Interim Results

20 August 2012

POWERFLUTE OYJ

INTERIM FINANCIAL REPORT

For the six months ended 30 June 2012

Powerflute Oyj ("Powerflute" or the "Group"), the packaging and paper group today announces its interim results for the six months ended 30 June 2012. Powerflute is quoted on the AIM market of the London Stock Exchange (Ticker: POWR).

HIGHLIGHTS

·; Revenue from continuing operations was €57.7m (2011: €58.3m)

·; Underlying EBITDA from continuing operations reduced by €1.4m to €5.9m (2011: €7.3m) due to lower selling prices and an increase in variable expenses resulting from one-off production challenges

·; Profit before tax from continuing operations reduced to €2.1m (2011: €5.6m) due to lower trading profits and the impact of non-recurring items in both current and prior periods

·; Basic earnings per share 0.5 cents (2011: 1.6 cents)

·; 5 million shares purchased under the share buy-back programme at a cost of €1.5m

·; Acquisition of 10% interest in Kotkamills completed in July 2012

·; Group remains in a strong financial position with net cash of €13.3m (Dec 2011: €19.1m)

Dermot Smurfit, Chairman of Powerflute, commented:

"The first half of 2012 has been another period of progress and development for Powerflute. Our Packaging Papers business continued to perform well despite tougher market conditions and production challenges throughout the period.

The Group paid a dividend for the year ended 31 December 2011 of 1.3 cent per share during the first half and commenced a share repurchase programme, reflecting the Board's belief that Powerflute's current share price does not reflect the intrinsic worth of the Group's businesses.

Consistent with our strategy to identify, acquire and turnaround underperforming assets, we continue to evaluate acquisition opportunities. During the first half, we completed extensive due diligence on a potential target but ultimately decided not to proceed. In July, the Group completed the acquisition of a 10% interest in Kotkamills, a large speciality paper business in Finland, which has strong positions in a number of interesting product sectors which we believe have considerable development potential.

Despite continuing economic uncertainty, the operating environment for our business remains broadly favourable and we are confident that the Group will perform well in the second half of the year. Powerflute is profitable and cash generative, with a strong balance sheet and considerable cash resources. The Group remains well positioned, both financially and strategically, to capitalise on opportunities as they arise including the value implicit in Powerflute's own current market valuation."

- Ends-

For further information, please contact:

About Powerflute

Powerflute Oyj ("the Company" or "Powerflute") is a paper and packaging group quoted on the AIM market of the London Stock Exchange (Ticker: POWR). Through its subsidiary Savon Sellu Oy, the Group operates a paper mill in Kuopio, Finland which produces a specialised form of semi-chemical fluting made from locally sourced birch. Corrugated boxes manufactured using Nordic semi-chemical fluting demonstrate strength and moisture resistance and are used for transportation of fruit and vegetables, high-value industrial goods such as electrical appliances and automotive components. The Kuopio mill is one of only three suppliers of Nordic semi-chemical fluting in Europe.

Forward-looking information

This announcement contains forward-looking statements, which are subject to risks and uncertainties because they relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends, and similar expressions concerning matters that are not historical facts. Such forward-looking statements involve known and unknown risks, uncertainties and other factors, which may cause the actual results, performance or achievements of the Group or the industry in which it operates, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. The forward-looking statements referred to in this paragraph speak only as at the date of this announcement. The Group will not undertake any obligation to release publicly any revision or updates to these forward-looking statements to reflect future events, circumstances, unanticipated events, new information or otherwise except as required by law or by any appropriate regulatory authority.

POWERFLUTE OYJ

INTERIM FINANCIAL REPORT

For the six months ended 30 June 2012

CHAIRMAN'S STATEMENT

The first half of 2012 has been another period of progress and development for Powerflute. Our Packaging Papers business continued to perform well despite tougher market conditions and production challenges throughout the period.

Despite continuing economic uncertainty, the operating environment for our business remains broadly favourable and we are confident that the Group will perform well in the second half of the year. Powerflute is profitable and cash generative, with a strong balance sheet and considerable cash resources. The Group remains well positioned, both financially and strategically, to capitalise on opportunities as they arise.

In May, we paid a dividend for the year ended 31 December 2011 of 1.3 cent per share which was a 30% increase on the prior year and represented an attractive 5% yield for shareholders. The share buy-back programme, which was initiated following the AGM in April, has resulted in the repurchase of five million shares, or 1.7% of the issued share capital, at a total cost of €1.5 million and has helped to support Powerflute's delisting from First North Finland, which was successfully completed at the end of June. Trading in the Group's shares is now concentrated on the AIM market of the London Stock Exchange. Subject to market conditions, the Group will continue to re-purchase shares and has authority from shareholders to acquire up to a total of 9.6% of the issued share capital, As these shares are held in Treasury, and are not counted as part of the shares in issue, the share re-purchase programme will have a positive impact on the Group's earnings per share. These initiatives reflect the Board's belief that Powerflute's current market value does not reflect its true intrinsic business worth.

We continue to pursue opportunities for acquisitive growth and, during the period, examined a number of investment opportunities. We looked closely at the potential acquisition of a large, integrated pulp and paper mill, incurring due diligence and other costs of €0.5m. While acquisitions are central to our growth strategy, we remain disciplined buyers and withdrew from the transaction because of issues identified during due diligence. In July, we made a strategic investment of €1.5m to acquire 10% of Kotkamills, a large speciality paper business in Finland which has strong positions in a number of interesting product sectors which we believe have considerable development potential.

While market conditions remain challenging, we continue to experience good demand for our products and are optimistic that, there will be some improvement in the pricing environment as the second half progresses in line with normal seasonal patterns. However, speculation on the future of the Eurozone and general economic weakness within the Southern European economies, which are major markets for our products coupled with the low price of recovered paper which benefits producers of competing products, all represent significant challenges for the Group. Absent any further deterioration in market conditions due to the factors outlined above, we continue to expect that the Group will perform well during the second half of the year.

GROUP RESULTS

The Group reported a profit for the period attributable to equity holders of the company of €1.6 million (2011: €5.1 million) and earnings per share for the period of 0.5 cents (2011: 1.8 cents). This included a profit for the period from continuing operations of €1.6 million (2011: €4.7 million) and no contribution for the period from discontinued operations (2011: €0.4 million profit).

The Group completed the disposal of the Graphic Papers business on 3 May 2011 and the results of this activity have been reported within discontinued operations. Continuing operations currently comprise the Packaging Papers business segment.

Results of continuing operations

Revenue from continuing operations reduced by 2% to €57.7 million (2011: €58.3 million) due principally to the impact of more challenging conditions in key European markets which resulted in lower average selling prices. Delivery and production volumes were similar to the levels achieved in the same period of the prior year.

Profit before tax from continuing operations reduced by €3.5 million to €2.1 million (2011: €5.6 million). However, routine items accounted for only €0.8m of the deterioration while the net impact of non-recurring or exceptional items, which included income in 2011 and expenses in 2012, was €2.7 million.

Profit before tax from continuing operations for the six months ended 30 June 2012 is stated after charging costs related to an aborted acquisition of €0.5 million and unrealised losses relating to hedging of future foreign currency exposures of €0.3 million, while the result for the six months ended 30 June 2011 included a gain of €1.9m on the disposal of shares in Harvestia.

Underlying EBITDA from continuing operations reduced by €1.4 million compared with the same period of the prior year, due principally to the impact of lower average selling prices and higher variable costs explained elsewhere in this report. Following the high level of capital investment in 2010 and 2011, depreciation increased by €0.2 million, while net finance expenses reduced by €0.9m due to the improvement in the financial position of the Group.

PACKAGING PAPERS

Despite general economic uncertainty and, more specifically, the challenges faced by Spain and Italy which are both major markets for our products, trading conditions for Packaging Papers continued to be broadly favourable. Demand remained reasonably strong throughout most of the period and we successfully operated the mill at full capacity without market-related stoppages. Although conditions towards the end of the second quarter grew increasingly challenging, we ended the period with a healthy order book.

Reductions in recycled fibre costs and softening demand, particularly during the second quarter, resulted in increased competition from producers of recycled fluting products and some price erosion in major European markets. However, as a result of the efforts made to improve the performance of our products and to expand our presence in developing economies outside of Europe, we were able to take a more robust stance than in previous cyclical downturns and increased sales in attractive alternative markets. This, together with favourable movements in the US Dollar exchange rate, resulted in average selling prices that were only 3% lower than the same period of the prior year and only 5% below the peak levels achieved during the second half of 2011.

The major programme of capital investment in the pulp and paper mill completed during the second half of 2011 has delivered the expected improvements in quality, lowered manufacturing costs and improved daily productivity. However, there was also an increase in the frequency of mechanical failures in some areas of the mill where investments had been made, leading to a higher number of unplanned stoppages and a consequent loss of production and increase in variable costs.

A decision was made to take an unplanned maintenance stop during the second quarter to perform corrective work and, based upon performance since then, we are confident that the major issues have been successfully resolved. Any further work required will be undertaken during the planned routine maintenance stop in the second half. As a result of the above, production volume for the first half was 8-10% below our expectations and only comparable with that achieved during the same period of the prior year, which also included a maintenance stop.

GRAPHIC PAPERS

The Group completed the disposal of the Graphic Papers business on 3 May 2011 and accordingly no commentary is provided on the performance of this business during the period.

TAXATION

The income tax charge on profits from continuing operations of €0.6 million (2011: €0.9 million) is based upon an estimate of the annual tax rate expected for the full financial year applied to the profit before taxation of continuing operations after adjusting for the impact of disallowable items of income and expenditure. The underlying annual tax rate on profits before taxation in Finland is 24.5%.

During the year ended 31 December 2011, the Group sold a portion of its shareholding in Harvestia and sold its entire interest in the Graphic Papers businesses, realising a profit on both disposals. In preparing its financial statements for the year ended 31 December 2011, the Group assumed that the resulting gains would be exempt from corporate taxes under the substantial shareholder exemptions normally available to industrial companies in Finland. Details of the assumptions made are set out in Note 3 to the financial statements for the year ended 31 December 2011.

In response to an advance ruling request filed by the company, the Finnish tax authority (Vero) has indicated that it does not consider Powerflute to be an industrial company, but instead regards it as a venture capitalist and therefore not eligible to take advantage of participation or substantial shareholder exemptions. The directors consider that the advance ruling made by Vero is not consistent with the previous actions of the Company, the nature of its current business activities or its strategy for future growth and development and intend to contest the decision.

In view of this, the financial statements for the six months ended 30 June 2012 continue to be prepared on the basis that the Group is an industrial company and that the gains arising on the disposals will be exempt from corporate taxes. In the event that this is not the case, then additional taxes of €2,986,000 would be payable in connection with the disposals.

EARNINGS PER SHARE AND DIVIDENDS

Basic earnings per share were 0.5 cents (2011: 1.8 cents). Basic earnings per share from continuing operations were also 0.5 cents (2011: 1.6 cents loss).

The Group paid a final dividend for the year ended 31 December 2011 of 1.3 cent per share. The record date for the dividend was 2 May 2012 and the payment was made on 18 May 2012. The level of annual dividend is approved by the Annual General Meeting and the Board does not make any payment on account or pay any interim dividend.

CASH FLOW

The Group started the period with net cash of €19.1 million, consisting of cash and short term deposits of €45.6 million and interest bearing loans and borrowings of €26.5 million.

The principal sources of funds during the period were:

·; €3.6 million net cash inflow from operating activities (2011: €5.2 million)

·; €0.4 million interest received on cash and short term deposits (2011: €0.4 million)

The principal applications of funds during the period were:

·; €3.8 million payment of dividend for the year ended 31 December 2011 (2011: €2.3 million)

·; €2.1 million of capital expenditure (2011: €5.0 million)

·; €1.5 million on purchase of own shares (2011: nil)

·; €1.4 million on purchase of Harvestia shares (2011: nil)

·; €0.8 million of interest and similar costs (2011: €1.8 million)

By 30 June 2012, the Group's net cash position had reduced by €5.8 million to €13.3 million, consisting of cash and short term deposits of €39.5 million and interest bearing loans and borrowings of €26.2 million.

BORROWING FACILITIES

The maturity profile of the Group's bank and other borrowing facilities at 30 June 2012 and 31 December 2011 was as follows:

Other interest bearing borrowings include liabilities under working capital facilities and leasing arrangements. The expiry dates of these facilities are such that they are expected to remain available to the Group for periods in excess of one year.

TREASURY MANAGEMENT AND CURRENCY RISK

The main functional currency of the Group is the Euro. The Group has transactional and balance sheet exposures to a number of other currencies, and in particular to the US dollar. The transactional exposure arises as approximately 30% of the sales by volume and value and approximately 5% of the expenses by value of the Group's continuing operations are denominated in US dollars. The balance sheet exposure arises in connection with the assets and liabilities arising from these transactions.

It is the Group's policy to use forward exchange contracts to hedge a portion of its foreign currency exposure for a period of up to 12 months from the balance sheet date. At 30 June 2012, the Group had hedged 100% of its net exposure to the US dollar for the six months ended 31 December 2012, 50% of its net exposure for the quarter ending 31 March 2013 and 25% of its net exposure for the quarter ending 30 June 2013. There was no hedging in place for any period beyond 30 June 2013.

PRINCIPAL RISKS AND UNCERTAINTIES

The principal risks and uncertainties faced by the continuing operations of the Group have not changed from those described in the 2011 Annual Report. Changes in the macroeconomic environment, competition, technology, people, and financial conditions all have the potential to adversely impact on the Group's operating and financial performance. A more detailed explanation of these risks and uncertainties is set out on page 16 of the Annual Report for the year ended 31 December 2011, a copy of which is available on the Group's website.

GOING CONCERN

The Board has undertaken a review of the Group's forecasts and the associated risks and sensitivities and has concluded that the Group has adequate resources to enable it to continue its activities for the foreseeable future, being a period of at least 12 months from the date of this statement.

STRATEGY

The Group will continue to invest in the development of its existing businesses and to pursue opportunities for growth through the acquisition of underperforming paper and packaging businesses where the Group can bring to bear its management expertise and insight to improve performance and deliver returns for shareholders.

Recent capital expenditure in Packaging Papers has delivered returns in line with our expectations and there are further attractive projects that we will pursue during the second half of 2012 and beyond. Significant progress has been made in positioning the business as a premium supplier and in increasing diversity in the customer base. Together, these initiatives have contributed to increased resilience in the face of challenging economic conditions. Harvestia continues to grow in new and potentially lucrative areas and is an increasingly influential participant in the Finnish wood market.

OUTLOOK

While market conditions remain challenging, we continue to experience good demand for our products and are optimistic that, there will be some improvement in the pricing environment as the second half progresses in line with normal seasonal patterns. However, speculation on the future of the Eurozone and the general economic weakness within the Southern European economies, which are major markets for our products, coupled with the low price of recovered paper which benefits producers of competing products, all represent significant challenges for the Group. Absent any further deterioration in market conditions due to the factors outlined above, we continue to expect that the Group will perform well during the second half of the year.

for the six months ended 30 June 2012

The notes form an integral part of this condensed consolidated interim financial information

for the six months ended 30 June 2012

The notes on pages 12 to 23 form an integral part of this condensed consolidated interim financial information

INTERIM CONSOLIDATED STATEMENT OF FINANCIAL POSITION

At 30 June 2012

The notes on pages 12 to 23 form an integral part of this condensed consolidated interim financial information

INTERIM CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

for the six months ended 30 June 2012

The notes on pages 12 to 23 form an integral part of this condensed consolidated interim financial information

INTERIM CONSOLIDATED CASH FLOW STATEMENT

for the six months ended 30 June 2012

*Less amounts included in escrow (€2,000,000), further details are presented in the Annual report 2011 Note 18

The notes on pages 12 to 23 form an integral part of this condensed consolidated interim financial information

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

1 Corporate Information

Powerflute Oyj is a public limited company incorporated and domiciled in Finland. The Company's shares are listed on the Alternative Investment Market ("AIM") of the London Stock Exchange (Ticker: POWR). The Company had a secondary listing on First North Finland, the alternative market of the NASDAQ OMX Helsinki Ltd, but was delisted on 29 June 2012. The address of the Company's registered office is Sorsasalo/Box 57, FI-70101 Kuopio, Finland.

The principal activities of the company and its subsidiaries are the manufacture of paper and packaging products and are described in more detail in Note 7.

The condensed consolidated interim financial statements for the six months ended 30 June 2012 were approved for issue by the Company's Board of Directors on 20 August 2012. These condensed consolidated interim financial statements have been reviewed, not audited.

2 Basis of preparation

The condensed consolidated interim financial statements for the six months ended 30 June 2012 have been prepared in accordance with IAS 34 Interim Financial Reporting. The condensed consolidated interim financial statements do not include all the information and disclosures required in annual financial statements, and should be read in conjunction with the Group's annual financial statements for the year ended 31 December 2011.

3 Significant accounting policies

The accounting policies adopted in the preparation of the interim condensed consolidated financial statements are consistent with those followed in the preparation of the Group's annual financial statements for the year ended 31 December 2011, except for the adoption of new standards and interpretations as of 1 January 2012, noted below:

IAS 12 - Deferred Tax: Recovery of Underlying Assets (Amendment)

IFRS 7 - Disclosures - Transfers of financial assets (Amendment)

IFRS 1 - Severe Hyperinflation and Removal of Fixed Dates for First-time Adopters (Amendment)

The adoption of the new standards and interpretations mentioned above did not have any impact on the accounting policies, financial position or performance of the Group. The Group has not early adopted any other standard, interpretation or amendment that has been issued but is not yet effective.

4 Significant accounting judgements, estimates and assumptions

The preparation of the condensed consolidated interim financial statements requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of revenues, expenses, assets and liabilities, and the disclosure of contingent liabilities, at the reporting date. However, uncertainty about these assumptions and estimates could result in outcomes that could require a material adjustment to the carrying amount of the asset or liability affected in the future.

In preparing these condensed consolidated interim financial statements, the significant judgements made by management in applying the Group's accounting policies and the key sources of estimation uncertainty were the same as those that applied to the consolidated financial statements for the year ended 31 December 2011, with the exception of changes in estimates that are required in determining the provision for income taxes.

Key assumptions concerning the future and other key sources of estimation uncertainty at the reporting date, where a different opinion could result in a material adjustment to the carrying amounts of assets and liabilities within the next financial year, are discussed below.

Taxation of gains arising on disposal of shares

During the year ended 31 December 2011, the Group sold a portion of its shareholding in Harvestia and sold its entire interest in the Graphic Papers businesses, realising a profit on both disposals. In preparing its financial statements for the year ended 31 December 2011, the Group assumed that the resulting gains would be exempt from corporate taxes under the substantial shareholder exemptions normally available to industrial companies in Finland. Details of the assumptions made are set out in Note 3 to the financial statements for the year ended 31 December 2011.

In response to an advance ruling request filed by the company, the Finnish tax authority (Vero) has indicated that it does not consider Powerflute to be an industrial company, but instead regards it as a venture capitalist and therefore not eligible to take advantage of participation or substantial shareholder exemptions. The directors consider that the advance ruling made by Vero is not consistent with the previous actions of the Company, the nature of its current business activities or its strategy for future growth and development and intend to contest the decision.

In view of this, the financial statements for the six months ended 30 June 2012 continue to be prepared on the basis that the Group is an industrial company and that the gains arising on the disposals will be exempt from corporate taxes. In the event that this is not the case, then additional taxes of €2,986,000 would be payable in connection with the disposals.

Carry forward and utilisation of tax losses

Certain of the Group's subsidiaries incurred tax losses in the years ended 31 December 2009 and 2010 and it has been assumed that these losses may be carried forward and used to relieve taxable profits in subsequent years, reducing the Group's overall tax burden. During the period since the losses were incurred, there have been changes in ownership of the shares of the Group's ultimate parent company, Powerflute Oyj, which represent more than 50% of the total issued share capital. Powerflute Oyj is listed on the Alternative Investment Market of the London Stock Exchange and until 29 June 2012 was also listed on First North Finland, the alternative market of NASDAQ OMX Helsinki, neither of which is recognised as a regulated exchange by the relevant tax authorities. Accordingly, a special dispensation is required to enable carry forward and utilisation of losses. The Group has assumed that such a dispensation will be granted. However, if the Group is not able to obtain the required dispensation, then taxes on profits would increase by €1,922,000.

5 Principal risks and uncertainties

The principal risks and uncertainties faced by the continuing operations of the Group have not changed from those described in the 2011 Annual Report. Changes in the macroeconomic environment, competition, technology, people, and financial conditions all have the potential to adversely impact on the Group's operating and financial performance. A more detailed explanation of these risks and uncertainties is set out on page 16 of the Annual Report for the year ended 31 December 2011, a copy of which is available on the Group's website.

6 Seasonality of operations

Due to the seasonal nature of the Group's business activities, higher revenues, operating profits and cash generation are generally expected in the second half of the year, although this can be affected significantly by the timing of annual maintenance shutdowns which reduce production availability, or changes in market conditions which can impact on demand and average pricing levels. In the financial year ended 31 December 2011, 52% of revenue and 58% of EBITDA from trading activities was generated in the second half.

7 Segmental information

For management purposes, the Group is organised into business units based upon the products and services which it supplies. The reportable operating segments are as follows:

·; Packaging Papers, which is involved in the production and sale of Nordic semi-chemical fluting for use in premium-grade corrugated-box applications.

·; Graphic Papers, which was disposed of during the year ended 31 December 2011 and is presented as discontinued operations. See Note 13 for further details.

No operating segments have been aggregated to form the above reportable operating segments.

The costs of central functions, including the costs of corporate and other central services, are allocated to the reportable operating segments using cost allocation methodologies appropriate to each category of expense and consistent with the methods used in management reporting. The comparative amounts for the year ended 30 June 2011 have been restated to reflect allocation of the total cost of central functions to continuing operations.

Management monitors the operating results of the business units separately for the purpose of making decisions about resource allocation and performance assessment. The principal measure used to monitor and evaluate segmental performance is earnings before interest, tax, depreciation and amortisation ("EBITDA"). The measurement basis for Segment EBITDA excludes the effects of non-recurring or exceptional income or expenditure from the results of the operating segments. It also excludes the effects of equity-settled share-based payments and unrealised gains or losses on financial instruments. Interest income and expenditure are not allocated to segments.

Transfer prices between operating segments are on an arm's-length basis in a manner similar to transactions with third parties.

The Group's share of the profit or loss of Harvestia is reported within the Packaging Papers segment. Segment operating profit does not include finance income and finance costs.

8 Investment in an associate

On 2 January 2012, the Group increased its investment in Harvestia Oy ("Harvestia"), a wood procurement company based in Finland, from 30% to 45% through the acquisition of a further 15% of the equity of Harvestia for cash consideration of €1,432,000. The purchase of Harvestia shares was financed from the Group's own cash resources.

Prior year information

On 21 December 2010, Powerflute announced that Vapo Oy, a leading supplier of renewable fuels, bioelectricity, bioheat and environmental business solutions based in Finland, had agreed to acquire a 30% interest in Harvestia Oy, the Group's wood procurement venture with Myllykoski. The transaction was completed on 19 January 2011 and Powerflute received aggregate net proceeds of €2,458,000 in cash from the sale of Harvestia shares to Vapo and repayment of working capital and equity contributions previously made to Harvestia. Following completion of the transaction, Powerflute's interest in Harvestia decreased from 33% to 30%. This resulted to a gain of €1,869,000 in the income statement for the period ended 30 June 2011.

Harvestia is accounted for using the equity method. The Group's share of the assets, liabilities, income and expenses of the associated entity at 30 June 2012 and at 31 December 2011 are as follows:

9 Impairments

As at 30 June 2012, the market capitalisation of the Group was significantly higher than the book value of its equity and no triggering events regarding the impairment of Group's assets were identified. Therefore, the Group has not performed any impairment testing on its assets or business units as per 30 June 2012.

10 Income tax

Income tax is recognized based upon management's best estimate of the weighted average annual income tax rate expected for the full financial year.

Major components of income tax in the interim consolidated income statement are:

11 Dividends

A dividend of 1.3 cents per share for the year ended 31 December 2011 was proposed by the directors and approved by shareholders at the Annual General Meeting held on 26 April 2012. The record date for the dividend was 2 May 2012 and payment was made on 18 May 2012.

12 Earnings per share

Basic earnings per share is calculated by dividing the net profit or loss for the period attributable to ordinary equity holders of the parent by the weighted average number of ordinary shares outstanding during the year.

Diluted earnings per share amounts are calculated in accordance with the requirements of IAS 33 - Earnings per share, by dividing the net profit for the year attributable to ordinary equity holders of the parent by the weighted average number of ordinary shares outstanding during the year plus the weighted average number of ordinary shares that would be issued on conversion of all the dilutive potential ordinary shares into ordinary shares.

Authority to repurchase and repurchase of shares

On 26 April 2012, the Annual General Meeting granted authority to the Board of Directors to decide on the repurchase of up to 28,000,000 Powerflute's shares pursuant to Chapter 15, Section 5(2) of the Finnish Companies Act by using funds in the company's unrestricted equity. The proposed amount of shares corresponded to approximately 9.6 % of all shares and votes of the company then in issue. The authority remains effective until 30 June 2013 unless revoked or amended before this date by a General Meeting of Shareholders, and replaces any previous similar authorities granted to the Board of Directors.

In accordance with this authority, the company purchased 5,000,000 of its own shares during the period from 21 May 2012 to 19 June 2012, representing 1.7% of the issued share capital.

Authority to issue new shares

On 26 April, 2012, the Annual General Meeting granted authority to the Board of Directors to resolve on the issuance of up to 60,000,000 shares through a share issue or granting of options or other special rights granting entitlement to shares pursuant to Chapter 10, Section 1 of the Finnish Companies Act. This authority may be utilised in one or several issues. The Board of Directors may resolve to give either new shares or shares in the company's possession. The proposed amount of shares corresponded to approximately 20.7 % of all shares and votes of the Company then in issue. This authority provides the right to deviate from the shareholders' pre-emptive subscription right. The authority remains effective until 30 June 2013 unless revoked or amended before this date by a General Meeting of Shareholders, and replaces any previous similar authorities granted to the Board of Directors.

13 Discontinued operations

Prior year information

On 3 May 2011, the Group announced that it had reached agreement on the sale of the businesses that comprise the Graphic Papers to an acquisition vehicle under the control of Paper Excellence BV, an integrated pulp and paper company registered in the Netherlands. The total consideration for the disposal was €38.5 million before disposal costs, consisting of cash consideration of €32.5 million and the assumption of €6.0 million of debt by the purchaser.

In its financial statements for the year ended 31 December 2010, the Group adjusted the carrying amounts of the assets and liabilities of Graphic Papers to their fair value less costs to sell in accordance with the provisions of IAS 36 Impairment of assets and recognised an impairment charge of €22.1 million net of deferred taxes in the income statement. Following completion of the disposal in May 2011, the Group has recognised a gain on the disposal of the discontinued operations of €1.6 million in the income statement for the year ended 31 December 2011.

The financial results of Graphic Papers for the four months ended 30 April 2011 were consolidated with those of the Group for the year ended 31 December 2011. However, the Group does not have any other businesses in the Graphic Papers operating segment and this segment is no longer reviewed by management. Accordingly, financial information for Graphic Papers has not been separately disclosed in Note 7 - Segmental Information.

The major classes of assets and liabilities of Graphics Papers business disposed and the gain arising on the disposal was as follows:

Other costs to sell and provisions against uncertainties include specific provisions for certain expenses which were to be assumed by the Group under the terms of the sale and purchase agreement, together with a general provision of €1.5 million for potential claims under warranties and indemnities provided to the purchaser. At 20 August 2012, the Group had not received notification of any potential claims under the warranties and indemnities.

€2,000,000 of the cash consideration is held in escrow until November 2012 as security against potential claims under warranties and indemnities provided by the Group to the purchaser of the Graphic Papers businesses. At 20 August 2012, the Group had not received notification of any potential claims under the warranties and indemnities.

14 Property, plant and equipment

The Group acquired assets with a cost of €2,075,000 during the six months ended 30 June 2012 (2011: €4,999,000).

15 Derivative Financial Instruments

Derivative financial instruments are recorded on the balance sheet at fair value.

The Group uses foreign exchange forward contracts to manage some of its transaction exposures. Currency forward contracts are not designated as cash flow, fair value or net investment hedges and are entered into for periods consistent with currency transaction exposures up to 12 months in advance.

Hedge accounting has been applied to commodity derivatives. Gains and losses arising on commodity derivatives are recognized in the hedging reserve in equity and are recognized in the income statement during the period or periods in which the hedged forecast transaction affects the income statement. This is generally within 12 to 24 months of the balance sheet date.

16 Share-based payments

In April 2012, the company established the Powerflute Stock Option Scheme ("PSOS 2012") for the benefit of certain of the Group's directors and senior executives. The maximum number of share options available for grant under the PSOS 2012 is 14,000,000 shares, equivalent to 4.8% of the existing issued share capital of the Company.

On 5 April 2012, the Board approved the grant of options over a total of 8,469,300 of the Company's ordinary shares under the terms of the PSOS 2012. The grant consisted of 2,823,100 each of 2012A, 2012B and 2012C options. The 2012A, 2012B and 2012C options are subject to different share price performance targets and measurement dates, but in all other respects are identical. In exchange for the grant of options under the PSOS 2012, each of the participants has agreed to relinquish any entitlement they may have under any previous option schemes and accordingly, the PSOS 2012 has been designated as a replacement scheme for the PSOP 2007 and PSOS 2009 schemes.

The fair value of the options granted is estimated at the date of grant using a binomial pricing model taking into account the terms and conditions under which the options were granted. The contractual life of each option granted is seven years. There is no cash settlement of the options. The fair value of options granted during the six months ended 30 June 2012 was estimated on the date of grant using the following assumptions (identical to 2012A, 2012B and 2012C options):

Dividend yield (%) 0.0

Expected volatility (%) 40.0

Risk-free interest rate (%) 1.25

Expected life (years) 7.00

Weighted average share price (pence) 24.75

Prior year information

During the six months period ended 30 June 2011, certain members of the executive management team who were not directors of Powerflute Oyj resigned from their employment. Under the rules of the Powerflute Stock Option Scheme ("PSOS"), the executives concerned were obliged to surrender their entitlement to share options. This has been accounted for as a cancellation by forfeiture in accordance with IFRS 2 Share-based Payments and the resulting gain of €13,000 has been recognised in full during the period ended 30 June 2011. The net expenses resulting from all share-based payments amounted to €196,000.

17 Borrowings and loans

Movements in borrowings are analyzed as follows:

18 Contingent liabilities

During the year ended 31 December 2011, the Group sold a portion of its shareholding in Harvestia and sold its entire interest in the Graphic Papers businesses, realising a profit on both disposals. In preparing its financial statements for the year ended 31 December 2011, the Group assumed that the resulting gains would be exempt from corporate taxes under the substantial shareholder exemptions normally available to industrial companies in Finland.

In response to an advance ruling request filed by the company, the Finnish tax authority (Vero) has indicated that it does not consider Powerflute to be an industrial company, but instead regards it as a venture capitalist and therefore not eligible to take advantage of participation or substantial shareholder exemptions.

The directors consider that the advance ruling made by Vero is not consistent with the previous actions of the Company, the nature of its current business activities or its strategy for future growth and development and intend to contest the decision.

In view of this, the financial statements for the six months ended 30 June 2012 continue to be prepared on the basis that the Group is an industrial company and that the gains arising on the disposals will be exempt from corporate taxes. In the event that this is not the case, then additional taxes of €2,986,000 would be payable in connection with the disposals.

Uncertainty relating to the utilization of tax losses has been discussed in the section 4 of this report.

19 Related Party Transactions

Certain of the Group's directors and members of its executive management team have significant beneficial and non-beneficial interests in the ordinary share capital of the Group. Full details of these interests are disclosed in the annual financial statements for the year ended 31 December 2011.

a) Transactions with related parties

Savon Sellu Oy, a subsidiary of Group, purchases a proportion of its raw materials from Harvestia Oy. The goods are purchased on normal market terms. Transactions with related parties for the six months ended 30 June 2012 and 30 June 2011 were as follows:

b) Key management compensation

Key management compensation for the six months ended 30 June 2012 amounted to €964,000 (30 June 2011: €843,000) analysed as follows:

c) Directors' interest in employee share incentive plans

The share options held by executive members of the Board of Directors providing entitlement to purchase ordinary shares have the following expiry dates and exercise prices:

Further details of the share options awarded to directors of the Company are provided in Note 16 and in the Annual Report for the year ended 31 December 2011.

20 Events occurring after the balance sheet date

On 10 July 2012, the Group announced that it had acquired a 10% interest in Kotkamills Oy ("Kotkamills"), an integrated forest products business located in Kotka in Eastern Finland. In order to facilitate the investment, Kotkamills issued new shares representing 10% of its enlarged share capital to Powerflute in exchange for a direct cash injection of €1.5 million. The investment was funded from Powerflute's own cash resources.

REPORT ON REVIEW OF INTERIM FINANCIAL INFORMATION

To the Board of Directors of Powerflute Oyj

Introduction

We have reviewed the accompanying condensed consolidated interim financial information of Powerflute Oyj ("Powerflute" or "the Company") for the six months ended 30 June 2012, consisting of the Income Statement, Statement of Comprehensive Income, Statement of Financial Position, Statement of Changes in Equity and Cash Flow Statement, together with related Notes 1 to 20.

The Board of Directors and the Managing Director are responsible for the preparation and presentation of this interim financial information in accordance with IAS 34 - Interim Financial Reporting. Our responsibility is to express a conclusion on the interim financial information based on our review.

Scope of Review

We conducted our review in accordance with International Standard on Review Engagements 2410, "Review of Interim Financial Information Performed by the Independent Auditor of the Entity." A review of interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the condensed consolidated interim financial information for the six months ended 30 June 2012 is not prepared, in all material respects, in accordance with International Accounting Standard 34.

Helsinki, 20 August 2012

ERNST & YOUNG OYAuthorised Public Accountant Firm

Mikko Järventausta

Authorised Public Accountant

Notes: A review does not provide assurance on the maintenance and integrity of the website, including controls used to achieve this, and in particular on whether any changes may have occurred to the financial information since first published. These matters are the responsibility of the directors but no control procedures can provide absolute assurance in this area.