Smurfit Kappa Group (SKG), the paper and packaging giant created through the merger of Jefferson Smurfit and Kappa Packaging last year, has started to see an improvement in its European businesses.

The firm said yesterday that the economic backdrop in Europe had shown "some early indications of improvement" in the last quarter of 2005.

SKG chief executive, Gary McGann, said these "initial indicators of recovery" had continued into 2006.

Mr McGann was speaking as the firm reported a pre-tax loss of €110 million for 2005, marking a substantial shift from the €8.6 million profit recorded in 2004.

Last year's loss at the pre-tax level was due in large part to costs associated with a debt refinancing linked to the merger deal.

As part of the transaction, a number of Kappa's bonds were redeemed, and Smurfit's senior credit facilities were refinanced.

Yesterday's results are based mostly on Smurfit's performance, including just one month's contribution from Kappa as well as partial contributions from speciality paper company Munksjo and the K-Club in Kildare.

Sales were down 8 per cent at €4.437 billion on this basis, which does not take account of the sale of Munksjo for €450 million and the sale of the K-Club for €115 million in the course of the year.

The packaging company pointed to lower paper prices in its major markets.

When Kappa, Munksjo and the K-Club are excluded from the numbers, sales were down 2 per cent at €4.2 billion, while earnings before interest, tax, depreciation and amortisation (Ebitda - a good measure of the firm's ability to service debt) fell by 9 per cent to €481 million.

The company's Ebitda margin on this same basis fell from 12.3 per cent to 11.4 per cent.

Net debt at the enlarged group, including Kappa, stood at €4.5 billion at the end of December, up from €2.9 billion a year earlier.

This increase included the assumption of €1.8 billion in debt from Kappa.

Free cashflow last year was €66 million, down from €187 million in 2004.