitled to call upon the Equity CNMV Guarantees where DS Smith fails to fund the consideration for the Acquisition. The Company shall be required to place the Rights Issue Proceeds in an account which is subject to certain conditions such that, where the CNMV calls upon the Equity CNMV Guarantee Issuing Banks to make a payment under an Equity CNMV Guarantee (and in certain other circumstances), the Equity CNMV Guarantee Issuing Banks shall have access to such funds.
The terms of the Rights Issue are more fully described at page 19 of Part I (Letter from the Chairman), above.
On 4 June 2018, DS Smith and certain Europac Shareholders, who are members of the Isidro family, entered into irrevocable undertakings, which are binding in all circumstances, regarding the sale and purchase of the direct and indirect interest of those Europac Shareholders, having agreed to sell their direct and indirect interests in the Proposed Offer (the "Family Irrevocable Undertakings").
The complete list of Family Irrevocable Undertakings signed and the shareholders who undertook the commitment to sell their direct and indirect shares in the Proposed Offer (the "Family Shareholders"), including the Executive Chairman (Mr. José Miguel Isidro Rincón), the Executive Vice Chairman (Mr. Enrique Isidro Rincón) and two further Board members of Europac (Mr. Fernando Isidro Rincón and Aguasal, S.A.U., represented by Ms. María Amelia Ángela Isidro Rincón), is as laid out in the below table:
| Number of | % of total issued | |
|---|---|---|
| Europac Shareholder | Europac Shares | Europac Shares |
| Jose Miguel Isidro Rincón | 5,083,840 | 5.12 |
| Corporación Oudaloi, S.L. | 629,513 | 0.63 |
| Enrique Isidro Rincón | 3,804,360 | 3.83 |
| Manuel Isidro Martín | 191,129 | 0.19 |
| Cristina Isidro Martín | 191,129 | 0.19 |
| Fernando Isidro Rincón | 3,137,289 | 3.16 |
| Ana Carmen Pinedo Calvo | 17,246 | 0.02 |
| Equipamiento e Instalaciones Industriales, S.A. | 499,106 | 0.50 |
| Diego Isidro Rincón | 4,090,167 | 4.12 |
| Gonzalo Isidro Navarro | 4,960 | 0.00 |
| Alejandra Isidro Navarro | 4,960 | 0.00 |
| Mª de los Ángeles Isidro Rincón | 3,955,956 | 3.99 |
| Pilar Isidro Rincón | 3,910,315 | 3.94 |
| Beatriz Isidro Rincón | 3,883,000 | 3.91 |
| Marta Isidro Rincón | 3,762,286 | 3.79 |
| Fernando José Sánchez-Girón González | 21,840 | 0.02 |
| María Amelia Ángela Isidro Rincón | 3,079,873 | 3.10 |
| Aguasal, S.A.U. | 208,551 | 0.21 |
| Manuel Isidro Rincón | 3,231,073 | 3.26 |
| Total | ––––––––––––– 39,706,593 |
––––––––––––– 40.01 |
| –––––––––––––––––––––––––– | –––––––––––––––––––––––––– |
Also on 4 June 2018, DS Smith and certain other Europac Shareholders entered into irrevocable undertakings, which are binding even in the event of a higher competing offer for Europac being formally announced, regarding the sale and purchase of the direct and indirect interest of those Europac Shareholders, having agreed to sell their direct and indirect interests in the Proposed Offer (the "Other Irrevocable Undertakings" and, together with the Family Irrevocable Undertakings, the "Irrevocable Undertakings").
The complete list of Other Irrevocable Undertakings signed and the shareholders who undertook the commitment to sell their direct shares in the Proposed Offer (together with the Family Shareholders, the "Selling Shareholders") is the following:
| Number of | % of total issued | |
|---|---|---|
| Europac Shareholder | Europac Shares | Europac Shares |
| Mr Ángel Fernández González. and | ||
| Ms. Concepción Herrero Cuadrado | 6,770,025 | 6.82 |
| Onchena, S.L. | 5,954,053 | 6.00 |
Certain terms and conditions of the Irrevocable Undertakings to tender the shares are identical, and include the following:
As an exception to the above, Mr. Ángel Fernández González and Ms. Concepción Herrero Cuadrado have expressly not undertaken the obligations referred in paragraphs (d) and (e) above, having undertaken only to accept the Proposed Offer, even in the case that the CNMV were to authorise a competing offer.
Further terms of the Family Irrevocable Undertakings to tender the shares are identical between such Family Irrevocable Undertakings, and include the following:
(f) those Family Shareholders who are directors of Europac: (a) shall, in connection with the report to be issued by the Europac Board regarding the Proposed Offer, present the Proposed Offer in a favourable manner and vote in favour of it; and (b) shall exercise all their rights in connection with Europac to procure that Europac accepts the Proposed Offer with regard to the Europac Shares that Europac holds in treasury, not later than the date when the Europac Board issues the report referred to in (a) above, and does not revoke the acceptance, all of the above in full compliance with fiduciary duties (in particular regarding any conflicts of interest to which they may be subject).
On 4 June 2018, DS Smith and Europac entered into a break fee agreement (the "Break Fee Agreement") pursuant to which:
The Break Fee Agreement contains customary provisions relating to conduct of business prior to completion, assistance with provision of information and satisfaction of the conditions of the Proposed Offer, including agreement by Europac not to modify the share capital of Europac in any way, including by increasing or decreasing the number of issued shares by way of bonus issue or cancellation of treasury stock (subject to fiduciary duties).
The Break Fee Agreement also includes an obligation on Europac to tender all the Europac Shares that Europac holds in treasury by not later than the date when the Europac Board publishes its report on the Proposed Offer, and not to revoke such acceptance, all the above subject to fiduciary duties and to further assessment of the Proposed Offer on the basis of the Prospectus, as well as taking into account any advice received from Europac's legal or financial advisers, and providing that: (i) the report referred to above contains a favourable opinion of the Proposed Offer; (ii) there is no competing offer; and (iii) circumstances have not materially negatively changed.
The Break Fee Agreement has been executed by Mr. Enrique Isidro Rincón in the name and on behalf of Europac, further to the resolutions passed by the Europac Board in a meeting held on 30 May 2018, and by Mr. José Miguel Isidro Rincón, Mr. Enrique Isidro Rincón and Mr. Fernando Isidro Rincón in their capacity as Europac Shareholders.
DS Smith and Europac entered into a non-disclosure agreement on 16 May 2018 (the "NDA") pursuant to which DS Smith has undertaken to keep information relating to Europac and its subsidiaries, their businesses and the Europac Shareholders confidential and not to disclose it to third parties except: (a) to its professional advisers, officers, employees and subsidiaries and the officers, employees and professional advisers of each of those subsidiaries on a need-to-know basis; and (b) if required by law, rule, regulation or written or verbal instruction by any judicial, governmental or competent supervisory or regulatory body.
Pursuant to the NDA, DS Smith has also undertaken, for a period of one year from 16 May 2018, not to:
Until the earlier of: (i) a period of one year from 16 May 2018; or (ii) the date on which the Proposed Offer is announced or DS Smith otherwise assumes a binding obligation to make the Proposed Offer, or until the date on which a bona fide third party makes or announces an intention to make, a general offer to acquire the shares in Europac, DS Smith will not, and will ensure that each member of the DS Smith Group does not, directly or indirectly, alone or together with another person, acquire, or cause another person to acquire, other than through or in the context of the Proposed Offer, shares or an interest in the shares or in any debt instruments of Europac, or enter into an agreement or arrangement as a result of which DS Smith or a member of the DS Smith Group may acquire such shares, interests or debt instruments.
Save as referred to above, or as otherwise described within the NDA, the obligations of DS Smith pursuant to the NDA will remain in force until the earlier of Completion or the elapsing of a period of two years from 16 May 2018.
Other than as indicated at paragraph 12 of Part I (Letter from the Chairman) of this Circular, at this point DS Smith has no proposals in respect of Europac's employees. In connection with the Proposed Offer, DS Smith intends to comply with any requirements imposed by local law to inform and consult Europac's works' councils and/or employee representatives.
There is no commitment to maintain the dividend policy of Europac after Completion. The dividend policy of Europac will be determined by its board of directors and will depend on future cash flow levels as well as future financing and investment needs, amongst other things.
DS Smith has no current intention to amends Europac's bye-laws following Completion other than to amend the accounting reference date of Europac to bring the financial year in line with the other companies in the DS Smith Group.
It is DS Smith's current intention to nominate representatives to be appointed to the Europac Board. As a result, certain directors of Europac at the date of this Circular may leave the Europac Board in order for these appointments to be made. Equally, DS Smith's representatives may be appointed to other Europac management bodies. A final decision will only be taken at the relevant time in this regard.
While Europac remains a listed company, DS Smith will continue to observe the Spanish recommendations on good corporate governance required under Spanish law. It is DS Smith's current intention to maintain independent directors (consejeros independientes) on the Europac Board while Europac remains a listed company, although as a result of the appointment of DS Smith's representatives as directors (consejeros dominicales), the number of independent directors could be significantly reduced.
If Europac is delisted, the structure of the Europac Board would change. The independent directors would be substituted with executive directors and directors related to the majority shareholder (consejeros ejecutivos o dominicales). In addition, Europac would no longer be required to observe the Spanish recommendations on good corporate governance for listed companies.
DS Smith currently intends to seek the delisting of the Europac Shares as soon as practicable following Completion.
DS Smith intends to call such a meeting to be held within three months of Completion to vote in favour of the delisting of the Europac Shares, and to make an application for delisting to the CNMV as soon as practicable following that shareholders' meeting, and, in any event, within six months of Completion.
The delisting will be carried out in compliance with all applicable legal requirements.
If the Proposed Offer is accepted by a high number of shareholders, it is currently intended that DS Smith and Europac will apply to the CNMV for the authorisation to delist Europac Shares without making a delisting tender offer.
If the CNMV does not require a delisting tender offer, DS Smith currently intends to adopt all measures that may be necessary to facilitate the acquisition of any remaining Europac Shares held by minority shareholders, placing a standing purchase order in the market at the same price offered under the Proposed Offer, until the effective delisting of Europac.
It is DS Smith's current intention to make use of any and all legal procedures available to itself or to Europac (whether immediately following Completion or in the future) in order to seek to attain full ownership of Europac.
Shareholders should read the whole of this Circular and not rely solely on the financial information contained in this Part IV (Historical Financial Information relating to the Europac Group).
The historical financial information relating to the Europac Group for the financial years ended 31 December 2017, 31 December 2016 and 31 December 2015 set out below has been extracted without material adjustment from the consolidated financial statements of the Europac Group for the financial years ended 31 December 2017, 31 December 2016 and 31 December 2015, which were prepared in accordance with International Financial Reporting Standards as adopted by the European Union.
The statutory financial statements of the Europac Group for each of the relevant years have been audited by Ernst & Young, S.L., and their reports are unqualified. There are no material differences between the accounting policies of the Europac Group and those adopted by the Company in its latest annual accounts.
| 2017 | 2016 | 2015 | ||
|---|---|---|---|---|
| Note | €'000s | €'000s | €'000s | |
| Continuing operations Revenue |
4 | 868,219 | 801,150 | 805,660 |
| Change in inventories of finished products and work | ||||
| in progress | 4,408 | (2,743) | (367) | |
| Own work capitalised | 4,818 | 2,833 | 5,182 | |
| Raw materials and consumables used | (427,796) | (396,844) | (407,336) | |
| Other operating revenue | 22,065 | 13,161 | 3,390 | |
| Employee benefits expense | 7 | (117,252) | (113,878) | (109,825) |
| Other operating expenses | 5 | (198,159) | (179,939) | (192,349) |
| Depreciation and amortisation | 10, 12 & 13 | (51,789) | (48,912) | (48,667) |
| Grants related to non-financial non-current assets Impairment and (loss)/gain on disposal of non-current |
21 | 2,311 | 2,492 | 4,597 |
| assets | 12 | (361) ––––––––––– |
338 ––––––––––– |
2,170 ––––––––––– |
| Operating profit | 106,464 ––––––––––– |
77,658 ––––––––––– |
62,455 ––––––––––– |
|
| Finance income | 6 | 621 | 3,365 | 399 |
| Finance costs | 6 | (9,293) | (13,155) | (17,261) |
| Change in fair value of financial instruments | 698 | (1,186) | 116 | |
| Exchange differences | (1,659) | 425 | 18 | |
| Impairment and gain on disposal of financial instruments | 15 | 4,106 ––––––––––– |
– ––––––––––– |
– ––––––––––– |
| Net finance costs | (5,527) ––––––––––– |
(10,552) ––––––––––– |
(16,728) ––––––––––– |
|
| Share of profit of equity-accounted investees | 14 | 369 ––––––––––– |
115 ––––––––––– |
131 ––––––––––– |
| Profit before tax | 101,306 ––––––––––– |
67,222 ––––––––––– |
45,858 ––––––––––– |
|
| Corporate income tax expense | 8 | (23,343) ––––––––––– |
(18,321) ––––––––––– |
(13,410) ––––––––––– |
| Profit for the year | 77,963 –––––––––––––––––––––– |
48,901 –––––––––––––––––––––– |
32,449 –––––––––––––––––––––– |
|
| Profit for the year attributable to: | ||||
| Owners of the parent | 77,963 | 48,884 | 32,449 | |
| Non-controlling interests | – | 17 | – | |
| ––––––––––– 77,963 |
––––––––––– 48,901 |
––––––––––– 32,449 |
||
| –––––––––––––––––––––– | –––––––––––––––––––––– | –––––––––––––––––––––– | ||
| Euros | Euros | Euros | ||
| Earnings Per Share Basic |
9 | 0.847 | 0.547 | 0.371 |
| Diluted | 9 | 0.847 | 0.547 | 0.371 |
| Note | 2017 €'000s |
2016 €'000s |
2015 €'000s |
|
|---|---|---|---|---|
| Profit for the year | 77,963 ––––––––––– |
48,901 ––––––––––– |
32,449 ––––––––––– |
|
| Other comprehensive income from measurement of available for sale financial assets |
15 | 1,887 | 2,219 | – |
| Cash flow hedges Translation differences |
23 | 79 (135) |
2,914 (5) |
1,827 141 |
| Actuarial gains and losses and other adjustments Expense for capital increase |
26 | 1,016 – |
(2,124) (10) |
876 (29) |
| Gains from transactions with treasury stock Tax effect |
25 | 3 (786) ––––––––––– |
2 (719) ––––––––––– |
232 (749) ––––––––––– |
| Other comprehensive income/(expense) for the year |
2,064 | 2,277 | 2,298 | |
| Transfers to profit or loss from measurement of available for sale financial assets Cash flow hedges |
15 | ––––––––––– (4,106) – |
––––––––––– – – |
––––––––––– – (2) |
| Tax effect | 1,027 ––––––––––– |
– ––––––––––– |
1 ––––––––––– |
|
| Transfers to Profit or Loss Total comprehensive income/(expense) for the year |
(3,080) ––––––––––– 76,948 –––––––––––––––––––––– |
– ––––––––––– 51,178 –––––––––––––––––––––– |
(2) ––––––––––– 34,745 –––––––––––––––––––––– |
|
| Total comprehensive income/(expense) attributable to: |
||||
| Owners of the parent Non-controlling interests |
76,948 – |
51,161 17 |
34,745 – |
Consolidated Statement of Financial Position for the years ended 31 December 2017, 2016 and 2015
| 2017 | 2016 | 2015 | ||
|---|---|---|---|---|
| Assets | Note | €'000s | €'000s | €'000s |
| Non-current assets | ||||
| Intangible assets | 10 | 98,537 | 95,632 | 95,644 |
| Property, plant and equipment | 12 | 678,062 | 685,466 | 681,257 |
| Investment property Investments accounted for using the equity method |
13 14 |
2,016 2,045 |
2,028 1,693 |
2,508 1,639 |
| Non-current financial assets | 15 | 3,584 | 14,765 | 1,820 |
| Deferred tax assets | 24 | 45,782 | 48,281 | 49,139 |
| Biological assets | 11 | 6,710 | 6,990 | 6,280 |
| Total non-current assets | ––––––––––– 836,736 |
––––––––––– 854,854 |
––––––––––– 838,286 |
|
| Current assets | ––––––––––– | ––––––––––– | ––––––––––– | |
| Inventories | 16 | 88,110 | 79,152 | 79,798 |
| Trade receivables | 17 | 56,302 | 50,139 | 59,355 |
| Other receivables | 17 | 18,061 | 37,385 | 20,646 |
| Current tax assets | 3,026 | 693 | 200 | |
| Other current financial assets | 15 | 877 | 2,284 | 1,566 |
| Cash and cash equivalents | 18 | 85,500 ––––––––––– |
94,768 ––––––––––– |
89,820 ––––––––––– |
| Total current assets | 251,876 ––––––––––– |
264,422 ––––––––––– |
251,384 ––––––––––– |
|
| Total assets | 1,088,612 ––––––––––– |
1,119,276 ––––––––––– |
1,089,670 ––––––––––– |
|
| Liabilities | ||||
| Non-current liabilities | ||||
| Grants | 21 | 5,924 | 6,562 | 6,591 |
| Non-current provisions | 20 | 15,554 | 16,838 | 14,821 |
| Bank borrowings and bonds or other negotiable securities Other financial liabilities |
22 23 |
301,999 13,887 |
329,821 47,163 |
308,105 58,897 |
| Deferred tax liabilities | 24 | 60,015 | 61,750 | 61,205 |
| Total non-current liabilities | ––––––––––– 397,379 |
––––––––––– 462,134 |
––––––––––– 449,618 |
|
| Current liabilities | ––––––––––– | ––––––––––– | ––––––––––– | |
| Current provisions | 20 | 3,367 | 3,670 | 5,056 |
| Bank borrowings and bonds or other negotiable securities | 22 | 16,473 | 32,221 | 48,639 |
| Other financial liabilities | 23 | 25,900 | 28,271 | 18,833 |
| Trade payables | 192,097 | 175,068 | 163,973 | |
| Other payables | 19 | 33,555 | 45,256 | 44,683 |
| Current tax liabilities | 7,875 ––––––––––– |
3,108 ––––––––––– |
2,417 ––––––––––– |
|
| Total current liabilities | 279,267 ––––––––––– |
287,594 ––––––––––– |
283,601 ––––––––––– |
|
| Total liabilities | 676,646 ––––––––––– |
749,728 ––––––––––– |
733,219 ––––––––––– |
|
| Net assets | 411,966 –––––––––––––––––––––– |
369,548 –––––––––––––––––––––– |
356,450 –––––––––––––––––––––– |
|
| Equity | ||||
| Share capital | 25 | 198,476 | 194,737 | 187,247 |
| Reserves | 25 | 241,887 | 209,011 | 185,376 |
| Treasury stock | (34,370) | (38,013) | (13,728) | |
| Adjustments for changes in value in available for sale | ||||
| financial assets Adjustments for changes in value in hedging transactions |
– (336) |
1,664 (399) |
– (2,584) |
|
| Adjustments for changes in value – translation differences | – | 135 | 141 | |
| Other equity adjustments | 6,221 | 2,321 | – | |
| Total equity attributable to owners of the parent | ––––––––––– 411,878 |
––––––––––– 369,456 |
––––––––––– 356,450 |
|
| Non-controlling interest | 88 | 92 | – | |
| Total equity | ––––––––––– 411,966 |
––––––––––– 369,548 |
––––––––––– 356,450 |
|
| –––––––––––––––––––––– | –––––––––––––––––––––– | –––––––––––––––––––––– |
| At 31 December 2017 | 198,476 | 241,887 | (34,370) | 6,221 | (336) | 88 | 411,966 |
|---|---|---|---|---|---|---|---|
| –––––––––––––––– | –––––––––––––––– | –––––––––––––––– | –––––––––––––––– | –––––––––––––––– | –––––––––––––––– | –––––––––––––––– | |
| Other changes | – | (743) | – | – | – | (4) | (747) |
| –––––––– | –––––––– | –––––––– | –––––––– | –––––––– | –––––––– | –––––––– | |
| or own equity instruments (net) | – | – | (8,787) | – | – | – | (8,787) |
| Share-based payment transactions | – | – | – | 3,900 | – | – | 3,900 |
| Payment of dividends Transactions with treasury stock |
– | (28,897) | – | – | – | – | (28,897) |
| Capital increases/(reductions) | 3,739 | (16,169) | 12,430 | – | – | – | – |
| Total comprehensive income | –––––––– | –––––––– | –––––––– | –––––––– | –––––––– | –––––––– | –––––––– |
| – | 78,684 | – | – | (1,736) | – | 76,948 | |
| At 31 December 2016 | 194,737 | 209,011 | (38,013) | 2,321 | 1,401 | 92 | 369,548 |
| or own equity instruments (net) Share-based payment transactions Other changes |
– – – –––––––– |
– – 49 –––––––– |
(24,285) – – –––––––– |
– 2,321 – –––––––– |
– – – –––––––– |
– – 75 –––––––– |
(24,285) 2,321 124 –––––––– |
| Capital increases/(reductions) Payment of dividends Transactions with treasury stock |
7,490 – |
(7,490) (16,224) |
– – |
– – |
– – |
– – |
– (16,224) |
| Total comprehensive income | – | 47,300 | – | – | 3,845 | 17 | 51,161 |
| At 31 December 2015 | 187,247 | 185,376 | (13,728) | – | (2,444) | – | 356,450 |
| –––––––– | –––––––– | –––––––– | –––––––– | –––––––– | –––––––– | –––––––– | |
| Transactions with treasury stock | – | – | (2,907) | – | – | – | (2,907) |
| or own equity instruments (net) | – | (104) | – | – | – | – | (104) |
| Other changes | –––––––– | –––––––– | –––––––– | –––––––– | –––––––– | –––––––– | –––––––– |
| Total comprehensive income | – | 33,236 | – | – | 1,509 | – | 34,745 |
| Capital increases/(reductions) | 7,202 | (7,202) | – | – | – | – | – |
| Payment of dividends | – | (12,390) | – | – | – | – | (12,390) |
| At 1 January 2015 | 180,045 | 171,834 | (10,821) | – | (3,953) | – | 337,105 |
| –––––––– | –––––––– | –––––––– | –––––––– | –––––––– | –––––––– | –––––––– | |
| Note | Share capital €'000s |
Reserves €'000s |
stock and own equity instru- ments €'000s |
Other equity instru- ments €'000s |
Valuation adjust- ments €'000s |
Non controlling interest €'000s |
Total equity €'000s |
| Treasury |
| Consolidated Statement of Cash Flows for the years ended 31 December 2017, 2016 and 2015 | ||||
|---|---|---|---|---|
| 2017 | 2016 | 2015 | ||
| Continuing operations Operating activities |
Note | €'000s | €'000s | €'000s |
| Profit before tax | 101,306 | 67,222 | 45,858 | |
| Adjustments to profit before tax: | ||||
| – Depreciation and amortisation |
10, 12 & 13 | 51,789 | 48,912 | 48,667 |
| – Other adjustments to profit (net) |
(6,004) | 7,685 | 9,111 | |
| Changes in working capital | 6,387 | 8,367 | (13,453) | |
| Dividends received | 162 | 119 | 9 | |
| Receipts (payments) for corporate income tax | (19,637) | (10,872) | (6,587) | |
| Other receipts/(payments) for operating activities | (1,335) ––––––––––– |
(341) ––––––––––– |
(963) ––––––––––– |
|
| Cash flows from operating activities | 132,668 ––––––––––– |
121,094 ––––––––––– |
82,642 ––––––––––– |
|
| Investing activities | ||||
| Acquisition of group companies, associates and | ||||
| business units | (9,923) | (602) | – | |
| Payments for PP&E, intangible assets and investment property |
(61,205) | (53,131) | (59,325) | |
| Payments for other financial assets | – | (323) | (1,061) | |
| Payments for other assets | – | (334) | (1,588) | |
| Proceeds from sale of Group companies, associates | ||||
| and business units | 34,270 | – | – | |
| Proceeds from sale of PP&E, intangible assets and | ||||
| investment property | 1,213 | 1,715 | 3,910 | |
| Proceeds from sale of other financial assets | 14,298 | 293 | – | |
| Proceeds from sale of other assets | – | – | 231 | |
| Interest received | 456 ––––––––––– |
206 ––––––––––– |
390 ––––––––––– |
|
| Cash flows used in investing activities | (20,891) ––––––––––– |
(52,176) ––––––––––– |
(57,443) ––––––––––– |
|
| Financing activities | ||||
| Payments for equity instruments – acquisitions | (8,784) | (3,834) | (2,675) | |
| Issue of financial liability instruments | 90,000 | 40,000 | 41,516 | |
| Repayment of financial liability instruments and amortisation | (165,600) | (72,217) | (59,400) | |
| Dividends and returns on equity instruments paid | 25 | (28,897) | (16,224) | (12,390) |
| Interest paid | (8,984) | (11,553) | (19,350) | |
| Other financing activities | 337 ––––––––––– |
– ––––––––––– |
8,167 ––––––––––– |
|
| Cash flows from/(used in) financing activities | (121,928) ––––––––––– |
(63,828) ––––––––––– |
(44,133) ––––––––––– |
|
| Effect of movements in foreign exchange rates | 883 ––––––––––– |
(143) ––––––––––– |
(57) ––––––––––– |
|
| Increase/(decrease) in cash and cash equivalents | (9,268) ––––––––––– |
4,947 ––––––––––– |
(18,990) ––––––––––– |
|
| Net cash and cash equivalents at 1 January | 94,768 ––––––––––– |
89,820 ––––––––––– |
108,810 ––––––––––– |
|
| Net cash and cash equivalents at 31 December | 18 | 85,500 –––––––––––––––––––––– |
94,767 –––––––––––––––––––––– |
89,820 –––––––––––––––––––––– |
| Cash at banks and on hand | 56,206 | 50,627 | 79,655 | |
| Other financial assets | 29,294 ––––––––––– |
44,141 ––––––––––– |
10,166 ––––––––––– |
|
| Net cash and cash equivalents at 31 December | 18 | 85,500 –––––––––––––––––––––– |
94,767 –––––––––––––––––––––– |
89,820 –––––––––––––––––––––– |
Papeles y Cartones Europa, S.A. (hereinafter, Europac or the parent company) was incorporated on 31 December, 1995 and is the head of a group (hereinafter, the Group or Europac Group) whose core business is the manufacture and sale of paper and corrugated board for packaging, and the manufacture of corrugated board packaging.
The Group has its head office in Alcobendas (Madrid) and has production centres in the following locations:
Spain:
Portugal:
France:
The company's registered address is in Dueñas (Palencia), at Carretera de Burgos a Portugal, Km. 96.
Europac is currently listed on the Madrid and Barcelona stock exchanges.
In 2017, the Group carried out the following corporate operations, including the following:
In 2016, the Group carried out other corporate operations, including the following:
● On 3 August 2016, the Group recorded the merger of Harpalus, S.L. in the Companies Registry, with effect from 1 July 2016 (Note 10).
Please refer to Note 33 for further detail in relation to changes in group structure between the comparative periods.
This historical financial information has been prepared to present the financial condition, results of operations and cash flows of the Papeles y Cartones Europa, S.A. group (hereinafter the Group or Europac Group).
The financial information of the Europac Group for each of the previous three financial years has been prepared by Europac and presented in their audited Consolidated Financial Statements on a consistent basis, being International Reporting Standards as adopted by the EU ("IFRS"). This financial information has been accurately translated into English for the purposes of inclusion in this Circular and has been prepared in accordance with the requirements of the Prospective Directive regulation and the UK Listing Rules. As part of these procedures, the DS Smith Group have re-presented the translated financial information in order to align to DS Smith's presentational format.
All notes to the financial information include amounts for continuing operations, unless otherwise mentioned.
The amounts contained in these consolidated Financial Statements are expressed in thousands of euros, unless otherwise indicated. The Group's presentation currency is the Euro.
These Financial Statements give a true and fair view of the Group's consolidated equity and financial position at 31 December 2017, 2016 and 2015, the consolidated results of its operations, the changes in consolidated equity and the consolidated cash flow.
The consolidated Financial Statements have been prepared on a historical cost basis, except for biological assets and derivative financial instruments, which have been recorded at fair value.
The accounting policies used in preparing these consolidated Financial Statements are the same for each of the financial years ended 31 December 2017, 2016 and 2015, as none of the amendments to the standards that became applicable for the first time in 2017 or 2016, which are indicated below, had a material impact for the Group:
| in the EU |
|---|
| 01 January 2017 |
| 01 January 2017 |
| 15 February 2015 |
| 01 January 2016 |
| 01 January 2016 |
| 01 January 2016 |
| 01 January 2016 |
| 15 February 2015 |
| 01 January 2016 |
| 01 January 2016 |
| 01 January 2016 |
Please refer to note 2.28 for details of standards and interpretations issued by the IASB and applied for the first time in this financial year, and 2.29 for those not applicable in this financial year.
The consolidated Financial Statements comprise the Financial Statements of the parent company and its subsidiaries at 31 December 2017, 31 December 2016 and 31 December 2015.
Subsidiaries are fully consolidated from the acquisition date, which is the date on which the Group acquires control, and continue to be fully consolidated until the date on which said control ceases. The Financial Statements of subsidiaries have the same reporting date as the parent company and are prepared using the same accounting policies in a consistent and uniform manner. All balances and inter-company transactions, including unrealised gains and losses from transactions between group companies and dividends, are eliminated.
A change in the percentage of the holding in a subsidiary, which does not involve the loss of control, is accounted for as an equity transaction. If the Group loses control over a subsidiary:
Business combinations are accounted for using the acquisition method. The acquisition cost is the sum of the consideration transferred, measured at the fair value on the acquisition date, and the amount of any non-controlling interest in the acquiree. For each business combination, the Group chooses whether to measure the non-controlling interest in the acquiree either at fair value or at the noncontrolling interest's proportionate share of the identifiable net assets. Acquisition costs incurred are expensed and recorded in the separate consolidated income statement.
When the Group acquires a business, it assesses the financial assets and liabilities assumed for appropriate classification in accordance with the contractual terms, economic circumstances and pertinent conditions at the acquisition date. This includes the separation of embedded derivatives in the host contracts entered into by the acquiree.
If the business combination is achieved in stages, the acquisition date carrying value of the acquirer's previously held equity interest in the equity is re-measured to fair value at the acquisition date and any gains or losses arising from such re-measurement are recognised in consolidated profit or loss.
Any contingent consideration to be transferred by the acquirer is recognised at fair value at the acquisition date. Subsequent changes to the fair value of the contingent consideration that is deemed to be an asset or liability is recognised in accordance with International Accounting Standard 39 either in profit or loss. A contingent consideration that is classified as equity is not re-measured. Any subsequent settlement is accounted for within equity. In instances where the contingent consideration does not fall within the scope of International Accounting Standard 39, it is measured in accordance with the appropriate IFRS. If the contingent consideration is classified as equity, it is not measured, and any subsequent settlement is accounted for within equity.
Goodwill is initially measured at cost, which is the excess of the sum of the consideration transferred and the amount of any non-controlling interest in the acquiree over the net identifiable assets acquired and liabilities assumed. If the fair value of the net assets acquired exceeds the value of the consideration transferred, the difference is recognised directly in the income statement, unless, as was the case in the merger carried out in 2016, it underlies a transaction with own equity instruments, in which case the difference is recorded directly against reserves. After initial recognition, goodwill is measured at cost less any accumulated impairment losses. For the purpose of impairment testing, from the acquisition date goodwill acquired in a business combination is allocated to each of the Group's cash generating units that are expected to benefit from the combination, irrespective of whether other assets or liabilities of the acquiree are assigned to those units.
When goodwill forms part of the cash generating unit and part of the operation within that unit is disposed of, the goodwill associated with the operation disposed of is included in the carrying amount of the operation when determining the gain or loss on disposal of the operation. Goodwill disposed of in this manner is measured based on the relative values of the operation disposed of and the portion of the cash generating unit retained.
The Group has an interest in a joint venture, which is a jointly controlled company, whereby the venturers have a contractual arrangement which establishes joint control over the economic activities of the company. The contract requires unanimous agreement among the venturers for financial and operating decisions. In 2017, 2016 and 2015, the Group recorded this interest using the equity method in accordance with IFRS 11.
The Group's investments in associates are accounted for using the equity method. Associates are entities over which the Group has significant influence.
Under the equity method, the investment in an associate is initially recognised at cost in the consolidated balance sheet, and the carrying amount is increased or decreased depending on changes in the Group's share of the associate's net assets. Goodwill relating to the associate is included in the carrying amount of the investment and is neither amortised nor individually tested for impairment.
The Group's share of the associate's profit or loss is recognised in the income statement. When there has been a change recognised directly in the equity of the associate, the Group recognises its share of the change and discloses it, where applicable, in the statement of changes in equity. Unrealised gains and losses resulting from transactions between the Group and the associate are eliminated to the extent of the interest in the associate.
The Group's share of the profit of associates is recorded directly in the consolidated income statement. This is the profit attributable to equity holders of the associate and hence, corresponds to profit after tax and non-controlling interests in the subsidiaries of the associate.
The Financial Statements of the associates are prepared for the same reporting period as those of the Group and the necessary adjustments are made so as to bring the accounting policies in line with those of the Group.
After application of the equity method, the Group determines whether it is necessary to recognise an additional impairment loss on its net investment in the associate. The Group determines at each reporting date whether there is any objective evidence that the investment in the associate is impaired. If this is the case, the Group calculates the amount of impairment as the difference between the recoverable amount of the associate and its carrying value and recognises the amount in "Share of profit/(loss) of associates" in the consolidated income statement.
Upon loss of significant influence over the associate, the Group measures and recognises any retaining investment at its fair value. Any difference between the carrying amount of the associate upon the loss of significant influence and the fair value of the retained investment plus proceeds from disposal is recognised in the consolidated income statement.
The Group's consolidated financial statements are presented in Euros, which is also the parent company's functional currency. Each group company determines its own functional currency, and the items included in each company's financial statements are measured using that functional currency. The Group uses the direct method of consolidation and has chosen to recycle gains or losses arising when translating these items using this method.
Property, plant and equipment is stated at acquisition or production cost, net of accumulated depreciation and, as the case may be, accumulated impairment losses. The cost of plant and equipment built by the Group is determined using the same principles as the acquired assets, additionally taking into account inventory production cost criteria. Production costs are capitalised by crediting the cost attributable to the asset to "Own work capitalised" in the consolidated income statement.
Depreciation of property, plant and equipment is calculated using the straight-line method to allocate their cost or re-valued amounts to their residual values over the estimated useful lives, as follows:
| Buildings: | 40-50 years |
|---|---|
| Machinery, fixtures and tools: | 6-20 years |
| Other PPE: | 6-10 years |
Interest costs directly attributable to the acquisition, construction or production of an asset that necessarily require a substantial period of time for start-up or sale are capitalised as part of the cost of the asset. Other interest costs are expensed in the period in which they occur. Finance costs include interest and other costs the Group incurs in connection with the financing obtained.
Maintenance and repair costs are charged to the income statement in the period when they occur.
After initial recognition of the asset, the only costs capitalised are those expected to generate future economic benefits, to the extent that these costs can be reliably measured.
The replacement of items of property, plant and equipment which may be capitalised reduces the carrying amount of the replaced items. If the cost of the replaced items has not been depreciated independently and it is not practical to determine the carrying amount, the replacement cost is used as a proxy for the cost of the items at the time of acquisition or construction.
The cost of own work capitalised is measured at the cost of warehouse materials consumed at the cost of the staff performing the work on the internally-constructed assets.
Investment property is measured using the same criteria described for property, plant and equipment.
Investment property is depreciated on a straight-line basis over the estimated useful life of 50 years.
Computer software is measured at the acquisition cost or, as the case may be, production cost. Maintenance costs and annual use expenses are charged directly to the income statement as incurred.
Computer software is amortised over its estimated useful life, which ranges between three and seven years.
Research costs are recorded as an expense in the income statement as incurred.
The costs associated with software development and the design and testing of new products have been capitalised to the extent that:
The Group has the necessary technical and financial resources to complete development of the asset (or to use it internally) and has developed budgetary and analytical accounting control systems which make it possible to monitor the budgeted costs, modifications introduced and the costs actually allocated to the different projects.
The cost of assets generated internally by the Group is determined using the same principles as those used to determine the cost of inventory production. Production costs are capitalised by crediting the cost attributable to the asset to "Own work capitalised" in the consolidated income statement.
Greenhouse gas emission allowances are measured at the acquisition price or production cost. When these allowances are acquired free of charge, their acquisition cost is deemed to be the fair value of the allowances at the acquisition date based on trading prices in secondary markets and they are recognised with a credit to "Government grants" (Note 21 below). Emission allowances are not amortised and are measured at historical cost. Provisions for impairment are recorded for allowances which are to be sold and not consumed by the company when their carrying amount is greater than the market value. Allowances are eventually de-registered from the balance sheet on their transfer to third parties, certification of their consumption by the Government or when they expire. The estimate of the expense for the use of emission allowances, which is generally certified by the Government in the year following their consumption, is recognised under "Current Provisions" (Note 20) according to the historical cost of the allowances held by the company using the weighted average cost criterion.
Non-repayable grants associated with the greenhouse gas emission allowances allocated to the group companies free of charge under the EU Emissions Trading System 2013-2020 are taken to profit or loss as "Grants related to non-financial non-current assets" when the subsidised emission allowances are disposed of, deemed impaired or consumed.
The Group assesses, at each reporting date, whether there is an indication that an asset may be impaired. If any indication exists, or when annual impairment testing for an asset is required, the Group estimates the asset's recoverable amount. An asset's recoverable amount is the higher of an asset's or cash-generating unit's (CGU) fair value less costs to sell and its value in use and is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets. When the carrying amount of an asset exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. In determining fair value less costs to sell, recent market transactions are taken into account, if available. If no such transactions can be identified, an appropriate valuation model is used. These calculations are corroborated by valuation multiples, quoted share prices for publicly traded subsidiaries or other available fair value indicators.
The Group bases its impairment calculation on detailed budgets and forecast calculations, which are prepared separately for each of the Group's CGUs to which the individual assets are allocated. These budgets and forecasts generally cover a period of between three and five years. For longer periods, a long-term growth rate is calculated and applied to estimate future cash flows after the last year.
Impairment losses of continuing operations, including impairment of inventories, are recognised in the consolidated income statement under expense headings consistent with the function of the impaired asset, except for previously re-valued property, for which the revaluation is recorded directly in equity. In this case, the impairment loss is also recognised in equity until the amount of the previous revaluation is offset.
(a) Financial assets
Financial assets within the scope of International Accounting Standard 39 are classified as financial assets at fair value through profit or loss, loans and receivables, held-to-maturity investments, available-for-sale financial assets, or as derivatives designated as hedging instruments in an effective hedge, as appropriate. The Group determines the classification of its financial assets at initial recognition.
All financial assets are recognised initially at fair value plus transaction costs, except in the case of financial assets recorded at fair value through profit or loss.
The purchase or sale of financial assets that require delivery of assets within a time frame established by regulation or convention in the market place (regular-way trades) are recognised on the trade date, i.e. the date that the Group commits to purchase or sell the asset.
The Group's financial assets include cash and short-term deposits, trade and other receivables, loans and other receivables, quoted and unquoted financial instruments and derivative financial instruments.
The subsequent measurement of financial assets depends on their classification as described below:
● Financial assets at fair value through profit or loss
This category includes financial assets held for trading and financial assets designated upon initial recognition at fair value through profit or loss. Financial assets are classified as held for trading if they are acquired for the purpose of sale or repurchase in the near term. Derivatives, including separated embedded derivatives, are also classified as held for trading unless they are designated as effective hedging instruments as defined by International Accounting Standard 39.
Financial assets at fair value through profit or loss are carried in the consolidated balance sheet at fair value with net changes in fair value recognised in "Finance costs" in the consolidated income statement.
Financial assets designated upon initial recognition at fair value through profit or loss are designated at their initial recognition date and only if the criteria under International Accounting Standard 39 are satisfied. The Group has not designated any financial assets at fair value through profit or loss.
The Group evaluates its financial assets held for trading, other than derivatives, to determine whether the intention to sell them in the near term is still firm. When, in exceptional circumstances, the Group is unable to trade these financial assets due to inactive markets and the management's intention to sell them in the foreseeable future changes, the Group may elect to reclassify these financial assets. The reclassification to loans and receivables, available-for-sale assets or held-to-maturity assets depends on the nature of the asset. This evaluation does not affect any financial assets designated at fair value through profit or loss using the fair value option at initial recognition; these instruments cannot be reclassified after initial recognition.
Derivatives embedded in host contracts are accounted for as separate derivatives and recorded at fair value if their characteristics and risks are not related to those of the host contracts and the host contracts are not held for trading or designated at fair value though profit or loss. These embedded derivatives are measured at fair value with changes in fair value recognised in the consolidated income statement. Reassessment only occurs if there is a change in the terms of the contract that significantly modifies the cash flows that would otherwise be required.
● Loans and other receivables
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. After initial measurement, these financial assets are subsequently measured at amortised cost using the effective interest rate method, less impairment. Amortised cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are an integral part of the effective interest. The interest accrued in accordance with this effective interest rate is included under "Finance income" in the consolidated income statement. The losses arising from impairment are recognised in the consolidated income statement in "Finance costs" for loans and "Other operating expenses" for receivables.
● Held-to-maturity investments
Non-derivative financial assets with fixed or determinable payments and fixed maturities are classified as held-to-maturity when the Group has the positive intention and ability to hold them to maturity. After initial measurement, held-to-maturity investments are measured at amortised cost using the effective interest rate method, less impairment. Amortised cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are an integral part of the effective interest. The interest accrued in accordance with this effective interest rate is included under "Finance income" in the consolidated income statement. The losses arising from impairment are recognised in the consolidated income statement in "Finance costs".
● Available-for-sale financial assets
Available-for-sale financial assets include investments in equity instruments and debt securities. Equity instruments classified as available-for-sale are those that are neither classified as held for trading nor designated at fair value through profit or loss. Debt securities in this category are those that are intended to be held for an indefinite period of time and that may be sold in response to needs for liquidity or in response to changes in market conditions.
After initial measurement, available-for-sale financial assets are subsequently measured at fair value with unrealised gains or losses recognised as income and expense recorded directly in equity under "Valuation adjustments – Available-for-sale financial assets" until the investment is derecognised, at which time the cumulative gain or loss is recognised in "Other operating revenue", or the investment is deemed to be impaired, when the cumulative loss is reclassified to "Finance costs" in the consolidated income statement. Interest earned while holding available-for-sale financial assets is registered as interest income using the effective interest rate method.
The Group evaluates whether the ability and intention to sell its available-for-sale financial assets in the near term is still firm. When, in rare circumstances, the Group is unable to trade these financial assets due to inactive markets and management's intention to do so in the foreseeable future changes, the Group may elect to reclassify these financial assets. Reclassification to loans and receivables is permitted when the financial assets meet the definition of loans and receivables and the Group has the intent and ability to hold these assets for the foreseeable future or until maturity. Reclassification to the held-to-maturity category is only permitted when the entity has the ability and intention to hold the financial asset accordingly.
For a financial asset reclassified from the available-for-sale category, the fair value at the date of reclassification becomes its new amortised cost and any previous gain or loss on the asset that has been recognised in equity is reclassified to profit or loss over the remaining life of the investment using the effective interest-rate method. Any difference between the new amortised cost and the maturity amount is also amortised over the remaining life of the asset using the effective interest rate. If the asset is subsequently determined to be impaired, then the amount recorded in equity is reclassified to the consolidated income statement.
A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets) is derecognised when:
When the Group has transferred its rights to receive cash flows from an asset or has entered into a pass-through arrangement, it evaluates if and to what extent it has retained the risks and rewards of ownership. When it has neither transferred nor retained substantially all of the risks and rewards of the asset, nor transferred control of the asset, the asset is recognised to the extent of the Group's continuing involvement in the asset.
In that case, the Group also recognises an associated liability. The transferred asset and the associated liability are measured on a basis that reflects the rights and obligations that the Group has retained.
Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration that the Group could be required to repay.
The Group assesses, at each reporting date, whether there is any objective evidence that a financial asset or a group of financial assets is impaired. A financial asset or a group of financial assets is deemed to be impaired if, and only if, there is objective evidence of impairment as a result of one or more events that have occurred after the initial recognition of the asset (an incurred "loss event") and that loss event has an impact on the estimated future cash flows of the financial asset or the group of financial assets that can be reliably estimated. Evidence of impairment may include indications that the debtors or a group of debtors is experiencing significant financial difficulty, default or delinquency in interest or principal payments, the probability that they will enter bankruptcy or other financial reorganisation and when observable data indicate that there is a measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults.
● Financial assets carried at amortised cost
For financial assets carried at amortised cost, the Group first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant, or collectively for financial assets that are not individually significant. If the Group determines that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. Assets that are individually assessed for impairment and for which an impairment loss is, or continues to be, recognised are not included in a collective assessment of impairment.
If there is objective evidence that an impairment loss has been incurred, the amount of the loss is measured as the difference between the asset's carrying amount and the present value of estimated future cash flows (excluding future expected losses that have not yet been incurred). The present value of the estimated future cash flows is discounted at the financial asset's original effective interest rate. If a loan has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate.
The carrying amount of the asset is reduced through the use of an allowance for impairment account and the amount of the loss is recognised in the consolidated income statement. Interest income continues to be accrued on the reduced carrying amount and is accrued using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss. The interest income is recorded as part of finance income in the consolidated income statement. Loans together with the associated allowance are written off when there is no realistic prospect of future recovery and all collateral has been realised or has been transferred to the Group. If, in a subsequent year, the amount of the estimated impairment loss increases or decreases because of an event occurring after the impairment was recognised, the previously recognised impairment loss is increased or reduced by adjusting the allowance account. If a future write-off is later recovered, the recovery is credited to finance costs in the consolidated income statement.
For available-for-sale financial assets, the Group assesses at each reporting date whether there is objective evidence that an investment or a group of investments is impaired.
In the case of equity investments classified as available-for-sale, objective evidence would include a significant or prolonged decline in the fair value of the investment below its cost. "Significant" is evaluated against the original cost of the investment and "prolonged" against the period in which the fair value has been below its original cost. When there is evidence of impairment, the cumulative loss (measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that investment previously recognised in the consolidated income statement) is removed from the consolidated statement of recognised income and expense and recognised in the consolidated income statement.
Impairment losses on equity investments are not reversed through the consolidated income statement; increases in their fair value after impairment are recognised directly in equity.
In the case of debt instruments classified as available-for-sale, impairment is assessed based on the same criteria as financial assets carried at amortised cost. However, the amount recorded for impairment is the cumulative loss measured as the difference between the amortised cost and the current fair value, less any impairment loss on that investment previously recognised in the consolidated income statement.
Future interest income continues to be accrued based on the reduced carrying amount of the asset, using the rate of interest employed to discount the future cash flows for the purpose of measuring the impairment loss. The interest income is recorded as part of finance income. If, in a subsequent year, the fair value of a debt instrument increases and the increase can be objectively related to an event occurring after the impairment loss was recognised in the consolidated income statement, the impairment loss is reversed through the consolidated income statement.
Financial liabilities within the scope of International Accounting Standard 39 are classified as financial liabilities at fair value through profit or loss, loans and borrowings, or as derivatives designated as hedging instruments in an effective hedge, as appropriate. The Group determines the classification of its financial liabilities at initial recognition.
All financial liabilities are recognised initially at fair value plus, in the case of loans and borrowings, directly attributable transaction costs.
The Group's financial liabilities include trade and other payables, bank overdrafts, loans and borrowings, and derivative financial instruments.
After initial recognition, interest bearing loans and borrowings are subsequently measured at amortised cost using the EIR method. Gains and losses are recognised in the consolidated income statement when the liabilities are derecognised as well as through the effective interest rate amortisation process.
Amortised cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are an integral part of the effective interest rate. The interest accrued in accordance with this effective interest rate is included under "Finance costs" in the consolidated income statement.
A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires.
When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as the de-recognition of the original liability and the recognition of a new liability. The difference in the respective carrying amounts is recognised in the consolidated income statement.
Financial assets and financial liabilities are offset and the net amount reported in the consolidated balance sheet if, and only if:
The fair value of financial instruments that are traded in active markets at each reporting date is determined by reference to quoted market prices or dealer price quotations without any deduction for transaction costs.
For financial instruments not traded in an active market, the fair value is determined using appropriate valuation techniques. Such techniques include:
An analysis of fair values of financial instruments and further details as to how they are measured are provided in Note 23.
Initial recognition and subsequent measurement
Where appropriate, the Group uses derivative financial instruments, such as forward currency contracts, interest rate swaps and forward commodity contracts, to hedge its foreign currency risks, interest rate risks and commodity price risks, respectively. These derivative financial instruments are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequently re-measured at fair value at each reporting date. Derivatives are carried as financial assets when the fair value is positive and as financial liabilities when the fair value is negative.
Any gains or losses arising from changes in the fair value of derivatives are taken directly to the consolidated income statement, except for the effective portion of cash flow hedges, which is recognised within income and expense recognised directly in equity.
For the purpose of hedge accounting, hedges are classified as:
At the start of a hedge relationship, the Group formally designates and documents the hedge relationship to which the Group wishes to apply hedge accounting and the risk management objective and strategy for undertaking the hedge. The documentation includes identification of the hedging instrument, the hedged item or transaction, the nature of the risk being hedged and how the entity will assess the effectiveness of changes in the hedging instrument's fair value in offsetting the exposure to changes in the hedged item's fair value or cash flows attributable to the hedged risk. Such hedges are expected to be highly effective in achieving offsetting changes in fair value or cash flows and are assessed on an ongoing basis to determine that they actually have been highly effective throughout the financial reporting periods for which they were designated.
Hedges that meet the strict criteria for cash flow hedges are accounted for as follows:
The effective portion of the gain or loss on the hedging instrument is recognised directly in equity in "Valuation adjustments – hedging transactions", while any ineffective portion is recognised immediately in the consolidated income statement in "Changes in fair value of financial instruments".
Amounts recognised as income and expenses recognised directly in equity are transferred to the consolidated income statement when the hedged transaction affects profit or loss, such as when the hedged financial income or financial expense is recognised or when a forecast sale occurs. When the hedged item is the cost of a non-financial asset or non-financial liability, the amounts recognised as income and expenses recognised directly in equity are transferred to the initial carrying amount of the non-financial asset or liability.
If the forecast transaction or firm commitment is no longer expected to occur, the cumulative gain or loss previously recognised in equity is transferred to the consolidated income statement. If the hedging instrument expires or is sold, terminated or exercised without replacement or rollover, or if its designation as a hedge is revoked, any cumulative gain or loss previously recognised in income and expenses recognised directly in equity remains in equity until the forecast transaction or firm commitment affects profit or loss.
The Group uses financial derivative instruments to mitigate its exposure to volatility in interest payments on financial liabilities carrying variable interest rates (Note 23).
Current versus non-current classification
Derivative instruments that are not designated as effective hedging instruments are classified as current or non-current or separated into a current and non-current portion based on an assessment of the facts and circumstances (e.g. the underlying contracted cash flows):
The Group recognises a biological asset when, and only when:
Biological assets should be measured, both on initial recognition and as of each reporting date, according to their fair value less estimated point-of-sale costs, except in the event that the fair value cannot be measured reliably (Note 11).
A gain or loss arising on initial recognition of a biological asset at fair value less estimated point-of-sale costs and from a change in fair value less estimated point-of-sale costs of a biological asset shall be included in profit or loss for the period in which it arises.
Inventories are valued at the lower of cost and net realisable value, applying the following criteria:
Cost is written down to the inventories' net realisable value as required. Net realisable value is the estimated selling price in the ordinary course of business, less estimated costs of completion and the estimated costs necessary to make the sale.
Cash and cash equivalents comprise cash at banks and on hand, short-term deposits and short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of change in value. To this end, cash equivalents include investments maturing within three months.
The company's ordinary shares are classified as equity. The Group has not issued any preference shares. Costs directly attributable to the issuance of new shares are deducted from equity net of the corresponding tax effect.
Own equity instruments that are reacquired by the Group are recognised separately at cost and deducted from equity on the balance sheet, regardless of why they were bought back. Any gain or loss on the sale of own equity instruments is recognised directly in equity.
Tax expense (income) includes current and deferred tax expenses (income).
Current tax is the amount of income tax payable (recoverable) in respect of consolidated taxable profit (tax loss) for the year. Current income tax assets and liabilities for the current period are measured at the amount expected to be recovered from or paid to the tax authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted at the reporting date.
Deferred tax liabilities are the amounts of income tax payable in future periods in respect of taxable temporary differences, while deferred tax assets are the amounts of income tax recoverable in future periods in respect of deductible temporary differences, the carryforward of unused tax losses and the carryforward of unused tax credits.
For these purposes, temporary differences are differences between the carrying amount of an asset or liability and its tax base.
Deferred tax liabilities are recognised for all taxable temporary differences, except:
Deferred tax assets are recognised for all taxable temporary differences, except:
The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred income tax asset to be utilised. Unrecognised deferred tax assets are also reviewed at each reporting date, and are recorded to the extent that it is probable that a taxable profit will be available against which the deferred tax asset can be applied.
Deferred tax assets and liabilities are measured at the tax rates that are expected to be applied in the year when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the reporting date.
Deferred tax relating to items recognised outside the consolidated income statement is registered outside the consolidated income statement. Deferred tax items are recognised in correlation to the underlying transaction either in the income statement or directly in equity.
Deferred tax assets and deferred tax liabilities are offset if a legally enforceable right exists to set off current tax assets against current income tax liabilities and the deferred taxes relate to the same taxable entity and the same tax authority.
Tax benefits acquired as part of a business combination, but not satisfying the criteria for separate recognition at that date, may be subsequently recognised if certain facts and circumstances have changed. The adjustment would either be treated as a reduction to goodwill (as long as it does not exceed goodwill) if it was incurred during the measurement period or else in the consolidated income statement.
Revenues, expenses and assets are recognised net of the amount of sales tax, except:
The net amount of sales tax recoverable from, or payable to, the tax authority is included as part of receivables or payables in the consolidated balance sheet.
(a) Pensions and other post-employment benefits
Some Group companies have committed to top up their employees' pension plans as follows:
These liabilities are treated as other long-term employee benefits. The amount recognised as a liability is the estimated present value of the obligation, less, as the case may be, the market value of the assets of the corresponding funds. The current service cost plus interest cost less the expected return on any plan assets is recognised as an expense or income for the year. Actuarial gains and losses and past service costs are recognised immediately in the income statement for the year.
(c) Termination benefits
Except in cases of justified dismissal, companies are required to pay compensation to employees when their employment is terminated. As there is no foreseeable need for the irregular termination of employment, termination benefits, when they arise, are charged to the consolidated income statement at the time the dismissal decision is announced.
Certain members of the Group's management team receive share-based remuneration, under which members provide services in consideration for equity instruments. The cost of share-based payment transactions settled via equity instruments is recorded, together with the corresponding increase under the heading "Other equity instruments" in the period in which the service and/or performance conditions are met. The accumulated cost recognised for equity instruments at each closing date and until the vesting date reflects the part of the vesting period accrued and the Group's best estimate of the equity instruments that are finally granted (See Note 25). The expense recorded in the consolidated income statement is included under the heading "Employee benefits expense".
Expenses for rights that are not consolidated are not recorded, except those transactions with sharebased payments which are awarded subject to a market condition, which are treated as granted regardless of whether the market condition is satisfied or not, provided that the rest of the service or performance conditions are met.
When the terms of the plan are modified, the minimum expense recorded is the expense that would have been incurred if said terms had not been modified and, furthermore, an expense is recorded for any modification that increases the fair value of the share-based payment transaction or which, valued at the date of modification, is beneficial for the employees.
Upon cancellation of the plan, this is treated as if the rights had been consolidated at the date of cancellation, and any unrecognised expense for these rights is immediately recognised. This includes any right where the non-decisive conditions for consolidation under the control of the company or the employee have not been met. However, if new rights replace those cancelled, and these are designated as replacement rights on the date they are granted, the cancelled rights and the new rights will be treated as if they were modifications of the original rights, as described in the previous paragraph.
Provisions are recognised when:
The amounts recognised in the consolidated balance sheet reflect the best estimate of the expenditure required to settle the present obligation at the end of the reporting period, after taking into consideration the risks and uncertainties relating to the provision and, where the effect is material, the impact of the time value of money, so long as the annual outflows can be reliably determined. When discounting is used, the time value of money is recognised as a finance cost in the consolidated income statement.
Provisions do not reflect related tax effects or gains on the expected disposal or abandonment of assets.
Provisions are reversed against profit or loss when it is no longer probable that an outflow of resources will be required to meet the obligation. The reversal is recognised in the consolidated separate income statement heading in which the corresponding expense was recognised. Any surplus over the corresponding expense is recognised within "Other operating revenue" in the consolidated income statement.
Contingent liabilities are possible obligations that arise from past events and whose existence will be confirmed by the occurrence or non-concurrence of uncertain future events not wholly within the control of the Group, as well as present obligations that arise from past events for which it is not probable that an outflow of resources will be required to settle the obligation or the amount of the obligation cannot be measured with sufficient reliability. Contingent liabilities are not recognised, but disclosed in the notes unless the possibility of an outflow of resources is remote.
Income and expenses are recognised when they arise on an accrual basis, regardless of when actual payment or collection occurs.
Ordinary revenue from the sale of goods and the rendering of services is recognised at the fair value of the consideration received or receivable. Discounts likely to be granted for prompt payment, volume purchases or other factors at the time of revenue recognition are deducted from the amount of revenue recognised.
Revenue from the sale of goods is recognised when the significant risks and rewards of ownership of the goods have passed to the buyer, regardless of when legal title is passed.
Revenue from the rendering of services is recognised in the financial year in which they are provided, as no stages of service contracts are pending completion.
Interest income is recognised using the effective interest rate method.
Revenue for dividends is recognised at the moment the Group's right to receive the payment is established.
Leases in which the all the risks and rewards of ownership of an asset are substantially transferred to the Group are classified as finance leases. All other leases are classified as operating leases.
Finance leases are capitalised at the lease's commencement at the lower of the fair value of the leased property and the present value of the minimum lease payments. Initial direct costs are added to the carrying amount of the leased asset. The minimum lease payments are apportioned between the finance charge and the reduction in the outstanding liability. The finance charge is distributed over the term of the lease so as to achieve a constant periodic rate of interest on the remaining balance of the liability. The payment obligation, net of finance charges, is recorded under payables, and the finance charge is recorded in the consolidated income statement as it accrues. Leased assets are classified within property, plant and equipment or intangible assets by nature and are depreciated/amortised over their useful lives.
Payments made under operating leases are recognised as an expense in a straight-line basis over the lease term unless another systematic basis is more representative of the time pattern of the user's benefit.
Government grants are recognised when there is reasonable assurance that the grant will be received and that the group will comply with all the attached conditions. When the grant relates to an expense item, it is recognised as income over the period necessary to match the grant on a systematic basis to the costs that it is intended to offset. When the grant relates to an asset, it is recognised as deferred income and credited to income in equal amounts over the expected useful life of the related asset.
When the Group receives non-monetary grants, the asset and the grant are recorded at their nominal amounts and credited to the consolidated income statement on a straight-line basis over the expected useful life of the corresponding asset. When loans or similar assistance are provided by governments or related institutions with an interest rate below the current applicable market rate, the effect of this favourable interest is regarded as an additional government grant.
The Group classifies its assets and liabilities as current and non-current in the consolidated balance sheet. To this end, current assets and current liabilities are those that meet the following criteria:
Assets are classified as current when the Group:
Liabilities are classified as current when the Group:
Financial liabilities are classified as current when they are due to be settled within 12 months after the reporting date.
The Group carries out activities whose primary purpose is to prevent, mitigate or repair environmental damage caused by its operations. Expenses incurred in connection with these environmental activities are recognised as other operating expenses in the year in which they are incurred.
Property, plant and equipment acquired for the purpose of sustained use in its business operations whose main purpose is to minimise environmental damage and/or enhance environmental protection, including those intended to reduce or eliminate pollution by the Group in the future, are recognised in the corresponding asset heading following the asset measurement, presentation and disclosure criteria outlined in Note 2.8 above.
The Group intends to adopt the standards, interpretations and amendments to standards issued by the IASB which are not mandatory in the European Union as at the reporting date when they enter into force, where applicable. Although the Group is currently analysing their impact, based on the analyses performed to date, the Group estimates that their initial application will not have a material impact on its consolidated financial statements, except with regard to the following standards, interpretations and amendments to standards that have been issued:
The disclosure of changes in liabilities arising from financing activities during financial year 2017 is as follows:
| 1 Jan 2017 | Cash flow | €'000s Changes in cons. scope |
Translation differences |
31 Dec 2017 | |
|---|---|---|---|---|---|
| Deferred tax assets Non-current debt |
32,221 | (9,239) | (6,496) | (13) | 16,473 |
| with financial entities | 329,821 | (27,822) | – | – | 301,999 |
| ––––––––– | ––––––––– | ––––––––– | ––––––––– | ––––––––– | |
| Total debt with | 362,042 | (37,061) | (6,496) | (13) | 318,472 |
| financial entities | –––––––––––––––––– | –––––––––––––––––– | –––––––––––––––––– | –––––––––––––––––– | –––––––––––––––––– |
The Group intends to adopt the standards, interpretations and amendments to standards issued by the IASB which are not mandatory in the European Union as at the reporting date when they enter into force, where applicable. Although the Group is currently analysing their impact, based on the analyses performed to date, the Group estimates that their initial application will not have a material impact on its consolidated financial statements, except with regard to the following standards, interpretations and amendments to standards that have been issued:
In July 2014, the IASB published the final version of IFRS 9 Financial Instruments, which replaces International Accounting Standard 39 "Financial Instruments: Recognition and Measurement" and all the previous versions of IFRS 9. This standard brings together the three phases of the project for financial instruments: classification and measurement, impairment and hedge accounting. IFRS 9 is effective for annual periods beginning on or after 1 January 2018, with earlier application being permitted. Except for hedge accounting, it requires retroactive application, but amendment of comparative information is not required. For hedge accounting, the requirements are generally applied prospectively, with some limited exceptions.
The Group plans to adopt the new standard on the required application date and not restate comparative information. In 2017, the Group conducted a high-level assessment of the impacts of the three aspects of IFRS 9. This assessment is based on currently available information and may be subject to changes as a result of additional information that becomes available in 2018 when the Group adopts IFRS 9. In general, the Group does not expect major changes in the balance sheet and in the net worth, except as a result of the effect of application of the requirements in IFRS 9 for restructuring financial liabilities made in the past.
The Group does not expect major changes in its balance sheet or net worth as a result of application of the classification and measurement requirements in IFRS 9. It expects to continue measuring at fair value all the financial assets which are currently recognised at fair value.
Shares of unlisted entities are expected to be held in the foreseeable future. No losses for impairment have been recognised in the consolidate income statement for these investments for previous years. The Group expects to apply the option to present the changes in fair value in other comprehensive income and, therefore, it believes that the application of IFRS 9 will not have a material impact.
Loans, as well as trade receivables, are held in order to receive the contractual cash flows and it is expected that they will involve cash flows that only represent payments of principal and interest. The Group analysed the characteristics of the contractual cash flows of these instruments and concluded that the instruments complied with the criteria to be measured at amortised cost in accordance with IFRS 9. Consequently, these instruments do not need to be reclassified.
(b) Impairment
IFRS 9 requires the Group to recognise expected credit losses on all its debt instruments, loans and trade receivables, whether over 12 months or a full lifetime. The group analysed the application of IRFS 9 and concluded that the impact is not significant, as a result of the strict credit risk management policies followed by the Group.
(c) Hedge accounting
The Group determined that all existing hedge relations, which are currently considered effective hedges, can continue to be classified as hedges pursuant to IFRS 9. The group has opted to the prospective application of hedge accounting. Since IRFS 9 does not change the general principles on how effective hedges should be recorded, the Group does not expect any significant impact as a result of the application of this standard.
IFRS 9 requires that when financial liabilities are restructured, the income statement in the year in which the restructuring takes place recognised the difference between:
Bearing in mind that over recent years, the Group has restructured its syndicated loan several times, it has recalculated the impact of the new terms in accordance with IFRS 9. The estimated impact at 1 January 2018 is a reduction in the financial liability of €3.2m, an increase in Deferred tax liabilities of €0.8m, and the consequent increase in Equity of €2.4m. IFRS 9 considers that a financial liability is restructured when the discounted present value of the remaining cash flow of the refinanced debt, using the original effective interest rate, it is at least 10 per cent. different from the carrying amount of the debt.
IFRS 15 was published in May 2014 and amended in April 2016, and establishes a new five-step model that applies to the recording of revenue from contracts with customers. According to IFRS 15, revenue is recognised in an amount that reflects the consideration to which the company expects to be entitled in exchange for the transfer of goods or services to a customer. This new standard repeals all the previous standards relating to revenue recognition. It requires full or partial retroactive application for annual periods beginning on or after 1 January 2018. In 2017, the Group performed a preliminary assessment of IFRS 15. The Group's business is to manufacture and supply paper reels to corrugated board manufacturers, as well as to manufacture and supply boxes to end customers. The Group also sells electric power that it generates at its co-generation plants, as well as recovered paper that it collects in different recovery points. In general, the paper reels, corrugated board boxes and recovered corrugated board are sold by means of sales orders from customers that are subject to general sales conditions. Discounts for prompt payment or sales volume are agreed with certain customers.
This standard is not expected to have an impact on the Group's profit for sale orders. The Group expects that the recognition of revenue will take place when control of the asset is transferred to the customer, generally upon delivery of the goods.
In the analysis performed to adopt IRFS 15, the Group considers the following in relation to the sale of our products:
Some contracts with customers provide rights of return, trade discounts and volume discounts. The Group currently recognises revenue from the sale of goods at the fair value of the consideration received or receivable, net of returns, trade discounts and volume discounts. If the revenue cannot be reliably measured, the Group defers recognition of the revenue until the uncertainty is resolved. Such provisions lead to variable consideration in accordance with IFRS 15 and this will need to be estimated at the start of the contract and subsequently updated.
IFRS 15 requires entities to consider that there will be no significant revenue reversals when estimating variable consideration. The Group expects application of the restriction in recognition of variable consideration to lead to the deferral of more revenue than is the case with the current standard.
When an order with a customer provides a right of return of the good in a specific period, the Group currently recognises that right of return when it is claimed by the customer and the Group accepts the claim.
Therefore, according to the current accounting policy, the amount of the correction of revenue relating to expected returns is not recognised, and these are only recognised when the returned good is received at the Group's warehouse and the corresponding entry and correction to the cost of sales is recorded.
In accordance with IFRS 15, given that the orders allow customers to return the products when the specifications thereof or their physical state upon receipt are not as agreed, the consideration received is variable. The Group has decided to use the expected value method to estimate the goods that will be returned.
The Group's Management believes that the impact of the adjustments and reclassifications to be carried out is not material.
The Group provides, on an annual basis, retroactive volume discounts for certain products purchased by its customers once the annual volume of products sold in a period exceeds a certain volume stipulated in the agreement. In accordance with the current accounting policy, the Group estimates the expected volume discounts, deducting from the start of the period the revenue of each sale with 100 per cent. of the agreed volume discount. At the end of the year, the Group assesses compliance with the volume discount customer by customer and adjusts sales accordingly.
In accordance with IFRS 15, volume discounts give rise to variable consideration. In order to estimate the variable consideration, the Group considers that the most likely amount method better predicts the amount of the variable consideration for contracts that have one single discount when they exceed the agreed volume, while for contracts with more than one discount, depending on volume, the expected value method or the most likely amount method would be applied depending on which of them better predicts the amount of the variable consideration for that type of contract. The Group has applied the requirements of IFRS 15 to the significant reversals of variable consideration and has concluded that effect would not be material.
In general, the Group receives short-term advances from its customers, which are presented as part of "Trade payables". In its operations of manufacturing and supplying Paper and Corrugated Board, the Group does not receive long-term advances from its customers. According to IFRS 15, the Group must determine whether there is a significant financing component in its contracts. However, the Group has decided to use the practical solution provided in IFRS 15, and will not adjust the amount of the consideration for the effects of the significant financing component of the contracts when the Group expects, at the start of the contract, that the period between transfer of the good or service to the customer and the corresponding collection date will be one year or less. Therefore, for short-term advances, the Group will not record a financing component, even if it is significant.
IFRS 15 includes presentation and disclosure requirements that are more detailed than in current standards. The presentation requirements represent a significant change with regard to current practice and significantly increase the volume of disclosures required in the Group's financial statements.
Many of the disclosure requirements in IFRS 15 are completely new and the Group has assessed whether the impact of some of these requirements will be material. In general, the group does not expect to see a major increase in the volume of disclosures. In particular, the Group expects that the Notes to the financial statements will be extended as a result of the disclosures corresponding to the judgements made: on determining the transaction price of those contracts that include variable consideration, how the transaction price has been assigned to the different performance obligations and the assumptions used to estimate the independent sales prices of each performance obligation. In addition, in accordance with the requirements of IFRS 15, the Group will disaggregate, as the case may be, the revenue recognised in customer contracts in categories that describe how the nature, amount, schedule and uncertainty of the revenue and cash flows are affected by economic factors. It will also disclose information on the relationship between the revenue disclosed and the information on the revenue disclosed for each reportable segment. In 2017, the Group assessed the systems, internal controls, policies and procedures necessary to gather and disclose the required information.
In addition to the main adjustments described above, upon adoption of IFRS 15, other items in the financial statements will be adjusted, such as deferred taxes, assets held for sale and their associated liabilities, the profit or loss after tax of discontinued operations, as well as investments in associates and joint ventures. In addition, exchange differences for the translation of foreign operations will also be adjusted.
The recognition and measurement requirements of IFRS 15 are also applicable to the recognition and measurement of any gain or loss on deregistration of non-financial assets (such as property, plant and equipment and intangible assets) when such deregistration is not in the ordinary course of business. However, the effect of these changes is not expected to be material for the Group in the transition.
In summary, the impact of adoption of IFRS 15 on the Statement of Financial Position is expected no to be material.
IFRS 16 was published in January 2016 and replaces IAS 17 Leases, IFRIC 4 Determining whether an arrangement contains a lease, SIC-15 Operating leases – Incentives, and SIC-27 Evaluating the substance of transactions in the legal form of a lease.
IFRS 16 establishes the principles for recognition, measurement, presentation and disclosure of leases and requires lessees to record all leases under one single lessee accounting model similar to the current accounting model applied to finance leases in accordance with IAS 17. The standard includes two exemptions whereby lessees are not required to recognise assets and liabilities for leases of low-value assets (for example, personal computers) and also short-term leases (i.e. leases for 12 months or less). On lease commencement, the lessee will recognise a liability for the present value of the lease payments (i.e. the lease liability) and an asset that represents the right to use the underlying asset during the lease term (i.e. the right-of-use asset). Lessees are required to recognise interest on lease liabilities separately from depreciation of the lease right-of-use asset.
Lessees will also be required to reassess lease liabilities on the occurrence of certain events (for example, a change in the lease term or a change in future lease payments as a result of a change in the reference index or rate). The lessee will generally recognise the amount of the reassessment of the lease liability as an adjustment to the right-of-use asset.
Accounting by lessors according to IFRS 16 is not amended substantially with regard to the current accounting pursuant to International Accounting Standard 17. Lessors will continue classifying leases with the same classification principles as in International Accounting Standard 17 and will record two types of lease: operating leases and finance leases.
IFRS 16 also requires lessees and lessors to include more extensive disclosures than those required under International Accounting Standard 17.
IFRS 16 is effective for those periods beginning on or after 1 January 2019. Early application is permitted but not prior to an entity applying IFRS 15. A lessee may either apply the standard with full retrospective effect or by means of a modified retroactive transition. The provisions for transition to the standard allow certain exemptions.
In 2018, the Group will continue to assess the potential effect of IFRS 16 on its consolidated financial statements.
The other standards and interpretations issued by the IASB, but which are not applicable in this period and which are not expected to have a material impact on the Group are:
| Standard, interpretation or amendment | Date of adoption by the EU |
Date of application in the EU |
Date of application of IASB |
|---|---|---|---|
| IFRS 17 – Insurance contracts | Pending | Pending | 1 January 2021 |
| CINIIF 22 – Foreign currency transactions and advance consideration |
Pending | Pending | 1 January 2018 |
| CINIIF 23 – Uncertainty over income tax treatments |
Pending | Pending | 1 January 2019 |
| Annual improvements to IFRS – 2014-2016 cycle |
Pending | Pending | 1 January 2017 and 1 January 2018 |
| Annual improvements to IFRS – 2015-2017 cycle |
Pending | Pending | 1 January 2019 |
| Amendments to IAS 28 – Long-term investments in associated and joint ventures |
Pending | Pending | 1 January 2019 |
| Amendments to IAS 40 – Transfers of investment property |
Pending | Pending | 1 January 2018 |
| Amendments to IFRS 2 – Classification and measurement of share-based payments transactions |
Pending | Pending | 1 January 2018 |
| Amendments to IFRS 4 – Applying IFRS 9 financial instruments with IFRS4 insurance contracts |
November 2017 |
1 January 2018 | 1 January 2018 |
| Amendments to IFRS 9 – Prepayment features with negative compensation |
Pending | Pending | 1 January 2019 |
| Amendments to IFRS 10 and IAS 28 – Sale or contributions of assets between an investor and its associate or joint venture |
Pending | Pending | Indefinitely postponed |
| Amendments to IFRS 15 – Clarifications on standard |
October 2017 | 1 January 2018 | 1 January 2018 |
The preparation of the Group's consolidated Financial Statements requires management to use estimates and judgements to estimate certain assets, liabilities, revenue, expenses and commitments recorded therein.
The management judgements, key assumptions concerning the future and other key sources of estimation uncertainty at the reporting date that have a significant risk of causing a material adjustment to the carrying amounts of consolidated assets and liabilities within the next financial year are described in this section. The Group based its assumptions and estimates on parameters available when the consolidated Financial Statements were prepared. Existing circumstances and assumptions about future developments, however, may change due to market changes or circumstances arising beyond the control of the Group. Such changes are reflected in the assumptions when they occur.
The Group, which regularly acquires businesses, allocates the acquisition price paid to the fair value of the assets and liabilities acquired. The Group hires independent experts to determine the acquisition date fair value of the identifiable assets and liabilities acquired (mainly properties, equipment and employment-related obligations). The valuation techniques used are based on comparable transaction multiples, the amortised replacement cost (whenever no comparable market existed) and certain actuarial calculations in respect of employment-related obligations. The fair value of the properties acquired is sensitive to changes in supply and demand in the property and forestry markets (Notes 10 and 11).
Impairment exists when the carrying value of an asset or cash generating unit exceeds its recoverable amount, which is the higher of its fair value less costs to sell and its value in use. The fair value less costs to sell calculation is based on available data from binding sales transactions in arm's length transactions of similar assets or observable market prices less incremental costs for disposing of the asset. The value in use calculation is based on a discounted cash flow model. The cash flows are derived from the budget for the coming years and do not include restructuring activities that the Group is not yet committed to or significant future investments that will enhance the performance of the asset of the CGU being tested. The recoverable amount is sensitive to the discount rate used for the discounted cash flow model as well as the expected future cash inflows and the growth rate used to estimate terminal value. The key assumptions used to determine the recoverable amount for the different CGUs are further explained in Note 10.
Uncertainties exist with respect to the interpretation of tax regulations, changes in tax laws, and the amount and timing of future taxable income. Given the wide range of international business relationships and the long-term nature and complexity of existing contractual agreements, differences arising between the actual results and the assumptions made, or future changes to such assumptions, could necessitate future adjustments to taxable income and expenses already recorded. The Group records provisions, based on reasonable estimates, for possible consequences of audits by the tax authorities of the respective counties in which it operates. The amount of such provisions is based on various factors, such as experience of previous tax audits and differing interpretations of tax regulations by the Group and the responsible tax authority. Such differences of interpretation may arise on a wide variety of issues depending on the conditions prevailing in the respective Group company's domicile. As the Group assesses the probability for litigation and subsequent cash outflow with respect to taxes as remote, no contingent liability has been recognised.
Deferred tax assets are recognised for all unused tax losses to the extent that it is probable that a taxable profit will be available against which the losses can be utilised. Significant management judgement is required to determine the amount of deferred tax assets that can be recognised, based upon the likely timing and the level of future taxable profits together with future tax planning strategies.
Further details on taxes are disclosed in Notes 8 and 24.
The cost of defined benefit pension plans and other post-employment benefits and the present value of the pension obligation are determined using actuarial valuations. An actuarial valuation involves making various assumptions that may differ from actual developments in the future. These include the determination of the discount rate, future salary increases, mortality rates and future pension increases. Due to the complexity of the valuation, the underlying assumptions and its long-term nature, a defined benefit obligation is sensitive to changes in these assumptions. All assumptions are reviewed at each reporting date. Due to the complexity of the valuation work required, the Group uses an independent expert to perform the necessary assumptions and estimates.
In determining the appropriate discount rate, management considers the interest rates of corporate bonds in the respective currency with at least an investment grade rating, with extrapolated maturities corresponding to the expected duration of the defined benefit obligation.
The mortality rate is based on publicly available mortality tables for the specific country. Future salary increases and pension increases are based on expected future inflation rates for the respective country.
Further details about the assumptions used are given in Note 26.
When the fair value of the derivative financial instruments recorded in the consolidated balance sheet cannot be derived from active markets, their fair value is determined using valuation techniques including the discounted cash flow model. The inputs to these models are taken from observable markets where possible, but where this is not feasible, a degree of judgement is required in establishing fair values. The judgements include consideration of inputs such as liquidity risk, credit risk and volatility. Changes in assumptions about these factors could affect the reported fair value of financial instruments.
Further details about the Group's derivatives are provided in Note 23.
The Group is a defendant in several ongoing lawsuits. The directors, counselled by the Group's legal advisors, have made judgments about the outcome of these lawsuits. A different outcome to that initially estimated in respect of these lawsuits could affect the amounts recognised in the Group's consolidated Financial Statements. Further details about the Group's contingent liabilities are given in Note 28.
The parameters used in calculating return on investment and on operations provided for in the Electricity Sector Act and the Royal Decree regulating renewable energies are subject to annual modification or for each regulatory part-period or period which may affect the balances of assets, liabilities, revenue and expenses related to the Electricity System sector activity.
The interpretation of the existing legislation or new legislation related to the regulation of the Electricity Sector with definitive economic effects that will finally be determined by the resolutions of those bodies competent for their liquidation remains pending at the date of preparation of these Financial Statements.
The breakdown of the level of measurement of assets and liabilities recorded at their fair value in the Group's Financial Statements is as follows:
| Fair value measurement used ––––––––––––––––––––––––––––––––––––––––––– |
|---|
| Measurement | Quoted prices in active markets |
Significant observable inputs |
Significant unobservable inputs |
||
|---|---|---|---|---|---|
| €'000s | date | Total | (Level 1) | (Level 2) | (Level 3) |
| Assets measured at fair value: | |||||
| Biological assets (Note 11) | 31/12/2017 | 6,710 | – | 6,710 | – |
| Securities portfolio (available | |||||
| for-sale assets) (Note 15) | 31/12/2017 | 784 | 784 | – | – |
| Liabilities measured at fair value: | |||||
| Derivatives (Note 23) | 31/12/2017 | 761 | – | 761 | – |
Hierarchy of fair value measurement 2016
| Fair value measurement used ––––––––––––––––––––––––––––––––––––––––––– |
|||||
|---|---|---|---|---|---|
| Quoted prices in active |
Significant observable |
Significant unobservable |
|||
| Measurement | markets | inputs | inputs | ||
| €'000s | date | Total | (Level 1) | (Level 2) | (Level 3) |
| Assets measured at fair value: | |||||
| Biological assets (Note 11) | 31/12/2016 | 6,990 | – | 6,990 | – |
| Securities portfolio (available | |||||
| for-sale assets) (Note 15) | 31/12/2016 | 13,123 | 13,123 | – | – |
| Derivatives (Note 15) | 31/12/2016 | 1,641 | – | 1,641 | – |
| Liabilities measured at fair value: | |||||
| Derivatives (Note 23) | 31/12/2016 | 1,882 | – | 1,882 | – |
Hierarchy of fair value measurement 2015
| Fair value measurement used ––––––––––––––––––––––––––––––––––––––––––– |
|||||
|---|---|---|---|---|---|
| €'000s | Measurement date |
Total | Quoted prices in active markets (Level 1) |
Significant observable inputs (Level 2) |
Significant unobservable inputs (Level 3) |
| Assets measured at fair value: | |||||
| Biological assets (Note 11) | 31/12/2015 | 6,280 | – | 6,280 | – |
| Securities portfolio | |||||
| (available-for-sale assets) (Note 15) | 31/12/2015 | 687 | 687 | – | – |
| Derivatives (Note 15) | 31/12/2015 | 461 | – | 461 | – |
| Liabilities measured at fair value: | |||||
| Derivatives (Note 23) | 31/12/2015 | 3,922 | – | 3,922 | – |
The criteria used to identify the Group's operating segments are based on the management information reported to the chief operating decision-maker, which is in turn based on the Group's organisational structure, which comprises two business segments (Paper and Board), each of which determines its individual business policies, and a non-operating Corporate division that provides services to the operating units. Transfer prices between operating segments are on an arm's length basis. The Group does not perform any other significant activities. The Group's reportable operating segments and their main revenue-generating products and services are as follows:
The financial information from the consolidated separate income statement reported regularly to the chief decision-maker for each operating segment is the following:
The rest of the consolidated separate income statement and statement of financial position headings are compiled and reported to the chief decision-maker on an aggregate basis.
The Group also discloses financial information for the following geographic segments:
| Corrugated Paper Board Eliminations Year Ended 31 December 2017 €'000s €'000s €'000s Net segment revenue external customers 484,783 383,436 – other segments 104,356 9,540 (113,895) –––––––––––– –––––––––––– –––––––––––– Total 589,138 392,976 (113,895) |
Consolidated €'000s 868,219 – –––––––––––– |
|---|---|
| –––––––––––––––––––––––– –––––––––––––––––––––––– –––––––––––––––––––––––– |
868,219 –––––––––––––––––––––––– |
| Operating profit before depreciation/ | |
| amortisation for the segment 148,531 (1,950) – |
146,581 |
| Unassigned profit or loss | 11,672 |
| Consolidated EBITDA | –––––––––––– 158,253 |
| Depreciation and amortisation | (51,789) |
| –––––––––––– | |
| Operating profit (loss) | 106,464 |
| Net financial income (expense) | (5,527) |
| Share of profit of equity-accounted investees | 369 –––––––––––– |
| Profit (loss) before tax from continuing | |
| operations | 101,306 –––––––––––––––––––––––– |
| Intangible Assets, Property, Plant and | |
| Equipment and Investment Property 581,152 197,463 – |
778,615 |
| Unallocated assets (*) | 309,997 –––––––––––– |
| Total Assets | 1,088,612 |
| Investment properties 48,065 19,923 – |
–––––––––––– 67,988 |
| Corrugated | ||||
|---|---|---|---|---|
| Year Ended 31 December 2016 | Paper €'000s |
Board €'000s |
Eliminations €'000s |
Consolidated €'000s |
| Net segment revenue external customers |
441,057 | 360,093 | – | 801,150 |
| other segments | 77,770 | 7,924 | (85,694) | – |
| Total | –––––––––––– 518,828 –––––––––––––––––––––––– |
–––––––––––– 368,017 –––––––––––––––––––––––– |
–––––––––––– (85,694) –––––––––––––––––––––––– |
–––––––––––– 801,150 –––––––––––––––––––––––– |
| Operating profit before depreciation/ amortisation for the segment Unassigned profit or loss |
104,741 | 18,095 | – | 122,836 3,735 –––––––––––– |
| Consolidated EBITDA Depreciation and amortisation |
126,571 (48,912) –––––––––––– |
|||
| Operating profit (loss) Net financial income (expense) Share of profit of equity-accounted investees |
77,659 (10,552) 115 –––––––––––– |
|||
| Profit (loss) before tax from continuing operations |
67,222 –––––––––––––––––––––––– |
|||
| Intangible Assets, Property, Plant and Equipment and Investment Property Unallocated assets (*) |
542,448 | 240,678 | – | 783,126 336,150 –––––––––––– |
| Total Assets | 1,119,276 –––––––––––– |
|||
| Investment properties | 45,071 | 11,901 | – | 56,972 |
| Year Ended 31 December 2015 Net segment revenue external customers |
Paper €'000s 448,240 |
Corrugated Board €'000s 357,420 |
Eliminations €'000s – |
Consolidated €'000s 805,660 |
| other segments Total |
86,451 –––––––––––– 534,691 |
7,254 –––––––––––– 364,674 |
(93,704) –––––––––––– (93,704) |
– –––––––––––– 805,660 |
| –––––––––––––––––––––––– | –––––––––––––––––––––––– | –––––––––––––––––––––––– | –––––––––––––––––––––––– | |
| Operating profit before depreciation/ amortisation for the segment unassigned profit or loss |
106,822 | 9,683 | – | 116,505 (5,383) |
| Consolidated EBITDA Depreciation and amortisation |
–––––––––––– 111,122 (48,667) –––––––––––– |
|||
| Operating profit (loss) Net financial income (expense) Share of profit of equity-accounted investees |
62,455 (16,728) 131 –––––––––––– |
|||
| Profit (loss) before tax from continuing operations |
45,858 –––––––––––––––––––––––– |
|||
| Intangible Assets, Property, Plant and Equipment and Investment Property Unallocated assets (*) |
552,586 | 225,229 | – | 777,815 |
| 311,855 | ||||
| Total Assets | –––––––––––– 1,089,670 –––––––––––– |
(*) Other non-current assets and all current assets of the group: these assets are shared by both businesses and a reasonable allocation to each business is not possible.
The breakdown of "Other operating expenses" is as follows:
| 2017 | 2016 | 2015 | |
|---|---|---|---|
| €'000s | €'000s | €'000s | |
| Impairment losses on receivables (Note 17) | (418) | 571 | (2,147) |
| Losses on defaulting trade receivables | – | 16 | 1,648 |
| Provisions | – | (253) | 71 |
| Leases | 6,323 | 6,488 | 6,148 |
| Upkeep and repairs | 15,526 | 13,579 | 19,130 |
| Independent professional services | 8,403 | 7,040 | 5,788 |
| Transport | 53,156 | 50,402 | 52,734 |
| Insurance premiums | 2,527 | 2,795 | 3,562 |
| Supplies | 57,997 | 52,599 | 58,235 |
| Other external services | 39,295 | 34,693 | 33,620 |
| Emission allowance usage expense (Note 10) | 3,338 | 3,395 | 3,877 |
| Taxes | 9,336 | 7,485 | 8,741 |
| Other expenses | 2,676 ––––––––––– |
1,129 ––––––––––– |
942 ––––––––––– |
| 198,159 –––––––––––––––––––––– |
179,939 –––––––––––––––––––––– |
192,349 –––––––––––––––––––––– |
|
Fees paid during the year for the services provided by Ernst & Young are as follows:
| 2017 | 2016 | 2015 | |
|---|---|---|---|
| €'000s | €'000s | €'000s | |
| Audit services Other accounting review and verification services Other services |
313 42 105 ––––––––––– |
303 20 100 ––––––––––– |
309 51 113 ––––––––––– |
| Finance income | 460 | 423 | 473 |
| –––––––––––––––––––––– | –––––––––––––––––––––– | –––––––––––––––––––––– |
These items include interest income and expenses relating to financial assets and liabilities not recognised at fair value through profit or loss.
The breakdown of finance income and costs to the year ended 31 December is as follows:
| 2017 | 2016 | 2015 | |
|---|---|---|---|
| €'000s | €'000s | €'000s | |
| Interest from loans Other finance income |
90 531 ––––––––––– |
85 3,280 ––––––––––– |
177 222 ––––––––––– |
| Finance income | 621 | 3,365 | 399 |
| –––––––––––––––––––––– | –––––––––––––––––––––– | –––––––––––––––––––––– | |
| Interest on bank borrowings and bonds and other negotiable | 2017 | 2016 | 2015 |
| €'000s | €'000s | €'000s | |
| securities | 7,704 | 12,230 | 15,133 |
| Interest and commission on factoring contracts | 1,002 | 1,005 | 1,594 |
| Other financial expenses | 587 | (80) | 534 |
| Finance costs | ––––––––––– | ––––––––––– | ––––––––––– |
| 9,293 | 13,155 | 17,261 | |
| –––––––––––––––––––––– | –––––––––––––––––––––– | –––––––––––––––––––––– |
The breakdown of employee remuneration in 2017, 2016 and 2015 is as follows:
| 2017 | 2016 | 2015 | |
|---|---|---|---|
| €'000s | €'000s | €'000s | |
| Continuing operations | |||
| Wages and salaries | 82,938 | 79,438 | 77,290 |
| Social security costs | 24,514 | 23,965 | 24,132 |
| Contributions to supplementary pension system (Note 26) | 784 | 1,003 | 1,518 |
| Termination benefits | 1,264 | 2,931 | 3,580 |
| Share-based payment expense | 3,900 | 2,321 | – |
| Other employee welfare expenses | 3,852 | 4,220 | 3,305 |
| Personnel expenses | ––––––––––– 117,252 –––––––––––––––––––––– |
––––––––––– 113,878 –––––––––––––––––––––– |
––––––––––– 109,825 –––––––––––––––––––––– |
The breakdown of the Group's staff, together with the averages, at each reporting date is as follows:
| 2017 | Headcount at year end 2016 |
2015 | |||||||
|---|---|---|---|---|---|---|---|---|---|
| Europac Group staff | Men | Women | Total | Men | Women | Total | Men | Women | Total |
| Senior executives and | |||||||||
| directors | 4 | 2 | 6 | 4 | 2 | 6 | 4 | 1 | 5 |
| Directors | 44 | 12 | 56 | 71 | 18 | 89 | 97 | 28 | 125 |
| Graduates (five-year | |||||||||
| degrees) | 96 | 44 | 140 | 144 | 52 | 196 | 139 | 44 | 183 |
| Graduates (three-year | |||||||||
| degrees) | 89 | 61 | 150 | 258 | 65 | 323 | 248 | 88 | 336 |
| Administrative Staff | 66 | 86 | 152 | 69 | 123 | 192 | 60 | 128 | 188 |
| Sales representatives | 89 | 96 | 185 | 67 | 47 | 114 | 46 | 40 | 86 |
| Machine operators | 1,489 –––––––– |
100 –––––––– |
1,589 –––––––– |
1,268 –––––––– |
78 –––––––– |
1,346 –––––––– |
1,286 –––––––– |
77 –––––––– |
1,363 –––––––– |
| Total | 1,877 –––––––––––––––– |
401 –––––––––––––––– |
2,278 –––––––––––––––– |
1,881 –––––––––––––––– |
385 –––––––––––––––– |
2,266 –––––––––––––––– |
1,880 –––––––––––––––– |
406 –––––––––––––––– |
2,286 –––––––––––––––– |
| 2017 | 2016 | 2015 | ||||||
|---|---|---|---|---|---|---|---|---|
| Men | Women | Total | Men | Women | Total | Men | Women | Total |
| 4 | 2 | 6 | 4 | 2 | 6 | 6 | 1 | 7 |
| 44 | 13 | 57 | 84 | 23 | 107 | 92 | 30 | 122 |
| 102 | 42 | 144 | 142 | 48 | 190 | 143 | 43 | 186 |
| 87 | 58 | 145 | 253 | 77 | 330 | 258 | 88 | 346 |
| 64 | 85 | 149 | 65 | 126 | 190 | 56 | 126 | 182 |
| 89 | 91 | 180 | 56 | 44 | 100 | 46 | 39 | 85 |
| 1,506 | 104 | 1,611 | 1,279 | 78 | 1,357 | 1,287 | 75 | 1,361 –––––––– |
| 1,895 | 397 | 2,292 | 1,882 | 396 | 2,278 | 1,887 | 402 | 2,289 –––––––––––––––– |
| –––––––– –––––––––––––––– |
–––––––– –––––––––––––––– |
–––––––– –––––––––––––––– |
–––––––– –––––––––––––––– |
–––––––– | Average headcount –––––––– –––––––––––––––– –––––––––––––––– |
–––––––– –––––––––––––––– |
–––––––– –––––––––––––––– |
During financial year 2017 there were 11 employees with disability greater than 33 per cent. (2016:13).
Europac Group companies file annual corporate income tax returns. The profits of the companies resident in Spain, as determined under tax law, are taxable at a rate of 25 per cent. in 2017. The tax rates applicable to companies resident in Portugal range between 22.5 per cent. and 29.5 per cent., while the rate applicable in France stands at 33.3 per cent. Certain deductions, including those for environmental investment, training expenses, job creation and research and development expenses, can be deducted from the tax charge.
A breakdown of the corporate income tax expense is given below:
| 2017 | 2016 | 2015 | |
|---|---|---|---|
| Continuing operations | €'000s | €'000s | €'000s |
| Current tax expense | |||
| For the year | 22,290 | 14,083 | 11,083 |
| Adjusted from prior years | (427) ––––––––––– |
(2,896) ––––––––––– |
(1,373) ––––––––––– |
| 21,863 | 11,187 | 9,710 | |
| Deferred tax charge | |||
| Origin and reversal of temporary differences in the year | 1,043 | 5,018 | 3,690 |
| Adjustments from prior years | 437 | 2,117 | – |
| Change in tax rate | – ––––––––––– |
– ––––––––––– |
10 ––––––––––– |
| 1,480 ––––––––––– |
7,134 ––––––––––– |
3,699 ––––––––––– |
|
| Total income tax expense in the income statement | 23,343 –––––––––––––––––––––– |
18,321 –––––––––––––––––––––– |
13,410 –––––––––––––––––––––– |
The reconciliation of the actual tax charge to that at the domestic corporation tax rate is as follows:
| 2017 | 2016 | 2015 | |
|---|---|---|---|
| €'000s | €'000s | €'000s | |
| Profit before income tax Share of profit of equity accounted investments, net of tax |
100,937 369 ––––––––––– |
67,107 115 ––––––––––– |
45,727 131 ––––––––––– |
| Profit before tax and share of profit of equity accounted | 101,306 | 67,222 | 45,858 |
| investments, net of tax | ––––––––––– | ––––––––––– | ––––––––––– |
| Permanent differences – From individual companies – From consolidation adjustments – Deductions and bonuses applied, not recognised in |
(12,537) (11,004) |
(1,525) (115) |
(2,573) – |
| prior years | (5,615) | (3,260) | – |
| – | 17,049 | 10,716 | 11,759 |
| Unrecognised/off-balance-sheet tax credits | ––––––––––– | ––––––––––– | ––––––––––– |
| Total permanent differences | (12,107) | 5,816 | 9,054 |
| ––––––––––– | ––––––––––– | ––––––––––– | |
| Adjusted profit | 89,199 | 73,038 | 54,912 |
| ––––––––––– | ––––––––––– | ––––––––––– | |
| Income tax at the domestic corporation tax rate of 25% (2016: 25%, 2015: 28%) |
22,300 | 18,260 | 15,375 |
| Notional tax rate differences at foreign companies | 1,034 | 841 | (603) |
| Deferred tax rate difference owing to change of rate | – | – | 10 |
| Adjustments from prior years and other items | 9 | (780) | (1,373) |
| Income tax expense – total Europac Group | ––––––––––– | ––––––––––– | ––––––––––– |
| 23,343 | 18,321 | 13,410 | |
| –––––––––––––––––––––– | –––––––––––––––––––––– | –––––––––––––––––––––– |
The permanent differences for the financial year 2017 correspond mainly to the difference between the tax and accounting value of the capital gains generated for the sale of the subsidiary companies (Note 33) and listed shares (Note 14).
The fiscal credits generated and no activated correspond to the tax losses generated for the French subsidiary companies, as well as the Moroccan subsidiary company until its date of exclusion from the consolidation scope.
The breakdown of the current income tax liabilities is as follows:
| Current tax liabilities | ––––––––––– (4,849) –––––––––––––––––––––– |
––––––––––– (2,415) –––––––––––––––––––––– |
––––––––––– (2,218) –––––––––––––––––––––– |
|---|---|---|---|
| Payments on account and withholdings | 17,441 | 11,668 | 8,865 |
| Current tax assets/(liabilities) Current tax year |
(22,290) | (14,083) | (11,083) |
| €'000s | €'000s | €'000s | |
| 2017 | 2016 | 2015 |
Basic earnings per share are calculated by dividing the profit for the year attributable to the company's ordinary shareholders by the average weighted number of outstanding ordinary shares during the period, excluding Treasury stock. The breakdown of the calculation of basic earnings per share, as well as the average number of outstanding ordinary shares is as follows:
| 2017 | 2016 | 2015 | |
|---|---|---|---|
| €'000s | €'000s | €'000s | |
| Basic earnings per share | |||
| Profit for the year attributable to equity holders of the parent | |||
| company | 77,963 | 48,901 | 32,449 |
| Weighted average number of outstanding ordinary shares | 91,994,093 ––––––––––––– |
89,448,549 ––––––––––––– |
87,553,038 ––––––––––––– |
| Basic earnings per share (€/share) | 0.847 | 0.547 | 0.371 |
| –––––––––––––––––––––––––– | –––––––––––––––––––––––––– | –––––––––––––––––––––––––– | |
| Number of shares | |||
| 2017 | 2016 | 2015 | |
| Average number of outstanding ordinary shares | |||
| Outstanding ordinary shares at the start of the period | 97,368,366 | 93,623,429 | 90,022,528 |
| Average effect of treasury shares | (6,074,898) | (4,636,585) | (2,913,437) |
| Average effect of issued shares | 700,625 ––––––––––––– |
461,705 ––––––––––––– |
443,947 ––––––––––––– |
| Weighted average number of outstanding ordinary | |||
| shares | 91,994,093 –––––––––––––––––––––––––– |
89,448,549 –––––––––––––––––––––––––– |
87,553,038 –––––––––––––––––––––––––– |
Diluted earnings per share amounts are calculated by adjusting the profit attributable to equity holders of the parent company by the weighted average common stock outstanding in respect of all dilutive effects of potential ordinary shares, i.e. as if all potentially dilutive ordinary shares had been converted. The parent company does not have different classes of potentially diluting ordinary shares at a material level.
| Contracts and |
Industrial property |
CO2 | |||||
|---|---|---|---|---|---|---|---|
| Computer | customer | and other | Emission | Work in | |||
| Goodwill | software | portfolio | rights | Allowances | Progress | Total | |
| €'000s | €'000s | €'000s | €'000s | €'000s | €'000s | €'000s | |
| Cost | |||||||
| At 1 January 2017 | 89,422 | 21,695 | 1,336 | 264 | 2,314 | 1,567 | 116,598 |
| Increases | 5,026 | – | – | – | 2,664 | 681 | 8,371 |
| De-registrations | – | – | – | – | (3,940) | – | (3,940) |
| Transfers | – | 201 | – | – | – | (201) | – |
| Changes in consolidated | |||||||
| scope | – | 14 | – | (41) | – | – | (27) |
| Translation differences | – –––––––––– |
– –––––––––– |
– –––––––––– |
(2) –––––––––– |
– –––––––––– |
– –––––––––– |
(2) –––––––––– |
| At 31 December 2017 | 94,448 –––––––––– |
21,910 –––––––––– |
1,336 –––––––––– |
221 –––––––––– |
1,038 –––––––––– |
2,047 –––––––––– |
121,000 –––––––––– |
| Amortisation and | |||||||
| impairment | |||||||
| At 1 January 2017 | – | (19,529) | (1,201) | (236) | – | – | (20,871) |
| Amortisation | – | (1,362) | (136) | (7) | – | – | (1,505) |
| Changes in consolidated | |||||||
| scope | – | (14) | – | 21 | – | – | 7 |
| Translation differences | – –––––––––– |
– –––––––––– |
– –––––––––– |
1 –––––––––– |
– –––––––––– |
– –––––––––– |
1 –––––––––– |
| At 31 December 2017 | – –––––––––– |
(20,905) –––––––––– |
(1,336) –––––––––– |
(221) –––––––––– |
– –––––––––– |
– –––––––––– |
(22,368) –––––––––– |
| Carrying amount | |||||||
| At 1 January 2017 | 89,422 | 2,166 | 135 | 28 | 2,314 | 1,567 | 95,632 |
| At 31 December 2017 | –––––––––– 94,448 |
–––––––––– 1,005 |
–––––––––– – |
–––––––––– – |
–––––––––– 1,038 |
–––––––––– 2,047 |
–––––––––– 98,537 |
| –––––––––––––––––––– | –––––––––––––––––––– | –––––––––––––––––––– | –––––––––––––––––––– | –––––––––––––––––––– | –––––––––––––––––––– | –––––––––––––––––––– |
| Contracts and |
Industrial property |
CO2 | |||||
|---|---|---|---|---|---|---|---|
| Goodwill €'000s |
Computer software €'000s |
customer portfolio €'000s |
and other rights €'000s |
Emission Allowances €'000s |
Work in Progress €'000s |
Total €'000s |
|
| Cost | |||||||
| At 1 January 2016 Increases De-registrations Transfers |
89,422 – – – –––––––––– |
21,439 92 – 164 –––––––––– |
1,336 – – – –––––––––– |
264 – – – –––––––––– |
1,760 4,894 (4,340) – –––––––––– |
971 760 – (164) –––––––––– |
115,192 5,746 (4,340) – –––––––––– |
| At 31 December 2016 | 89,422 –––––––––– |
21,695 –––––––––– |
1,336 –––––––––– |
264 –––––––––– |
2,314 –––––––––– |
1,567 –––––––––– |
116,598 –––––––––– |
| Amortisation and impairment |
|||||||
| At 1 January 2016 Amortisation |
– – –––––––––– |
(17,822) (1,707) –––––––––– |
(1,201) – –––––––––– |
(525) 289 –––––––––– |
– – –––––––––– |
– – –––––––––– |
(19,453) (1,418) –––––––––– |
| At 31 December 2016 | – –––––––––– |
(19,529) –––––––––– |
(1,201) –––––––––– |
(236) –––––––––– |
– –––––––––– |
– –––––––––– |
(20,871) –––––––––– |
| Carrying amount At 1 January 2016 |
89,422 | 3,617 | 135 | (261) | 1,760 | 971 | 95,739 |
| At 31 December 2016 | –––––––––– 89,422 –––––––––––––––––––– |
–––––––––– 2,166 –––––––––––––––––––– |
–––––––––– 135 –––––––––––––––––––– |
–––––––––– 28 –––––––––––––––––––– |
–––––––––– 2,314 –––––––––––––––––––– |
–––––––––– 1,567 –––––––––––––––––––– |
–––––––––– 95,632 –––––––––––––––––––– |
| Contracts | Industrial | ||||||
|---|---|---|---|---|---|---|---|
| and | property | CO2 | |||||
| Computer | customer | and other | Emission | Work in | |||
| Goodwill | software | portfolio | rights | Allowances | Progress | Total | |
| €'000s | €'000s | €'000s | €'000s | €'000s | €'000s | €'000s | |
| Cost | |||||||
| At 1 January 2015 | 89,422 | 18,959 | 1,336 | 221 | 1,945 | 2,217 | 114,100 |
| Increases | – | 290 | – | 91 | 2,345 | 918 | 3,644 |
| De-registrations | – | (6) | – | (48) | (2,530) | – | (2,584) |
| Transfers | – –––––––––– |
2,196 –––––––––– |
– –––––––––– |
– –––––––––– |
– –––––––––– |
(2,164) –––––––––– |
32 –––––––––– |
| At 31 December 2015 | 89,422 –––––––––– |
21,439 –––––––––– |
1,336 –––––––––– |
264 –––––––––– |
1,760 –––––––––– |
971 –––––––––– |
115,192 –––––––––– |
| Amortisation and | |||||||
| impairment | |||||||
| At 1 January 2015 | – | (15,734) | (1,201) | (215) | – | – | (17,150) |
| Amortisation | – | (2,094) | – | (278) | – | – | (2,372) |
| De-registrations | – | 6 | – | – | – | – | 6 |
| Transfers | – –––––––––– |
– –––––––––– |
– –––––––––– |
(32) –––––––––– |
– –––––––––– |
– –––––––––– |
(32) –––––––––– |
| At 31 December 2015 | – –––––––––– |
(17,822) –––––––––– |
(1,201) –––––––––– |
(525) –––––––––– |
– –––––––––– |
– –––––––––– |
(19,548) –––––––––– |
| Carrying amount | |||||||
| At 1 January 2015 | 89,422 –––––––––– |
3,225 –––––––––– |
135 –––––––––– |
6 –––––––––– |
1,945 –––––––––– |
2,217 –––––––––– |
95,644 –––––––––– |
| At 31 December 2015 | 89,422 | 3,617 | 135 | (261) | 1,760 | 971 | 95,739 |
| –––––––––––––––––––– | –––––––––––––––––––– | –––––––––––––––––––– | –––––––––––––––––––– | –––––––––––––––––––– | –––––––––––––––––––– | –––––––––––––––––––– |
The breakdown of goodwill is as follows:
| Changes in Goodwill | 2017 €'000s |
2016 €'000s |
2015 €'000s |
|---|---|---|---|
| Company | |||
| Trasloga, S.L. | 1,529 | 1,529 | 1,529 |
| Torrespack 2000, S.A. | 392 | 392 | 392 |
| Imocapital, SGPS, S.A. | 281 | 281 | 281 |
| Cartova, S.A. | 1,463 | 1,463 | 1,463 |
| Europac Portugal, SGPS, S.A. | 61,812 | 61,812 | 61,812 |
| Cartonajes Esteve y Nadal, S.L. | 1,456 | 1,456 | 1,456 |
| Europac Energia Viana, S.A. | 1,381 | 1,381 | 1,381 |
| Europac Recicla Lisboa, S.A. | 1,634 | 1,634 | 1,634 |
| Europac Cartão Ovar, S.A. | 1,754 | 1,754 | 1,754 |
| Europac Recicla Porto, S.A. | 4,218 | 4,218 | 4,218 |
| Europac Papeterie de Rouen | 6,653 | 6,653 | 6,653 |
| Europac Cartonnerie Atlantique y Savoie | 5,070 | 5,070 | 5,070 |
| Europac Cartonnerie de Rouen | 1,779 | 1,779 | 1,779 |
| Europac Packaging Lucena, SL | 3,924 | – | – |
| Europac Recicla Duero (Transcon, S.A.) | 1,102 –––––––––– |
– –––––––––– |
– –––––––––– |
| Total | 94,448 –––––––––––––––––––– |
89,422 –––––––––––––––––––– |
89,422 –––––––––––––––––––– |
Please refer to Note 29 for business combinations generating goodwill in 2017.
Goodwill, which is an intangible asset with an unlimited useful life, was apportioned to the Group's cash generating units (CGUs) for the purpose of appropriate impairment testing pursuant to International Accounting Standard 36.
The apportionment of goodwill to each generating unit in the Group at 31 December 2017 and 2016 is summarised below:
| 2015 | ||
|---|---|---|
| €'000s | €'000s | €'000s |
| 1,102 | – | – |
| 55,865 | 55,865 | 55,865 |
| 6,653 | 6,653 | 6,653 |
| 8,753 | 4,829 | 4,829 |
| 15,224 | 15,224 | 15,224 |
| 6,848 | 6,848 | 6,848 |
| 3 | 3 | 3 ––––––––––– |
| 94,448 | 89,422 | 89,422 –––––––––––––––––––––– |
| 2017 ––––––––––– –––––––––––––––––––––– |
2016 ––––––––––– –––––––––––––––––––––– |
The recoverable amount of a CGU is the higher of fair value less the cost to sell and value in use. Value in use is calculated using projected cash flows based on financial budgets adopted by Group management for a three to five year period.
The Group's management prepares financial projections principally based on key assumptions that take into account the changes experienced since its preparation together with the general macro-economic situation, specific expectations by geographic region, the economic situation in the sector of operation, the economic situation of the Group and the CGUs and their ability to generate revenue, together with the expectations relating to the development of the business.
The key assumptions used reflect past experience. To prepare them, external sources of information are used, with a temporary scope, extended through internal information sources. The key assumptions are consistent with the sources of external information.
The specific period used by the Group to project cash flows at all its CGUs is four years.
The breakdown of assets attributed to each CGU with significant goodwill is as follows:
| Description | Corrugated Board Spain €'000s |
Paper Portugal €'000s |
Corrugated Board Portugal €'000s |
Paper France €'000s |
Corrugated Board France €'000s |
|---|---|---|---|---|---|
| Goodwill Property, plant and equipment and |
8,753 | 55,865 | 15,224 | 6,653 | 6,848 |
| Intangible assets | 52,051 | 193,561 | 67,199 | 127,123 | 55,302 |
| Financial investments | 5 | 255 | 105 | 679 | 295 |
| Deferred tax assets | 3,018 | 1,337 | 588 | 19,948 | 13,161 |
| Biological assets | – ––––––––––– |
2,000 ––––––––––– |
– ––––––––––– |
– ––––––––––– |
– ––––––––––– |
| Non-current assets | 63,827 ––––––––––– |
253,019 ––––––––––– |
83,116 ––––––––––– |
154,403 ––––––––––– |
75,606 ––––––––––– |
| Grants Non-current provisions Non-current financial liabilities |
(1,497) – (123) |
(190) (4,910) (182) |
(1,108) (2,409) – |
(959) (2,491) – |
(12) (6,818) – |
| Deferred tax liabilities | (1,170) ––––––––––– |
(18,986) ––––––––––– |
(8,415) ––––––––––– |
(20,425) ––––––––––– |
(10,176) ––––––––––– |
| Non-current liabilities | (2,790) ––––––––––– |
(24,268) ––––––––––– |
(11,931) ––––––––––– |
(23,876) ––––––––––– |
(17,006) ––––––––––– |
| Inventories Trade and other receivables Trade and other payables |
7,121 12,084 (15,604) ––––––––––– |
16,739 32,757 (74,366) ––––––––––– |
13,225 6,401 (18,391) ––––––––––– |
14,644 10,536 (35,992) ––––––––––– |
19,833 8,549 (29,133) ––––––––––– |
| Working Capital | 3,602 | (24,870) | 1,236 | (10,812) | (751) |
| Total Capital Invested | ––––––––––– 64,639 –––––––––––––––––––––– |
––––––––––– 203,881 –––––––––––––––––––––– |
––––––––––– 72,420 –––––––––––––––––––––– |
––––––––––– 119,715 –––––––––––––––––––––– |
––––––––––– 57,848 –––––––––––––––––––––– |
The recoverable amount of a CGU is the higher of fair value less the cost to sell and value in use. Value in use is calculated using projected cash flows based on financial budgets adopted by Group management for a three to five year period. The applied discount rates consider the operational and financial risks associated with each of the CGUs. Cash flows subsequent to the last year of the projection are estimated by applying a constant growth rate in accordance with long-term growth expectations in the industry.
The Group has defined the cash generating units (CGUs) indicated in the above table.
In accordance with the impairment tests conducted for 2017 and 2016 pursuant to International Accounting Standard 36, the directors of the Europac Group believe that the CGUs are compliant with the profitability requirements under that standard. It has not therefore been necessary to recognise any impairment loss in respect of the goodwill and assets apportioned to those CGUs.
The recoverable amount of all CGUs in the Group has been determined on the basis of value in use.
The calculation of value in use for CGUs is sensitive to the following assumptions:
The assumptions used are as follows:
The discount rates reflect the market's view of the specific risks faced by each CGU, taking into account the time value of money, the risks intrinsic to the market in which the CGUs operate, and the risks specific to each CGU. The discount rate is based on the specific circumstances of the Group and its CGUs, and reflects its pre-tax weighted average cost of capital ("WACC") calculated using the capital asset pricing model ("CAPM") approach. In accordance with this approach, WACC is the result of weighting the cost of the Group's sources of financing (debt and equity) in accordance with the Group's market-based financial structure. The cost of equity is the return that an investor would require for investing its funds in the Group, estimated as the risk-free rate (10-year bonds in the market in which the CGU operates) plus a risk premium estimated in accordance with the CAPM. The cost of debt is estimated with reference to a benchmark interest rate based on long-term rate curves and a spread reflecting the market-driven financial structure under consideration. The costs of equity used for each of the CGUs range from 11.45 per cent. to 12.97 per cent. (between 10.73 per cent. and 13.65 per cent. in 2016 and between 11.29 per cent. and 14.43 per cent. in 2015), depending on the geographic area where the given CGU operates. The pre-tax cost of debt is estimated at 2 per cent. for the entire Group, since the Group's financing is mostly obtained on a centralised basis (2.9 per cent. in 2016 and 2.2 per cent. in 2015).
(e) The estimate of the terminal value of each CGU at the end of the specific period is estimated at all the CGUs by calculating the present value of revenue in perpetuity at a rate of constant growth.
The discount rates after tax and with growth used at the CGUs with significant goodwill are as follows:
| CGU | WACC | Growth rate |
|---|---|---|
| Corr. board Spain | 7.2% | 1.5% |
| Paper Portugal | 7.6% | 1.5% |
| Corr. board Portugal | 7.6% | 1.5% |
| Paper France | 6.8% | 1.5% |
| Corr. board France | 6.8% | 1.5% |
The residual value represents 117.8 per cent., 78.6 per cent., 82.5 per cent., 88.1 per cent. and 94.8 per cent. of the total recoverable value of the Board Spain, Paper Portugal, Board Portugal, Paper France and Board France CGUs respectively.
The parent company's management performs a sensitivity analysis, particularly with regard to the discount rate used and the residual growth rate, in order to ensure that any changes in the estimates of said rates do not have an impact on the recovery of the aforementioned values.
With regard to the assessment of value in use of the CGUs, the directors believe that no reasonably possible change in any of the above key assumptions would cause the carrying amount of a given CGU to materially exceed its recoverable amount.
With regard to the analysis of the sensitivity of the value in use of CGUs with significant Goodwill to changes in the key assumptions, particularly the discount rate and residual growth rate, the changes that have been deemed reasonably possible related to the general recovery of the economy and of private consumption are as follows:
On 3 August 2016, the instrument notarising the merger by acquisition of Harpalus, S.L., approved by decision of the General Shareholders' Meeting of 29 June 2016, was registered with the Companies Registry of Palencia. The date of the merger for accounting purposes was set at 1 July 2016.
The reasons for carrying out the operations can be summarised as:
● De-concentration of ownership, thereby making control of the Company disputable in the market;
● Disappearance of the discount to which Europac's market capitalisation may be exposed on being controlled by one family holding company, with the merger thereby leading to an increase in Europac's market capitalisation; and
The common draft terms of merger were drawn up and signed by the directors of the two companies on 7 April 2016. The independent expert appointed by the Companies Registry issued a favourable opinion with regard to the swap rate and fairness of the equity instruments provided by the companies, without it being necessary for the acquiring company to undertake a capital increase.
The swap ratio was of 9.17396596 shares of the parent company for each share of Harpalus, S.L., with no additional cash compensation or the issue of new shares of the parent company as Harpalus, S.L. was previously a shareholder in the parent company.
The date of acquisition of Harpalus was 1 July 2016, which is the date as from which the merger took effect for the purposes of the company's accounting.
The consideration received by Europac, which amounted to €20.4m, corresponds to a net debt taken on to acquire 1,795,454 treasury shares, in accordance with the fair value of the following assets and liabilities:
| Harpalus, S.L. €'000s |
|
|---|---|
| Non-current assets | 10,397 |
| Deferred tax assets | 6,464 |
| Trade and other receivables | 238 |
| Cash and cash equivalents | 145 |
| Current financial liabilities | (37,300) |
| Trade and other payables | (394) ––––––––––– |
| Total net assets acquired | (20,449) ––––––––––– |
| Non-controlling interests | – ––––––––––– |
| Consideration received | (20,449) –––––––––––––––––––––– |
With regards to the valuation of the treasury shares acquired in the operation, management considered that the share price, which at the date of the acquisition of Harpalus amounted to EUR 4.75 per share, was not the best reference of the fair value of the share price, since it is not sufficiently liquid in the market. In this regard, the use of the share Price or any other reasonable value would not affect equity, since the difference between the treasury shares handed over to the shareholders of Harpalus and received from these shareholders would be recorded in equity for a value of €20.4m.
Fully amortised intangible assets still in use at 31 December 2017 amount to €17.4m (2016: €14.8m; 2015: €13.1m).
Customer contracts and portfolios mainly include the fair value on the acquisition date of an agreement entered into for the acquisition of Europac Papeterie de Rouen, S.A. pursuant to which the former owner undertakes to buy a certain volume of paper from the company over a period of five years. This agreement was identified in the process of the business combination relating to that company. This heading also includes the fair value of a customer portfolio of Europac Cartonnerie de Rouen, S.A.S.
"Work in progress" in 2017, 2016 and 2015 is primarily comprised of capitalised cost for the development of information systems that are in the process of being implemented.
The increases and transfers under "Computer Software" recorded in 2017, 2016 and 2015 mainly correspond to the cost of implementing new information systems in the Group.
"CO2 Emission Allowances" includes the balance of the Greenhouse Gas Emission Allowances granted by the authorities at no charge and, as the case may be, those acquired from third parties.
The breakdown of the changes under this heading in 2017, 2016 and 2015 is as follows:
| No. emission Issue |
|
|---|---|
| Total emission allowances at 31 December 2014 | 408,680 |
| Allowances acquired on the market in 2015 Submission of govt-certified allowances and expired allowances Allowances received from government in 2015 Allowances sold to third parties in 2015 |
150,000 (528,530) 231,460 – ––––––––––– |
| Total emission allowances at 31 December 2015 | 261,610 |
| Allowances acquired on the market in 2016 Submission of govt-certified allowances and expired allowances Allowances received from government in 2016 Allowances sold to third parties in 2016 |
550,000 (557,626) 227,043 (100,000) ––––––––––– |
| Total emission allowances at 31 December 2016 | 381,027 |
| Allowances acquired on the market in 2017 Submission of govt-certified allowances and expired allowances Allowances received from government in 2017 Allowances sold to third parties in 2017 |
200,000 (554,577) 222,585 (75,000) ––––––––––– |
| Total emission allowances at 31 December 2017 | 174,035 –––––––––––––––––––––– |
The breakdown of the number of the impact of the disposals and estimated consumption of emission allowances on the Group's earnings in 2017, 2016 and 2015 is as follows:
| Grants transferred to profit and loss €'000s (Note 21) |
Gain (loss) on disposal assets €'000s (Note 12) |
Provision for impairment of assets €'000s (Note 12) |
Emission allowance usage expense €'000s (Note 20) |
Other expenses €'000s |
Total €'000s |
|
|---|---|---|---|---|---|---|
| 2015 | ||||||
| Certif. allowances used in 2014 | – | – | – | 22 | – | 22 |
| Sale of allowances 2015 | – | – | – | – | – | – |
| Est. usage allowances 2015 | 1,638 | – | – | (3,899) | – | (2,261) |
| –––––––––– | –––––––––– | –––––––––– | –––––––––– | –––––––––– | –––––––––– | |
| Total gain (loss) 2015 | 1,638 | – | – | (3,877) | – | (2,239) |
| –––––––––––––––––––– | –––––––––––––––––––– | –––––––––––––––––––– | –––––––––––––––––––– | –––––––––––––––––––– | –––––––––––––––––––– | |
| 2016 | – | – | – | 132 | – | 132 |
| Certif. allowances used in 2015 | – | 61 | – | – | – | 61 |
| Sale of allowances 2016 | 1,432 | – | – | (3,527) | – | (2,094) |
| Est. usage allowances 2016 | –––––––––– | –––––––––– | –––––––––– | –––––––––– | –––––––––– | –––––––––– |
| Total gain (loss) 2016 | 1,432 | 61 | – | (3,395) | – | (1,901) |
| –––––––––––––––––––– | –––––––––––––––––––– | –––––––––––––––––––– | –––––––––––––––––––– | –––––––––––––––––––– | –––––––––––––––––––– | |
| 2017 | – | – | – | 21 | – | 21 |
| Certif. allowances used in 2016 | – | 52 | – | – | – | 52 |
| Sale of allowances 2017 | 1,336 | – | – | (3,359) | – | (2,023) |
| Est. usage allowances 2017 | –––––––––– | –––––––––– | –––––––––– | –––––––––– | –––––––––– | –––––––––– |
| Total gain (loss) 2017 | 1,336 | 52 | – | (3,338) | – | (1,950) |
| –––––––––––––––––––– | –––––––––––––––––––– | –––––––––––––––––––– | –––––––––––––––––––– | –––––––––––––––––––– | –––––––––––––––––––– |
There are no intangible assets with restricted ownership or which have been granted as security.
There are no amounts committed to the acquisition of intangible assets.
| At 31 December | 6,710 –––––––––––––––––––––– |
6,990 –––––––––––––––––––––– |
6,280 –––––––––––––––––––––– |
|---|---|---|---|
| Transfers to/from property, plant and equipment | – ––––––––––– |
385 ––––––––––– |
(843) ––––––––––– |
| Revaluations | (281) | (10) | 326 |
| De-registrations | – | – | (231) |
| Increase due to purchases | – | 335 | 1,588 |
| At 1 January | 6,990 | 6,280 | 5,440 |
| Continuing operations | |||
| €'000s | €'000s | €'000s | |
| 2017 | 2016 | 2015 |
The biological assets recorded fully correspond to the fair value of the trees in the forestry operations (mainly pine and eucalyptus) which are located in Spain (Castile and Leon) and Portugal (Alto Alentejo). The values of the land where these forestry operations are located are recorded as "Land and buildings" under the heading "Property, Plant and equipment" (Note 12). This land is recognised at its acquisition cost less the accumulated loss for impairment, as the case may be.
The Group did not acquire any new forestry operations in 2017, while in 2016 the Company acquired forestry operations in the municipality of Vinuesa (Soria).
The de-registrations in 2015 corresponded to the sales of wood taken from the operations at market value.
"Revaluations" correspond to the difference between the fair value of the biological assets and their carrying value in the previous year.
The main valuation techniques and the variables used in the valuation of the fair value of the biological assets by independent experts commissioned to estimate said value are as follows:
The value of the biological assets and the land are obtained as the average of the values by offsetting the current rent. In order to obtain the fair value of the biological assets with the land, the independent expert applies the method of the value of comparing transactions of land plots with comparable woodland.
The break down of this heading as at 31 December 2017, 2016 and 2015 is as follows:
| Land & | Machinery, fixtures |
Prepayments and work |
|||
|---|---|---|---|---|---|
| Buildings €'000s |
and tools €'000s |
Other PPE €'000s |
in progress €'000s |
Total €'000s |
|
| Cost | |||||
| At 1 January 2017 | 311,173 | 1,062,396 | 28,542 | 39,551 | 1,441,662 |
| Additions | 2,965 | 12,859 | 1,590 | 47,228 | 64,642 |
| Disposals | – | (3,218) | (134) | (5) | (3,357) |
| Transfers | 1,494 | 18,732 | 443 | (20,752) | (83) |
| Changes in consolidated scope | (10,075) | (9,317) | 1,134 | 10 | (18,248) |
| Translation differences | (525) –––––––––– |
(634) –––––––––– |
(29) –––––––––– |
(3) –––––––––– |
(1,191) –––––––––– |
| At 31 December 2017 | 305,032 –––––––––– |
1,080,818 –––––––––– |
31,546 –––––––––– |
66,029 –––––––––– |
1,483,425 –––––––––– |
| Depreciation and impairment | |||||
| At 1 January 2017 | (85,649) | (645,112) | (24,555) | (880) | (756,196) |
| Depreciation charge | (5,973) | (42,954) | (1,300) | – | (50,227) |
| Impairment | – | (315) | – | – | (315) |
| Disposals | 16 | 2,841 | 127 | – | 2,984 |
| Transfers | – | (85) | 168 | – | 83 |
| Changes in consolidated scope | 454 | (1,329) | (925) | – | (1,801) |
| Translation differences | 27 –––––––––– |
75 –––––––––– |
6 –––––––––– |
– –––––––––– |
108 –––––––––– |
| At 31 December 2017 | (91,125) –––––––––– |
(686,879) –––––––––– |
(26,479) –––––––––– |
(880) –––––––––– |
(805,364) –––––––––– |
| Carrying amount | |||||
| At 1 January 2017 | 225,524 –––––––––––––––––––– |
417,284 –––––––––––––––––––– |
3,987 –––––––––––––––––––– |
38,671 –––––––––––––––––––– |
685,466 –––––––––––––––––––– |
| At 31 December 2017 | 213,907 –––––––––––––––––––– |
393,939 –––––––––––––––––––– |
5,067 –––––––––––––––––––– |
65,149 –––––––––––––––––––– |
678,062 –––––––––––––––––––– |
| €'000s €'000s €'000s €'000s Cost At 1 January 2016 290,043 1,021,728 28,268 53,491 Additions 4,834 12,877 754 32,760 Disposals (21) (2,358) (1,125) (348) Transfers 15,265 29,853 632 (46,135) Changes in consolidated scope 822 – – – Translation differences 230 296 13 (217) –––––––––– –––––––––– –––––––––– –––––––––– –––––––––– At 31 December 2016 311,173 1,062,396 28,542 39,551 –––––––––– –––––––––– –––––––––– –––––––––– –––––––––– Depreciation and impairment At 1 January 2016 (80,397) (606,665) (24,310) (901) Depreciation charge (5,248) (40,866) (1,322) – Disposals 21 2,438 1,079 – Transfers (21) – – 21 Translation differences (4) (19) (2) – –––––––––– –––––––––– –––––––––– –––––––––– –––––––––– At 31 December 2016 (85,649) (645,112) (24,555) (880) –––––––––– –––––––––– –––––––––– –––––––––– –––––––––– Carrying amount At 1 January 2016 209,736 415,063 3,958 52,590 –––––––––––––––––––– –––––––––––––––––––– –––––––––––––––––––– –––––––––––––––––––– –––––––––––––––––––– At 31 December 2016 225,524 417,284 3,987 38,671 –––––––––––––––––––– –––––––––––––––––––– –––––––––––––––––––– –––––––––––––––––––– –––––––––––––––––––– Machinery, Prepayments Land & fixtures and work Buildings and tools Other PPE in progress €'000s €'000s €'000s €'000s Cost At 1 January 2015 281,425 976,211 27,936 51,283 Additions 2,447 16,644 548 41,900 Disposals – (2,923) (287) 61 Transfers 6,119 31,739 70 (39,753) Translation differences 52 57 1 – –––––––––– –––––––––– –––––––––– –––––––––– –––––––––– At 31 December 2015 290,043 1,021,728 28,268 53,491 –––––––––– –––––––––– –––––––––– –––––––––– –––––––––– Depreciation and impairment At 1 January 2015 (75,969) (570,450) (23,382) (251) Depreciation charge (4,675) (40,247) (1,315) – Impairment – (379) – (650) Disposals 247 1,854 282 – Transfers – 2,563 105 – Translation differences – (6) – – –––––––––– –––––––––– –––––––––– –––––––––– –––––––––– At 31 December 2015 (80,307) (606,665) (24,310) (901) –––––––––– –––––––––– –––––––––– –––––––––– –––––––––– Carrying amount At 1 January 2015 205,456 405,761 4,554 51,032 –––––––––––––––––––– –––––––––––––––––––– –––––––––––––––––––– –––––––––––––––––––– –––––––––––––––––––– At 31 December 2015 209,736 415,063 3,958 52,590 |
Land & Buildings |
Machinery, fixtures and tools |
Other PPE | Prepayments and work in progress |
Total |
|---|---|---|---|---|---|
| €'000s | |||||
| 1,393,530 51,225 (3,852) (385) 822 322 |
|||||
| 1,441,662 | |||||
| (712,273) (47,436) 3,538 – (25) |
|||||
| (756,196) | |||||
| 681,257 | |||||
| 685,466 | |||||
| Total €'000s |
|||||
| 1,336,856 61,538 (3,149) (1,825) 110 |
|||||
| 1,393,530 | |||||
| (670,052) (46,237) (1,029) 2,383 2,668 (6) |
|||||
| (712,273) | |||||
| 666,804 | |||||
| –––––––––––––––––––– | –––––––––––––––––––– | –––––––––––––––––––– | –––––––––––––––––––– | 681,257 –––––––––––––––––––– |
Additions in 2016 and 2017 mainly correspond to the investment made in machinery and fixtures at the Group's various paper and board plants, while additions in 2015 corresponded to investment in other fixtures, such as conditioning of elements or improvement of the purification of pulp, as well as the reform of PM2 in Duenas, the winder of Rouen and the start-up of a new corrugated board plant in Tangier.
Additions to property, plant and equipment included €4.8m (2016: €2.8m; 2015: €5.2m) corresponding to work performed by the company on its own assets.
The balance of "Work in progress" mainly reflects the amount of investments made over the year corresponding to investment projects which are at the execution stage on the reporting date and which, therefore, have not yet entered into operation.
"Disposals" in 2017, 2016 and 2015 included various disposals of property, plant and equipment and the elimination of the accounting records of fully depreciated items which are not in use. The disposal of assets generated losses of €0.1m in 2017 compared with a loss of €0.8m in 2016 and a gain of €2.8m in 2015.
The breakdown below shows the amounts recorded in the income statement for impairment and gains or losses on disposals of non-current assets:
| Impairment and gains (losses) on disposals of assets | 2017 | 2016 | 2015 |
|---|---|---|---|
| €'000s | €'000s | €'000s | |
| Gain/(loss) on disposals of property, plant and equipment | (123) | (787) | 2,849 |
| Gain/(loss) on disposals of emission allowances (Note 10) | 52 | 61 | – |
| Impairment of property, plant and equipment | (299) | 737 | (769) |
| Impairment of investment property | 9 | 327 | 90 |
| Total | ––––––––––– | ––––––––––– | ––––––––––– |
| (361) | 338 | 2,170 | |
| –––––––––––––––––––––– | –––––––––––––––––––––– | –––––––––––––––––––––– |
In 2017, no expenses were capitalised (2016: €2m; 2015: €0.1m) corresponding to the finance costs of investment projects during the installation and commissioning period of greater than one year prior to start-up.
The capitalisation rate of generic borrowing costs was 2.79 per cent. in 2016 (2015: 3.57 per cent.).
In 2017, the group received government grants associated with items of property, plant and equipment for €0.3m (2016: €1.0m; 2015: €8.2m). See Note 20.
The Europac Group has taken out different insurance policies to cover the main risks which its property, plant and equipment are subject to.
The amount of fully depreciated items which remain in use as at 31 December 2017 stood at €315m (2016: €291m; 2015: €269m).
The carrying amount of assets acquired through finance leases at 31 December 2017 was €4.2m (2016: €4.3m; 2015: €18.5m). The leased assets, mainly machinery and vehicles at plants, secure the financial liabilities attaching to those finance leases.
Future minimum payments of finance leases and the present value of net minimum lease payments are as follows:
| 2015 | |||||
|---|---|---|---|---|---|
| Minimum | Present | Minimum | Present | Minimum | Present |
| €'000s | value €'000s |
payments €'000s |
value €'000s |
payments €'000s |
value €'000s |
| 307 | |||||
| 499 | 497 | 860 | 853 | 1,173 | 1,146 |
| – | – | – | – | – | – |
| –––––––––– | |||||
| 832 | 825 | 1,204 | 1,160 | 1,497 | 1,453 |
| 7 | – | (14) | – | (44) | – |
| –––––––––– | |||||
| 839 | 825 | 1,190 | 1,160 | 1,453 | 1,453 –––––––––––––––––––– |
| payments 333 Between one and five years –––––––––– –––––––––– –––––––––––––––––––– |
2017 329 –––––––––– –––––––––– –––––––––––––––––––– |
344 –––––––––– –––––––––– –––––––––––––––––––– |
2016 307 –––––––––– –––––––––– –––––––––––––––––––– |
324 –––––––––– –––––––––– –––––––––––––––––––– |
The break down of this heading as at 31 December 2017, 2016 and 2015 is as follows:
| Total €'000s |
|
|---|---|
| Cost At 1 January 2017 Changes in consolidated scope |
3,313 121 ––––––––––– |
| At 31 December 2017 | 3,434 ––––––––––– |
| Amortisation and impairment At 1 January 2017 Amortisation Impairment Disposals Changes in consolidated scope At 31 December 2017 |
(1,285) (57) (28) 38 (86) ––––––––––– (1,418) ––––––––––– |
| Carrying amount At 1 January 2017 |
2,028 |
| At 31 December 2017 | –––––––––––––––––––––– 2,016 –––––––––––––––––––––– |
| Total €'000s |
|
|---|---|
| Cost At 1 January 2016 Additions Disposals |
4,220 85 (992) ––––––––––– |
| At 31 December 2016 | 3,313 ––––––––––– |
| Amortisation and impairment At 1 January 2016 Amortisation Disposals |
(1,713) (58) 486 ––––––––––– |
| At 31 December 2016 | (1,285) ––––––––––– |
| Carrying amount At 1 January 2016 |
2,508 –––––––––––––––––––––– |
| At 31 December 2016 | 2,028 –––––––––––––––––––––– |
| Total €'000s |
|
| Cost At 1 January 2015 Additions |
4,133 87 ––––––––––– |
| At 31 December 2015 | 4,220 ––––––––––– |
| Amortisation and impairment At 1 January 2015 Amortisation Disposals |
(1,745) (58) 90 |
| At 31 December 2015 | ––––––––––– (1,713) ––––––––––– |
| Carrying amount At 1 January 2015 |
2,388 –––––––––––––––––––––– |
| At 31 December 2015 | 2,508 –––––––––––––––––––––– |
Under "Investment property", the Group mainly recorded as at 31 December 2017 an industrial warehouse in Portugal for an amount of €1.4m (2016: €1.4m; 2015: €1.5m). Forestry land not operational is also included in this heading.
The industrial warehouse was rented in 2014 and in 2015 the Group reversed part of the impairment provision (€0.1m) to adjust its carrying amount to its fair value, while in 2016 a total of €0.3m was reversed (Note 12) and de-registrations as a result of disposals were recorded in an amount of €0.5m.
| At 31 December | 2,045 –––––––––––––––––––––– |
1,693 –––––––––––––––––––––– |
1,639 –––––––––––––––––––––– |
|---|---|---|---|
| Changes recognised in equity | – ––––––––––– |
(61) ––––––––––– |
(102) ––––––––––– |
| Share of profit of associates | 369 | 115 | 131 |
| Disposals in the year | (17) | – | – |
| At 1 January | 1,693 | 1,639 | 1,610 |
| €'000s | €'000s | €'000s | |
| 2017 | 2016 | 2015 |
| Nature of | Principal country of |
Ownership interest | |||
|---|---|---|---|---|---|
| business | operation | 2017 | 2016 | 2015 | |
| Cartonajes Santander, S.L. | Corr. board manufacture |
Spain | 39.6% | 39.6% | 36.6% |
| Cartonajes Cantabria, S.L. | Corr. board manufacture |
Spain | 39.6% | 39.6% | 36.6% |
| Industria Cartonera Asturiana, S.L. | Corr. board manufacture |
Spain | 39.6% | 39.6% | 36.6% |
| Euskocarton, S.L. | Corr. board manufacture |
Spain | 39.6% | 39.6% | 36.6% |
| Vianaport – Empresa de Trabalho Portuario, Lda. |
Port services | Portugal | – | 50.0% | 50.0% |
The Group holds investments in unlisted Spanish-resident associates which are not listed on the stock exchange and which are accounted for using the equity method. The Group is accounting for these investments under the equity method of accounting because the Group has the ability to exercise significant influence over the investment due to the Group's holdings.
The Group accounted for its 50 per cent. shareholding in Vianaport – Empresa de Trabalho Portuario, Lda. as a joint venture until its disposal in 2017.
The following items are an aggregate of the financial statements of the Europac Group's main associates on a 100 per cent. basis.
| 2017 | 2016 | 2015 | |
|---|---|---|---|
| €'000s | €'000s | €'000s | |
| Assets | 7,200 | 6,288 | 5,819 |
| Liabilities | 1,893 | 1,341 | 928 |
| Revenue | 5,006 | 5,887 | 3,421 |
| Profit after tax | 506 | 292 | 545 |
The break down of this heading as at 31 December 2017, 2016 and 2015 is as follows:
| 2017 | |||||
|---|---|---|---|---|---|
| Loans and | |||||
| Held for | Available | other | Held to | ||
| Trading | for sale | receivables | maturity | Total | |
| €'000s | €'000s | €'000s | €'000s | €'000s | |
| Non-current | |||||
| Equity instruments Other financial assets |
– – |
568 – |
– 2,526 |
– 490 |
568 3,016 |
| –––––––––– | –––––––––– | –––––––––– | –––––––––– | –––––––––– | |
| Total non-current financial assets | – –––––––––– |
568 –––––––––– |
2,526 –––––––––– |
490 –––––––––– |
3,584 –––––––––– |
| Current | |||||
| Equity instruments | 784 | – | – | – | 784 |
| Other financial assets | – –––––––––– |
– –––––––––– |
6 –––––––––– |
87 –––––––––– |
93 –––––––––– |
| Total current financial assets | 784 –––––––––– |
– –––––––––– |
6 –––––––––– |
87 –––––––––– |
877 –––––––––– |
| 2016 | |||||
| Loans and | |||||
| Held for | Available | other | Held to | ||
| Trading | for sale | receivables | maturity | Total | |
| €'000s | €'000s | €'000s | €'000s | €'000s | |
| Non-current | |||||
| Equity instruments | – | 13,145 | – | – | 13,145 |
| Other financial assets | – –––––––––– |
– –––––––––– |
712 –––––––––– |
908 –––––––––– |
1,620 –––––––––– |
| Total non-current financial assets | – –––––––––– |
13,145 –––––––––– |
712 –––––––––– |
908 –––––––––– |
14,765 –––––––––– |
| Current | |||||
| Equity instruments | 554 | – | – | – | 554 |
| Derivatives | 1,641 | – | – | – | 1,641 |
| Other financial assets | – –––––––––– |
– –––––––––– |
2 –––––––––– |
88 –––––––––– |
89 –––––––––– |
| Total current financial assets | 2,195 –––––––––– |
– –––––––––– |
2 –––––––––– |
88 –––––––––– |
2,284 –––––––––– |
| 2015 | |||||
| Loans and | |||||
| Held for | Available | other | Held to | ||
| Trading | for sale | receivables | maturity | Total | |
| €'000s | €'000s | €'000s | €'000s | €'000s | |
| Non-current | |||||
| Equity instruments Other financial assets |
– – |
577 – |
– 632 |
– 611 |
577 1,243 |
| –––––––––– | –––––––––– | –––––––––– | –––––––––– | –––––––––– | |
| Total non-current financial assets | – –––––––––– |
577 –––––––––– |
632 –––––––––– |
611 –––––––––– |
1,820 –––––––––– |
| Current | |||||
| Equity instruments | – | 687 | – | – | 687 |
| Derivatives | – | 461 | – | – | 461 |
| Other financial assets | – –––––––––– |
– –––––––––– |
338 –––––––––– |
80 –––––––––– |
418 –––––––––– |
| Total current financial assets | – –––––––––– |
1,148 –––––––––– |
338 –––––––––– |
80 –––––––––– |
1,566 –––––––––– |
"Equity instruments" in 2017 mainly includes minority shareholdings in companies in the board manufacturing sector and shares in listed companies in secondary markets.
In 2016, the Group acquired shares in listed companies (almost all in the IBEX35) for the sum of €10.4m as a result of the merger with Harpalus, S.L. These shares were sold in 2017 with a capital gain of €4.1m.
Accordingly, "Available-for-sale financial assets" in 2016 and 2015 include securities with no official quoted price, mainly investments in companies in the corrugated board manufacturing industry, and shares of listed companies in secondary markets.
The change in the financial assets available for sale is as follows:
| Available-for-sale financial assets | 2017 €'000s |
2016 €'000s |
2015 €'000s |
|---|---|---|---|
| Balance at 1 January | 13,145 | 577 | 577 |
| Business combinations | (9) | 10,397 | – |
| Revaluation | 1,887 | 2,219 | – |
| Transfer to profit or loss | (4,106) | – | – |
| De-registrations | (10,349) ––––––––––– |
(48) ––––––––––– |
– ––––––––––– |
| Balance at 31 December | 568 ––––––––––– |
13,145 ––––––––––– |
577 ––––––––––– |
"Current and non-current investments held to maturity" in 2017, 2016 and 2015 contains term deposits, guarantees and other financial assets with an explicit maturity.
Non-current "Loans and receivables" mainly includes the non-current maturities of loans granted by Europac Papeterie de Rouen, S.A.S. and Europac Cartonnerie de Rouen, S.A.S. to French public bodies for social purposes pursuant to prevailing legislation.
The break down of this heading as at 31 December 2017, 2016 and 2015 is as follows:
| 2017 | 2016 | 2015 | |
|---|---|---|---|
| €'000s | €'000s | €'000s | |
| Raw materials and consumables | 63,702 | 59,355 | 56,651 |
| Work in progress | 802 | 807 | 917 |
| Goods for resale | 908 | 712 | 612 |
| Finished goods | 22,698 ––––––––––– |
18,279 ––––––––––– |
21,618 ––––––––––– |
| 88,110 –––––––––––––––––––––– |
79,152 –––––––––––––––––––––– |
79,798 –––––––––––––––––––––– |
The directors of the parent company believe that the insurance arranged by the consolidated Group adequately covers the risk to which its inventories may be exposed.
There are no material commitments to purchase inventories at the 2017, 2016 and 2015 reporting dates
Inventory provisions at 31 December 2017 were €2.8m (2016: €2.3m, 2015: €4.1m).
Trade and other receivables comprise the following:
| 2017 | 2016 | 2015 | |
|---|---|---|---|
| €'000s | €'000s | €'000s | |
| Trade receivables Impairment and bad debt provisions |
61,557 (5,255) ––––––––––– |
56,751 (6,612) ––––––––––– |
67,637 (8,282) ––––––––––– |
| Total trade receivables | 56,302 | 50,139 | 59,355 |
| –––––––––––––––––––––– | –––––––––––––––––––––– | –––––––––––––––––––––– | |
| VAT refundable Other receivables Other receivables from tax authorities Impairment and bad debt provisions |
3,703 4,894 10,108 (644) ––––––––––– |
9,514 18,777 9,737 (643) ––––––––––– |
8,626 14,973 3,520 (6,473) ––––––––––– |
| Total other receivables | 18,061 | 37,385 | 20,646 |
| –––––––––––––––––––––– | –––––––––––––––––––––– | –––––––––––––––––––––– |
Changes in the provision for impairment and bad debt in 2017 and 2016 are as follows:
| 2017 | 2016 | 2015 | |
|---|---|---|---|
| €'000s | €'000s | €'000s | |
| Balance at 1 January | 7,256 | 14,755 | 16,915 |
| Changes in the consolidation scope | 669 | – | – |
| Provisions/(reversals) for the year | (418) | 571 | (2,147) |
| Utilisation | (1,608) | (8,069) | (14) |
| Balance at 31 December | ––––––––––– | ––––––––––– | ––––––––––– |
| 5,900 | 7,256 | 14,755 | |
| –––––––––––––––––––––– | –––––––––––––––––––––– | –––––––––––––––––––––– |
The Group's exposure to credit risk is mainly attributable to the receivables arriving in the ordinary course of business. Amounts stated in the balance sheet are shown net of the impairment losses on trade receivables and doubtful debts, which were recorded by the Group in accordance with its experience, having regard to expected performance and the economic circumstances prevailing at the reporting date.
The Group has factored without recourse certain receivables for sales of goods and services. Since the risks associated with these receivables have been substantially transferred, the balance of these receivables (with the non-due balance at 31 December 2017 and 2016 amounting to €61.4m, €59.7m respectively) was written off the Group's consolidated balance sheet at 31 December 2017 and 31 December 2016 (Note 23).
In June 2003, the Group brought an ordinary executive action against the company Empresa de Desenvolvimiento e Infraestruturas do Alqueva, S.A. ("EDIA") for collection of a right to collect compensation for the expropriation of the production unit of Portucel Recicla, which was flooded in the construction of the Alqueva dam (Portugal). The ordinary enforcement action led to various actions before different courts, which concluded with the Judgment of the Supreme Court of Justice of Portugal on 14 December 2016 in favour of the Group. As a consequence of said judgement, EDIA paid the Company a total of €14.1m in 2017 as principal plus interest accrued from 31 July 2002 to 27 March 2017. Said amount is recorded as part of the balance of "Receivables" at 31 December 2016 and a balance of €2.0m held in 2015 at the fair value at the balance sheet date.
As at 31 December 2017, 2016 and 2015, there were no indications that the usual collection periods for the balances included under outstanding trade receivables will not be met.
Trade and other receivables not covered by provisions at 31 December 2017, 2016 and 2015 broken down by age are as follows:
| Of which | ||||||
|---|---|---|---|---|---|---|
| Net | neither | More | ||||
| carrying impaired nor | 1 month | 1–2 | 2–3 | than | ||
| amount | past due | or less | months | months | 3 months | |
| Trade receivables | €'000s | €'000s | €'000s | €'000s | €'000s | €'000s |
| At 31 December 2017 | 60,551 | 49,910 | 9,924 | 344 | 63 | 310 |
| At 31 December 2016 | 68,272 | 57,713 | 10,025 | 184 | 95 | 255 |
| At 31 December 2015 | 67,855 –––––––––– |
58,500 –––––––––– |
9,040 –––––––––– |
253 –––––––––– |
19 –––––––––– |
43 –––––––––– |
The break down of this heading as at 31 December 2017, 2016 and 2015 is as follows:
| Bank balances Short-term deposits |
56,207 29,293 ––––––––––– |
50,627 44,141 ––––––––––– |
79,655 10,166 ––––––––––– |
|---|---|---|---|
| Net cash and cash equivalents | 85,500 | 94,768 | 89,820 |
| –––––––––––––––––––––– | –––––––––––––––––––––– | –––––––––––––––––––––– |
The balance under Cash at bank and in hand is kept in current accounts denominated in Euros, which accrue the market interest rate for this type of account.
The "Cash equivalents" are fully denominated in Euros and made up of bank deposits and similar highlyliquid investments, which mature in the first quarter of the year following the reporting date.
There are no restrictions on the availability of such balances.
The breakdown of the heading "Other payables" is shown below:
| 2017 €'000s |
2016 €'000s |
2015 €'000s |
|
|---|---|---|---|
| Remuneration payable | 16,065 | 15,616 | 15,202 |
| Personal income tax withholdings | 2,243 | 2,015 | 2,629 |
| Payable to social security agencies | 3,333 | 3,289 | 3,977 |
| Value added tax | 8,116 | 8,661 | 9,943 |
| Other payables | 3,798 ––––––––––– |
15,675 ––––––––––– |
12,933 ––––––––––– |
| 33,555 –––––––––––––––––––––– |
45,256 –––––––––––––––––––––– |
44,683 –––––––––––––––––––––– |
"Other payables" in the above mainly comprises prepayments from customers and other deferred charges.
The breakdown and changes under these headings for 2017, 2016 and 2015 are shown below:
| At 1 | At 31 | ||||
|---|---|---|---|---|---|
| January | Actuarial | December | |||
| 2017 €'000s |
Additions €'000s |
Utilisation €'000s |
Movements €'000s |
2017 €'000s |
|
| Non-current provisions | |||||
| Provisions for commitments to employees 16,247 Tax provisions |
524 | 611 – |
(830) – |
(1,016) – |
15,012 524 |
| Other provisions | 67 –––––––––– |
– –––––––––– |
(49) –––––––––– |
– –––––––––– |
18 –––––––––– |
| Total non-current provisions | 16,838 –––––––––––––––––––– |
611 –––––––––––––––––––– |
(879) –––––––––––––––––––– |
(1,016) –––––––––––––––––––– |
15,554 –––––––––––––––––––– |
| Current provisions | |||||
| Provision for use of CO2 allowances | 3,527 | 3,359 | (3,519) | – | 3,366 |
| Provision for restructuring | 127 | – | (127) | – | – |
| Other provisions | 16 –––––––––– |
– –––––––––– |
(16) –––––––––– |
– –––––––––– |
– –––––––––– |
| Total current provisions | 3,670 –––––––––––––––––––– |
3,359 –––––––––––––––––––– |
(3,662) –––––––––––––––––––– |
– –––––––––––––––––––– |
3,367 –––––––––––––––––––– |
| At 1 | At 31 | ||||
| January | Actuarial | December | |||
| 2016 | Additions | Utilisation | Movements | 2016 | |
| €'000s | €'000s | €'000s | €'000s | €'000s | |
| Non-current provisions | |||||
| Provisions for commitments to employees 14,109 | 770 | (755) | 2,124 | 16,247 | |
| Tax provisions | 524 | – | – | – | 524 |
| Other provisions | 187 –––––––––– |
– –––––––––– |
(120) –––––––––– |
– –––––––––– |
67 –––––––––– |
| Total non-current provisions | 14,820 –––––––––––––––––––– |
770 –––––––––––––––––––– |
(875) –––––––––––––––––––– |
2,124 –––––––––––––––––––– |
16,838 –––––––––––––––––––– |
| Current provisions | |||||
| Provision for use of CO2 allowances | 3,899 | 3,527 | (3,899) | – | 3,527 |
| Provision for restructuring | 1,129 | – | (1,002) | – | 127 |
| Other provisions | 27 –––––––––– |
(11) –––––––––– |
– –––––––––– |
– –––––––––– |
16 –––––––––– |
| Total current provisions | 5,056 –––––––––––––––––––– |
3,516 –––––––––––––––––––– |
(4,901) –––––––––––––––––––– |
– –––––––––––––––––––– |
3,670 –––––––––––––––––––– |
| At 1 | At 31 | ||||
|---|---|---|---|---|---|
| January | Actuarial | December | |||
| 2015 | Additions | Utilisation | Movements | 2015 | |
| €'000s | €'000s | €'000s | €'000s | €'000s | |
| Non-current provisions | |||||
| Provisions for commitments to employees 15,061 | 623 | (760) | (815) | 14,109 | |
| Tax provisions | 524 | – | – | – | 524 |
| Other provisions | 985 –––––––––– |
110 –––––––––– |
(908) –––––––––– |
– –––––––––– |
187 –––––––––– |
| Total non-current provisions | 16,570 –––––––––––––––––––– |
733 –––––––––––––––––––– |
(1,668) –––––––––––––––––––– |
(815) –––––––––––––––––––– |
14,820 –––––––––––––––––––– |
| Current provisions | |||||
| Provision for use of CO2 allowances | 2,552 | 3,899 | (2,552) | – | 3,899 |
| Provision for restructuring | – | 1,129 | – | – | 1,129 |
| Other provisions | 25 –––––––––– |
2 –––––––––– |
– –––––––––– |
– –––––––––– |
27 –––––––––– |
| Total current provisions | 2,578 –––––––––––––––––––– |
5,031 –––––––––––––––––––– |
(2,552) –––––––––––––––––––– |
– –––––––––––––––––––– |
5,056 –––––––––––––––––––– |
"Provisions for use of CO2 allowances" includes the amount estimated for greenhouse gas emission allowances used in the year (Notes 5 and 10).
Provisions for commitments to employees are disclosed in more detail in note 26.
Provisions for taxes reflect additional assessments in 2017 and 2016 and their corresponding late payment penalties and interest, for corporate income tax in respect of 2000 for the company Fábrica de Pape do Ave, S.A. The penalties have been appealed and a final decision is pending.
This heading includes the grants received from government bodies which have yet to be recorded in the income statement. It also includes a balancing entry for unused greenhouse gas emission allowances assigned by the environmental authorities to the Group free of charge, carried as intangible assets (Note 2.10 (c) and Note 10).
The Group acquired, at no cost, 222,585 emission allowances in 2017 valued at €1.3m, compared with 227,043 allowances in 2016 valued at €1.4m, and allowances in 2015 of 231,460 valued at €1.6m (Note 10). In 2017, the Group transferred a total of €1,336 (2016: €1,432; 2015: €1,638) to the consolidated income statement as revenue under "Grants related to non-financial assets".
In addition, the Group received new capital grants in 2017 in the amount of €0.3m, (2016: €1.0m; 2015: €8.2m). The amount of the capital grants transferred to profit and loss for the year totalled €1.0m in 2017 (2016: €1.0m; 2015: €3.0m). See "Grants related to non-financial assets" in the consolidated income statement).
"Bank borrowings" mainly comprises loans, balances drawn down from bank credit facilities and finance leases.
| 2017 | 2016 | 2015 | |||||||
|---|---|---|---|---|---|---|---|---|---|
| Non- | Non- | Total | Non | ||||||
| Current €'000s |
current €'000s |
Total €'000s |
Current €'000s |
current €'000s |
€'000s €'000s |
Current €'000s |
current €'000s |
Total €'000s |
|
| Syndicated loan1 Deferred finance |
12,500 268,125 | 280,625 | – | 290,000 | 290,000 | – | 250,000 | 250,000 | |
| expenses | – | (4,369) | (4,369) | – | (5,073) | (5,073) | – | (6,586) | (6,586) |
| Other loans2 | 2,291 | 38,136 | 40,427 | 30,529 | 44,439 | 74,968 | 46,670 | 64,007 | 110,677 |
| Finance leases3 | 264 | 107 | 371 | 161 | 455 | 616 | 289 | 684 | 974 |
| Credit facilities4 Short-term interest with |
514 | – | 514 | 131 | – | 131 | 218 | – | 218 |
| banks | 904 ––––––– |
– ––––––– |
904 ––––––– |
1,400 ––––––– |
– –––––––– |
1,400 –––––––– |
1,461 –––––––– |
– –––––––– |
1,461 –––––––– |
| 16,473 301,999 | 318,472 | 32,221 | 329,821 | 362,042 | 48,639 | 308,105 | 356,744 | ||
| –––––––––––––– | –––––––––––––– | –––––––––––––– | –––––––––––––– | –––––––––––––––– | –––––––––––––––– | –––––––––––––––– | –––––––––––––––– | –––––––––––––––– |
Notes:
(1) Syndicated Forward Start Facility entered into in February 2012 for up to €253m, of which €166m comprised a loan and €87m related to a revolving credit facility, both for five years with partial maturities. The rate of interest was indexed to Euribor, plus a spread of 3.25 per cent. The facility was subsequently refinanced and novated as follows:
– In July 2014, Europac Group signed a novation of the Forward Start Facility with the corresponding banks, which essentially involved deferring all outstanding due dates on the novation date by two years. The spread for this borrowing was reduced to 2.5 per cent. throughout the remaining life of the loan.
– In July 2015, Europac Group refinanced its syndicated borrowings by increasing the amount of the financing to €290m euros and extending the outstanding maturities on the novation date by two years up to 10 July 2021, with an annual interest rate indexed to the Euribor plus a margin of between 140 and 175 basis points depending on compliance with certain ratios.
The maturity schedule of non-current bank borrowings is as follows:
| 2017 | 2016 | 2015 | |
|---|---|---|---|
| €'000s | €'000s | €'000s | |
| 2017 | – | – | 38,493 |
| 2018 | – | 21,946 | 44,718 |
| 2019 | 32,335 | 36,489 | 39,516 |
| 2020 | 54,476 | 40,144 | 43,452 |
| 2021 | 47,796 | 52,811 | 136,369 |
| 2022 | 171,322 | 183,504 | 12,143 |
| 2023 and other | 438 ––––––––––– |
– ––––––––––– |
– ––––––––––– |
| 306,368 | 334,894 | 314,691 | |
| Discount to present value | (4,369) ––––––––––– |
(5,073) ––––––––––– |
(6,586) ––––––––––– |
| 301,999 | 329,821 | 308,105 | |
| –––––––––––––––––––––– | –––––––––––––––––––––– | –––––––––––––––––––––– |
All Group borrowings are Euro-denominated
The breakdown of the carrying amount of other financial liabilities recorded by the Group is as follows:
| Financial liabilities at fair value through profit and loss |
Trade and other payables |
Hedging derivatives |
Total | |
|---|---|---|---|---|
| Year Ended 31 December 2017 | €'000s | €'000s | €'000s | €'000s |
| Non-current Derivatives Payables to fixed asset suppliers Other financial liabilities |
309 – – |
– 12,997 129 |
452 – – |
761 12,997 129 |
| Total non-current other financial liabilities | –––––––––– 309 –––––––––––––––––––– |
–––––––––– 13,126 –––––––––––––––––––– |
–––––––––– 452 –––––––––––––––––––– |
–––––––––– 13,887 –––––––––––––––––––– |
| Current Payables to fixed asset suppliers |
– | 25,900 | – | 25,900 |
| Total current other financial liabilities | –––––––––– – –––––––––––––––––––– |
–––––––––– 25,900 –––––––––––––––––––– |
–––––––––– – –––––––––––––––––––– |
–––––––––– 25,900 –––––––––––––––––––– |
| Year Ended 31 December 2016 | Financial liabilities at fair value through profit and loss €'000s |
Trade and other payables €'000s |
Hedging derivatives €'000s |
Total €'000s |
| Non-current | ||||
| Derivatives Payables to fixed asset suppliers Other financial liabilities |
777 – – |
– 12,984 32,296 |
1,104 – – |
1,882 12,984 32,296 |
| Total non-current other financial liabilities | –––––––––– 777 –––––––––––––––––––– |
–––––––––– 45,281 –––––––––––––––––––– |
–––––––––– 1,104 –––––––––––––––––––– |
–––––––––– 47,163 –––––––––––––––––––– |
| Current Payables to fixed asset suppliers Other financial liabilities |
– – |
22,108 6,163 |
– – |
22,108 6,163 |
| Total current other financial liabilities | –––––––––– – –––––––––––––––––––– |
–––––––––– 28,271 –––––––––––––––––––– |
–––––––––– – –––––––––––––––––––– |
–––––––––– 28,271 –––––––––––––––––––– |
| Year Ended 31 December 2015 | Financial liabilities at fair value through profit and loss €'000s |
Trade and other payables €'000s |
Hedging derivatives €'000s |
Total €'000s |
| Non-current Derivatives Payables to fixed asset suppliers Other financial liabilities |
184 – |
– 17,864 37,111 |
3,738 – |
3,922 17,864 37,111 |
| Total non-current other financial liabilities | –––––––––– 184 –––––––––––––––––––– |
–––––––––– 54,975 –––––––––––––––––––– |
–––––––––– 3,738 –––––––––––––––––––– |
–––––––––– 58,897 –––––––––––––––––––– |
| Current Payables to fixed asset suppliers Other financial liabilities |
– – –––––––––– |
18,800 33 –––––––––– |
– – –––––––––– |
18,800 33 –––––––––– |
| Total current other financial liabilities | – –––––––––––––––––––– |
18,833 –––––––––––––––––––– |
– –––––––––––––––––––– |
18,833 –––––––––––––––––––– |
a) Factoring contracts
The group has non-recourse factoring contracts in place with certain financial institutions. The contractual limit of transferable receivables at 31 December 2017 amounted to €102m (2016: €112m; 2015: €88m), of which €61m had been transferred at 31 December 2017 (2016: €60m; 2015: €61m). All these contracts are indexed to the Euribor, with a spread of between 0.3 per cent. and 0.85 per cent. in 2015-2017.
In 2014, the Group set up a commercial paper issue programme on the MARF (Alternative Fixed-Income Market) for a maximum of €50m. This programme aims to reduce finance costs and diversify the sources of financing. In 2017, this programme was renewed and the maximum amount increased to €100m.
In 2017, the Group carried out issues for an average annual amount of €28m at an average cost of 0.7 per cent. (2016: €9m with an average cost of 0.9 per cent.; 2015: €14m with an average cost of 2.5 per cent.), with no outstanding balance at the end of any year presented.
The Group uses derivative financial instruments to hedge volatility risks associated with the floating interest rates borne by its major financial liabilities. The derivative instruments held by the Europac Group in 2017 are shown below:
| Contract | Notional (€'000s) | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Type of | Hedged | date/ Floating | Fixed | 31 | 31 | 31 | ||||
| derivative | financial | hedge | interest | interest | Strike | December | December | December | Accounting | |
| instrument | instrument | designation | rate | rate | Price | 2015 | 2016 | 2017 | Maturity | hedge |
| Vanilla floating-fixed swap | Syndicated loan | 31/07/2012 | E3M | 0.72% to | – | 151,178 | 43,521 | – | 16/02/2017 | yes |
| 1.28% | ||||||||||
| Vanilla floating-fixed swap | Syndicated loan | 14/12/2012 | E3M | 0.860% | – | 8,529 | 6,148 | – | 16/02/2017 | yes |
| Vanilla floating-fixed swap | Syndicated loan | 18/02/2013 | E3M | 0.71% to | – | 41,863 | 95,619 | – | 16/02/2017 | yes |
| 1.30% | ||||||||||
| Vanilla floating-fixed swap | Syndicated loan | 01/04/2016 | E3M | 0.0075% to | – | – | 133,438 | 124,688 | 12/07/2021 | no |
| 0.016% | ||||||||||
| Vanilla floating-fixed swap | Loan | 06/03/2013 | E6M | 0.980% | – | 40,000 | 35,714 | – | 15/03/2017 | yes |
| Vanilla floating-fixed swap | Cancelled | – | E6M | 0.480% | – | 17,600 | 15,200 | 10,400 | 08/08/2018 | no |
| Vanilla floating-fixed swap | Loan | 14/11/2014 | E3M | 0.480% | – | 20,000 | 20,000 | 18,571 | 07/02/2020 | yes |
| Gas formula swap | Gas futures purchases | 22/11/2016 | N/A | N/A | €18.68 | |||||
| /MWh | – | 24,814 | – | 31/12/2017 | no | |||||
| Exchange rate forwards | Future purchases pounds | 07/06/2017 | N/A | N/A | £0.896/€ | – | – | 3,624 | 25/01/2021 | yes |
| Exchange rate forwards | Future purchases pounds | 06/06/2017 | N/A | N/A | £0.883/€ | – | – | 4,535 | 25/10/2022 | yes |
The breakdown of the fair value of the financial instruments taken out by the Group, as well as the effect on the Income Statement and on Equity of changes in their value is shown below:
| Income and expenses recognised in other |
|||||||||
|---|---|---|---|---|---|---|---|---|---|
| Fair Value | Income Statement | comprehensive income | |||||||
| Derivative financial | 2017 | 2016 | 2015 | 2017 | 2016 | 2015 | 2017 | 2016 | 2015 |
| instruments | €'000s | €'000s | €'000s | €'000s | €'000s | €'000s | €'000s | €'000s | €'000s |
| Interest-rate derivatives | (452) | (1,104) | (3,738) | (1,056) | 281 | (2) | 79 | 2,914 | 1,827 |
| Speculative derivatives | (309) ––––––– |
863 ––––––– |
277 ––––––– |
(1,172) ––––––– |
1,604 –––––––– |
525 –––––––– |
– –––––––– |
– –––––––– |
– –––––––– |
| (761) –––––––––––––––– –––––––––––––––– |
(241) | (3,461) –––––––––––––––– |
(2,228) –––––––––––––––– |
1,885 –––––––––––––––– |
523 –––––––––––––––– |
79 –––––––––––––––– |
2,914 –––––––––––––––– |
1,827 –––––––––––––––– |
Payables to fixed assets suppliers classified as non-current relates to amounts payable to suppliers of investments falling due after one year.
"Other financial liabilities" mainly includes the maturities at more than one year of a loan of €40m granted by the Agency for Business Innovation, Funding and Internationalisation of Castile Leon (ADE). This loan was repaid early in February 2017.
The breakdown of the due dates of non-current, non-derivative other financial liabilities is as follows:
| 2017 €'000s |
2016 €'000s |
2015 €'000s |
|
|---|---|---|---|
| 2017 | – | – | 10,058 |
| 2018 | – | 11,452 | 10,790 |
| 2019 | 6,814 | 10,562 | 10,727 |
| 2020 | 4,456 | 8,878 | 8,878 |
| 2021 | 2,010 | 16,654 | 15,755 |
| 2022 | 1,408 | – | – |
| Other | 29 ––––––––––– |
– ––––––––––– |
– ––––––––––– |
| Total | 14,717 | 47,546 | 56,208 |
| Deferred finance costs | (1,591) ––––––––––– |
(2,265) ––––––––––– |
(1,233) ––––––––––– |
| Total non-current other financial liabilities | 13,126 | 45,281 | 54,975 |
| –––––––––––––––––––––– | –––––––––––––––––––––– | –––––––––––––––––––––– |
The finance costs of other financial liabilities have been estimated by applying the effective interest rate method
e) Fair value
Given that almost all the Group's financial liabilities bear interest at benchmark rates, it is believed that the fair value of such liabilities is not materially different from their carrying amount (Note 3)
f) Risk policy and management
The Group's activities expose it to various types of financial risk: market risk, credit risk, liquidity risk and interest-rate risk on cash flows. The Group analyses uncertainty in the financial markets and takes steps to minimise any adverse effect on the Group's returns by arranging derivative instruments, among other measures.
The most important financial risks faced by the Europac Group are:
● Financial covenants
The investments in group plants and corporate acquisitions over the past few years were supported by financing structures that are thought to be appropriate. However, those structures carry obligations to comply with certain covenants granted to the lenders. It is therefore critical that compliance with those covenants be suitably monitored. The Group's Finance Department draws up financial projections in the short and long term based on its business plans and regularly monitors compliance with covenants to forestall any risk of non-compliance and warn management so that it may take corrective steps. Under the terms of this loan, failure to comply with financial covenants on two or more occasions qualifies as a breach of contract that would entitle the lenders to declare early maturity.
The Group complied with the covenants of its financial debt in 2017.
● Exchange-rate risk
The Group mainly carries on its business in Spain, Portugal, France and other countries of the Eurozone, so most of its transactions are accordingly denominated in Euros. The Group purchases some of its raw materials in United States dollars and has maintenance contracts for turbines in Pounds Sterling. Management does not regard exchange-rate risk as significant. However, when it considers it appropriate, it hedges these currencies.
The Group's credit risk exposure mainly relates to receivables arising in the ordinary course of business. Group management believes that the credit risk to which it is exposed is not significantly concentrated (Note 17 itemises unimpaired balances past due). However, the Group has policies in place to ensure that wholesale customers have an appropriate credit and solvency history. The Group's finance area accordingly operates a risk department concerned with the Group's main markets. The main role of this department is to design, implement, monitor and control customer and credit risk acceptance policies. The Group has credit and surety insurance in place.
● Continuity risk
At 31 December 2017, the Group had negative working capital of €27.4m (2016: €23.2m; 2015: €32.2m). The directors of the parent company estimate that the cash flows generated by the business and the available lines of financing make it possible to meet current liabilities. Consequently, the directors of the parent company have prepared the consolidated financial statements following the going concern principle.
● Liquidity risk
The Group carries out prudent liquidity risk management based on establishing and maintaining minimum liquidity ratios. Similarly, the Group's Management, with the aim of maintaining minimum financing availability, took out, as part of the syndicated loan, a line of credit for an approximate amount of €90m in 2015. This financing is supplemented with a sufficient number of lines of credit and factoring arrangements, as well as a corporate paper issue programme entered into in 2017 for a maximum sum of €100m, which grants flexibility, availability and diversification of appropriate sources of shortterm financing in the business.
● Cash flow interest-rate risk and fair value risk
Cash flows from the Group's operating activities are independent of changes in market interest rates. Therefore, there is no natural hedging between operating cash flows and financial cash flows. The Group's exposure to interest-rate risk is mainly present in long-term debt which is almost all indexed to variable rates, thus exposing the Group to interest-rate risk in cash flows. Fixed-rate borrowings, which are not significant in the Group, expose the Group to fair value interest-rate risk. Group policy is to arrange derivative financial instruments to swap floating rates for fixed rates or restrict the volatility of floating rates to a given range, while maintaining a reasonable balance between fixed and floating rates.
The Europac Group's sensitivity to interest rate fluctuations in 2017 and 2016 is shown below in thousands of Euros:
| Variances due to interest rate fluctuations | |||||||
|---|---|---|---|---|---|---|---|
| 2017 | 2016 | 2015 | |||||
| 0.25% | (0.25%) | 0.25% | (0.25%) | 0.25% | (0.25%) | ||
| €'000s | €'000s | €'000s | €'000s | €'000s | €'000s | ||
| Estimated effect on profit after tax | 202 | (202) | 349 | (349) | (375) | 375 | |
| Estimated effect on equity after tax | (317) | 317 | (212) | 212 | 194 | (194) |
● Financial instruments and bank deposits
The credit risk of the balances with banks and financial institutions is managed by the Group's Treasury Departments in accordance with the guidelines received from the Finance Department. The Group generally maintains a net debit cash position through its use of credit facilities, reflecting its policy of using any surplus cash to pay down credit facilities; this risk is accordingly regarded as not material.
● Capital management
The Group aims to maintain its financial solvency at reasonable levels, maintaining its debt/equity ratio at acceptable levels. Group policy on dividends, investment and financing is managed in regard to debt levels. In 2017, the group distributed dividends to shareholders for 60 per cent. of the consolidated net profit (2016: 50%; 2015: No disclosure).
No changes were made to the objectives, policies or processes for managing the Group's financial solvency in the years ending 31 December 2017, 2016 and 2015.
The ratios used by the Group to manage financial solvency are the same as those indicated in the above section entitled "Financial Covenants".
In order to minimise this risk, the raw materials purchasing department is focused on signing longterm contracts, searching for new supply markets and avoiding supplier concentration. Furthermore, the Group has in recent years undertaken strategic acquisitions of recycled paper recovery companies to enable vertical integration and mitigate the supply and price risk associated with this material.
The other major category in group cost structure carrying supply and price volatility risk is the cost of electricity, since paper manufacturing is power-intensive. The Group mitigated this risk to minimum levels by constructing co-generation and combined-cycle power plants in the paper production plants, which are operated under Spain's special power tariff scheme. The price volatility risk of the cost of gas, which is used as fuel in the combined-cycle plant, is mitigated by the use of financial instruments, where necessary.
It is not possible to make a reliable estimate of the impact on the consolidated income statement of a significant change in the price of raw materials as it is not possible to reliably estimate which part of said change could be charged to the customer through the sales price of the finished product.
Below is the impact forecast for the income statement in different scenarios under the assumption that the prices of all raw materials used by the Europac Group rise at a similar rate:
| 2017 | 2016 | 2015 | ||
|---|---|---|---|---|
| Estimated | Estimated | Estimated | ||
| Change in | Repercussion | effect on | effect on | effect on |
| price of raw | of the change | profit/(loss) | profit/(loss) | profit/(loss) |
| materials | on sales prices | after tax | after tax | after tax |
| €'000s | €'000s | €'000s | €'000s | €'000s |
| +/- 5% | 10% | +/- 14,815 | +/- 12,991 | +/- 12,970 |
| +/- 5% | 30% | +/- 10,523 | +/- 10,104 | +/- 10,088 |
| +/- 5% | 50% | +/- 8,231 | +/- 7,217 | +/- 7,206 |
| +/- 5% | 70% | +/- 4,938 | +/- 4,330 | +/- 4,323 |
| +/- 5% | 100% | – | – | – |
The effect on the Europac Group's equity would not materially differ from that shown in the above table for profit/loss after tax.
● Customer concentration risk
Although revenue concentration by customer is not greater than the sector average, the Sales Department conducts certain analyses on customer concentration in order to implement measures to mitigate any potential risk.
● Sales price risk
In order to mitigate this risk and prevent a reduction in contribution margins, the Group has computer systems which produce reliable data on the cost and profitability of any offer before it is presented to the customer.
The Europac Group's business processes and management model are processed through a unique ERP for all business lines, combined with a logistics system in the Paper division and a production planning system in the Board division. In order to mitigate the risk of concentration in the physical location of the systems, as well as the risk of hacking or the blocking of the communications systems, the Group stores data in a cloud environment and has a contingency plan in the event of a breakdown that is periodically updated.
● Risk of negligence by executives and employees
The Group is exposed to this type of risk given the need to delegate responsibility to executives.
In order to minimise exposure to this risk, it has established specific selection and training procedures for staff, as well as a catalogue of functions and competencies which each employee must meet in his/her position. There is also an Appointments and Remuneration Committee, Compliance and Business Ethics Committee, a Disciplinary System and a Code of Conduct which has been handed out to all Europac employees. A directors' and executives' liability insurance policy has been taken out.
● Workplace risk prevention
The Europac Group complies with regulations relating to Safety in the Workplace, Industrial Hygiene, Ergonomics and Applied Psycho-sociology and Workplace Medicine. As the Group's activity is industrial, occupational risk control and prevention takes on special importance and it is the Group's policy to promote improvements in work conditions aimed at raising the level of protection of the health and safety of our workers in the workplace.
The Europac Group ensures the quality of its products and compliance with prevailing legislation through the implementation of Comprehensive Quality Systems at all its centres. The Group has UNE-EN ISO 9001:2000 certifications at its main centres.
The Group has an internal audit department, whose main responsibility is to ensure compliance with the standards and procedures established by the Group, as well as to identify possible improvements.
In 2017, 2016 and 2015, none of the aforementioned risks had a material impact on the Europac Group.
Changes in deferred tax assets and liabilities, calculated in accordance with the accounting principles specified in Note 2.18, are as follows:
| Changes in deferred taxes in 2017 | €'000s | ||||
|---|---|---|---|---|---|
| 1 | Change | Recognised against | 31 | ||
| January | in scope | Earnings | Equity | December | |
| Deferred tax assets | |||||
| Tax losses | 36,855 | – | (2,278) | – | 34,577 |
| Tax deductions | 1,029 | – | (1,029) | – | – |
| Share-based payment transactions | 580 | – | 975 | – | 1,555 |
| Differences between tax and | |||||
| accounting assets | 4,739 | 476 | (284) | – | 4,932 |
| Provisions for commitments to employees | 3,868 | – | (41) | (298) | 3,529 |
| Provision for restructuring | – | – | – | – | – |
| Provisions for impairment of current | |||||
| assets and bad debt | 710 | – | 61 | – | 771 |
| Provision for impairment of | |||||
| non-current assets | 115 | – | 7 | – | 122 |
| Other provisions | 33 | – | (33) | – | – |
| Derivative financial derivatives | 133 | – | – | (17) | 116 |
| Other | 217 –––––––––– |
– –––––––––– |
(38) –––––––––– |
– –––––––––– |
179 –––––––––– |
| Total | 48,281 | 476 | (2,660) | (315) | 45,782 |
| –––––––––––––––––––– | –––––––––––––––––––– | –––––––––––––––––––– | –––––––––––––––––––– | –––––––––––––––––––– | |
| Deferred tax liabilities | |||||
| Differences between tax and | |||||
| accounting assets | 60,484 | 148 | (834) | – | 59,651 |
| Other | 1,266 –––––––––– |
– –––––––––– |
(346) –––––––––– |
(555) –––––––––– |
365 –––––––––– |
| Total | 61,750 | 148 | (1,180) | (555) | 60,015 |
| –––––––––––––––––––– | –––––––––––––––––––– | –––––––––––––––––––– | –––––––––––––––––––– | –––––––––––––––––––– |
| Changes in deferred taxes in 2016 | €'000s | ||||
|---|---|---|---|---|---|
| 1 | Change | Recognised against | 31 | ||
| January | in scope | Earnings | Equity | December | |
| Deferred tax assets | |||||
| Tax losses | 40,912 | 2,767 | (6,823) | – | 36,855 |
| Tax deductions | – | 3,697 | (2,669) | – | 1,029 |
| Share-based payment transactions | – | – | 580 | – | 580 |
| Differences between tax and | |||||
| accounting assets | 2,256 | – | 2,483 | – | 4,739 |
| Provisions for commitments to employees Provision for restructuring |
3,272 254 |
– – |
45 (254) |
550 – |
3,868 – |
| Provisions for impairment of current | |||||
| assets and bad debt | 1,016 | – | (306) | – | 710 |
| Provision for impairment of | |||||
| non-current assets | 115 | – | – | – | 115 |
| Other provisions | 45 | – | (11) | – | 33 |
| Derivative financial derivatives | 861 | – | – | (729) | 133 |
| Other | 406 | – | (189) | – | 217 |
| –––––––––– | –––––––––– | –––––––––– | –––––––––– | –––––––––– | |
| Total | 49,139 –––––––––––––––––––– |
6,464 –––––––––––––––––––– |
(7,144) –––––––––––––––––––– |
(178) –––––––––––––––––––– |
48,281 –––––––––––––––––––– |
| Deferred tax liabilities | |||||
| Differences between tax and | |||||
| accounting assets | 60,616 | – | (132) | – | 60,484 |
| Other | 589 | – | 123 | 555 | 1,266 |
| –––––––––– | –––––––––– | –––––––––– | –––––––––– | –––––––––– | |
| Total | 61,205 –––––––––––––––––––– |
– –––––––––––––––––––– |
(9) –––––––––––––––––––– |
555 –––––––––––––––––––– |
61,750 –––––––––––––––––––– |
| Changes in deferred taxes in 2015 | €'000s | ||||
| 1 | Change | Recognised against | 31 | ||
| January | in scope | Earnings | Equity | December | |
| Deferred tax assets | |||||
| Tax losses | 43,608 | – | (2,696) | – | 40,912 |
| Differences between tax and | |||||
| accounting assets | 3,130 | – | (874) | – | 2,256 |
| Provisions for commitments to | |||||
| employees | 3,521 | – | (18) | (230) | 3,272 |
| Provision for restructuring | – | – | 254 | – | 254 |
| Provisions for impairment of current | |||||
| assets | |||||
| and bad debt | 612 | – | 405 | – | 1,016 |
| Provision for impairment of non-current | |||||
| assets | 115 | – | – | – | 115 |
| Other provisions | 219 | – | (175) | – | 45 |
| Derivative financial derivatives | 1,339 | – | (21) | (456) | 861 |
| Other | 544 –––––––––– |
– –––––––––– |
(138) –––––––––– |
– –––––––––– |
406 –––––––––– |
| Total | 53,088 | – | (3,263) | (686) | 49,139 |
| –––––––––––––––––––– | –––––––––––––––––––– | –––––––––––––––––––– | –––––––––––––––––––– | –––––––––––––––––––– | |
| Deferred tax liabilities | |||||
| Differences between tax and | |||||
| accounting assets | 60,746 | – | (129) | – | 60,616 |
| Provisions for commitments to employees | 18 | – | (18) | – | – |
| Other Total |
5 –––––––––– 60,769 |
– –––––––––– – |
583 –––––––––– 436 |
– –––––––––– – |
589 –––––––––– 61,205 |
The breakdown at 31 December 2017, 2016 and 2015 of the tax loss carryforwards of the Group's companies, as well as the deadline for them to be offset, is as follows:
| Tax loss carryforwards | 2016 | 2015 | |||
|---|---|---|---|---|---|
| Deferred | Deferred | Deferred | |||
| Base | tax | Base | tax | Base | tax |
| €'000s | €'000s | €'000s | €'000s | €'000s | €'000s |
| 110,337 | 34,577 | 119,449 | 36,855 | 133,179 | 40,912 –––––––––––––––––– |
| –––––––––––––––––– | 2017 –––––––––––––––––– |
–––––––––––––––––– | –––––––––––––––––– | –––––––––––––––––– |
In addition, at 31 December 2017, the Group had unrecognised tax loss carryforwards in its assets in the amount of €35.9m (€23.6m at 31 December 2016; €21.1m at 31 December 2015), almost all of which have no expiry date.
Similarly, the Group has deductions in the tax payable pending offsetting for €3.1m that are not recognised as deferred tax assets. The expiry date for offsetting said deductions is:
| 2017 | 2016 | 2015 | |
|---|---|---|---|
| €'000s | €'000s | €'000s | |
| In 5 years Between 6 and 10 years Between 11 and 20 years No limit |
275 1,012 912 852 ––––––––––– |
– 2,356 912 1,156 ––––––––––– |
– 1,695 912 – ––––––––––– |
| Total | 3,051 | 4,424 | 2,607 |
| –––––––––––––––––––––– | –––––––––––––––––––––– | –––––––––––––––––––––– | |
| Recognised amount Unrecognised amount |
– 3,051 ––––––––––– |
1,029 3,395 ––––––––––– |
– 2,607 ––––––––––– |
| Total | 3,051 | 4,424 | 2,607 |
| –––––––––––––––––––––– | –––––––––––––––––––––– | –––––––––––––––––––––– |
These deductions mainly belong to the parent company and principally relate to investments, training expenses, research and development, environmental expenses, reinvestment and double taxation.
The parent company pays tax under the tax consolidation system together with its Spanish subsidiary Europac Recicla, S.A.
The Portuguese subsidiaries Europac Portugal SGPS, S.A., Europac Cartão Ovar, S.A., Lepe, Empresa Portuguesa de Embalagens, S.A., Europac Embalagem, S.A., Europac Kraft Viana, S.A., Europac Energia Viana, S.A., Europac Recicla Portugal, S.A., Europac Distribuição da Madeira, Lda. and Greenfrequency Energia, S.A. use the tax consolidation scope for the purposes of Portuguese corporate income tax and pay tax according to the Special Tax Regime of Group Companies.
Similarly, the companies Europac Papeterie de Rouen, S.A.S., Europac Cartonnerie de Rouen, S.A.S., Europac Cartonnerie Atlantique, S.A.S., Europac Cartonnerie Savoie, S.A.S. and SCI Europac, S.C. have used the tax consolidation scope in France as from 1 January 2010 for the purpose of paying corporate income tax in France.
The deferred assets and liabilities recognised by tax jurisdiction are as follows:
| Deferred tax by tax jurisdiction | Spanish tax group |
Portuguese tax group |
French tax group |
Total |
|---|---|---|---|---|
| Tax losses Temporary differences |
6,599 4,229 –––––––––– |
– 1,963 –––––––––– |
27,979 5,012 –––––––––– |
34,578 11,205 –––––––––– |
| Deferred tax assets | 10,828 | 1,963 | 32,991 | 45,782 |
| –––––––––– | –––––––––– | –––––––––– | –––––––––– | |
| Deferred tax liabilities | 2,169 | 27,693 | 30,154 | 60,015 |
| –––––––––– | –––––––––– | –––––––––– | –––––––––– |
The time horizon for using the taxable bases is 10 years.
Pursuant to prevailing tax legislation, taxation cannot be considered to be definitively settled until the returns have been inspected by the competent tax authorities or when they become time-barred. At the date of preparation of these financial statements of the parent company, the years 2014 to 2017 (both inclusive) remain open for inspection for all those taxes applicable to the parent company except the Special Electricity Tax, whereby the company is open for tax inspection for the years 2014 to 2017. Due to the different possible interpretations of applicable tax legislation and of the results of future inspections, tax liabilities of a contingent nature may exist; however, the Company directors consider that in the event of their existence, this would not significantly affect the Consolidated financial statements.
The subsidiary Europac Kraft Viana received an additional settlement from the Portuguese tax authorities, as a result of a Corporate Income Tax inspection for the year 2000 relating to the latter not accepting the use as from that year of the intensive regime applicable to the amortisation of part of its property, plant and equipment provided for under Article 9 of "Decreto Regulamentar" no. 2/90 of 12 June. In 2003, in accordance with "Decreto-lei" no. 248-A/2002, the company paid out the additional settlement, amounting to €2.4m (Note 17). In addition, in 2004, the Group received additional settlements from the tax authorities relating to the same situation for the years 2001 and 2002 for sums of approximately €2.5m and €1.4m respectively. In 2008, the Group received additional settlements from the tax authorities for the years 2004, 2005 and 2006 for the sums of €0.9m, €0.8m and €0.4m. On 27 December 2010, the Portuguese tax authorities undertook an inspection of the year 2007. The Group's directors and legal advisers consider that the basis of the additional settlements presented by the Portuguese tax authorities do not adhere to Portuguese tax legislation, to which end these have been appealed against in the courts. In January 2008, the Administrative and Fiscal Court ruled in favour of the Group in relation to the additional settlement appealed against by the Group regarding the use of the intensive regime applicable to the amortisation of part of its property, plant and equipment in the year 2000. This ruling was appealed against by the Portuguese tax authorities before the Central Administrative Court. In 2011, this court ruled in favour of the Group. This ruling is binding as it was not appealed against by the Portuguese authorities within the legal term and led to the reimbursement by the authorities to the Group of the additional settlements made. In August 2012, the Administrative and Fiscal Court ruled in favour of the Group on the additional settlement appealed against by the Group on the amortisation of part of its property, plant and equipment under the intensive regime in 2002. This ruling was not appealed against by the Portuguese authorities and hence is a binding ruling. In 2013, witnesses gave testimony as to the processes relating to the years 2004, 2005 and 2006.
The subsidiary Europac Embalagem received in 2003, as a result of a tax inspection corresponding to the year 2001, a notification from the tax authorities in relation to the tax deduction of capital losses in the sale of all of the shares of Lepe – Empresa Portuguesa de Embalgens, S.A., Europac Portugal, S.A. Consequently, the Group received an additional settlement from the Portuguese tax authorities in 2005 for approximately €3m. The Group's directors and legal advisers consider that the basis for the additional settlements presented by the Portuguese tax authorities do not adhere to Portuguese tax legislation, and have been appealed against through the courts, and consequently have not been recorded under any provision in the Consolidated financial statements.
In 2008, the Group paid the Portuguese tax authorities a sum of €0.5m (Note 17 "Other receivables from tax authorities") by way of additional settlement deriving from a tax inspection on the Tax on Collective Performance (Corporate Income Tax) for the year 2006 of the subsidiary Europac Cartao Ovar, S.A., based on the application of a tax credit in 2000 recorded in the tax return that was not accepted by the authorities. The additional settlement was appealed against by this company before the Portuguese judicial authorities.
The composition and changes of equity are disclosed in the statement of changes in equity.
The holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at meetings of the Company. In respect of the Company's shares that are held by the Group, all rights are suspended until those shares are reissued.
| Number of shares | ||||||
|---|---|---|---|---|---|---|
| 2017 | 2016 | 2015 | 2017 | 2016 | 2015 | |
| At 31 December | '000s | '000s | '000s | €'000s | €'000s | €'000s |
| Ordinary equity shares of €2 each issued, allotted, called up and fully paid |
99,238 | 97,368 | 93,623 | 198,476 | 194,737 | 187,247 |
At 01 January 2015, the parent company's share capital comprised 90,022,529 fully subscribed and paid up shares, each with a par value of two Euros.
On 24 June 2015, the parent company approved a capital increase charged to unrestricted reserves at a maximum figure of €7.2m, through the issue and circulation of up to 3,600,901 new shares, each with a par value of two Euros. The increase was fully subscribed by the existing shareholders on that date.
The General Shareholders' Meeting held on 24 June 2015 delegated powers to the board of directors for a period of five years, with an attached ability to further delegate, to increase capital on one or several occasions and up to half of the share capital, with an attached power to bar the exercise of pre-emption rights, and to change the wording of the final article of the Articles of Association, rendering null and void the authorisation conferred by the General Shareholders' Meeting held on 7 June 2011.
Therefore, at 31 December 2015, the capital comprised 93,623,428 shares, each with a par value of two Euros.
On 29 June 2016, the parent company approved a capital increase charged to unrestricted reserves at a maximum figure of €7.5m, through the issue and circulation of up to 3,744,937 new shares, each with a par value of two Euros. The increase was fully subscribed by the existing shareholders on that date and registered with the Companies Registry of Palencia in November 2016.
At 31 December 2016, the capital of the parent company comprised 97,368,366 shares, each with a par value of two Euros, fully subscribed and paid up.
On 28 June 2017, the parent company approved a capital increase charged to unrestricted reserves, with the free allocation of one new share for 25 old shares.
On 18 October 2017, the parent company carried out a capital reduction through the amortisation of 1,947,368 treasury shares, which led to a reduction in the capital of €3.9m and voluntary reserves of €8.6m, as well as a reduction in shares and equity of €12.4m.
Therefore, at 31 December 2017, the capital comprised 99,237,837 shares, each with a par value of two Euros.
There are no restrictions on the free transfer of the parent company's shares or preference shares.
The breakdown of the significant shareholders owning more than 5 per cent. of the capital of the parent company at 31 December 2017 and 2016 is as follows:
| 2017 | 2016 | 2015 |
|---|---|---|
| – | – | 40.0% |
| – | 6.6% | 6.6% |
| 6.4% | 6.4% | 6.4% |
| 5.0% | 5.0% | 5.0% |
| 5.0% | 5.0% | 5.0% |
| 5.7% | 5.5% | – |
| 5.1% | 5.1% | – |
| 5.5% | 6.2% | 3.5% ––––––––––– |
| 67.3% | 60.2% | 33.5% ––––––––––– |
| 100% | 100% | 100% –––––––––––––––––––––– |
| ––––––––––– ––––––––––– –––––––––––––––––––––– |
––––––––––– ––––––––––– –––––––––––––––––––––– |
The breakdown of the Group's reserves is as follows:
| 2015 | ||
|---|---|---|
| €'000s | €'000s | €'000s |
| 25,929 | 20,439 | 16,463 |
| 34,370 | 38,013 | 13,728 |
| 103,625 | 101,675 | 122,736 |
| 77,963 | 48,884 | 32,449 ––––––––––– |
| 241,887 | 209,011 | 185,376 –––––––––––––––––––––– |
| 2017 ––––––––––– –––––––––––––––––––––– |
2016 ––––––––––– –––––––––––––––––––––– |
Included in reserves is an amount totalling €25.9m (2016: €20.4m, 2015: €16.5m) in relation to legal reserves.
Pursuant to Article 274 of the Capital Companies Act (Ley de Sociedades de Capital), the parent company must appropriate 10 per cent. of earnings for the year to a legal reserve until such reserve reaches an amount equal to 20 per cent. of capital. This reserve is not distributable to shareholders. If no other reserves are available, it may be used to offset losses. In certain circumstances, the reserve may be used to increase capital to the extent that it would exceed 10 per cent. of capital after such increase.
Under Article 273(4) of the Capital Companies Act, the entity must institute a restricted reserve in an amount equal to the goodwill recognised on the asset side of its individual balance sheet, funded by earnings allocated at a rate of at least five percent of such goodwill per annum. If earnings are absent or insufficient for the purpose, the entity must use its unrestricted reserves. The reserves for goodwill, in accordance with Royal Decree 602/2016, were transferred in 2016 to voluntary reserves while the amount exceeding the registered goodwill will be unrestricted.
As a consequence of the merger with Harpalus, S.L. in 2016 (Note 10), treasury shares of the parent company were acquired in addition to those already held. Accordingly, at 31 December 2017, 2016 and 2015, the parent company held 5,438,608, 6,021,697 and 3,251,473 treasury shares respectively, representing 5.48 per cent., 6.18 per cent. and 3.47 per cent. of its share capital, respectively.
Gains on disposal of treasury shares amounted to €3,000 in 2017, €2,000 in 2016 and €0.2m in 2015. These gains are charged or credited to the company's voluntary reserves.
The parent company's Treasury stock reserve is maintained for the purpose of compliance with Article 148 (c) of the Capital Companies Act, which prescribes rules on Treasury stock. This reserve is restricted.
"Retained earnings and other reserves" chiefly comprises the parent company's voluntary reserves, the reserves of fully consolidated entities, the reserves of entities accounted for using the equity method and consolidated profit or loss for the year. The parent company's voluntary reserves, which stood at €20.7m at 31 December 2017 (2016: €12.9m; 2015: €23.1m), are unrestricted, subject to the exceptions under Articles 273 and 274 of the Capital Companies Act, as well as an amount of €2.3m as at 31 December 2017 from the reserves for goodwill.
On 29 June 2016, Europac's General Shareholders' Meeting approved a share option plan for executives, envisaged as a variable remuneration system consisting of the delivery of shares over a multi-annual period with the aim of contributing towards increasing the value of the Company, and thus the sustainability of profits and their long-term positioning. The plan has the following conditions:
On 31 December 2017, the Company recorded a personnel expense, charged to "Other equity instruments" for the sum of €3.9m in 2017 (€2.3m in 2016), corresponding to a personnel expense recorded for services rendered by the beneficiaries of the plan.
The valuation of the plan for the year ending on 31 December 2017 and 2016 was carried out by considering the share price at the date the plan was granted and compliance with the aim of the theoretical value of the Company of 100 per cent. and 90 per cent. respectively.
On 31 January 2017, the Board of Directors of the parent company agreed to distribute an interim dividend on 2016 profits for the sum of €8.7m, representing a gross amount of 0.0951 Euros per share.
On 28 June 2017, the General Shareholders' Meeting of the parent company approved a share dividend for the sum of €28.9m charged to profits from 2016, representing 0.318 Euros per share.
On 22 January 2016, the parent company's board of directors agreed a resolution to pay an interim dividend on 2015 profits of €4.8m, representing a gross amount of 0.0531 Euros per share.
On 29 June 2016, the parent company's General Shareholders' Meeting agreed to pay out a dividend of €16.2m charged to 2015 profits, representing 0.179 Euros per share.
| Balance sheet | 2017 | 2016 | 2015 |
|---|---|---|---|
| €'000s | €'000s | €'000s | |
| Pension supplements with allocated funds Retirement bonuses plan (unfunded) |
(15,839) (8,256) ––––––––––– |
(17,276) (8,626) ––––––––––– |
(16,308) (8,103) ––––––––––– |
| Present value of post-retirement obligations | (24,095) | (25,902) | (24,411) |
| ––––––––––– | ––––––––––– | ––––––––––– | |
| Fair value of plan assets | 9,679 | 10,266 | 10,895 |
| ––––––––––– | ––––––––––– | ––––––––––– | |
| Pension supplements with allocated funds Retirement bonuses plan (unfunded) |
6,160 8,256 ––––––––––– |
7,010 8,626 ––––––––––– |
5,413 8,103 ––––––––––– |
| Net post-retirement plan deficit Other long-term benefits – non-service bonuses |
(14,416) (596) ––––––––––– |
(15,636) (611) ––––––––––– |
(13,516) (593) ––––––––––– |
| Total provisions for commitments to employees (Note 20) | (15,012) | (16,247) | (14,109) |
| –––––––––––––––––––––– | –––––––––––––––––––––– | –––––––––––––––––––––– |
According to the actuarial studies referred to below, the extent of coverage of pension liabilities afforded by the assets allocated to the relevant fund was 61.1 per cent. in 2017 (2016: 59.4 per cent.; 2015: 66.8 per cent.).
The breakdown of movements in employee benefits is as follows:
| Defined benefit plans €'000s |
Other long-term benefits €'000s |
Total €'000s |
|
|---|---|---|---|
| Balance at 1 January 2015 | 14,422 | 639 | 15,061 |
| ––––––––––– | ––––––––––– | ––––––––––– | |
| Expense/(income) for the year Payment of remuneration in plans without allocated funds Contributions made to plans with allocated funds Actuarial differences recognised in equity |
734 (646) (179) (815) ––––––––––– |
(11) (35) - - ––––––––––– |
723 (681) (179) (815) ––––––––––– |
| Balance at 31 December 2015 | 13,516 | 593 | 14,109 |
| ––––––––––– | ––––––––––– | ––––––––––– | |
| Expense/(income) for the year | 703 | 67 | 770 |
| Payment of remuneration in plans without allocated funds | (419) | (49) | (467) |
| Contributions made to plans with allocated funds | (288) | - | (288) |
| Actuarial differences recognised in equity | 2,124 | - | 2,124 |
| Balance at 31 December 2016 | ––––––––––– | ––––––––––– | ––––––––––– |
| 15,636 | 611 | 16,247 | |
| ––––––––––– | ––––––––––– | ––––––––––– | |
| Expense/(income) for the year Payment of remuneration in plans without allocated funds Contributions made to plans with allocated funds Actuarial differences recognised in equity |
617 (470) (351) (1,016) ––––––––––– |
(6) (9) - - ––––––––––– |
611 (479) (351) (1,016) ––––––––––– |
| Balance at 31 December 2017 | 14,416 | 596 | 15,012 |
| –––––––––––––––––––––– | –––––––––––––––––––––– | –––––––––––––––––––––– | |
At 31 December 2017, the Group operated both defined benefit and defined contribution arrangements, and these are briefly described below.
"Pension supplements with allocated funds" reflects the extent to which the value of assets allocated to Group pension funds falls short of covering the present value of the Group's defined benefit pension liabilities.
"Defined-benefit plans, retirement bonuses" comprises the present value of obligations to pay retirement bonuses at the companies Europac Papeterie de Rouen, S.A.S., Europac Cartonnerie de Rouen, S.A.S., Europac Cartonnerie Atlantique, S.A.S. and Europac Cartonnerie Savoie, S.A.S.
"Other long-term benefits" includes the present value of long-service bonuses accrued by current employees of Europac Papeterie de Rouen, S.A., Europac Cartonnerie de Rouen, S.A.S., Europac Cartonnerie Atlantique, S.A.S. and Europac Cartonnerie Savoie, S.A.S.
Pension scheme trustees and representatives of the Group work with those managing the employee benefit arrangements to monitor the effects on the arrangements of changes in financial markets and the impact of uncertainty in assumption, and to develop strategies that could mitigate the risks to which these employee benefit schemes expose the Group.
The subsidiaries Europac Portugal SGPS, S.A., Europac Embalagem, S.A., and Europac Kraft Viana, S.A. are bound by commitments to pay pension supplements by reason of retirement and disability.
Up to 13 July 2007, those entities had maintained defined-benefit pension funds for their employees. On that date, in response to the incorporation of the Portuguese Insurance Institute, the companies modified the contract constituting the pension fund to convert those defined benefit funds into defined contribution funds with reference to persons then employed. The defined benefit funds were kept in place for retired employees and their beneficiaries, and for company directors with vested rights. At the start of the period (1 January 2007), current employees transferred to the defined contribution pension plan were allocated an initial balance equal to the present value of recognised liabilities as at 31 December 2006. Upon conversion of the fund, the Group also attributed certain additional contributions to some current employees to be made within five years. These plans cover all persons employed by the entities noted above at 13 July 2007, and persons employed later if they satisfy the terms of subscription.
These companies make monthly contributions to the fund equivalent to a percentage of salary, which is recorded as an expense when made. In 2017 contributions of €0.1m (2016: €0.1m; 2015: €0.1m) were made and recognised as an employee benefit expense.
In accordance with the modification to the pension fund contract noted above, current employees are no longer beneficiaries of these plans. The beneficiaries are limited to:
The terms of the contract referred to above require the entity to assure payment to beneficiaries of a monthly retirement or disability pension supplement in accordance with a specified formula, having regard to the present value of the gross monthly basic pay for the employee's occupational category at the date of his retirement and for the number of years of service, with a maximum of 30 years.
These defined benefit plans entail payments to employees of a specific amount upon retirement. The amount is estimated with reference to the employee's length of service with the company. All employees of the Group's French companies are covered by these retirement bonuses.
The liabilities arising for services rendered by employees under the defined benefit plans referred to above are estimated using actuarial studies conducted by various independent institutions and are detailed further below.
Long-service bonuses are accrued at present value by Europac Papeterie de Rouen, S.A., Europac Cartonnerie de Rouen, S.A.S., Europac Cartonnerie Atlantique, S.A.S. and Europac Cartonnerie Savoie, S.A.S. for current employees under the scheme.
| Pension supplements | 2017 | 2016 | 2015 |
|---|---|---|---|
| €'000s | €'000s | €'000s | |
| Schemes' liabilities at 1 January | 17,276 | 16,308 | 17,454 |
| Interest cost | 150 | 316 | 339 |
| Service cost recognised in the Consolidated Income Statement Actuarial (gains)/losses Pension supplement payments |
– (490) (1,097) ––––––––––– |
– 1,661 (1,010) ––––––––––– |
– (462) (1,023) ––––––––––– |
| Schemes' liabilities at 31 December | 15,839 | 17,276 | 16,308 |
| ––––––––––– | ––––––––––– | ––––––––––– | |
| Retirement bonuses plan | 2017 | 2016 | 2015 |
| €'000s | €'000s | €'000s | |
| Schemes' liabilities at 1 January | 8,626 | 8,103 | 8,459 |
| Interest cost | 94 | 164 | 170 |
| Service cost recognised in the Consolidated Income Statement | 460 | 427 | 445 |
| Actuarial (gains)/losses | (448) | 347 | (325) |
| Pension supplement payments | (476) | (414) | (646) |
| Schemes' liabilities at 31 December | ––––––––––– | ––––––––––– | ––––––––––– |
| 8,256 | 8,626 | 8,103 | |
| ––––––––––– | ––––––––––– | ––––––––––– | |
| 24,095 | 25,902 | 24,411 | |
| –––––––––––––––––––––– | –––––––––––––––––––––– | –––––––––––––––––––––– |
| Pension supplements | 2017 | 2016 | 2015 |
|---|---|---|---|
| €'000s | €'000s | €'000s | |
| Schemes' assets at 1 January | 10,266 | 10,895 | 11,491 |
| Employer contributions | 344 | 288 | 180 |
| Investment income | 88 | 208 | 219 |
| Actuarial gains/(losses) | 78 | (116) | 28 |
| Benefits paid to participants | (1,097) | (1,010) | (1,023) |
| Schemes' assets at 31 December | ––––––––––– | ––––––––––– | ––––––––––– |
| 9,679 | 10,266 | 10,895 | |
| –––––––––––––––––––––– | –––––––––––––––––––––– | –––––––––––––––––––––– | |
| Percentage of fair value of total assets | 2017 | 2016 | 2015 |
| Equity instruments Debt instruments Cash and cash equivalents Other |
5.3% 73.7% 20.0% 1.0% ––––––––––– |
5.4% 76.4% 16.9% 1.3% ––––––––––– |
4.9% 73.5% 20.7% 0.9% ––––––––––– |
| Schemes' assets at 31 December | 100% | 100% | 100% |
| –––––––––––––––––––––– | –––––––––––––––––––––– | –––––––––––––––––––––– | |
| Actual return on assets | 1.7% | 0.9% | 2.3% |
| Net interest cost – Defined benefit schemes | (63) | (108) | (119) |
| Net interest cost – Retirement bonuses plan | (94) | (164) | (170) |
The following table provides information on the distribution of the timing of expected benefit payments for the Europac Group scheme.
The Europac Group estimates that it will have to make contributions totalling €0.4m to the Europac Group schemes in 2018 (2017: €0.3m; 2016: €0.3m).
Principal actuarial assumptions for the Europac Group schemes are as follows:
| Pension supplements Discount rate for scheme liabilities Pension increase rate |
2017 1.15% 1.00% |
2016 0.90% 1.00% |
2015 2.00% 1.00% |
|---|---|---|---|
| Retirement bonuses | 2017 | 2016 | 2015 |
| Discount rate for scheme liabilities | 1.58% | 1.10% | 2.00% |
| Wage increase rate | 1.75% | 1.75% | 1.75% |
| Retirement age – managers | 65 | 65 | 65 |
| Retirement age – non-managers | 62 | 62 | 62 |
Assumptions regarding future mortality experience are set based on actuarial advice and in accordance with the relevant standard mortality tables. For the Group Scheme at 31 December 2017, the mortality base table used was TV 88/90 for the defined benefit scheme and INSEE 10-12 for the retirement bonuses scheme (2016: TV88/90 and INSEE 10-12, 2015: TV88/90 and INSEE 08-10).
The sensitivity of the liabilities in the Europac Group scheme to each significant actuarial assumption is summarised in the following table, showing the impact on the defined benefit obligation if each assumption is altered by the amount specified in isolation, whilst assuming that all other variables remain the same. In practice, this approach is not necessarily realistic since some assumptions are related. This sensitivity analysis applies to the defined benefit obligation only and not to the net defined benefit pension liability, the measurement of which depends on a number of factors including the fair value of plan assets.
| 2017 | 2016* | |||
|---|---|---|---|---|
| DB plan | Ret. bonus | DB plan | Ret. bonus | |
| Increase in pension liability due to: | €'000s | €'000s | €'000s | €'000s |
| 0.5% increase in discount rate | (773) | (230) | (884) | (466) |
| 0.5% decrease in discount rate | 840 | 468 | 964 | 507 |
| 0.5% increase in wages/pensions 0.5% decrease in wages/pensions |
880 (809) |
448 (418) |
1,008 (923) |
501 (466) |
* Note – no audited information presented in 2015 for this disclosure
| Net interest cost on group defined benefit plan | (157) | (277) | (289) |
|---|---|---|---|
| Total expense recognised in the Consolidated | ––––––––––– | ––––––––––– | ––––––––––– |
| Income Statement | (784) | (1,003) | (1,518) |
| Pension fund management costs | (7) | (8) | (8) |
| Service cost | (460) | (427) | (445) |
| Expenses with former employees | – | (126) | (680) |
| Gain/(loss) on other long-term benefits | 6 | (67) | 11 |
| Expense for contribution to defined contribution plans | (166) | (100) | (108) |
| 2017 €'000s |
Total 2016 €'000s |
2015 €'000s |
The strategies for the correlation between assets and liabilities used to manage risk are described below:
The entity that manages the plan has developed a model to analyse the correlation between assets and liabilities under the plan, known as Model ALX, which seeks to determine the suitable composition of a portfolio of financial assets, correlating the nature, risk, duration and profitability of assets, with the average maturity of responsibilities under the plan.
Accordingly, the conclusions of the analysis of the asset and liability correlation under the plan are set out below, which have been fully adopted in the investment policy followed by the pension plan:
| Asset and liability correlation strategy | ALX Model | |||
|---|---|---|---|---|
| Lower limit |
Central value |
Upper limit |
Investment policy |
|
| Shares | 0% | 0% | 5% | 5% |
| Fixed-rate obligations | 35% | 70% | 100% | 31% |
| Floating-rate obligations | 10% | 25% | 40% | 62% |
| Absolute return | 0% | 0% | 5% | 1% |
| Real estate | 0% | 0% | 5% | 1% |
| Liquidity | 0% | 5% | 100% | 0% |
Retirement benefits:
The Group monitors the liabilities associated with retirement benefits from its French subsidiaries on an annual basis derived from the corresponding actuarial calculations. The Group's management considers that the maximum risks associated with future payments of retirement benefits are limited and quantifiable, and that the potential impact of their occurrence is not material. For this reason, a strategy of correlation between assets and liabilities has not been carried out.
Non-cancellable operating lease rentals are payable as follows:
| 2017 | 2016 | 2015 | |
|---|---|---|---|
| €'000s | €'000s | €'000s | |
| Less than one year | 4,187 | 3,238 | 3,041 |
| Between one and five years | 6,793 | 7,403 | 8,073 |
| More than five years | 809 ––––––––––– |
– ––––––––––– |
– ––––––––––– |
| 11,789 –––––––––––––––––––––– |
10,641 –––––––––––––––––––––– |
11,114 –––––––––––––––––––––– |
Operating lease payments represent rentals payable by the Europac Group for certain of its vehicles, IT equipment, forklift trucks and buildings. These leases have an average life of three to five years, with no renewal option included in the contracts. The Group is unrestricted as to the arrangement of such leases.
At 31 December 2017, the Europac Group had committed to incur capital expenditure of €25.5m (31 December 2016: €20.4m; 31 December 2015: €7.3m).
In 2017 and 2016, the Europac Group provided bank guarantees and security to public institutions and private entities to a value of €10.6m and €10.8m, respectively. Since these guarantees are commercial and financial, they are not expected to give rise to any contingency or loss.
With regard to the syndicated loan for a maximum amount of €290m, six Europac subsidiaries act as joint and several guarantors of Europac for the banks extending the facility. The guarantee consists of a firstdemand guarantee with the same terms and conditions, and secures all the payment obligations assumed by Europac on entering into the said credit arrangement.
In 2007, the Portuguese trade union for the paper industries (Sindicato dos Trabalhadores das Indústrias de Celulose, Papel, Gráfica e Imprensa) filed an application for judicial review against the Instituto de Seguros de Portugal (an institution of which certain Group companies are stakeholders) by which the union moved to set aside the governmental body's decision to authorise changes to the Gescartao pension fund (see 'Employee Benefits,' Note 26). In addition, some former employees receiving benefits from the pension fund brought legal action against the company with the aim of cancelling the modification carried out in the fund. In 2012, the Supreme Court rejected the appeals filed by the pension fund beneficiaries, laying down a doctrine pursuant to which the consolidation of the rights is recognised for beneficiaries reaching retirement on a certain date. In accordance with this doctrine, it is unlikely that this litigation will result in a loss for the company over and above the existing provisions. Between the end of 2014 and start of 2016, it was possible to reach an agreement with all former employees, thus ending the Group's liabilities with said processes.
In April 2013, the National Markets and Competition Commission (Spanish acronym: CNMC) opened an investigation into bad competition practices, investigating Europac, among others. On 23 June 2015, the CNMC communicated a disciplinary penalty of €5.3m. A judicial appeal was lodged on 23 September 2015 before the National High Court. No provision has been recorded in the consolidated financial statements as the directors, as well as the company's legal advisers of the parent company, believe that it is unlikely that the company will have to make significant payments as a result of this case for the reasons mentioned in the communication of 23 June 2015 published as a Significant event to the Spanish securities market regulator (registration number 224904). At the date these financial statements were drawn up, the appeal is pending a final ruling.
At the date these financial statements were drawn up, the Group was party to other outstanding litigation. The Group's directors do not expect the rulings on these cases to have any material adverse effect on the consolidated financial statements not already recognised therein.
As a result of previous acquisitions, various contingent liabilities were identified and included within provisions, as required by IFRS 3 Business Combinations. Whilst it is difficult to reasonably estimate the ultimate outcome of these claims, the Directors' best estimate is that no losses are anticipated to arise on these contingent liabilities.
The following business combinations took place in 2017, 2016 and 2015:
● None
The fair value on the acquisition date of the full consideration transferred and of each category of consideration, as well as the amounts recognised for categories of assets and liabilities in these business combinations, are shown below:
| 2017 | |||
|---|---|---|---|
| Carrying | |||
| €'000s | amount Adjustments | Fair Value | |
| Property, plant and equipment | 8,125 | (1,905) | 6,219 |
| Deferred tax assets | – | 476 | 476 |
| Other non-current assets | 38 | – | 38 |
| Inventories | 507 | – | 507 |
| Trade and other receivables | 4,299 | (28) | 4,271 |
| Cash and cash equivalents | (1,987) | – | (1,987) |
| Deferred tax liabilities | (148) | – | (148) |
| Non-current financial liabilities | (3,597) | – | (3,597) |
| Trade and other payables | (2,512) ––––––––––– |
– ––––––––––– |
(2,512) ––––––––––– |
| Total net assets | 4,724 –––––––––––––––––––––– |
(1,457) –––––––––––––––––––––– |
3,267 –––––––––––––––––––––– |
| Cash paid to vendor | 7,936 | ||
| Cash payable to vendor | 358 ––––––––––– |
||
| Total consideration | 8,293 –––––––––––––––––––––– |
||
| Goodwill | 5,026 | ||
| Cash flow from the business combination Cash paid |
(7,936) | ||
| Cash and cash equivalents of the acquired company | (1,987) ––––––––––– |
||
| Net cash flow from the business combination | (9,923) –––––––––––––––––––––– |
| 2016 | |||
|---|---|---|---|
| €'000s | Carrying | amount Adjustments | Fair Value |
| Non-current assets Current assets Current liabilities |
300 55 (2) ––––––––––– |
520 – – ––––––––––– |
820 55 (2) ––––––––––– |
| Total net assets | 353 –––––––––––––––––––––– |
520 –––––––––––––––––––––– |
873 –––––––––––––––––––––– |
| Attributable to previous acquisitions: Reduction in investments Non-controlling interests |
– (75) ––––––––––– |
||
| Total net assets acquired | 798 –––––––––––––––––––––– |
||
| Cash paid or payable to the seller Directly attributable costs |
798 – |
||
| Cost of the business combinations Negative goodwill |
798 – |
Remuneration received by directors and executives and balances and transactions with related parties
| Significant shareholders |
Directors and senior executives |
Other related parties |
|||||||
|---|---|---|---|---|---|---|---|---|---|
| 2017 €'000s |
2016 €'000s |
2015 €'000s |
2017 €'000s |
2016 €'000s |
2015 €'000s |
2017 €'000s |
2016 €'000s |
2015 €'000s |
|
| Balances Sales and provision |
|||||||||
| of services Dividends received |
– – ––––––– |
– – ––––––– |
– – ––––––– |
– – ––––––– |
– – –––––––– |
– – –––––––– |
– – –––––––– |
– – –––––––– |
– – –––––––– |
| Total revenue | – ––––––– |
– ––––––– |
– ––––––– |
– ––––––– |
– –––––––– |
– –––––––– |
– –––––––– |
– –––––––– |
– –––––––– |
| Remuneration and attendance fees Dividends paid |
– 10,253 ––––––– |
– 9,535 ––––––– |
– 7,219 ––––––– |
5,221 2,965 ––––––– |
3,389 1,258 –––––––– |
3,389 – –––––––– |
– – –––––––– |
– – –––––––– |
– – –––––––– |
| Total payments | 10,253 ––––––– |
9,535 ––––––– |
7,219 ––––––– |
8,186 ––––––– |
4,647 –––––––– |
3,389 –––––––– |
– –––––––– |
– –––––––– |
– –––––––– |
| Other transactions Purchases of non-current assets |
– | – | – | – | – | – | 9,360 | 6,933 | 7,033 |
| Total other transactions |
––––––– – ––––––– |
––––––– – ––––––– |
––––––– – ––––––– |
––––––– – ––––––– |
–––––––– – –––––––– |
–––––––– – –––––––– |
–––––––– 9,360 –––––––– |
–––––––– 6,933 –––––––– |
–––––––– 7,033 –––––––– |
Directors who are themselves significant shareholders are addressed in the section on directors and senior executives
| 2017 | 2016 | 2015 | |
|---|---|---|---|
| Remuneration received by directors and executives | €'000s | €'000s | €'000s |
| Directors | |||
| Fixed remuneration | 1,592 | 1,576 | 1,496 |
| Variable remuneration | 1,393 | 500 | – |
| Per diems | 243 | 174 | 117 |
| Article-related provisions | 1,081 ––––––––––– |
1,438 ––––––––––– |
1,020 ––––––––––– |
| Total | 4,309 ––––––––––– |
3,688 ––––––––––– |
2,633 ––––––––––– |
| Life insurance premiums | 1 ––––––––––– |
1 ––––––––––– |
1 ––––––––––– |
| Executives | |||
| Total remuneration received by executives | 822 ––––––––––– |
605 ––––––––––– |
756 ––––––––––– |
No pension or life insurance obligations relating to former and present members of the board are extant other than those to which such persons may contingently become entitled by virtue of performance of their offices in the investees of the Portuguese subsidiaries.
In accordance with Article 229 of the Capital Companies Act, members of the board and parties related thereto have declared that they have no conflicts of interest with the parent company (except those indicated in section D of the Corporate Governance Report).
Neither the directors, nor persons acting on their behalf, have performed transactions in the year with the parent company (or with other Group companies) outside its ordinary business or under non-market conditions.
The related-party transactions disclosed in these financial statements were notified in six-monthly communications filed with the Spanish securities market regulator (Comisión Nacional del Mercado de Valores).
On 15 February 2018, the Board of Directors of the parent company agreed an interim dividend charged to 2017 profits of €0.1251 per share issued, amounting to approximately €11.7m, which was paid out on 26 February 2018.
In order to comply with prevailing legislation, the Group applies environmental improvement policies aimed at, among other things, recovering the water treated in the production process, the reduction of emissions, waste treatment, the reduction in consumption of certain polluting substances and noise reduction. These policies are enacted in specific action plans for the company's different plants.
In 2017, 2016 and 2015, the Group made investments in environmental assets for €5.4m, €6.5m and €5.3m, respectively. The investment in environmental assets mainly comes from the actions carried out in the factories at Alcolea del Cinca, Dueñas, Rouen (France) and Viana (Portugal) to improve energy efficiency, control of liquid and gas emissions and waste management. In 2017, 2016 and 2015, the environmental authorities allocated a total of 222,585, 231,460 and 240,174 emission allowances, respectively, to the Europac Group.
Notes 10 and 21 herein give a breakdown of the greenhouse gas emission allowances granted at no charge by the environmental authorities, as well as the consumption and surpluses in the year.
Similarly, the Europac Group incurred €4.2m, €4.5m and €5.0m in expenses for environmental protection and enhancement in 2017, 2016 and 2015, respectively. These are ordinary expenses and include the fees for the use of water, environmental audits, consumption and measurement of greenhouse gas emissions and environmental management.
The Europac Group did not record any provision for environmental actions in 2017, 2016 or 2015.
At the preparation date of these financial statements, the company's directors have no knowledge of any contingencies related to environmental protection and enhancement.
No environmental grants were received in 2017 and 2016 other than the free acquisition of greenhouse gas emission allowances described in Note 21.
The Europac Group's ultimate parent company is Papeles y Cartones Europa, S.A.
Group companies are grouped by the countries in which they are incorporated or registered. Unless otherwise noted, the undertakings below are wholly owned and consolidated by the Europac Group and the share capital held comprises ordinary or common shares which are held by Europac Group subsidiaries.
Europac Portugal SGPS, S.A. Europac Embalagem, S.A. Lepe – Empresa Portuguesa de Embalagens, S.A. Europac Cartão Ovar, S.A. Europac Distribuição da Madeira, Lda. Europac Kraft Viana, S.A. Europac Recicla Portugal, S.A. Europac Energia Viana, S.A. Europac Logística, Lda. Iberia Capital – Fundo Especial de Invest. Imob. Iberian Forest Fund – Fundo Especial de Invest.Imob.Florest. Greenfrequency Energía, S.A.
Europac Papeterie de Rouen, S.A.S. Europac Cartonnerie de Rouen, S.A.S. Europac Cartonnerie Atlantique, S.A.S. Europac Cartonnerie Savoie, S.A.S. SCI Europac, SC
Europac Recicla, S.A. Herederos de D.Timoteo, SL1,3 Europac Packaging Lucena, S.L.U. Cartonajes Santander, S.L.
2 Cartonajes Cantabria S.L. 2 Euskocartón, S.L. 2 Industria Cartonera Asturiana S.L. 2
In June 2017, the Moroccan company MED Packaging SARLAU was excluded from the consolidation scope after being sold off to third parties.
In May 2017, the Group included the company Trasncon Valladolid, SA within the consolidation scope, after acquiring 100 per cent. of its shares. The company is engaged in waste management. At the close of the year, the company was taken over by Europac Recicla, SA.
In April 2017, the companies Europac Logistica, SA and Vianaport LDA were removed from the consolidation scope after being sold off to third parties.
In December 2016, the companies Europac Integra, S.L. and Renova Generación de Energías Renovables de Castilla y León, S.L. were removed from the consolidation scope as a consequence of their liquidation and subsequent dissolution.
Following an analysis of the accounting policies of the Europac Group for each of the financial years ended 31 December 2015, 31 December 2016, and 31 December 2017, DS Smith concluded that there were no material differences between the accounting policies adopted by the DS Smith Group and the accounting policies adopted by the Europac Group, in each case for the period covered by the historical financial information. Consequently, no material adjustment needs to be made to the historical financial information for the Europac Group, in order to achieve consistency with the accounting policies of the DS Smith Group.
The unaudited pro forma financial information for the Enlarged Group and related notes in this Section A of this Part V (Unaudited pro forma financial information relating to the Enlarged Group) have been prepared to illustrate the effect of the Acquisition on the income statement of the DS Smith Group for the 2018 financial year as if the Acquisition had taken place on 1 May 2017 and the effect on the net assets of the DS Smith Group as if the Acquisition had occurred on 30 April 2018. The unaudited pro forma income statement for the Enlarged Group also illustrates the impact of DS Smith's acquisition of 80 per cent. of Interstate Resources Inc. as if that acquisition had taken place on 1 May 2017, instead of 25 August 2017.
The following unaudited pro forma financial information is based on the consolidated financial information of the DS Smith Group for the 2018 Financial Year, the historical financial information of the Europac Group for the year ended 31 December 2017 and the financial information of Interstate Resources Inc. for the period from 1 May 2017 to 25 August 2017 and compiled on the basis set out in the notes to the unaudited pro forma financial information. The unaudited pro forma financial information has been prepared in a manner consistent with the accounting policies adopted for the DS Smith Group for the 2018 financial year.
The unaudited pro forma financial information, which has been produced for illustrative purposes only, by its nature addresses a hypothetical situation and, therefore, does not represent the Enlarged Group's actual financial position or results. The unaudited pro forma financial information of the Group has been prepared in accordance with Annex II to the Prospectus Directive Regulation, as applied by item 13.3.3R of the Listing Rules.
The unaudited pro forma financial information does not constitute financial statements within the meaning of section 434 of the Companies Act 2006.
The unaudited pro forma financial information does not take into account trading of the DS Smith Group and/or the Europac Group subsequent to 30 April 2018 (in the case of the DS Smith Group) or 31 December 2017 (in the case of the Europac Group).
Investors should read the whole of this Circular and not rely solely on the unaudited financial information in this Part V (Unaudited pro forma financial information relating to the Enlarged Group). Deloitte's report on the unaudited pro forma financial information is set out in Section B of this Part V (Unaudited pro forma financial information relating to the Enlarged Group).
| Adjustments | |||||
|---|---|---|---|---|---|
| Continuing operations | DS Smith for the year ended 30 (Note 1) £m |
Interstate for the four months ended 31 April 2018 August 2017 (Note 2) £m |
Europac Group for the year ended 31 December (Note 3) £m |
Acquisition 2017 Adjustments (Note 4) £m |
Unaudited pro forma of the Enlarged Group for the year ended 30 April 2018 £m |
| Revenue Operating costs |
5,765 (5,282) ––––––––––– |
191 (164) ––––––––––– |
761 (663) ––––––––––– |
– (19) ––––––––––– |
6,717 (6,128) ––––––––––– |
| Operating profit before amortisation, acquisitions and disposals |
483 ––––––––––– |
27 ––––––––––– |
98 ––––––––––– |
(19) ––––––––––– |
589 ––––––––––– |
| Amortisation of intangible assets; acquisitions and disposals |
(122) ––––––––––– |
(1) ––––––––––– |
(1) ––––––––––– |
(9) ––––––––––– |
(133) ––––––––––– |
| Operating profit Finance income Finance costs Employment benefit |
361 2 (72) |
26 6 (6) |
97 1 (8) |
(28) – (7) |
456 9 (93) |
| net finance expense Net financing costs |
(4) ––––––––––– (74) |
– ––––––––––– – |
(1) ––––––––––– (8) |
– ––––––––––– (7) |
(5) ––––––––––– (89) |
| Profit after financing costs Share of profit of equity-accounted |
––––––––––– 287 |
––––––––––– 26 |
––––––––––– 89 |
––––––––––– (35) |
––––––––––– 367 |
| investments, net of tax Profit before income tax |
5 ––––––––––– 292 |
– ––––––––––– 26 |
– ––––––––––– 89 |
– ––––––––––– (35) |
5 ––––––––––– 372 |
| Income tax (expense)/credit | ––––––––––– (33) ––––––––––– |
––––––––––– (10) ––––––––––– |
––––––––––– (20) ––––––––––– |
––––––––––– 6 ––––––––––– |
––––––––––– (57) ––––––––––– |
| Profit for the year | 259 –––––––––––––––––––––– |
16 –––––––––––––––––––––– |
69 –––––––––––––––––––––– |
(29) –––––––––––––––––––––– |
315 –––––––––––––––––––––– |
Notes:
(b) An additional £9m has been recognised in amortisation in order to reflect the pro-rata increase in amortisation of acquired intangibles as a result of the Interstate acquisition.
(c) A charge of £1m has been recognised in "Finance costs" to reflect the estimated annual interest charges calculated under the effective interest method and payable under the additional amounts drawn down from existing facilities to finance part of the Acquisition. This is expected to be an ongoing annual cost.
| Adjustments | |||||
|---|---|---|---|---|---|
| Europac | Unaudited | ||||
| DS Smith Group | Group as at 31 |
pro forma of the Enlarged |
|||
| as at | December | Transaction | Acquisition | Group as | |
| 30 April 2018 | 2017 | Funding Adjustments | at 30 April | ||
| (Note 1) | (Note 2) | (Note 3) | (Note 4) | 2018 | |
| £m | £m | £m | £m | £m | |
| Assets | |||||
| Non–current assets | |||||
| Goodwill and intangible assets | 2,043 | 87 | – | 1,058 | 3,188 |
| Biological assets Property, plant and equipment |
3 2,396 |
6 599 |
– – |
– – |
9 2,995 |
| Investment Property | – | 2 | – | – | 2 |
| Equity accounted investments | 24 | 2 | – | – | 26 |
| Other investments | 11 | – | – | – | 11 |
| Deferred tax assets | 64 | 40 | – | – | 104 |
| Non–current Financial Assets | – | 3 | – | – | 3 |
| Other receivables | 7 | – | – | – | 7 |
| Derivative financial instruments | 15 ––––––––– |
– ––––––––– |
– ––––––––– |
– ––––––––– |
15 ––––––––– |
| Total non–current assets | 4,563 ––––––––– |
739 ––––––––– |
- ––––––––– |
1,058 ––––––––– |
6,360 ––––––––– |
| Current assets | |||||
| Inventories | 543 | 78 | – | – | 621 |
| Biological assets | 4 | – | – | – | 4 |
| Income tax receivable Trade and other receivables |
15 863 |
3 66 |
– – |
– – |
18 929 |
| Cash and cash equivalents | 297 | 75 | 1,421 | (1,421) | 372 |
| Other Current Financial Assets | – | 1 | – | – | 1 |
| Derivative financial instruments | 44 | – | – | – | 44 |
| Total current assets | ––––––––– 1,766 |
––––––––– 223 |
––––––––– 1,421 |
––––––––– (1,421) |
––––––––– 1,989 |
| Total assets | ––––––––– 6,329 ––––––––– |
––––––––– 962 ––––––––– |
––––––––– 1,421 ––––––––– |
––––––––– (363) ––––––––– |
––––––––– 8,349 ––––––––– |
| Liabilities | |||||
| Non–current liabilities | |||||
| Borrowings | (1,811) | (267) | (421) | – | (2,499) |
| Employee benefits | (106) | (13) | – | – | (119) |
| Other payables | (14) | (5) | – | – | (19) |
| Provisions Deferred tax liabilities |
(4) (195) |
(1) (53) |
– – |
– – |
(5) (248) |
| Derivative financial instruments | (35) | (1) | – | – | (36) |
| Other long term liabilities | – | (12) | – | – | (12) |
| Total non–current liabilities | ––––––––– (2,165) |
––––––––– (352) |
––––––––– (421) |
––––––––– – |
––––––––– (2,938) |
| Current liabilities | ––––––––– | ––––––––– | ––––––––– | ––––––––– | ––––––––– |
| Bank overdrafts | (29) | – | – | – | (29) |
| Borrowings | (162) | (15) | – | – | (177) |
| Trade and other payables | (1,705) | (199) | – | (42) | (1,946) |
| Income tax liabilities | (118) | (7) | – | – | (125) |
| Provisions Other financial liabilities |
(16) – |
(3) (23) |
– – |
– – |
(19) (23) |
| Derivative financial instruments | (24) | – | – | – | (24) |
| Total current liabilities | ––––––––– (2,054) |
––––––––– (247) |
––––––––– - |
––––––––– (42) |
––––––––– (2,343) |
| Total liabilities | ––––––––– (4,219) |
––––––––– (599) |
––––––––– (421) |
––––––––– (42) |
––––––––– (5,281) |
| Net assets | ––––––––– 2,110 |
––––––––– 363 |
––––––––– 1,000 |
––––––––– (405) |
––––––––– 3,068 |
| –––––––––––––––––––––– | –––––––––––––––––––––– | –––––––––––––––––––––– | –––––––––––––––––––––– | –––––––––––––––––––––– |
Notes:
| £m | |
|---|---|
| Rights Issue proceeds, net of underwriting costs Draw-down from existing facilities |
1,000 426 ––––––––––– |
| Estimated cash raised | 1,426 ––––––––––– |
| Debt issuance costs for additional standby facility | (5) ––––––––––– |
| Net increase in cash held | 1,421 –––––––––––––––––––––– |
The £421m increase in interest-bearing liabilities includes £426m drawn down from existing debt facilities, less £5m of debt issuance costs which have been netted against the liability.
(4) The consideration on the Acquisition will be payable as cash. A portion of the amounts paid is for treasury shares held by Europac and therefore will be deducted from the overall consideration. The Acquisition consideration is set out below:
| €m | |
|---|---|
| Cash Cash consideration relating to treasury shares |
1,667 (49) ––––––––––– |
| Acquisition net cash paid | 1,618 –––––––––––––––––––––– |
| Converted to GBP at an indicative exchange rate of €1: £0.8785 based on DS Smith forecasts | £1,421m –––––––––––––––––––––– |
The Acquisition has been accounted for using the acquisition method of accounting. Any excess consideration above the book value of the net assets acquired has been reflected as goodwill. A fair value exercise will be completed post Acquisition, therefore no account has been taken of any fair value adjustments that may arise on the Acquisition and no intangible assets and tax consequences have been valued at this stage. The adjustment to goodwill has been calculated as follows:
| £m | |
|---|---|
| Acquisition net cash paid Book value of net assets acquired |
1,421 (363) |
| Pro forma goodwill adjustment | ––––––––––– 1,058 –––––––––––––––––––––– |
An adjustment of £42m has been made to "trade and other payables" to reflect a payable for one-off transaction costs. This is made up of £19m of transaction costs and £23m of costs related to the Rights Issue.
(5) In preparing the unaudited statement of net assets of the Enlarged Group, no account has been taken of the trading activity or other transactions of the DS Smith Group since 30 April 2018 and no account has been taken of the trading activity or other transactions of the Europac Group since 31 December 2017.
(6) The table below sets out the net debt of the Enlarged Group as if the acquisition had occurred on 30 April 2018:
| £m | |
|---|---|
| DS Smith Group | (1,680) |
| Europac Group | (206) |
| Estimated cash raised (Note 3) | 1,421 |
| Cash consideration on Acquisition (Note 4) | (1,421) |
| Draw-down from existing facility, net of issuance costs for standby facility | (421) ––––––––––– |
| (2,307) | |
| –––––––––––––––––––––– |
The net debt of the DS Smith Group has been extracted, without material adjustment, from the 2018 Annual Report and Accounts which have been incorporated by reference in this document.
The net debt of the Europac Group has been calculated based on the reconciliation below. Line items have been extracted, without material adjustment, from the Statement of Financial Position of the Europac Group for the year ended 31 December 2017 included in Part IV (Historical Financial Information Relating to the Europac Group) of this Circular.
| €m | |
|---|---|
| Non-current Bank borrowings and bonds or other negotiable securities Current Bank borrowings and bonds or other negotiable securities Cash and cash equivalents |
(302) (17) 86 |
| Europac Group net debt | ––––––––––– (233) ––––––––––– |
| Converted to GBP at the December 2017 exchange rate of €1:£0.8828 | £(206)m –––––––––––––––––––––– |
Refer to notes 3 and 4 above for details on the net debt created by the transaction funding.
(7) In preparing the unaudited pro forma statement of net assets, no account has been taken of the amortisation of other intangibles or items subject to fair value acquisition accounting, on the basis that the actual amortisation charges will not be known until completion of the fair value exercise. Similarly, no adjustment has been made as a result of the Acquisition to reflect any synergies that may arise after the Acquisition as these are dependent upon future actions of management.
Deloitte LLP 2 New Street Square London EC4A 3BZ Tel: +44 (0) 20 7936 3000 Fax: +44 (0) 20 7583 1198 www.deloitte.co.uk
The Board of Directors on behalf of DS Smith Plc 350 Euston Road Regent's Place London NW1 3AX
J.P. Morgan Securities plc 25 Bank Street London E14 5JP
19 June 2018
Dear Sirs,
We report on the pro forma financial information (the "Pro forma financial information") set out in Part V of the Class 1 Circular (the "Circular") dated 19 June 2018, which has been prepared on the basis described in the notes thereto, for illustrative purposes only, to provide information about how:
might have affected the financial information presented on the basis of the accounting policies adopted by the Company in preparing the financial statements for the period ended 30 April 2018. This report is required by the Commission Regulation (EC) No 809/2004 (the "Prospectus Directive Regulation") as applied by Listing Rule 13.3.3R and is given for the purpose of complying with that requirement and for no other purpose.
It is the responsibility of the directors of the Company (the "Directors") to prepare the Pro forma financial information in accordance with Annex II items 1 to 6 of the Prospectus Directive Regulation as applied by Listing Rule 13.3.3R.
It is our responsibility to form an opinion, as to the proper compilation of the Pro forma financial information and to report that opinion to you in accordance with Annex II item 7 of the Prospectus Directive Regulation as applied by Listing Rule 13.3.3R.
Save for any responsibility which we may have to those persons to whom this report is expressly addressed and which we may have as a result of the inclusion of this report in the Circular, to the fullest extent permitted by law we do not assume any responsibility and will not accept any liability to any other person for any loss suffered by any such other person as a result of, arising out of, or in connection with this report or our statement, required by and given solely for the purposes of complying with Listing Rule 13.4.1R(6), consenting to its inclusion in the Circular.
In providing this opinion we are not updating or refreshing any reports or opinions previously made by us on any financial information used in the compilation of the Pro forma financial information, nor do we accept responsibility for such reports or opinions beyond that owed to those to whom those reports or opinions were addressed by us at the dates of their issue.
We conducted our work in accordance with the Standards for Investment Reporting issued by the Auditing Practices Board in the United Kingdom. The work that we performed for the purpose of making this report, which involved no independent examination of any of the underlying financial information, consisted primarily of comparing the unadjusted financial information with the source documents, considering the evidence supporting the adjustments and discussing the Pro forma financial information with the Directors.
We planned and performed our work so as to obtain the information and explanations we considered necessary in order to provide us with reasonable assurance that the Pro forma financial information has been properly compiled on the basis stated and that such basis is consistent with the accounting policies of the Company.
Our work has not been carried out in accordance with auditing or other standards and practices generally accepted in jurisdictions outside the United Kingdom, including Spain, and accordingly should not be relied upon as if it had been carried out in accordance with those standards or practices.
In our opinion:
Yours faithfully Deloitte LLP
Deloitte LLP is a limited liability partnership registered in England and Wales with registered number OC303675 and its registered office at 2 New Street Square, London EC4A 3BZ, United Kingdom. Deloitte LLP is the United Kingdom affiliate of Deloitte NWE LLP, a member firm of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee ("DTTL"). DTTL and each of its member firms are legally separate and independent entities. DTTL and Deloitte NWE LLP do not provide services to clients. Please see www.deloitte.com/about to learn more about our global network of member firms.
DS Smith and the DS Smith Directors, whose names appear in paragraph 4 (Directors) of this Part VI, accept responsibility for the information contained in this Circular. To the best of the knowledge and belief of DS Smith and the DS Smith Directors (who have taken all reasonable care to ensure that such is the case) the information contained in this Circular is in accordance with the facts and does not omit anything likely to affect the import of such information.
DS Smith was incorporated and registered in England and Wales on 7 July 1978 under the Companies Acts 1948 (as amended) as a private company limited by shares with the name David S. Smith (Packaging) Limited and registered number 01377658. Its name was changed to David S. Smith (Holdings) Limited on 11 August 1978. On 28 June 1982, the Company re-registered as a public company limited by shares with the name David S. Smith (Holdings) Public Limited Company. The Company listed on the London Stock Exchange on 3 March 1986. Its name was subsequently changed to DS Smith Plc on 17 September 2001.
The registered and head office of DS Smith is at 350 Euston Road, London NW1 3AX. Its telephone number is +44 (0)20 7756 1800.
The principal legislation under which DS Smith operates is the Companies Act 2006 and the regulations made under the Companies Act 2006.
3.1 The issued and fully paid share capital of DS Smith as at the Latest Practicable Date and following Admission of the New Ordinary Shares on completion of the Rights Issue (excluding any Ordinary Shares which may be issued on the exercise of options under the Employee Share Plans) is as follows:
| Ordinary Shares at | Ordinary Shares | |||
|---|---|---|---|---|
| the Latest | immediately | |||
| Practicable Date | following Admission | |||
| Number | £ | Number | £ | |
| Issued and fully paid | 1,074,571,043 | 107,457,104.30 | 1,367,635,872 | 136,763,587.20 |
Notes:
(1) As at the Latest Practicable Date, the Company does not hold any shares as treasury shares.
The Directors and their positions as at the date of this Circular are as follows:
| Name of Director | Position |
|---|---|
| Gareth Davis | (Non-executive Chairman) |
| Miles Roberts | (Group Chief Executive) |
| Adrian Marsh | (Group Finance Director) |
| Jonathan Nicholls | (Senior Independent Director) |
| Christopher Britton | (Independent Non-executive Director) |
| Ian Griffiths | (Independent Non-executive Director) |
| Kathleen O'Donovan | (Independent Non-executive Director) |
| Louise Smalley | (Independent Non-executive Director) |
As at the Latest Practicable Date, except as disclosed in the table below, neither the Directors nor any of their respective immediate families, will have any interests in the share capital of DS Smith which:
The following table sets out the interests of the Directors as at the Latest Practicable Date and immediately following Admission:
| As at the Latest | Immediately | |||
|---|---|---|---|---|
| Practicable Date | Approximate | following Admission Approximate |
||
| percentage | Number | percentage | ||
| Number of | of issued | of Ordinary | of issued | |
| Ordinary Shares | share capital (1) | Shares(2) | share capital (2) | |
| Gareth Davis | 106,900 | 0.01 | 136,054 | 0.01 |
| Miles Roberts | 1,651,589 | 0.16 | 2,102,022 | 0.15 |
| Adrian Marsh | 221,893 | 0.02 | 282,409 | 0.02 |
| Jonathan Nicholls | 109,307 | 0.01 | 139,117 | 0.01 |
| Christopher Britton | 10,550 | 0.00 | 13,427 | 0.00 |
| Ian Griffiths | 15,000 | 0.00 | 19,090 | 0.00 |
| Kathleen O'Donovan | 10,471 | 0.00 | 13,326 | 0.00 |
| Louise Smalley | 14,615 | 0.00 | 18,600 | 0.00 |
Notes:
Taken together, the combined percentage interest of the Directors in the issued share capital expected to subsist immediately following completion of the Rights Issue is approximately 0.20 per cent.
Details of other rights over Ordinary Shares held by the DS Smith Directors as at the Latest Practicable Date are set out below. Those rights are not included in the interests of the DS Smith Directors shown in the table above.
The following tables set out details of the options and awards held by the Directors under the Employee Share Plans as at the Latest Practicable Date.
(a) PSP
As at the Latest Practicable Date, participation by Directors in the PSP was as follows:
| Maximum Number of |
|||
|---|---|---|---|
| Ordinary Shares | |||
| Director | Award date | Vesting date(1) | under award |
| Miles Roberts | 30 July 2014 24 July 2015 01 July 2016 18 July 2017 |
30 July 2017 24 July 2018 01 July 2019 18 July 2020 |
375,700 356,214 415,876 335,619 |
| Adrian Marsh Notes: |
24 July 2015 01 July 2016 18 July 2017 |
24 July 2018 01 July 2019 18 July 2020 |
191,107 203,199 164,066 |
(1) If performance conditions are met.
(2) Dividend equivalents arising over the period between the grant date and the vesting date will be paid in cash or shares.
As at the Latest Practicable Date, participation by Directors in the DSBP was as follows:
| Maximum Number of Ordinary Shares |
||
|---|---|---|
| Award date | Vesting date(1) | under award |
| 24 July 2015 1 July 2016 18 July 2017 |
24 July 2018 1 July 2019 18 July 2020 |
156,734 146,018 67,123 |
| 24 July 2015 1 July 2016 18 July 2017 |
24 July 2018 1 July 2019 18 July 2020 |
72,074 68,797 31,629 |
Notes:
(1) Dividend equivalents arising over the period between the grant date and the vesting date were paid in cash prior to the 2017 Financial Year, following which they were paid in shares.
As at the Latest Practicable Date, participation by Directors in the Sharesave was as follows:
| Maximum | |||
|---|---|---|---|
| Number of | |||
| Ordinary Shares | |||
| Director | Award date | Vesting date(1) | under award |
| Miles Roberts Adrian Marsh |
1 April 2017 1 April 2017 |
1 April 2020 1 April 2020 |
2,702 2,702 |
The Irrevocable Undertakings are described in paragraph 6.1 of Part III of this Circular (Irrevocable Undertakings).
(a) General terms
The following Executive Directors have service agreements with DS Smith as follows:
| Director | Position | Date of joining the Group |
|---|---|---|
| Miles Roberts | Group Chief Executive | 4 May 2010 |
| Adrian Marsh | Group Finance Director | 24 September 2013 |
Details of the share options and awards held by the Executive Directors are set out in paragraph 4.2 (Interests of the Directors in Ordinary Shares pursuant to the Employee Share Plans) of this Part VI.
Each Executive Director is eligible to participate in DS Smith's bonus scheme and PSP. Miles Roberts receives an annual pension allowance of 30 per cent. of his base salary and Adrian Marsh receives an annual pension allowance of 20 per cent. of his base salary. The Executive Directors are also entitled under their services contracts to receive a car allowance or company car equivalent life cover and family medical insurance.
Each Executive Director's service contract can be terminated immediately by the Company for cause, or by either party giving 12 months' notice. Each service contract may also be terminated at any time by the Company by paying a sum in lieu of notice equal to 12 months' basic salary. Miles Roberts is entitled to pension allowance for the unexpired period of notice as well as basic salary. Miles Roberts may not compete with DS Smith for a six-month period after termination of employment and Adrian Marsh may not compete with DS Smith for a twelve-month period after termination.
(a) General terms
The dates of initial appointment to the Board and unexpired term of the Non-Executive Directors as at the Latest Practicable Date are as follows:
| Director | Position | Date of initial appointment |
Date of expiration of current term in office |
|---|---|---|---|
| Gareth Davis Jonathan |
Non-executive Chairman | 1 June 2010 | 31 May 2019 |
| Nicholls Christopher |
Senior Independent Director | 1 December 2009 | 1 December 2018 |
| Britton | Independent Non-Executive Director | 6 March 2013 | 6 March 2019 |
| Ian Griffiths Kathleen |
Independent Non-Executive Director | 23 June 2014 | 23 June 2020 |
| O'Donovan | Independent Non-Executive Director | 5 December 2012 | 5 December 2018 |
| Louise Smalley | Independent Non-Executive Director | 23 June 2014 | 23 June 2020 |
Each of the Chairman and the Non-Executive Directors has a letter of appointment. The appointment of a Non-Executive Director or Chairman is for a period of three years. The Non-Executive Directors and the Chairman are required to seek re-election at the annual general meeting of DS Smith and any subsequent annual general meeting as required by DS Smith's Articles or as the Board resolves. In addition, the Non-Executive Directors and Chairman are entitled to be reimbursed for expenses properly and reasonably incurred arising from the performance of their duties.
The appointment of each Non-Executive Director or the Chairman may be terminated: (a) immediately if not re-elected at any general meeting; (b) by giving DS Smith not less than one month's written notice; or (c) by resolution of a meeting of the Board (which shall include a majority of the Non-Executive Directors voting in favour, excluding the vote of the Non-Executive Director or Chairman to whom the vote relates) giving not less than one month's written notice, and in any event a payment may be given in lieu of such notice.
Save as disclosed in this Part VI, there are no existing service contracts between any Non-Executive Director and any member of the DS Smith Group which provide for benefits upon termination of employment.
As at the Latest Practicable Date, in so far as it is known to the Company by virtue of the notifications made pursuant to the Companies Act 2006 and/or Chapter 5 of the Disclosure Guidance and Transparency Rules, or as the Company is otherwise aware, the name of each person, other than a Director, who, directly or indirectly, is interested in voting rights representing three per cent. or more of the total voting rights in respect of the Company's issued share capital, and the amount of such person's holding, was as follows:
| As at the Latest | ||
|---|---|---|
| Practicable Date | ||
| Approximate | ||
| Number of | percentage | |
| Ordinary | of issued | |
| Shares | share capital (1) |
|
| BlackRock, Inc. | 76,566,473 | 7.13 |
| Aviva plc | 74,169,049 | 6.90 |
| Ameriprise Financial, Inc. and its group | 61,705,042 | 5.74 |
| Standard Life Investment Limited | 61,676,725 | 5.73 |
| Merpas Co SARL | 52,474,156 | 4.88 |
| Norges Bank Investment Management | 49,528,475 | 4.61 |
| Old Mutual plc | 40,259,254 | 3.75 |
| Royal London Asset Management Ltd | 36,431,235 | 3.39 |
Notes:
(1) On the basis that the total issued share capital of the Company as at the Latest Practicable Date was 1,074,571,043.
Save as disclosed in this paragraph 7 (Major Shareholders and Other Interests) of this Part VI, the Company is not aware of any holdings of voting rights (within the meaning of Chapter 5 of the Disclosure Guidance and Transparency Rules) by persons which will represent three per cent. or more of the total voting rights in respect of the issued ordinary share capital of the Company as at the Latest Practicable Date.
Insofar as is known to the Company, the Company is not, as at the Latest Practicable Date, directly or indirectly owned or controlled by another corporate, any foreign government or any other natural or legal person, severally or jointly. The Company is not aware of any arrangements the operation of which may at a subsequent date result in a change of control of the Company.
All Ordinary Shares (other than treasury shares) have the same voting rights.
Save as disclosed in the financial information relating to related party transactions as set out:
(c) in note 32 in DS Smith's notes to the 2016 Financial Statements on page 146 of the 2016 Annual Report and Accounts, each of which are incorporated by reference into this Circular, for each of the years ended 30 April 2018, 30 April 2017 and 30 April 2016, and during the period between 30 April 2018 and the Latest Practicable Date, the DS Smith Group entered into no transactions with related parties.
The following is a summary of each contract (not being a contract entered into in the ordinary course of business) to which DS Smith or any other member of the DS Smith Group is or has been a party: (i) within the two years immediately preceding the date of this Circular which is, or may be, material to DS Smith or the DS Smith Group; or (ii) at any time, which contains any provision under which any member of the DS Smith Group has any obligation or entitlement which is material to the DS Smith Group as at the date of this Circular:
(a) Break Fee Agreement
The Break Fee Agreement is described in Part III of this Circular (Principal Terms of the Proposed Offer).
(b) New Debt Facility Agreement
The New Debt Facility Agreement is described in Part III of this Circular (Principal Terms of the Proposed Offer).
(c) Equity CNMV Guarantee Agreement
The Equity CNMV Guarantee Agreement is described in Part III of this Circular (Principal Terms of the Proposed Offer).
On 28 June 2017, DS Smith and DS Smith Holdings (as relevant (the "Buyer")), Merpas Co. S.à r.l. ("Merpas") and IMRI entered into the Acquisition Agreement for the acquisition by DS Smith and DS Smith Holdings of 80 per cent. of the total issued share capital of Interstate Resources, Inc. ("IMRI") from Merpas for consideration of US\$920 million. The Buyer also assumed or undertook to procure repayment of 100 per cent. of the financial indebtedness of IMRI and its subsidiaries (the "IRI Group") at Completion. The consideration was subject to customary post-completion net debt and working capital adjustments.
The Buyer satisfied the consideration through: (i) a payment of US\$846 million in cash, to be satisfied out of the net proceeds of a placing, utilisation of a new debt facility and existing cash resources; and (ii) the issue of consideration shares with a value of US\$300 million. At Completion, DS Smith acquired a number of shares in IMRI equivalent in value to the consideration shares, and DS Smith Holdings acquired the remaining shares in IMRI that were the subject of the acquisition of 80 per cent. of the total issued share capital of IMRI (the "Initial Interest"). Under the terms of the Acquisition Agreement, Merpas is subject to a lock-up arrangement restricting its sale or transfer of DS Smith Shares until 25 August 2018.
The Acquisition Agreement contains representations, warranties, covenants, undertakings and conditions that are customary for a transaction of this size and nature. The Acquisition Agreement contains certain termination rights for each of the Buyer and Merpas that are exercisable by mutual written consent or written notice to the other in certain circumstances.
Following completion of the acquisition of the Initial Interest, the respective governance and other rights of DS Smith, DS Smith Holdings, IMRI and an entity within the Indevco Group ("Merpas Newco") is governed by the Shareholders' Agreement.
The Shareholders' Agreement contains customary governance provisions, reserved matters and restrictions on transfers of shares. The Shareholders' Agreement also contains certain customary warranties given by Merpas Newco and the Buyer as of the date of Completion and customary post-completion undertakings given by Merpas Newco.
Pursuant to the Shareholders' Agreement, on 1 September 2018, 1 September 2019, 1 September 2020 and 1 September 2021, Merpas Newco has the option to sell to the Buyer either all of the shares in IMRI then held by Merpas Newco or a number of shares in IMRI held by Merpas Newco representing not less than 10 per cent. of the shares in IMRI then issued and outstanding. If Merpas Newco holds shares in IMRI on 1 September 2022 or Merpas Newco holds less than 10 per cent. of the shares in IMRI then issued and outstanding on any date before 1 September 2022, Merpas Newco will be required to sell all of the shares in IMRI then held by it to the Buyer. Further, within one month of a change of control of DS Smith, Merpas Newco will have option to sell to the Buyer all of the shares in IMRI then held by it. If any of the above circumstances occur (each, a "Further Acquisition"), the Buyer will pay cash for any shares in IMRI sold to it by Merpas Newco with such shares valued on the basis of the higher of: (i) the initial enterprise value of the IRI Group; and (ii) IRI Group's consolidated EBITDA for the last 12 months multiplied by eight (or ten in the event of a change of control of DS Smith), adjusted for cash, debt and working capital pursuant to the adjustment mechanics provided in the Acquisition Agreement. DS Smith proposes to fund any Further Acquisition through cash and debt facilities available to it at such time.
On 29 June 2017, DS Smith, Citi and JPM entered into the Placing Agreement, pursuant to which DS Smith appointed Citi and JPM as joint bookrunners in connection with the placing of 62,637,363 new Ordinary Shares by the Company that raised approximately £280 million (net of commissions and expenses) to fund part of the cash portion of the consideration for the acquisition of the Initial Interest, the results of which were announced by DS Smith on 29 June 2017 Placing. Closing of the Placing and admission of the Placing shares to the Official List and to trading on the Main Market took place on 3 July 2017.
Subject to the terms and conditions of the Placing Agreement, each of Citi and JPM severally agreed, as agent for DS Smith, to use its reasonable endeavours to procure placees for such number of new Ordinary Shares as would result in gross proceeds from the Placing of £285 million (before commissions and expenses). In consideration for the services provided by Citi and JPM under the Placing Agreement, the Company paid Citi and JPM an aggregate commission of 1.7 per cent. of the gross proceeds from the Placing.
Under the Placing Agreement, the Company gave certain customary (for a transaction of this nature) representations, warranties and undertakings to Citi and JPM concerning, among other things, the accuracy of the statements of fact in certain public documents, including, but not limited to, the Placing announcement and the Acquisition announcement, and in relation to other matters relating to the DS Smith Group and its business. The Company also gave a customary indemnity to Citi and JPM, liability in respect of which is unlimited as to time and amount.
The Company undertook that (subject to certain limited exceptions) it would not, for a period of 90 calendar days following the closing date, without the prior written consent of Citi and JPM, directly or indirectly: (i) offer, issue, lend, charge, assign, sell or contract to sell or grant options in respect of or otherwise transfer or dispose of any Ordinary Shares (or any interest in Ordinary Shares) or any other securities exchangeable for or convertible into, or substantially similar to, Ordinary Shares (or any interest in Ordinary Shares); (ii) enter into any swap or other agreement that transfers, in whole or in part, any economic consequences of ownership of the Ordinary Shares; or (iii) make any announcement or other publication of the intention to do any of the foregoing or make any filing with respect thereto.
On 18 October 2017, DS Smith, Kameran Financial Limited (the "Seller") and Mr Vladimir Cohn entered into a share purchase agreement (the "SPA") for the acquisition by DS Smith of substantially all (>99 per cent.) of the total issued share capital of each of EcoPack S.R.L ("EcoPack") and EcoPaper S.A. ("EcoPaper") from the Seller for an enterprise value of circa €208 million. Consideration for the purchase comprised both cash and DS Smith Shares. Certain cash consideration given in relation to the purchase of EcoPaper was (and in some instances continues to be) held in escrow for release under certain conditions relating to ongoing litigation or an absence of any claim against the Seller under the terms of the SPA. The consideration was subject to customary post-completion net debt and working capital adjustments. The sale completed on 6 March 2018.
The SPA includes protective covenants requiring that non-Purchaser parties do not: (i) take part in competing business activities in the sphere of EcoPaper's and EcoPack's operations; and (ii) do not induce or employ a director or employee of EcoPaper or EcoPack, for a period of three years from completion. For a period of 15 months following completion, the Seller is subject to lock-up provisions in relation to DS Smith Shares received as consideration, with certain exceptions for, inter alia, transfers to a subsidiary or in the context of an offer made by a third party to all holders of DS Smith Shares.
The SPA contains representations, warranties, indemnities, covenants, undertakings and conditions that are customary for a transaction of this size and nature. The SPA is governed by Romanian law, and in the event of any dispute arising from or in connection with the SPA is subject to referral and resolution by way of arbitration.
On 20 May 2014, DS Smith entered into a £800 million revolving credit facility agreement (the "Revolving Credit Facilities Agreement") with Barclays Bank Plc, BNP Paribas, Citigroup Global Markets Limited, Commerzbank Aktiengesellschaft, HSBC Bank Plc, J.P. Morgan Limited, Lloyds Bank Plc, the Royal Bank of Scotland Plc, the Bank of Toyko-Mitsubishi UFJ, Ltd., Credit Lyonnais, ING Bank N.V., London Branch and Natixis as arrangers, Barclays Bank Plc, BNP Paribas, London Branch, Citigroup N.A., London Branch, Commerzbank Aktiengesellschaft, London Branch, HSBC Bank Plc, JPMorgan Chase Bank, N.A., London Branch, Lloyds Bank Plc, the Royal Bank of Scotland Plc, the Bank of Toyko-Mitsubishi UFJ, Ltd., London Branch, Credit Lyonnais, ING Bank N.V., London Branch and Natixis as original lenders (the "Original Lenders") and the Royal Bank of Scotland Plc as agent.
The Revolving Credit Facilities Agreement provides for DS Smith to receive multiple loans on a revolving credit basis (the "Loans") from the Original Lenders, which may be used to refinance existing indebtedness and for general corporate purposes including financing for future acquisitions and working capital. Each Loan is available to be drawn until the date falling one week prior to the final maturity date under the Revolving Credit Facilities Agreement (the "Availability Period"). The Loan may be drawn in different currencies (sterling, US dollars, Euros or other optional currencies). DS Smith was initially required to repay the Loans within five years. It had two extension options allowing it to extend this repayment date by one year at a time; the first extension option was utilised but not the second one and, therefore, the final repayment date of the Loans will fall six years after the original date of the Revolving Credit Facilities Agreement.
The Revolving Credit Facilities Agreement includes certain mandatory prepayment events, being (A) illegality; and (B) a change of control of DS Smith (if a lender so requests after a certain period of negotiations). DS Smith may also voluntarily prepay the Loans provided it gives five business days' notice and the prepayment is of a minimum of £1,000,000. The Revolving Credit Facilities Agreement provides that any undrawn part of the lenders' commitments will be automatically cancelled at the end of the Availability Period and that DS Smith can cancel the commitment of a lender which has defaulted.
The Loans are unsecured and are guaranteed by DS Smith. The Revolving Credit Facilities Agreement contains a mechanic for other members of the DS Smith Group to accede as guarantors. The Revolving Credit Facilities Agreement contains various customary representations, warranties and covenants (including financial covenants).
The Revolving Credit Facilities Agreement and any non-contractual obligations arising out of or in connection with it are governed by English law.
On 20 July 2016, DS Smith Finance B.V. ("Dutchco") entered into a €150 million facility agreement (the "Unicredit Facility Agreement") with Unicredit Bank AG as mandated lead arranger, Unicredit Luxembourg S.A. as original lender (the "Original Lender") and Unicredit Luxembourg S.A. as agent.
The Unicredit Facility Agreement provides for Dutchco to receive one initial loan, and two potential subsequent loans under an accordion facility (together, the "Loans") from the Original Lender, which may be used for general corporate purposes of the group. The initial Loan was available to be drawn until the date falling one month after the date of the Unicredit Facility Agreement, whilst the subsequent increase Loans are available to be drawn during the period specified in the relevant increase confirmation (together, the "Availability Periods"). The Loans may only be drawn in Euros. Dutchco is required to repay the Loans within five years.
The Unicredit Facility Agreement includes certain mandatory prepayment events, being: (A) illegality; and (B) a change of control of DS Smith (if a lender so requests after a certain period of negotiations). Dutchco may also voluntarily prepay the Loan provided it gives five business days' notice and the prepayment is of a minimum of €5,000,000. The Unicredit Facility Agreement provides that any undrawn part of the lender's commitments will be automatically cancelled at the end of the relevant Availability Period, and that Dutchco can cancel the commitment of a lender which has defaulted.
The Loan is unsecured and is guaranteed by DS Smith. The Unicredit Facility Agreement contains a mechanic for other members of the DS Smith Group to accede as guarantors. The Unicredit Facility Agreement contains various customary representations, warranties and covenants (including financial covenants).
The Unicredit Facility Agreement and any non-contractual obligations arising out of or in connection with it are governed by English law.
On 5 December 2008, DS Smith and DS Smith Finco Limited ("Finco") entered into a private shelf agreement (the "Private Shelf Agreement") with Prudential Investment Management, Inc. ("Prudential"), which was subsequently amended on 2 July 2010.
The Private Shelf Agreement provides for DS Smith to and/or Finco to issue senior promissory notes in an aggregate principal amount of \$150,000,000 (the "Notes"). The Notes may be issued and sold until the earliest of the date falling four years after the date of the Private Shelf Agreement and the 30th day after the Private Shelf Agreement has been terminated by either Prudential or the Company, each on 30 days' notice.
The Private Shelf Agreement generally contains representations, covenants and events of default which are customary for this type of agreement and includes certain covenants (including financial covenants) and events of default that are generally consistent with its other existing corporate borrowings. The Private Shelf Agreement includes a mandatory prepayment event, being a change of control of DS Smith (if a noteholder so requests after a certain period of negotiations). DS Smith or Finco may prepay any Note issued by them at any time in an amount not less than 5 per cent. of the aggregate principal amount of all outstanding Notes at that time. The Private Shelf Agreement also allows DS Smith and Finco to prepay the Notes in full on not less than five Business Days' notice as a result of certain tax events. Any issued Notes are required to mature no later than 12 years after their original issue date.
DS Smith and Finco each guarantee the other's Notes and the Private Shelf Agreement contains a mechanic for other members of the DS Smith Group to accede as guarantors. The Private Shelf Agreement contains various conditions to closing including representations and warranties by DS Smith and Finco, and customary affirmative and negative covenants.
The Private Shelf Agreement and any non-contractual obligations arising out of or in connection with it are governed by English law.
On 11 August 2010, DS Smith issued two series of unsecured notes pursuant to the Private Shelf Agreement, which included €59,000,000 4.395 per cent. Series A Senior Notes due 13 August 2018 and €59,000,000 4.825 per cent. Series B Senior Notes 11 August 2020 (collectively, the "Shelf Facility Notes"). The Shelf Facility Notes were issued for general corporate purposes.
On 8 December 2016, DS Smith entered into a €60 million bridge facility agreement (the "Danske Facility Agreement") with Danske Bank A/S, London Branch as original lender (the "Original Lender").
The Danske Facility Agreement provides for DS Smith to receive one loan (the "Loan") from the Original Lender, which may be used for general corporate purposes including financing for future acquisitions and working capital. The Loan was available to be drawn until the date falling 90 days after the date of the Danske Facility Agreement (the "Availability Period"). The Loan must be drawn in Euros. DS Smith is initially required to repay the Loan within two years, although it has two extension options allowing it to extend this repayment date, first by one year and then to 20 May 2020.
The Danske Facility Agreement includes certain mandatory prepayment events, being: (A) illegality; and (B) a change of control of DS Smith (if a lender so requests after a certain period of negotiations). DS Smith may also voluntarily prepay the Loan provided it gives five business days' notice and the prepayment is of a minimum of €1,000,000. The Danske Facility Agreement provides that any undrawn part of the lenders' commitments will be automatically cancelled at the end of the Availability Period, and that DS Smith can cancel the commitment of a lender which has defaulted.
The Loan is unsecured and is guaranteed by DS Smith. The Danske Facility Agreement contains a mechanic for other members of the DS Smith Group to accede as guarantors. The Danske Facility Agreement contains various customary representations, warranties and covenants (including financial covenants).
The Danske Facility Agreement and any non-contractual obligations arising out of or in connection with it are governed by English law.
On 27 January 2017, DS Smith entered into a €60 million bridge facility agreement (the "Santander Facility Agreement") with Abbey National Treasury Services Plc as original lender (the "Original Lender").
The Santander Facility Agreement provides for DS Smith to receive one loan (the "Loan") from the Original Lender, which may be used for general corporate purposes including financing for future acquisitions and working capital. The Loan was available to be drawn until the date falling 90 days after the date of the Santander Facility Agreement (the "Availability Period"). The Loan must be drawn in Euros. DS Smith is initially required to repay the Loan within two years, although it has two extension options allowing it to extend this repayment date, first by one year and then to 20 May 2020.
The Santander Facility Agreement includes certain mandatory prepayment events, being: (A) illegality; and (B) a change of control of DS Smith (if a lender so requests after a certain period of negotiations). DS Smith may also voluntarily prepay the Loan provided it gives five business days' notice and the prepayment is of a minimum of €1,000,000. The Santander Facility Agreement provides that any undrawn part of the lenders' commitments will be automatically cancelled at the end of the Availability Period.
The Loan is unsecured and is guaranteed by DS Smith. The Santander Facility Agreement contains a mechanic for other members of the DS Smith Group to accede as guarantors. The Santander Facility Agreement contains various customary representations, warranties and covenants (including financial covenants).
The Santander Facility Agreement and any non-contractual obligations arising out of or in connection with it are governed by English law.
On 6 August 2012, DS Smith issued five series of unsecured notes pursuant to a note agreement (the "Note Agreement"), which included US\$20,000,000 3.71 per cent. Series A Senior Notes due 6 August 2017, US\$72,000,000 4.09 per cent. Series B Senior Notes due 6 August 2019, US\$10,000,000 4.28 per cent. Series C Senior Notes due 6 August 2020, US\$30,000,000 4.47 per cent. Series D Senior Notes due 6 August 2021 and US\$268,000,000 4.65 per cent. Series E Senior Notes due 6 August 2022 (collectively, the "US Private Placement Notes"). The US Private Placement Notes were issued for general corporate purposes.
The Note Agreement generally contains representations, covenants and events of default which are customary for this type of agreement and includes certain covenants (including financial covenants) and events of default that are generally consistent with its other existing corporate borrowings. In addition, DS Smith may voluntarily prepay the US Private Placement Notes, plus a make-whole payment, at any time, in whole or in part. In the event of a change of control in respect of DS Smith, the US Private Placement Notes may be redeemed at the option of the holders of the US Private Placement Notes. In the event of certain changes affecting taxation, DS Smith may elect to prepay the US Private Placement Notes, subject to certain rights of the affected holders of the US Private Placement Notes.
On 14 September 2015, DS Smith issued €500,000,000 2.250 per cent. Notes (the "2.250 per cent. MTN Notes") due 16 September 2022 (the "2.250 per cent. MTN Notes Maturity Date") under its €2,500,000,000 euro medium term note programme in respect of which the interest rate payable is subject to adjustment from time to time in the event of a rating change concerning DS Smith's senior unsecured long-term debt.
On 26 July 2017, DS Smith issued €750,000,000 1.375 per cent. Notes (the "1.375 per cent. MTN Notes") due 26 July 2024 (the "1.375 per cent. MTN Notes Maturity Date") and £250,000,000 2.875 per cent. Notes (the "2.875 per cent. MTN Notes" and, together with the 2.250 per cent. MTN Notes and the 1.375 per cent. MTN Notes, the "MTN Notes") due 26 July 2029 (the "2.875 per cent. MTN Notes Maturity Date" and, together with the 2.250 per cent. MTN Notes Maturity Date and the 1.375 per cent. MTN Notes Maturity Date, the "MTN Notes Maturity Date") under its €2,500,000,000 euro medium term note programme in respect of which the interest rate payable is subject to adjustment from time to time in the event of a rating change concerning DS Smith's senior unsecured long-term debt.
The MTN Notes were issued for general corporate purposes.
The terms and conditions of the MTN Notes contain a negative pledge and events of default which are customary for Euro medium term notes. In addition, the MTN Notes may be redeemed prior to the relevant MTN Notes Maturity Date at the option of (i) DS Smith on any day up to but excluding the day that is three months prior to the MTN Notes Maturity Date at a make whole redemption price, (ii) DS Smith on any day during the period from (and including) the day that is three months prior to the MTN Notes Maturity Date at par, or (iii) any holders of the MTN Notes upon a change of control in respect of DS Smith at par. In the event of certain changes affecting taxation, DS Smith may elect to redeem the MTN Notes at par.
The following is a summary of each contract (not being a contract entered into in the ordinary course of business) to which Europac or any other member of the Europac Group is or has been a party: (i) within the two years immediately preceding the date of this Circular which is, or may be, material to Europac or the Europac Group; or (ii) at any time, which contains any provision under which any member of the Europac Group has any obligation or entitlement which is material to the Europac Group as at the date of this Circular. With the exception of the Break Fee Agreement and the NDA, information contained in this paragraph 9.2 of Part VI has been compiled solely from information included in public documents published by Europac:
(a) Break Fee Agreement
The Break Fee Agreement is described in Part III of this Circular (Principal Terms of the Proposed Offer).
The NDA is described in Part III of this Circular (Principal Terms of the Proposed Offer).
On 16 February 2012, Europac entered into a Forward Start Facility for up to €253 million, of which €166 million comprised a loan and €87 million related to a revolving credit facility, both for five years with partial maturities. The sole purpose of the Forward Start Facility is to partly re-finance the existing syndicated loan. The rate of interest was indexed to Euribor, plus a spread of 3.25 per cent. On 24 July 2014, Europac signed a novation of the Forward Start Facility with the corresponding banks, which essentially involved deferring all outstanding due dates on the novation date by two years. The spread for this borrowing was reduced to 2.5 per cent. throughout the remaining life of the loan.
On 10 July 2015, Europac refinanced its syndicated borrowings by increasing the amount of the financing to €290 million and extending the outstanding maturities on the novation date by two years up to 10 July 2021, with an annual interest rate indexed to Euribor plus a margin of between 140 and 175 basis points depending on compliance with certain ratios.
On 28 December 2016, Europac signed an amendatory non-extinctive novation of this syndicated borrowing whereby the maturity date was extended to 10 July 2022 and its interest indexed to Euribor plus a margin of between 120 and 155 basis points depending on compliance with certain ratios.
At 31 December 2017, the balance of the syndicated loan amounted to €281 million (€290 million euros in 2016).
In 2014, the Europac Group set up a commercial paper issue programme on the MARF (Alternative Fixed Income Market) for a maximum of €50 million. In 2017, this programme was renewed and the maximum amount increased to €100 million.
In 2017 the Europac Group carried out issues for an average annual amount of €28 million at an average cost of 0.7 per cent. (€9 million with an average cost of 0.9 per cent. in 2016), with no outstanding balance at the end of said years.
In respect of the current financial year, the Company paid an interim dividend of 4.9 pence per Ordinary Share on 1 May 2018.
In respect of the 2018 Financial Year, the Company paid a final dividend of 10.6 pence per Ordinary Share to Shareholders on 1 November 2017 and an interim dividend of 4.6 pence per Ordinary Share on 2 May 2017. Therefore, the total dividend paid to Shareholders in respect of the 2018 Financial Year was made at the rate of 15.2 pence per Ordinary Share.
In respect of the 2017 Financial Year, the Company paid a final dividend of 8.8 pence per Ordinary Share to Shareholders on 1 November 2016 and an interim dividend of 4.0 pence per Ordinary Share on 3 May 2016. Therefore, the total dividend paid to Shareholders in respect of the 2017 Financial Year was made at the rate of 12.8 pence per Ordinary Share.
In respect of the 2016 Financial Year, the Company paid a final dividend of 7.7 pence per Ordinary Share to Shareholders on 2 November 2015 and an interim dividend of 3.7 pence per Ordinary Share on 1 May 2016. Therefore, the total dividend paid to Shareholders in respect of the 2016 Financial Year was made at the rate of 11.4 pence per Ordinary Share.
Following Completion, DS Smith intends to maintain the same dividend policy.
DS Smith is of the opinion that the working capital available to the Enlarged Group, which includes the net proceeds of the Rights Issue and the New Debt Facility, is sufficient for its present requirements, that is, for at least the next 12 months from the date of publication of this Circular.
There are no governmental, legal or arbitration proceedings (including any such proceedings which are pending or threatened of which the Company is aware) during a period covering at least the previous 12 months preceding the date of this Circular which may have, or have had, a significant effect on the Company's and/or the DS Smith Group's financial position or profitability.
There are no governmental, legal or arbitration proceedings (including any such proceedings which are pending or threatened of which the Company is aware) during a period covering at least the previous 12 months preceding the date of this Circular which may have, or have had, a significant effect on Europac and/or the Europac Group's financial position or profitability.
There has been no significant change in the trading or financial position of the DS Smith Group since 30 April 2018, being the date to which the latest audited consolidated financial statements of the DS Smith Group were prepared.
There has been no significant change in the trading or financial position of the Europac Group since 31 December 2017, the date to which the latest audited consolidated financial statements of the Europac Group were prepared, on which the historical financial information of the Europac Group, as set out in Part IV (Historical financial information relating to the Europac Group) of this Circular, was based.
Citi, Goldman Sachs and JPM have each given and not withdrawn their written consent to the inclusion in this Circular of references to their respective names in the form and context in which they appear.
Deloitte has given, and not withdrawn, its written consent to the inclusion in this Circular of its report in Section B of Part V (Unaudited pro forma financial information relating to the Enlarged Group), in the form and context in which they appear.
The following documents, which have been approved, filed with or notified to the FCA, and which are available for inspection in accordance with paragraph 16 (Documents on display) of this Part VI, contain information about the DS Smith Group which is relevant to this Circular:
The table below sets out the sections of these documents which are incorporated by reference in, and form part of, this Circular, and only the parts of the documents identified in the table below are incorporated by reference in, and form part of, this Circular. The parts of these documents which are not incorporated by reference are either not relevant for investors or are covered elsewhere in this Circular. To the extent that any part of any information referred to below itself contains information which is incorporated by reference, such information shall not form part of this Circular.
Except as indicated below, information contained on the Company's website or the contents of any website accessible from hyperlinks on the Company's website are not incorporated into and do not form part of this Circular.
| Reference document | Information incorporated by reference into this Circular |
Page number(s) in reference document |
|---|---|---|
| DS Smith Announcement | Principal terms and conditions of the Acquisition | 15 |
| 2018 Annual Report and Accounts | Note 31 to DS Smith's financial statements for the 2018 Financial Year |
133 |
| 2017 Annual Report and Accounts | Note 31 to DS Smith's financial statements for the 2017 Financial Year |
126 |
| 2016 Annual Report and Accounts | Note 32 to DS Smith's financial statements for the | |
| 2016 Financial Year | 146 |
Copies of the following documents will be available for inspection during normal business hours on any weekday (Saturdays, Sundays and public holidays excepted) at the offices of Slaughter and May, One Bunhill Row, London EC1Y 8YY and at the Company's registered office up to and including the date of the General Meeting and for the duration of the General Meeting:
The following expressions have the following meanings throughout this Circular, unless the context otherwise requires:
| 2016 Annual Report and Accounts | DS Smith's annual report and accounts in respect of the 2016 Financial Year; |
|---|---|
| 2016 Financial Year | DS Smith's financial year ended 30 April 2016; |
| 2017 Annual Report and Accounts | DS Smith's annual report and accounts in respect of the 2017 Financial Year; |
| 2017 Financial Year | DS Smith's financial year ended 30 April 2017; |
| 2018 Annual Report and Accounts | DS Smith's annual report and accounts in respect of the 2018 Financial Year; |
| 2018 Financial Year | DS Smith's financial year ended 30 April 2018; |
| Acceptance Undertakings | the Irrevocable Undertakings and the Treasury Shares Commitment; |
| Acquisition | has the meaning ascribed to it in paragraph 1 (Introduction) of Part I (Letter from the Chairman) of this Circular; |
| Admission | the proposed admission of New Ordinary Shares by the UKLA to listing on the premium segment of the Official List and by the London Stock Exchange to trading on the Main Market following completion of the Rights Issue; |
| Break Fee Agreement | the break fee agreement entered into by DS Smith and Europac, as further detailed at page 47 of this Circular; |
| business day | a day (excluding Saturdays, Sundays and public holidays in England and Wales) on which banks are generally open for business in London; |
| Buyer | DS Smith; |
| CAGR | compound annual growth rate; |
| CCM | corrugated case material; |
| certificated | in relation to a share or other security, a share or other security, title to which is recorded in the relevant register of the share or other security concerned as being held in certificated form (that is, not in CREST); |
| Citi | Citigroup Global Markets Limited; |
| Closing Price | the closing middle market price of a relevant share as derived from SEDOL on any particular day; |
| CNMV | Comisión Nacional del Mercado de Valores, the Spanish Securities and Exchange Commission; |
| Companies Act 2006 | the Companies Act 2006, as amended; |
| Completion | completion of the Acquisition; |
|---|---|
| CREST or CREST | the relevant system, as defined in the CREST Regulations (in respect of which Euroclear is the operator as defined in the CREST Regulations); |
| CREST Manual | the rules governing the operation of CREST as published by Euroclear; |
| CREST Proxy Instruction | has the meaning ascribed to it in paragraph 17 (Action to be taken) of Part I (Letter from the Chairman) of this Circular; |
| CREST Regulations | the Uncertificated Securities Regulations 2001 (SI 2001 No. 01/378), as amended; |
| Deloitte | Deloitte LLP; |
| Disclosure Guidance and Transparency Rules |
the rules made by the FCA under Part VI of FSMA relating to the disclosure of information (as amended from time to time); |
| DSBP | the Company's Deferred Share Bonus Plan; |
| DS Smith or the Company | DS Smith Plc, a company incorporated in England and Wales with registered number 01377658 and having its registered office at 350 Euston Road, London, NW1 3AX; |
| DS Smith Announcement | the DS Smith announcements dated 4 June 2018 in relation to the proposed Acquisition and the Rights Issue; |
| DS Smith Board or Board | the board of Directors of DS Smith; |
| DS Smith Directors or Directors | the directors of the Company, whose names appear on page 10 of this Circular, or, as the context requires, the directors from time to time of the Company, and Director shall be construed accordingly; |
| DS Smith Group or the Group | DS Smith and its subsidiaries and subsidiary undertakings from time to time and, where the context requires, each one of them; |
| DS Smith Prospectus | the prospectus published by DS Smith on 19 June 2018; |
| EBITDA | earnings before interest, tax, depreciation and amortisation; |
| Employee Share Plans | the PSP, DSBP, LTIP, Sharesave, International Sharesave and US ESPP; |
| Enlarged Group | the DS Smith Group and the Europac Group together following Completion or the DS Smith Group if the Acquisition is not completed, as the context requires; |
| Equiniti | Equiniti Limited; |
| EU Merger Regulation | Council Regulation (EC) 139/2004 (as amended); |
| Euroclear | Euroclear UK and Ireland Limited; |
| Europac | Papeles y Cartones de Europa S.A., a Spanish corporation with registered address of Avenida de Fuencarral, 98, (Alcobendas) Madrid and registered at the Commercial Registry of Palencia under volume 227, sheet 208, page P-2350, and Tax Identification Number (N.I.F) A34158824; |
| Europac Board | the board of directors from time to time of Europac; |
|---|---|
| Europac Group | Europac and its subsidiaries and subsidiary undertakings from time to time and, where the context requires, each one of them; |
| Europac Shareholder | a holder of Europac Shares from time to time; |
| Europac Shares | the ordinary shares of EUR 2 each in the capital of Europac; |
| EU | the European Union; |
| Excluded Territories | United States, Australia, Canada, Hong Kong, Japan, South Africa, Switzerland or the United Arab Emirates and any other jurisdiction where the extension or availability of the Rights Issue (and any other transaction contemplated thereby) would breach any applicable law; |
| Executive Directors | the Directors who hold the position of executive director, and each an Executive Director; |
| Family Irrevocable Undertakings | the irrevocable undertakings having been entered into by certain Europac Shareholders who are members of the Isidro family, as further detailed in paragraph 6.1 of Part III (Principal terms and conditions of the Proposed Offer); |
| Family Shareholders | has the meaning given in paragraph 6.1 of Part III (Principal terms and conditions of the Proposed Offer); |
| FCA | the Financial Conduct Authority of the United Kingdom; |
| FMCG | fast moving consumer goods; |
| Form of Proxy | the form of proxy for use at the General Meeting; |
| FSMA | the Financial Services and Markets Act 2000, as amended from time to time; |
| General Meeting | the general meeting of the Company to be held at 11.00 a.m. on 10 July 2018 at Melia White House, Albany Street, London NW1 3UP to approve the Resolution, the notice of which is contained in Part VIII of this Circular; |
| Goldman Sachs | Goldman Sachs International |
| IFRS | the International Financial Reporting Standards, as adopted by the European Union; |
| Joint Underwriters | Citi, Goldman Sachs and JPM; |
| JPM | J.P. Morgan Securities plc, which conducts its UK investment banking business as J.P. Morgan Cazenove; |
| International Sharesave | the Company's International Sharesave Plan; |
| Irrevocable Undertakings | the Family Irrevocable Undertakings and the Other Irrevocable Undertakings, as further detailed in paragraph 6.1 of Part III (Principal terms and conditions of the Proposed Offer); |
| Latest Practicable Date | 18 June 2018 (being the latest practicable date before publication of this Circular); |
| Listing Rules | the Listing Rules made by the FCA under Part VI of FSMA (as amended from time to time); |
|---|---|
| London Stock Exchange | London Stock Exchange plc; |
| LTIP | the Company's Long Term Incentive Plan; |
| Main Market | the London Stock Exchange's main market for listed securities; |
| MAR or Market Abuse Regulation | Regulation (EU) No 596/2014 of the European Parliament and of the Council of 16 April 2014 on market abuse; |
| NDA | the non-disclosure agreement entered into by DS Smith and Europac, as further detailed at page 47 of this Circular; |
| New Debt Facility | the debt facility made available under the New Debt Facility Agreement; |
| New Debt Facility Agreement | the new debt facility agreement entered into by DS Smith; Goldman Sachs; JPM; J. P. Morgan Chase Bank, N.A., London Branch; Goldman Sachs International Bank; and J.P. Morgan Europe Limited, as further detailed at page 44 of this Circular; |
| New Ordinary Shares | Ordinary Shares to be allotted and issued pursuant to the Rights Issue; |
| Non-Executive Directors | the Directors who hold the position of Chairman of the DS Smith Board or non-executive director, and each a non-Executive Director; |
| Notice of General Meeting | the notice of the General Meeting contained in Part VIII of this Circular; |
| Offer Document | the tender offer document to be submitted to and, approved by the CNMV and published in connection with the Proposed Offer in accordance with applicable law; |
| Offer Price | EUR 16.80 per Europac Share (subject to any adjustments allowed under the terms of the Offer Document), equating to equating to a total of approximately EUR 1,667 million for all of the Europac Shares as at the Latest Practicable Date; |
| Official List | the official list of the FCA; |
| Ordinary Shares | the ordinary shares of 10 pence each in the capital of DS Smith; |
| Other Irrevocable Undertakings | the irrevocable undertakings having been entered into by certain Europac Shareholders who are not members of the Isidro family, as further detailed in paragraph 6.1 of Part III (Principal terms and conditions of the Proposed Offer); |
| PRA | the Prudential Regulation Authority of the United Kingdom; |
| Proposed Offer | the proposed offer by DS Smith to purchase the entire issued share capital of Europac to be made under the Offer Document and as may be varied in accordance with applicable law; |
| Prospectus Directive Regulation | the Commission Regulation (EC) No. 809/2004; |
| Registrar | Equiniti, or any other registrar appointed by the Company from time to time; |
|---|---|
| Regulatory Information Service | one of the regulatory information services authorised by the UKLA to receive, process and disseminate regulatory information from listed companies; |
| Resolution | the resolution to be proposed at the General Meeting and set out in the Notice of General Meeting; |
| Restricted Territories | any jurisdiction where the extension and availability of this Circular would breach any applicable law, and each a Restricted Territory; |
| Rights Issue | the proposed issue by way of rights of New Ordinary Shares to Shareholders; |
| Selling Shareholders | has the meaning given in paragraph 6.1 of Part III (Principal terms and conditions of the Proposed Offer); |
| SEDOL | the London Stock Exchange Daily Official List of share identifiers; |
| Shareholder | a holder of Ordinary Shares from time to time; |
| Sharesave | the Company's Sharesave Plan; |
| Treasury Shares Commitment | the commitment from the Europac Board under the terms of the Break Fee Agreement that it will procure acceptance at the start of the acceptance period for the Acquisition in respect of all treasury shares held by Europac representing 6.14 per cent. of the entire share capital of Europac (subject to fiduciary duties and to issuing the mandatory board report taking into account the relevant financial and legal advice); |
| UKLA | the UK Listing Authority; |
| UK | the United Kingdom of Great Britain and Northern Ireland; |
| uncertificated or in uncertificated form |
in relation to a share or other security title to which is recorded in the relevant register of the share or other security concerned as being held in uncertificated form (that is, in CREST) and title to which may be transferred by using CREST; |
| United Kingdom or UK | the United Kingdom of Great Britain and Northern Ireland; |
| United States or US | the United States of America, its territories and possessions, any state of the United States of America and the District of Columbia; and |
(Incorporated and registered in England and Wales with registered number 01377658)
NOTICE IS GIVEN that a general meeting of DS Smith Plc (the "Company") will be held at 11.00 a.m. on 10 July 2018 (UK time) at Melia White House, Albany Street, London NW1 3UP for the purpose of considering and, if thought fit, passing the following resolution. The Resolution will be proposed as an ordinary resolution.
THAT the proposed acquisition by the Company of the entire issued share capital of Europac pursuant to the terms and subject to the conditions contained in the offer document to be approved by the Comisión Nacional del Mercado de Valores (the Spanish Securities and Exchange Commission) (the "Acquisition") be and is approved, and the board of directors of the Company (or any duly constituted committee of the board of directors) (the "Board") be and is authorised to take all such steps as may be necessary, expedient or desirable in relation to the Acquisition and to carry the same into effect with such modifications, variations, revisions or amendments (provided such modifications, variations or amendments are not of a material nature) as the Board may in its absolute discretion deem necessary, expedient or desirable.
Iain Simm Company Secretary
19 June 2018
Registered No: 01377658 Registered office: 350 Euston Road, London, NW1 3AX
If two or more valid but differing appointments of a proxy are received in respect of the same share for use at the same meeting, the one which is last received (regardless of its date or the date of its signature) shall be treated as replacing and revoking the others as regards that share; if the Company is unable to determine which was received last, none of them shall be treated as valid in respect of that share. To be effective, Forms of Proxy and powers of attorney or other authority, if any, under which they are signed or a notarially certified or office copy of such power or authority must reach the Registrars at the address shown on the Form of Proxy, and the Registrars must receive any electronic appointment of proxy, not later than 48 hours before the time of the Meeting. Completion and return of the Form or appointing a proxy electronically will not, however, prevent a Member from attending and voting at the Meeting instead of the proxy. A Member must inform the Registrars in writing of any termination of the authority of a proxy.
In order for a proxy appointment or instruction made using the CREST service to be valid, the appropriate CREST message (a CREST Proxy Instruction) must be properly authenticated in accordance with Euroclear's specifications and must contain the information required for such instructions, as described in the CREST Manual. The message, regardless of whether it constitutes the appointment of a proxy or an amendment to the instruction given to a previously appointed proxy must, in order to be valid, be transmitted so as to be received by the issuer's agent (ID RA19) by 9.00 a.m. on 6 July 2018. For this purpose, the time of receipt will be taken to be the time (as determined by the timestamp applied to the message by the CREST Applications Host) from which the issuer's agent is able to retrieve the message by enquiry to CREST in the manner prescribed by CREST. After this time any change of instructions to proxies appointed through CREST should be communicated to the appointee through other means.
CREST members and, where applicable, their CREST sponsors or voting service providers should note that Euroclear does not make available special procedures in CREST for any particular messages. Normal system timings and limitations will therefore apply in relation to the input of CREST Proxy Instructions. It is the responsibility of the CREST member concerned to take (or, if the CREST member is a CREST personal member or sponsored member or has appointed a voting service provider(s), to procure that his CREST sponsor or voting service provider(s) take(s)) such action as shall be necessary to ensure that a message is transmitted by means of the CREST system by any particular time. In this connection, CREST members and, where applicable, their CREST sponsors or voting service providers are referred, in particular, to those sections of the CREST Manual concerning practical limitations of the CREST system and timings.
The Company may treat as invalid a CREST Proxy Instruction in the circumstances set out in Regulation 35(5)(a) of the Uncertificated Securities Regulations 2001. The CREST Manual can be reviewed at www.euroclear.com.
As at 18 June 2018 (being the latest practicable date prior to publication of this Circular), the Company's issued share capital consisted of 1,074,571,043 ordinary shares, carrying one vote each. No shares were held in treasury. Therefore, the total voting rights in the Company as at 18 June 2018 are 1,074,571,043.
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