Interim Results

30 September 2014

Powerflute

Interim Results 2014

Powerflute Oyj ("Powerflute" or the "Group") today announces its interim results for the six months ended 30 June 2014. Powerflute is quoted on the AIM market of the London Stock Exchange (POWR).

HIGHLIGHTS

· Revenue increased 10% to €72.7 million (2013: €66.3 million)

· EBITDA from operating activities increased 30% to €10.4 million (2013: €8.0 million)

· Operating profit improved 31% to €7.4 million (2013: €5.5 million)

· Profit before tax increased by 31% €6.9 million (2013: €5.2 million)

· EPS improved by 35% to 1.9 cents per share (2013: 1.4 cents)

· Dividend of 1.35 cents per share paid in May 2014

Commenting on the results, Dermot Smurfit, Chairman of Powerflute said:

The Group performed strongly during the first half of the year with volumes, revenues and profits from operating activities all well ahead of the same period of the prior year. The trading environment continued to be broadly favourable, with healthy demand in most major markets, some further improvement in selling prices and stable raw material and other input costs. The Group was able to capitalise on these conditions with another strong operational performance and this was reflected in a further improvement in EBITDA generated from operating activities.

Order intake during the third quarter has been healthy and despite the impact of normal seasonal factors and some weakness in recycled containerboard, average pricing levels have been maintained in most major markets. Accordingly, the outlook for the second half of the year remains broadly positive.

- Ends-

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About Powerflute

Powerflute is a paper and packaging group quoted on the AIM market of the London Stock Exchange (Ticker: POWR). 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 superior 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.

CHAIRMAN'S STATEMENT

The Group performed strongly during the first half of the year with volumes, revenues and profits from operating activities all well ahead of the same period of the prior year.

Despite tough economic conditions across much of Europe and elsewhere, the trading environment continued to be broadly favourable, with healthy demand in most major markets, some further improvement in selling prices and stable raw material and other input costs. The Group was able to capitalise on these conditions with another strong operational performance and this was reflected in a further improvement in EBITDA generated from operating activities.

BUSINESS REVIEW

Results

Revenue from continuing operations for the six months ended 30 June 2014 increased by €6.4 million (10%) to €72.7 million, due principally to an increase in volumes. Average selling prices were slightly ahead of those in the same period of the prior year and were comparable with the prices achieved during the final quarter of 2013.

EBITDA from operating activities increased by €2.4 million (29%) to €10.4 million (2013: €8.0 million) and operating profit improved by €2.4 million (31%) to €7.4m (2013: €5.5 million). Net finance expenses were €0.4m (2013: €0.3m) while profit before tax increased to €7.0 million (2013: €5.2 million).

Demand for semi-chemical fluting was healthy throughout the period and this, together with the strong operational performance, resulted in a 6% increase in volumes compared with the same period of the prior year. A modest improvement in average selling prices, relatively stable variable costs and tight control of fixed overheads meant that the benefit of additional volumes translated directly into higher profits.

Net cash flow from operating activities improved to an inflow of €6.2 million (2013: €0.8 million outflow) due to a combination of the improved trading performance and a lower seasonal increase in net working capital than in prior years. Capital expenditure of €1.4m was also slightly lower (2013: €2.2 million). The Group paid a dividend of €3.8 million in May 2014 (2013: €3.8 million) and remains in a strong financial position with a net cash surplus of €5.6 million (2013: €3.9 million).

Packaging Papers

In common with other producers of containerboard, Packaging Papers experienced favourable market conditions during the first half of the year, with strong demand throughout the period and relative stability in pricing and input costs. This was despite the tough economic environment throughout much of Europe and challenging conditions in a number of other major markets.

Towards the end of the period, there was some softening in containerboard markets generally, particularly in Europe, due to a combination of normal seasonal factors and also some weakness in recycled containerboard. While demand for Nordic semi-chemical fluting remained healthy there was pressure on prices in certain markets, which we were generally able to resist without loss of volumes.

Demand has recovered well after the normal summer slowdown and producers of competing and similar grades announced price increases during July. Powerflute followed with an announcement of selective price increases for deliveries from September onwards and we are cautiously optimistic about the prospects for market conditions in the final quarter.

The Kuopio mill performed particularly strongly and operated at full capacity throughout the period. Production volumes increased by 6% to 136,000 tonnes (2013: 129,000), principally due to the successful investments made in the pulp mill during 2013, which have both improved pulp and paper quality and increased capacity. Raw materials and other variable costs reduced slightly on a per tonne basis due to a combination of improved operating efficiencies, lower fibre and chemical costs and tight control of other variable expenses.

Kotkamills

The performance of Kotkamills continued to improve during the period, although profitability remains at relatively low levels. Construction markets in Europe and elsewhere are slowly returning to normal and demand for laminating papers, phenolic overlaying films and sawn timber products is recovering. In contrast, the continuing decline in demand for newsprint, magazine and printing papers is creating further challenges for the printing paper activity. We remain satisfied with our 10% investment in Kotkamills, but have no immediate plans to increase our holding.

FINANCIAL REVIEW

Cash flow and borrowings

The Group started the period with a net cash surplus of €5.1 million, consisting of cash and cash equivalents of €28.9 million and interest bearing loans and borrowings of €23.8 million.

The net cash flow from operating activities was an inflow of €6.2 million (2013: €0.8 million outflow), consisting of:

· €10.0 million inflow from trading activities (€8.5 million inflow)

· €3.2 million outflow due to increase in net working capital (2013: €6.0 million outflow)

· €0.6 million outflow due to payment of corporate taxes (2013: €3.3 million outflow)

Net working capital increased during the first half due to normal seasonal factors, but the impact was lower than in the prior year as sales in the final quarter of 2013 were stronger than in 2012 and wood inventories were also relatively high at the year end.

The other applications of funds during the period were:

· €3.8 million of dividend for the year ended 31 December 2013 (2013: €3.8m)

· €1.4 million of capital expenditure (2013: €2.2 million)

· €0.4 million of net interest and similar costs (2013: €0.3 million)

By 30 June 2014, the Group's net cash surplus had improved slightly to €5.6 million (2013: €3.9 million), consisting of cash and short term deposits of €28.3 million and interest-bearing loans and borrowings of €22.7 million.

Treasury management and currency risk

The main functional currency of the Group is the Euro, but the Group has transactional and balance sheet exposure to a number of other currencies and in particular, to the US Dollar. The exposure arises as approximately 30% of the Group's sales by volume and 5% of its expenses are denominated in US Dollars.

It is the Group's policy to use forward exchange contracts to hedge a portion of its foreign currency exposure. During the second half of 2013 and throughout much of the first half of the year, the Euro-US Dollar exchange rate remained relatively stable and the Euro was expected to weaken against the US Dollar in the medium term. A decision was taken to allow existing hedging to unwind without replacement and at 30 June 2014, there was no hedging in place.

The US Dollar rate has recently moved in the Group's favour and if the current situation is maintained this will have a beneficial impact on the results for the second half. The Group will continue to monitor the situation closely and if appropriate will implement hedging in line with the previous policy of hedging up to 100% of the exposure for a period of up to 12 months.

Capital expenditure

Capital expenditure during the period was €1.4 million (2013: €2.2 million) and related mainly to completion of a number of smaller projects in the pulp mill and on the winder station of the paper machine, together with advance payments on projects to be completed during the annual maintenance shutdown in September.

Dividend

The payment of an increased dividend for the year ended 31 December 2013 of 1.35 cents per share (1.30 cents per share for the year ended 31 December 2012) was approved by the Annual General Meeting of shareholders held on 29 April, 2014. The ex-dividend date for the dividend was Wednesday, 30 April 2014, the record date was Monday, 5 May 2014 and payment was made on Friday, 23 May 2014.

LEADERSHIP AND PEOPLE

Teresa Presas, the former Director General of CEPI, the Confederation of European Paper Industries, was appointed as a director of Powerflute Oyj, the parent company of the Group, at the Annual General Meeting of shareholders held on 29 April 2014. She brings over 30 years' experience in the paper industry and prior to joining CEPI in 2003 held a number of senior positions with speciality packaging and paper group Tetra Pak.

PRINCIPAL RISKS AND UNCERTAINTIES

The principal risks and uncertainties faced by the Group have not changed from those described on page 18 of the 2013 Annual Report, a copy of which is available for download from www.powerflute.com. The notes to these interim financial statements include consideration of the uncertainties affecting the Group in the remaining six months of the year.

OUTLOOK

Order intake during the third quarter has been healthy and despite the impact of normal seasonal factors and some weakness in recycled containerboard, average pricing levels have been maintained in most major markets. Accordingly, the outlook for the second half of the year remains broadly positive.

for the six months ended 30 June 2014

The notes on pages 12 to 20 form an integral part of this condensed consolidated interim financial information

for the six months ended 30 June 2014

The notes on pages 12 to 20 form an integral part of this condensed consolidated interim financial information

INTERIM CONSOLIDATED STATEMENT OF FINANCIAL POSITION

At 30 June 2014

The notes on pages 12 to 20 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 2014

The notes on pages 12 to 20 form an integral part of this condensed consolidated interim financial information

INTERIM CONSOLIDATED CASH FLOW STATEMENT

for the six months ended 30 June 2014

The notes on pages 12 to 20 form an integral part of this condensed consolidated interim financial information

NOTESTO INTERIM CONSOLIDATED 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 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 interim condensed consolidated financial statements for the six months ended 30 June 2014 were approved for issue by the Company's Board of Directors on 30 September 2014. These interim condensed consolidated financial statements have been reviewed, not audited.

2 Basis of preparation

The interim condensed consolidated financial statements for the six months ended 30 June 2014 have been prepared in accordance with IAS 34 Interim Financial Reporting. The interim condensed consolidated 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 2013.

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 consolidated financial statements for the year ended 31 December 2013, except for the adoption of new standards and interpretations as of 1 January 2014, noted below:

Investment Entities (Amendments to IFRS 10, IFRS 12 and IAS 27)

Offsetting Financial Assets and Financial Liabilities - Amendments to IAS 32

Novation of Derivatives and Continuation of Hedge Accounting - Amendments to IAS 39

Recoverable Amount Disclosures for Non-Financial Assets - Amendments to IAS 36

IFRIC 21 Levies

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 interim condensed consolidated 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 interim condensed consolidated 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 2013.

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 2013 and 2012, the Group has assumed that the resulting gains are exempt from corporate taxes under the substantial shareholder exemptions 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 2013.

During the year ended 31 December 2012, the Group was informed by the Tax Administration division of Vero, the Finnish taxation authority, that it is considered to be a venture capital company and not eligible to take advantage of the substantial shareholder exemptions. The Tax Administration considered that the gains arising on the share disposals should be subject to tax and confirmed assessments for the year ended 31 December 2011 including €3,571,000 of taxes relating to the share transactions.

Following a detailed review of the facts and circumstances by the Group's advisers, including consideration of current tax regulations and official guidance on their implementation, recent case history and the treatment of other tax payers in similar circumstances, the Group considered that it had strong and defensible arguments against the decision of the Tax Administration and during the year ended 31 December 2013 filed an appeal against the decision with the Assessment Adjustment Board (AAB) of Vero.

In December 2013, the Group's appeal against the original tax assessments was upheld by the AAB. The AAB determined that the Group was not a venture capital company and overturned the original tax assessments and returned the matter to the Tax Administration for reconsideration. In March 2014, the Group received notification that the Tax Administration has filed a further appeal with the Administrative Court in Helsinki against the decision of the AAB to overturn the original assessments.

While the taxes have been paid to avoid the risk of interest and other penalties, the financial statements 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. The taxes originally assessed by the Tax Administration and paid by the Group have not been recognised in the income statement, but have been recorded as a current financial asset in the balance sheet. Full provision has been made against the estimated future costs of the handling the dispute within the results of discontinued operations.

In the event that the Group does not prevail in its appeal against the original tax assessment, then additional taxes of €3,571,000 would have to be recognised within the results of discontinued operations. There would be no impact on the net cash position of the Group, or on the results from continuing operations.

In view of this, the financial statements for the six months ended 30 June 2014 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.

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 2013 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 14 of the Annual Report for the year ended 31 December 2013, 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 2013, 49% of revenue and 50% 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 Group has only one reportable operating segment:

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

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.

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 a joint venture

The Group has a 47,5% interest in Harvestia Oy ("Harvestia"), a wood procurement company based in Finland. Harvestia is a private limited company that is not listed on any public exchange.

The Group's investment in Harvestia is classified as a joint venture and Harvestia is accounted for using the equity method.

Summarised financial information of the joint venture at 30 June 2014 and at 30 June and reconciliation with the carrying amount of the investment in consolidated financial statements are set below:

9 Impairments

As at 30 June 2014, 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 2014.

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 1.35 cents per share for the year ended 31 December 2013 was proposed by the directors and approved by shareholders at the Annual General Meeting held on 29 April 2014. The record date for the dividend was 5 May 2014 and payment was made on 23 May 2014.

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 29 April 2014, 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 9.9 % of all shares and votes of the company then in issue. The authority remains effective until 30 June 2015 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.

Authority to issue new shares

On 29 April 2014, the Annual General Meeting granted authority to the Board of Directors to resolve on the issuance of up to 28,000,000 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 9.9 % 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 2015 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 Property, plant and equipment

The Group acquired assets with a cost of €1,439,000 during the six months ended 30 June 2014 (2013: €2,187,000).

14 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.

There have been no transfers between Levels 1-3 and the Group did not incur gains or losses recorded in the statement of comprehensive income with respect to Level 3 financial instruments.

15 Share-based payments

For the six months ended 30 June 2014, the Group has recognised €164,000 of share-based payment expense in the income statement (30 June 2013: €191,000).

16 Borrowings and loans

Movements in borrowings are analyzed as follows:

17 Commitments and contingencies

Mortgages

The Group has pledged the assets and shares of its principal trading subsidiary Savon Sellu Oy as security for interest-bearing borrowing facilities provided by Nordea and Finnvera. The remainder of the Group's assets are unencumbered.

18 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 2013.

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.

The six months ended June 30, 2013 there was a shareholder capital loan of €1,000,000. The principal amount of the loan, together with accrued interest, was due for repayment on 31 July 2013.

Transactions with related parties for the six months ended 30 June 2014 and 30 June 2013 were as follows:

b) Key management compensation

Key management compensation for the six months ended 30 June 2014 amounted to €898,000 (30 June 2013: €910,000) 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 15 and in the Annual Report for the year ended 31 December 2013.

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 2014, 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 18.

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 2014 is not prepared, in all material respects, in accordance with International Accounting Standard 34.

Helsinki, 30 September 2014

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.