POWR.L Regulatory News (POWR)

15 March 2012

POWERFLUTE OYJ

Preliminary Results

For the year ended 31st December 2011

Powerflute Oyj ("Powerflute" or the "Group"), the packaging and paper group, today announces its preliminary results for the year ended 31 December 2011. Powerflute is quoted on the AIM market of the London Stock Exchange (Ticker: POWR) and on NASDAQ OMX First North, the alternative market of the NASDAQ OMX Helsinki (Ticker POW1V).

Financial Highlights:

·; Revenues from continuing operations increased by 15% to €121.5 million (2010: €105.4 million) and operating profit doubled to €14.3m (2010: €7.1m)

·; Disposal of the loss-making Graphic Papers business segment in May 2011 generated cash proceeds of €32.5m

·; Financial position improved by €48.2 million during the year to a net cash position of €19.1m (2010: net debt €29.1m), including cash and cash equivalents of €45.6m

·; EPS improved to 3.5 cents per share (2010: 13.3 cents loss)

·; The directors intend to recommend a dividend for 2011 of 1.3 cents per share (2010: 1.0 cents per share) representing a yield of approximately 5%

·; Share repurchase programme of up to 25 million shares representing 8.6% of issued share capital to be initiated, subject to market conditions

·; Application to be made to Helsinki Stock Exchange for delisting from First North with effect from 30 June 2012

·; Share consolidation on a one for ten basis to be proposed to an Extraordinary General Meeting to be held once delisting from First North is completed

Operational Highlights:

·; Significant progress made with delivery of the Group's strategy of maximising returns through improved market positioning, operational efficiencies and targeted capital investment

·; Strong recovery in demand in most markets and attractive pricing levels resulted in robust growth, improved profitability and strong cash generation

·; Management action to reposition the Group and its products in more attractive markets, together with returns from capital investment projects, contributed significantly to the improved performance

·; Disposal of Graphic Papers has transformed the Group, strengthening its financial position and providing funds for investment in continuing businesses and the pursuit of new opportunities

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

"Powerflute enjoyed a profitable and successful year and made considerable progress with the implementation of its business strategy during 2011. Favourable market conditions, operational improvements and returns from capital investment contributed to much improved levels of profitability. The disposal of Graphic Papers in May 2011 made a significant contribution and helped to return the Group to a robust net cash position at the year end. Our intention to return capital to shareholders through an increased dividend and a share repurchase programme reflects the Board's belief that Powerflute's current market value does not reflect its true intrinsic business worth.

"The Group has made an encouraging start to the year and while market conditions are expected to remain challenging in 2012, recent announcements of price increases suggest that confidence may be returning, providing grounds for cautious optimism. With significant cash balances available to us we have the financial resources to continue with investment in our remaining businesses where there is still scope for further improvement. We remain focused on our acquisitive growth strategy in the paper and packaging sectors and the Group's strong financial position will enable us to take advantage of opportunities as they arise."

- Ends-

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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) and on NASDAQ OMX First North, the alternative market of NASDAQ OMX Helsinki (Ticker POW1V). 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.

CHAIRMAN'S STATEMENT

Powerflute enjoyed a profitable and successful year and made considerable progress with the implementation of its business strategy during 2011. Packaging Papers benefited from favourable market conditions for much of the year and this, together with operational improvements and returns from previous capital investment contributed to much improved levels of profitability. The disposal of Graphic Papers in May 2011 transformed the Group's financial position and we now have considerable funds available to us for investment in the development of remaining businesses and for the pursuit of new opportunities.

Revenue from continuing operations increased by 15% to €121.5 million (2010: €105.4 million) and operating profit from continuing operations doubled to €14.3 million (2010: €7.1 million). The operating margin improved to 11.8% (2010: 6.7%).

Basic earnings per share improved to 3.5 cents (2010: 13.3 cents loss) and basic earnings per share from continuing operations of 3.4 cents was also a significant improvement on the prior year (2010: 1.8 cents). In recognition of the strong performance, the directors intend to recommend the payment of an increased dividend of 1.3 cents per share (1.0 cents per share) for the year ended 31 December 2011.

Although we expect macroeconomic conditions to be more challenging in 2012, we look to the future with optimism and are confident that the Group is well positioned to benefit from any improvement in conditions as the year progresses and has the financial resources to take advantage of opportunities as they arise.

Disposal of Graphic Papers

The successful and profitable disposal of the Graphic Papers businesses in May 2011 for total consideration of €38.5m was the most significant development for the Group during the year. After performing well in 2009, Graphic Papers encountered more challenging market conditions in 2010 and as a non-integrated paper producer was heavily impacted by the dramatic increase in pulp and other raw material costs experienced over the last two years. We believe that the disposal to Paper Excellence, which has both pulp and paper production assets, represents a successful outcome for both the Graphic Papers business and the Group.

Results of continuing operations

The Packaging Papers business experienced favourable market conditions for much of 2011 and performed very strongly. Robust demand and attractive pricing continued in many of the markets in which the Group's products are sold and this, together with management action to improve penetration into more profitable markets, resulted in revenues from continuing operations increasing by 15% to €121.5m (2010: €105.4m). Higher volumes, better average prices and returns from capital investment made during 2010 and 2011 all contributed to an improvement in operating profit from continuing operations to €14.3m (2010: €7.1m). Although market conditions became more challenging as the year progressed, Packaging Papers continued to perform well and we believe that the actions taken during 2010 and 2011 have improved the underlying competitive position and resilience of this business.

Harvestia, the Group's wood supply organisation in Finland, continued to develop well and grew very strongly during 2011. In January 2011, we welcomed Vapo Oy as an equal partner alongside Powerflute and Myllykoski Corporation. During the year, Harvestia continued to expand its operations into new business areas and this, together with wood supplies to Vapo, contributed to an 85% increase in revenues which now exceed €200m per annum. Following the acquisition of Myllykoski by UPM-Kymmene, Powerflute and Vapo agreed to purchase Myllykoski's interest in Harvestia. The transaction was completed in January 2012 and the Group now has a 45% interest in Harvestia.

Strategy

The Group will continue to invest in the development of its existing businesses. 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 2012 and beyond. Harvestia continues to grow rapidly into new and potentially lucrative areas and has become an influential participant in the Finnish wood market. We continue to actively seek opportunities for further acquisitions, either to complement our existing businesses or to achieve penetration into new sectors of the paper and packaging markets where the Group can bring to bear its management expertise and insight.

Financial position

Strong cash generation from Packaging Papers and receipt of the proceeds from the disposal of Graphic Papers transformed the financial position of the Group. The net funding position improved by €48.2 million during the year and by 31 December 2011 the Group had net cash of €19.1 million, including cash and cash equivalents of €45.6 million and borrowings of €26.5 million, equivalent to only 1.4 times EBITDA. This represents an improvement of more than €70m from the peak level of borrowings at the end of 2009 and the Group now has a strong financial platform from which to pursue further development of its existing businesses and to consider strategic investments in new areas.

Dividend

The directors intend to recommend to the Annual General Meeting to be held in Kuopio on 26 April 2012, the payment of a dividend of 1.3 cents per share (2010: 1.0 cents per share) for the year ended 31 December 2011. The ex-dividend date would be 26 April 2012. The record date for the proposed dividend would be 2 May 2012 and the payment would be made on or about 18 May 2012. The proposed dividend would represent a yield of approximately 5% based on the Group's closing share price on 14 March 2012.

Share repurchase, consolidation and intention to delist from First North

In view of the current low valuation of the Group's shares, the directors consider that repurchase and cancellation of own shares would represent an attractive and value enhancing use of the Group's financial resources. In accordance with the authority granted to them at the Annual General Meeting held on 27 May 2011 and subject to market conditions, the directors intend to initiate a share repurchase programme involving up to 25,000,000 shares representing 8.6% of the issued share capital. The programme will be undertaken by way of market purchases and the authority to repurchase shares will be renewed at the forthcoming Annual General Meeting to be held on 26 April 2012.

In February 2008, the Group applied for a secondary listing of its shares on First North, the alternative market of the OMX Nordic Exchange. The volume of trading of the company's shares on First North does not currently justify the additional expense and administrative burden associated with a secondary listing. Accordingly, the directors have informed the Helsinki Stock Exchange that it is their intention to apply for delisting from First North and to concentrate trading of the company's shares through its primary listing of depositary interests on the Alternative Investment Market of the London Stock Exchange. The current intention is that delisting should become effective from 30 June 2012. The formal application for delisting is expected to be made to the Helsinki Stock Exchange during April and further details of how this will affect shareholders and of the steps necessary for conversion of direct shareholdings into depositary interests will be communicated to shareholders at this time.

Following fundraising activities in December 2008 and November 2010, the number of shares in issue has increased from 88,000,000 at the time of the Initial Public Offering in May 2007 to the current level of 289,818,174. With this number of shares in issue, small changes in the Group's share price can have a significant impact on market capitalisation. In order to address this, the directors intend to recommend to shareholders a share consolidation on a one for ten basis. Detailed proposals will be presented for consideration by shareholders at an Extraordinary General Meeting to be held once delisting from First North has been completed.

People

On behalf of the directors and shareholders, I would like to thank all of our employees for their continuing commitment and dedication. It is through their hard work that we have been able to achieve the significant progress made during the year and to deliver such a strong financial performance. The Group remains committed to the continued development of a talented, motivated and fulfilled workforce.

Dr Ulrich Scheufelen, who was appointed as a director in April 2009 shortly after the acquisition of Papierfabrik Scheufelen, has indicated that following the successful disposal of the Graphic Papers businesses he does not wish to offer himself for re-election as a director of the Group at the forthcoming Annual General Meeting. He continues to be involved with Papierfabrik Scheufelen in an advisory capacity to the new owners and I would like to take this opportunity to thank him for the contribution that he has made to the development of the Group and its businesses and to wish him every success in his future endeavours.

Outlook

The Group has enjoyed a profitable and successful year and made considerable progress with the implementation of its strategy. The disposal of the Graphic Papers business in May 2011 has transformed our financial position and we now have considerable funds available for investment in the development of remaining businesses and the pursuit of new opportunities. The Packaging Papers business enjoyed a particularly successful year as favourable market conditions, operational improvements and returns from previous capital investment contributed to much improved levels of profitability.

Speculation over the future of the Eurozone and the strength of major economies affected many of the markets in which the Group operates during the second half of 2011. Following a period of some weakness, paper and packaging markets have shown signs of improvement during the first quarter of 2012 and recent announcements of price increases suggest that confidence may be returning, providing grounds for cautious optimism. The Group has continued to perform well and has made an encouraging start to the year.

Whilst we expect market conditions to remain challenging throughout 2012, we are confident that Powerflute is well placed both financially and strategically to take advantage of opportunities as they arise, and to benefit from any improvement in trading conditions as the year progresses.

Dermot Smurfit

Chairman

15 March 2012

CHIEF EXECUTIVE'S STATEMENT

During 2011, we delivered on many of the objectives established ahead of the rights issue and placing undertaken in November 2010. Considerable progress was made improving the performance and competitive position of our Packaging Papers business and many of the actions taken in 2011 will continue to deliver benefits in 2012 and beyond as we progress towards best-in-class performance in this business. The disposal of Graphic Papers leaves the Group in a much improved financial position and this has created a strong platform from which to pursue growth and development opportunities in both the medium and long term.

Our operational excellence programme in Packaging Papers concentrated on three main areas during 2011: investment in product performance and operational efficiency, improving customer focus and technology and innovation. Using the proceeds from the rights issue and placing, we completed a number of major investment projects intended to reduce cost or enhance our service offering. Several of these projects were already delivering considerable benefits by the end of the year. Greater focus on understanding the needs of our customers has resulted in changes to formulations and specifications which have improved the performance and usability of our products and this, together with enhancements to service levels, has further strengthened our competitive position. We continue to invest in improving the performance of our products and exploring opportunities to reduce manufacturing costs through innovation.

During the year, many of the improvement programmes operating in Packaging Papers were consolidated into "Operation Ilmarinen", which now provides a coherent framework for future development of this business, with clear objectives and complementary strategies for delivering sustainable performance improvement in the medium term.

In September 2011, our semi-chemical fluting business Savon Sellu celebrated production of the eight millionth tonne of paper since the mill began operation in 1968. This was marked by a number of celebrations, including a conference which was attended by many of our major customers, agents and suppliers. The level of interest in this event was a testament to the strength of the relationships that the business has with its major stakeholders.

The decision to proceed with the sale of Graphic Papers to Paper Excellence BV, a privately owned producer of pulp and paper, was taken after much deliberation by the Board. Graphic Papers had been under our control for a little over two years and during this period good progress had been made despite very challenging market conditions. Following adverse developments in worldwide pulp markets, we concluded that this business would be better able to tackle the challenges it faces as part of an integrated group with its own pulp production. The disposal to Paper Excellence for total consideration of €38.5m, including the assumption of €6.0m of debt by the purchaser, has transformed our financial position and provided us with the financial platform necessary to further invest in Packaging Papers and to pursue other development opportunities.

Speculation over the future of the Eurozone and macroeconomic challenges faced by major economies created considerable uncertainty in many of our markets during the second half of 2011 and we, like most of our customers and competitors, experienced softening demand and some price erosion as the year progressed. Despite this, Packaging Papers continued to perform well and has made a good start to 2012. We look to the future with a degree of optimism as there is scope for further improvement in our own business and we are well positioned to benefit from any improvement in market conditions.

BUSINESS REVIEW

GROUP

The Group enjoyed a profitable and successful year and made considerable progress with the implementation of its strategy as favourable market conditions, operational improvements and returns from previous capital investment contributed to much improved levels of profitability.

Revenue from continuing operations increased by 15% to €121.5 million (2010: €105.4 million) and EBITDA from continuing operations increased by 70% to €18.8 million (2010: €11.1 million), due principally to the impact of strong demand and attractive selling prices in most major markets.

Operating profit from continuing operations improved to €14.3 million (2010: €7.1 million) due to the strong performance of Packaging Papers and the inclusion of an exceptional gain of €1.9 million realised on the sale of Harvestia shares in January 2011. The profit for the period attributable to shareholders improved to €10.1 million (2010: €23.4 million loss, or €1.3 million loss before impairment of Graphic Papers assets).

PACKAGING PAPERS

Packaging Papers performed very strongly during the year, achieving EBITDA of €18.8 million (2010: €7.1 million) on revenues up 15% to €121.5 million (2010: €105.4 million). This included an exceptional profit of €1.9 million from the sale of shares of Harvestia. On an underlying basis EBITDA from continuing operations was €16.9 million, representing a margin of 14% (2010: 14%).

Savon Sellu

Through its subsidiary Savon Sellu, the Group operates a paper mill in Kuopio, Finland, which produces a specialised form of semi-chemical fluting for use in the construction of corrugated case materials. Nordic semi-chemical fluting is made from locally sourced birch and boxes manufactured from it demonstrate exceptional strength, rigidity and moisture resistance and are used extensively for transportation of fruit and vegetables and high value industrial goods such as electrical appliances, automotive and other machinery components. The Kuopio mill is one of three large suppliers of semi-chemical fluting based in the Nordic region.

Demand during the first half of the year was very strong, with most customers and producers operating at close to full capacity due to a combination of restocking and strong recovery in end markets. This created an environment where a robust approach to pricing continued to be possible and margins throughout the industry improved to levels not seen since before the economic downturn. Over the summer months, we experienced a period of relative stability with good demand and pricing before uncertainty over the future of the Eurozone and the strength of global economies adversely affected confidence in the final quarter. Although market conditions weakened towards the end of the year, we were still able to operate at close to full capacity and experienced only moderate price erosion.

Despite the favourable market conditions, total deliveries increased by only 2% compared with the prior year. This was principally due to an extended annual maintenance shutdown during the first half to allow the completion of a number of major capital investment projects and to a further shutdown during the expensive Christmas period. Together, these stoppages reduced available capacity by more than 15,000 tonnes.

Average selling prices increased by 13% compared with the prior year. However, this was largely due to the low prices achieved during the first half of 2010 depressing the average for the prior year. In practice, selling prices were remarkably stable throughout the period with a difference of only 3% between the maximum and minimum average pricing level achieved over the course of the year.

During the year, we worked very hard to improve the mix of business and were able to achieve increased penetration of more profitable and attractive markets where the unique performance characteristics of our products are more highly valued and to reduce our dependence on markets where the customer's approach is more commoditised and competition is more intense. This contributed to the healthy increase in EBITDA margins, which was achieved despite the constraint on volumes, and also improved our resilience in the face of weakening market conditions towards the end of the fourth quarter.

Following the rights issue and placing in 2010, which raised net proceeds of €18.3m, we committed to a number of major investment projects which were completed during the latter stages of 2010 and in the first half of 2011. In particular, investment and modifications in the pulp mill have improved both quality and yield and should ultimately lead to an increase in paper performance and output capacity and investment in a fully-automated wide-width packing line has reduced labour costs and enhanced our ability to service the new generation of wide-web corrugators. We also completed a major overhaul and refurbishment of the steam turbine generator, which is typically required every seven to eight years and was last performed in 2004, and carried out a significant number of other major repairs and replacements.

Loss of capacity and additional costs during the extended planned maintenance shutdown, together with expenditure on energy during the turbine refurbishment, had a significant impact on the result for the year. However, the completed projects are already delivering returns in line with or ahead of our expectations and should yield benefits in 2012 and beyond.

Harvestia

This was a year of significant change for Harvestia, the Group's wood procurement organisation which is accounted for under the equity method as an associated company.

In January 2011, we welcomed Vapo Oy, a large Finnish forest products group, as an equal partner in Harvestia alongside Powerflute and Myllykoski Corporation. In addition to its direct investment, Vapo also contributed its wood procurement organisation and agreed to source 100% of its substantial wood requirements through Harvestia. This, together with increased penetration of business areas such as supply of biomass to energy companies and producers of biofuels, resulted in growth of more than 85% compared with the prior year and Harvestia's revenues during 2011 exceeded €200 million.

Following the acquisition of Myllykoski Corporation by UPM-Kymmene, which has its own wood procurement organisation, Powerflute and Vapo agreed to purchase Myllykoski's interest in Harvestia. This transaction was completed in January 2012 and the Group now has a 45% interest in Harvestia.

Outlook for Packaging Papers

Despite softer market conditions during the fourth quarter of 2011, the outlook for Packaging Papers remains broadly positive. Some price erosion has occurred, but recent announcements of price increases from producers of competing products provide evidence that conditions may be stabilising and might improve as the year progresses. The order intake during the first quarter of 2012 has been reasonably robust and actions taken to improve competitive position and achieve greater pricing resilience during down cycles appear to be working. Returns from capital investment should also help to bolster performance during 2012.

GRAPHIC PAPERS

Through its former subsidiary Papierfabrik Scheufelen, the Group operated a paper mill in Lenningen, Germany, producing up to 300,000 tonnes of coated woodfree papers from mixed hardwood and softwood pulps. Coated woodfree papers are used in the production of printed promotional material such as brochures, leaflets and other point of sale materials for producers and distributors of premium branded goods.

On 3 May 2011, the Group completed the disposal of Graphic Papers to a newly formed subsidiary of Paper Excellence BV, a producer of pulp and paper registered in the Netherlands. The total consideration for the disposal was €38.5 million, consisting of cash of €32.5 million and the assumption of €6.0 million of debt by the purchaser.

During the period prior to its disposal, Graphic Papers continued to experience weak demand and high raw material costs and the loss for the period from discontinued operations was €1.4 million, which represented a small improvement on performance during the same period of the prior year.

After recognising a gain on acquisition of €33.0 million in the year ended 31 December 2009 and an impairment charge of €22.1 million in the year ended 31 December 2010, both net of deferred taxes, the Group has recognised a gain on disposal of the discontinued operations of €1.6 million in its income statement for the year ended 31 December 2011. Graphic Papers had previously reported an operating profit of €9.1 million for the year ended 31 December 2009 and an operating loss of €6.2 million for the year ended 31 December 2010.

The cash consideration of €32.5 million represented a significant return on the Group's initial cash investment in Graphic Papers and despite the shorter than expected period of ownership, the disposal was consistent with Powerflute's strategy to create value for shareholders through the acquisition and restructuring of underperforming paper and packaging businesses.

Marco Casiraghi

Chief Executive Officer

FINANCIAL REVIEW

Review of 2011

The disposal of the loss-making Graphic Papers business transformed both the financial position and profitability of the Group during 2011. Packaging Papers, benefiting from favourable market conditions, operational improvements and returns from previous capital investment, achieved record levels of profitability and generated strong operational cash flow.

The profit for the period attributable to shareholders improved dramatically to €10.1 million (2010: €23.4 million loss, or €1.3 million loss before impairment of Graphic Papers assets) and the disposal proceeds of €32.5 million contributed to a €48.2 million improvement in net debt, leaving the Group with a net cash surplus of €19.1 million at 31 December 2011, including cash balances of €45.6 million.

Revenue from continuing operations

Revenue from continuing operations increased by 15% to €121.5 million (2010: €105.4 million), due principally to the impact of higher average selling prices in most markets. Despite the extended maintenance shutdown during the first half, total deliveries increased by 2%, while average selling prices increased by 13% compared with the prior year.

Operating profit from continuing operations

Operating profit from continuing operations improved to €14.3 million (2010: €7.1 million) due to the strong performance of Packaging Papers and the inclusion of the gain of €1.9 million realised on the sale of Harvestia shares in January 2011.

Raw materials and consumable costs increased by €7.3 million (14%) to €60.0 million (2010: €52.6 million). This was due to a combination of higher expenditure on routine maintenance, additional electricity purchases during the steam turbine generator refurbishment, an inventory effect as production exceeded deliveries and cost inflation on chemicals and other raw materials. Wood and other fibre costs remained stable throughout the period.

Employee benefit expenses increased by €2.4 million (16%) to €17.6 million (2010: €15.2 million) as a result of awards under performance related employee incentive schemes and recruitment of additional resources in product development, maintenance and engineering. Other expenses increased by €2.7 million 10% to €28.7 million (2010: €26.1 million), due principally to higher delivery charges.

Depreciation and amortisation increased to €4.5 million (2010: €4.0 million) reflecting the impact of higher capital expenditure in the second half of 2010 and the first half of 2011.

Finance income and expenses

The Group had net finance expenses of €1.9 million (2010: €2.3 million) consisting of finance income of €0.3 million (2010: €1.6 million) less finance expenses of €2.2 million (2010: €3.8 million).

Finance income in the year ended 31 December 2010 included €1.5 million of gains arising from the treatment of certain elements of the subscription rights offered in the rights issue and placing completed in November 2010 as derivative financial instruments in accordance with the provisions of IAS 32 Financial Instruments: Presentation and IAS 39 Financial Instruments: Recognition and Measurement.

The underlying increase in interest income and the considerable reduction in interest expense are attributable to the improvement in the Group's financial position and liquidity following completion of the disposal of Graphic Papers and to a year of strong cash generation from Packaging Papers.

Profit before tax from continuing operations

Profit before tax from continuing operations improved by €7.5 million (155%) to €12.4 million (2010: €4.9 million).

Taxation

The tax charge of €2.6 million (2010: €1.6 million) represents an effective tax rate of 20.9% (2010: 33.9%) and is based upon the weighted average annual tax rate for the year applied to the underlying profit or loss before taxation after adjusting for the impact of disallowable items of income and expenditure and the availability of tax losses. The underlying tax rate on profits before taxation in Finland during the year was 26%.

Discontinued operations

During the year, the Group disposed of the businesses of the Graphic Papers segment to Paper Excellence BV, a producer of pulp and paper registered in the Netherlands. The total consideration was €38.5 million before disposal costs, consisting of cash consideration €32.5 million and the assumption of €6.0 million of debt by the purchaser.

The gain after tax from discontinued operations for the period was €0.3 (2010: €26.6 million loss) consisting of a loss for the period from trading activities of €1.4 million (2010: €4.5 million loss) and a gain on disposal before related tax credits of €1.6 million (2010: charge for impairment of the assets of Graphic Papers net of deferred taxes of €22.1 million). The gain on disposal has been calculated after making full provision for all costs to sell, including provisions against future claims.

Earnings per share and dividends

Basic earnings per share for the year were 3.5 cents (2010: loss per share of 13.3 cents). Basic earnings per share from continuing operations increased by just under 90% to 3.4 cents (2010: 1.8 cents).

The directors intend to recommend to the Annual General Meeting to be held in Kuopio on 26 April 2012, the payment of a dividend of 1.3 cents per share (1.0 cents per share) for the year ended 31 December 2011. The ex-dividend date would be 26 April 2012. The record date for the proposed dividend would be 2 May 2012 and the payment would be made on or about 18 May 2012. The proposed dividend would represent a yield of approximately 5% based on the Group's closing share price on 14 March 2012.

Balance sheet

Total assets and total equity and liabilities reduced to €117.1 million at 31 December 2011 (2010: €158.4 million), reflecting the impact of the disposal of the Graphic Papers businesses. Total equity increased to €58.5 million (2010: €52.8 million) due to the strong performance of Packaging Papers during the year, while the disposal of Graphic Papers had limited impact on total equity as a result of the impairment provisions made in 2010. The number of shares in issue remained unchanged at 289.8 million (2010: 289.8 million) and net assets per share increased by 10% to €0.20 (2010: €0.18).

Total capital expenditure reduced to €7.7 million (2010: €9.2 million). However, the expenditure was incurred almost entirely within Packaging Papers and represented an increase on the prior year expenditure in this business (2010: €5.0 million). The major projects completed during the year were the investment in a fully-automated packing line and the overhaul and refurbishment of the steam turbine generator, which is typically required every seven to eight years and was last performed in 2004.

Cash flow

At the start of the year, the Group had net debt of €29.1 million, consisting of interest bearing loans and borrowings of €47.8 million less cash and short term deposits of €18.7 million.

During the year, the Group generated net cash inflow from operating activities of €19.2 million (2010: €16.3 million). EBITDA from continuing operations was €18.8 million (2010: €11.1 million) and net working capital reduced by €0.4 million (2010: €4.4 million reduction). Net working capital in Packaging Papers was almost unchanged as activity related increases in inventory and trade receivables were largely offset by measures to reduce credit terms with customers and improve payment terms with suppliers.

The cash consideration of €32.5 million from the disposal of Graphic Papers was payable in two installments. €25.0 million was received by the Group on completion of the transaction in May 2011 and the remaining €7.5 million was received in November 2011. In addition, the Group received proceeds of €2.5 million in connection with the sale of shares in Harvestia to Vapo in January 2011.

The principal payments made during the year were:

·; €15.3 million of loan repayments (2010: €11.0 million)

·; €7.7 million of capital expenditure (2010: €9.2 million)

·; €2.9 million of dividends (2010: nil)

·; €2.8 million of interest and similar costs (2010: €5.1 million)

·; €1.3 million of expenses related to the rights issue and placing undertaken in November 2010 (2010: €0.6 million)

The loan repayments include both scheduled repayments and accelerated repayment of term loans from the proceeds of the Graphic Papers disposal. Capital expenditure included investment in a fully automated wide-roll packing line and a major refurbishment of the steam turbine generator.

At 31 December 2011, the Group had a net cash surplus of €19.1 million, consisting of cash and short term deposits of €45.6 million (2010: €18.7 million) less interest bearing loans and borrowings of €26.5 million (2010: €47.8 million).

The improvement of €48.2 million compared with the prior year is attributable to receipt of proceeds from the disposal of Graphic Papers, the assumption of debt by the purchaser and strong operating cash flow from Packaging Papers.

Borrowing facilities

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

Other interest bearing loans and borrowings includes liabilities under revolving credit and invoice finance arrangements. While advances under certain of these facilities are classified as current liabilities due to their short term nature, the facility themselves remain available to the Group for a period in excess of one year.

At 31 December 2011, the Group had bank and other borrowing and financing facilities of €26.0 million (2010: €73.9 million) comprising amortising term loans of €6.0 million (2010: €23.9 million) and revolving credit and invoice financing facilities of €20.0 million (2010: €50.0 million). At 31 December 2011, the Group was utilising €25.5 million of these facilities (2009: €70.1 million).

The principal covenants which apply to the Group's borrowings are:

·; Ratio of net debt to EBITDA

·; Ratio of EBITDA to total net cash interest

·; Debt service cover

At 31 December 2011, the Group was in full compliance with the provisions of its banking agreements.

Going concern

The directors have undertaken a recent and thorough review of the Group's budget, forecasts and associated risks and sensitivities and have 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 approval of the financial statements.

Foreign exchange

The Group has manufacturing operations in Finland, which is within the European Community and uses the euro as its functional currency. The Group reports its Income Statement and Cash Flow Statement results in euros using the average exchange rate for each month to translate other currency amounts into euros. The Balance Sheet is translated using the exchange rates prevailing at the Balance Sheet date.

The Group sells and distributes its products and purchases raw materials in international markets and has transactional exposure to a number of other currencies and, in particular, to the US dollar. Approximately 30% of the Group's sales by volume and value and approximately 5% of its expenditure on raw materials, consumables and other expenses are denominated in US dollars.

The relative movement of the US dollar against the euro during 2011 when compared to 2010 is summarised below:

·; Movement in average exchange rate between 2010 and 2011 - 5% adverse

·; Movement in exchange rate at balance sheet date between 2010 and 2011 - 1% favourable

Treasury management and currency risk

It is the policy of the Group to hedge a portion of its foreign currency exposures for a maximum period of up to 12 months using forward exchange contracts. Wherever possible the Group takes advantage of natural hedges between income and expenditure and only considers hedging the net exposure. The Group does not seek to designate such derivative contracts as hedges for the purpose of hedge accounting. Forward currency exposures are reviewed on an on-going basis by the senior management of the Group, but decisions on the application and implementation of the hedging policy are reserved for the Board. The Group does not engage in currency speculation.

PRINCIPAL RISKS AND UNCERTAINTIES

The management of the Group's businesses and the execution of its strategy are subject to a number of risks attributable to both the specific operations of the business and to the macroeconomic environment. The following section comprises a summary of what the Board considers to be the principal risks and uncertainties which could potentially impact on the Group's operating and financial performance.

SUMMARY AND OUTLOOK

The Group has enjoyed a profitable and successful year and made considerable progress with the implementation of its strategy. The disposal of the Graphic Papers business in May 2011 has transformed our financial position and we now have considerable funds available for investment in the development of remaining businesses and the pursuit of new opportunities. The Packaging Papers business enjoyed a particularly successful year as favourable market conditions, operational improvements and returns from previous capital investment contributed to much improved levels of profitability.

Speculation over the future of the Eurozone and the strength of major economies affected many of the markets in which the Group operates during the second half of 2011. Following a period of some weakness, paper and packaging markets have shown signs of improvement during the first quarter of 2012 and recent announcements of price increases suggest that confidence may be returning, providing grounds for cautious optimism. The Group has continued to perform well and has made an encouraging start to the year.

Whilst we expect market conditions to remain challenging throughout 2012, we are confident that Powerflute is well placed both financially and strategically to take advantage of opportunities as they arise, and to benefit from any improvement in trading conditions as the year progresses.

for the year ended 31 December 2011

for the year ended 31 December 2011

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

at 31 December 2011

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

for the year ended 31 December 2011

 CONSOLIDATED CASH FLOW STATEMENT

for the year ended 31 December 2011

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1. Corporate information

Powerflute Oyj is a public limited company incorporated and domiciled in Finland. The address of the registered office is Sorsasalo/Box 57, FI-70101 Kuopio, Finland. The Company has a primary listing on the Alternative Investment Market (AIM) of The London Stock Exchange and a secondary listing on First North Finland, part of NASDAQ OMX First North, the alternative market of the NASDAQ OMX Helsinki.

The consolidated financial statements of the Company for the year ended 31 December 2011 was approved for issue by resolution of the Company's Board of Directors 15 March 2012.

The principal activities of the company and its subsidiaries ("the Group") are described in Note 7.

2. Accounting policies

2.1 Basis of preparation

The consolidated financial statements of Powerflute Oyj and its subsidiaries have been prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB) and adopted by the EU.

The consolidated financial statements have been prepared on a historical cost basis, except for derivative financial instruments that have been measured at fair value. The consolidated financial statements are presented in euros and all values are rounded to the nearest thousand (€000) except when otherwise indicated.

2.2 Basis of consolidation

The consolidated financial statements comprise the financial statements of the Group and its subsidiaries as at 31 December of each year.

Subsidiaries are fully consolidated from the date of acquisition, being the date on which the Group obtained control, and continue to be consolidated until the date that such control ceases. The financial information relating to subsidiaries is prepared for the same reporting year as the parent company, using consistent accounting policies. All intra-group balances, income and expenses, unrealised gains and losses and dividends resulting from intra-group transactions are eliminated in full.

The business combination of Powerflute Oyj and Savon Sellu Oy is accounted for in accordance with the pooling of interest method.

A change in the ownership interest of a subsidiary, without a loss of control, is accounted for as an equity transaction. If the Group loses control over a subsidiary it:

§ Derecognises the assets (including goodwill) and liabilities of the subsidiary

§ Derecognises the carrying amount of any non-controlling interest

§ Derecognises the cumulative translation differences recorded in equity

§ Recognises the fair value of the consideration received

§ Recognises the fair value of any investment retained

§ Recognises any surplus or deficit in profit or loss

§ Reclassifies the parent's share of components previously recognised in other comprehensive income to profit or loss or retained earnings, as appropriate

In the statement of comprehensive income, income and expenses from discontinued operations are reported separately from income and expenses from continuing operations down to the level of profit after taxes. This approach is adopted even where the Group retains a non-controlling interest in the subsidiary.

2.3 Changes in accounting policy and disclosures

The accounting policies adopted by the Group are consistent with those of the previous year except as mentioned below.

The Group has adopted all of the following new and amended IFRS and IFRIC interpretations that are relevant to its operations and effective as of 1 January 2011:

IAS 24 Related party disclosures (Amendment)

IFRIC 14 Prepayments of a minimum funding requirement (Amendment)

IFRIC 19 Extinguishing Financial Liabilities with Equity Instruments

Annual Improvements to IFRSs (May 2010)

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.

2.4 Summary of significant accounting policies

a) Business combinations and goodwill

Business combinations other than those between entities under common control are accounted for in accordance with the acquisition method. Under the acquisition method the cost of acquisition is allocated to the acquired identifiable assets, liabilities and contingent liabilities (net assets) based on their fair values at the date of acquisition. Any difference between the cost of acquisition and the fair value of the acquired net assets is recognised as goodwill in the consolidated statement of financial position or income (referred to as negative goodwill) in the consolidated income statement.

Goodwill is initially measured at cost, being the excess of the cost of acquisition over the fair value of the acquired net assets. Following initial recognition, goodwill is measured at cost less accumulated impairment losses. Goodwill is tested for impairment annually or more frequently if events or changes in circumstances indicate that the carrying value may be impaired.

Business combinations between entities under common control are accounted for in accordance with the pooling of interest method. Under the pooling of interest method the entities are combined from the beginning of the financial year in which the combination took place. The consolidated income statement reflects the results of the combining entities for the full year and the consolidated balance sheet the assets and liabilities at their carrying values. The excess of the cost of acquisition over the share capital of the acquired entity is recognised in consolidated shareholders' equity. Goodwill is not recognised.

b) Investment in associated companies

Associated companies are entities over which the Group has significant influence but not control. The Group's investments in associated companies are accounted for using the equity method.

Under the equity method, the Group's investment in an associate is initially recorded in the statement of financial position at cost and is later adjusted for post-acquisition changes in the Group's share of net assets of the associate. 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 results of operations of an associate is recognised in the income statement and its share of any changes in the equity is recognised and disclosed, when applicable, in the statement of changes in equity. Unrealised gains and losses on transactions between the Group and its associates are eliminated to the extent of the Group's interest in the associated company, unless the loss provides evidence of an impairment of the asset transferred.

The Group's share of profit of associated companies is shown on the face of the income statement. This is the profit attributable to equity holders of the associate and, therefore, is profit after tax and non-controlling interests in the subsidiaries of the associates.

Unless otherwise stated in Note 6, the financial statements of associated companies are prepared for the same reporting period as the parent company. Accounting policies have been changed where necessary to ensure consistency with the policies adopted by the Group.

After application of the equity method, the Group determines whether It is necessary to recognise an additional impairment loss on its investment in an associated company. At each reporting date, the Group determines whether there is any objective evidence that an investment in an associated company 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 impairment loss in the income statement.

Upon loss of significant influence over an associate, the Group measures and recognises any retained investment at its fair value. Any difference between the carrying amount of the investment in an associate upon loss of significant influence and the fair value of the retained investment and proceeds from disposal is recognised In profit or loss. Equity accounting is discontinued when the Group has lost its significant influence over the associate or when the carrying amount of the investment in an associated company reaches zero, unless the Group has incurred or guaranteed obligations in respect of the associated company.

c) Non-current assets held for sale

Non-current assets and disposal groups classified as held for sale are measured at the lower of carrying amount and fair value less costs to sell. Non-current assets and disposal groups are classified as held for sale if their carrying amounts will be recovered through a sale transaction rather than through continuing use. This condition is considered to be met only when the sale is highly probable, the asset or disposal group is available for immediate sale in its present condition and the sale is expected to qualify for recognition as a completed sale within one year from the date of classification.

Property, plant and equipment and intangible assets once classified as held for sale are not depreciated or amortised.

d) Foreign currency translation

The consolidated financial statements are presented in euros, which is the functional and presentation currency of the Group and all of its subsidiaries and associated companies.

Transactions denominated in foreign currencies are translated into the functional currency using the exchange rates prevailing on the transaction date. Monetary assets and liabilities in foreign currencies are translated into the functional currency using the exchange rates prevailing at the reporting date. Foreign exchange gains and losses arising from financial assets and liabilities are recorded in the income statement.

e) Revenue recognition

Revenue is recognised to the extent that it is probable that the economic benefits will flow to the Group and revenue can be reliably measured. Revenue is measured at the fair value of the consideration received, excluding discounts, rebates, and other sales taxes or duty, and is adjusted for exchange differences on sales in foreign currency. The Group assesses its revenue arrangements against specific criteria in order to determine if it is acting as principal or agent and has concluded that it is acting as principal in all of its revenue arrangements. The following specific recognition criteria must also be met before revenue is recognised:

(i) Sale of goods

Revenue from the sale of the goods is recognised as income when the significant risks and rewards of ownership of the goods have passed to the buyer and the Group no longer has a continuing right to dispose of the goods or effective control over the goods. Usually, this means that sales are recorded upon delivery of goods to the customer in accordance with agreed terms of delivery, which are based on Incoterms 2000. The main categories of terms covering Group sales are:

§ "D" terms, under which the Group is obliged to deliver the goods to the buyer at the agreed destination, usually the buyer's premises, in which case the point of sale is the moment of delivery to the buyer.

§ "C" terms, whereby the Group arranges and pays for the external carriage and certain other costs, though the Group ceases to be responsible for the goods once they have been handed over to the carrier in accordance with the relevant term. The point of sale is thus the handing over of the goods to the carrier contracted by the seller for the carriage to the agreed destination.

§ "F" terms, being where the buyer arranges and pays for the carriage, thus the point of sale is the handing over of goods to the carrier contracted by the buyer.

(ii) Interest income

For all financial instruments measured at amortised cost and interest bearing financial assets classified as available for sale, interest income or expense is recorded using the effective interest rate (EIR) method. Interest income is included in finance income in the income statement.

f) Taxes

(i) Current income tax

Current income tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted by the reporting date at the countries where the Group operates and generates taxable income.

Current income tax relating to items recognised directly in equity is recognised in equity and not in the income statement.

(ii) Deferred tax

Deferred tax is provided using the liability method on temporary differences at the reporting date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes.

Deferred tax liabilities are recognised for all taxable temporary differences, except:

§ where the deferred tax liability arises from the initial recognition of goodwill or of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and

§ in respect of taxable temporary differences associated with investments in subsidiaries and associates, where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future.

Deferred tax assets are recognised for all deductible temporary differences, carry forward of unused tax credits and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carry forward of unused tax credits and unused tax losses can be utilised except:

§ where the deferred tax asset relating to the deductible temporary difference arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and

§ in respect of deductible temporary differences associated with investments in subsidiaries and associates, deferred tax assets are recognised only to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilised.

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 tax asset to be utilised. Unrecognised deferred tax assets are reassessed at each reporting date and are recognised to the extent that it has become probable that future taxable profit will allow the deferred tax asset to be recovered.

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to 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 profit or loss is recognised outside profit or loss. Deferred tax items are recognised in correlation to the underlying transaction either in other comprehensive income or directly in equity.

Deferred tax assets and deferred tax liabilities are offset, if a legally enforceable right exists to set off current income tax assets against current income tax liabilities and the deferred taxes relate to the same taxable entity and the same taxation authority.

(iii) Sales tax

Revenues, expenses and assets are recognised net of the amount of sales tax except:

§ where the sales tax incurred on a purchase of assets or services is not recoverable from the taxation authority, in which case the sales tax is recognised as part of the cost of acquisition of the asset or as part of the expense item as applicable; and

§ receivables and payables that are stated with the amount of sales tax included.

The net amount of sales tax recoverable from, or payable to, the taxation authority is included as part of receivables or payables in the statement of financial position.

g) Government grants

Government grants are recognised where there is reasonable assurance that the grant will be received and all attaching conditions will be complied with. 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 compensate. Where the grant relates to an asset, it is recognised as deferred income.

Where the Group receives non-monetary grants, the asset and the grant are recorded at nominal amounts and released to the income statement over the expected useful life of the relevant asset by equal annual instalments.

h) Pensions and other post-employment benefits

The Group operates defined contribution and defined benefit pension plans which require contributions to be made into separately administered funds. In addition, the Group also provides certain other post-employment benefits to eligible employees who retire before reaching their normal retirement date. These benefits are unfunded.

(i) Defined contribution plans

The costs of providing benefits under defined contribution pension plans are recognised in the income statement on an accruals basis.

(ii) Defined benefit plans

The costs of providing benefits under defined benefit plans are determined separately for each plan using the projected unit credit method. Actuarial gains and losses are recognised as income or expense when the net cumulative unrecognized actuarial gains and losses for each individual plan at the end of the previous reporting period exceed 10% of the higher of the defined benefit obligation and the fair value of the plan assets at that date. These gains or losses are recognised over the expected average remaining working lives of the employees participating in the plans.

Past service costs are recognised as an expense on a straight line basis over the average period until the benefits become vested. If the benefits have already vested, immediately following the introduction of, or changes to, a pension plan, past service costs are recognised immediately.

The defined benefit asset or liability comprises the present value of the defined benefit obligation (using a discount rate based on high quality corporate bonds), less past service costs and actuarial gains and losses not yet recognised and less the fair value of plan assets out of which the obligations are to be settled. Plan assets are assets that are held by a long term employee benefit fund or qualifying insurance policies. Plan assets are not available to the creditors of the Group, nor can they be paid directly to the Group. Fair value is based on market price information. The value of any defined benefit asset recognised is restricted to the sum of any past service costs and actuarial gains and losses not yet recognised and the present value of any economic benefits available in the form of refunds from the plan or reductions in the future contributions to the plan.

(iii) Other post-employment benefits

The Group participates in a number of industry or country specific early retirement schemes which provide eligible employees with the opportunity to retire before they reach normal retirement date. The Group regards such schemes as unfunded postemployment benefits and recognises their costs over the remaining active working life of the employee in accordance with the requirements of IAS 19 Employee Benefits.

Where entitlement to post-employment benefits arises as a result of termination of employment by the Group, the benefit is treated as a termination cost. The expense is recognised in the income statement and the related liability is recorded in the statement of financial position immediately in accordance with the provisions of IAS 37 Provisions, contingent liabilities and contingent assets.

i) Share based payment transactions

Employees (including senior executives) of the Group receive remuneration in the form of share based payment transactions, whereby employees render services as consideration for equity instruments ("equity settled transactions").

The cost of equity settled transactions with employees is measured by reference to the fair value of the equity instruments at the date on which they are granted. The fair value is determined by using an appropriate pricing model, further details of which are given in Note 23.

The cost of equity settled transactions is recognised, together with a corresponding increase in equity, over the period in which the performance and/or service conditions are fulfilled, ending on the date on which the relevant employees become fully entitled to the award ("the vesting date"). The cumulative expense recognised for equity settled transactions at each reporting date until the vesting date reflects the extent to which the vesting period has expired and the Group's best estimate of the number of equity instruments that will ultimately vest. The income statement expense or credit for a period represents the movement in cumulative expense recognised as at the beginning and end of that period and is included in employee benefits expense (Note 8.2).

No expense is recognised for awards that do not ultimately vest, except for equity-settled transactions for which vesting is conditional upon a market or non-vesting condition. These are treated as vesting irrespective of whether or not the market or non-vesting condition is satisfied, provided that all other performance and/or service conditions are satisfied.

Where an equity settled award is cancelled, it is treated as if it vested on the date of cancellation, and any expense not yet recognised for the awards is recognised immediately. This includes any award where non-vesting conditions within the control of either the entity or the employee are not met. However, if a new award is substituted for the cancelled award, and designated as a replacement award on the date that it is granted, the cancelled and new awards are treated as if they were a modification of the original award.

Where the terms of an equity settled award are modified, the minimum expense recognised is the expense as if the terms had not been modified, if the original terms of the award are met. An additional expense is recognised for any modification that increases the total fair value of the share based payment transaction, or is otherwise beneficial to the employee as measured at the date of modification.

All cancellations of equity settled transaction awards are treated equally.

The dilutive effect of outstanding options is reflected as additional share dilution in the computation of diluted earnings per share (see Note 11).

j) Financial instruments - initial recognition and subsequent measurement

(i) Financial assets

Initial recognition and measurement

Financial assets within the scope of IAS 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. The Group determines the classification of its financial assets at initial recognition depending upon the purpose for which the financial assets were acquired.

All financial assets are recognised initially at fair value plus, in the case of investments other than at fair value through profit and loss, directly attributable transaction costs. Purchases or sales of financial assets that require delivery of assets within a time frame established by regulation or convention in the marketplace are recognised on the trade date, which is 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, loan and other receivables and derivative financial instruments.

Subsequent measurement

The subsequent measurement of financial assets depends on their classification as follows.

Financial assets at fair value through profit or loss

Financial assets at fair value through profit or loss includes financial assets held for trading and financial assets designated upon initial recognition as at fair value through profit or loss.

Financial assets are classified as held for trading if they are acquired for the purpose of selling or repurchasing in the near term. This category includes derivative financial instruments that are not designated as hedging instruments in hedge relationships as defined by IAS 39. Derivatives, including separated embedded derivatives are also classified as held for trading unless they are designated as effective hedging instruments. Financial assets at fair value through profit and loss are carried in the statement of financial position at fair value with changes in fair value recognised in the income statement.

Changes in fair value of foreign exchange forward contracts are recognised within sales and other expenses and changes in fair value of commodity forward contracts are recognised in other expenses.

The Group has not designated any financial assets upon initial recognition as at fair value through profit or loss.

The Group evaluates its financial assets at fair value through profit and loss (held for trading) to determine whether the intent to sell them in the near term is still appropriate. When the Group is unable to trade these financial assets due to inactive markets and management's intent to sell them in the foreseeable future significantly changes, the Group may elect to reclassify these financial assets in rare circumstances. The reclassification to loans and receivables, available for sale or held to maturity 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 designation.

Loans and 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, they are subsequently measured at amortised cost using the effective interest rate (EIR) 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 EIR. The EIR amortisation is included in finance income in the income statement. The losses arising from impairment are recognised in the income statement in finance costs.

Derecognition

A financial asset is derecognised when:

§ the rights to receive cash flows from the asset have expired; and

§ the Group has transferred its rights to receive cash flows from the asset or has assumed an obligation to pay the received cash flows in full without material delay to a third party under a pass through arrangement; and either a) the Group has transferred substantially all the risks and rewards of the asset, or b) the Group has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.

When the Group has transferred its rights to receive cash flows from an asset or has entered into a pass through arrangement, and has neither transferred nor retained substantially all 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 recognizes 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.

(ii) Impairment of financial assets

The Group assesses at each reporting date whether there is any objective evidence that a financial asset or group of financial assets is impaired. A financial asset or 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 has 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. If there is objective evidence that an impairment loss has 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 credit 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 and 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 account and the amount of the loss is recognized in the 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 income statement.

(iii) Financial liabilities

Initial recognition and measurement

Finance liabilities within the scope of IAS 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. The Group determines the classification of its financial liabilities at initial recognition.

All financial liabilities are recognised initially at fair value and in the case of loans and borrowings, include directly attributable transaction costs.

The Group's financial liabilities include trade payable and other payable, bank overdraft, loans and borrowings, financial guarantee contracts, and derivative financial instruments.

Subsequent measurement

The subsequent measurement of financial liabilities depends on their classification as follows:

Financial liabilities at fair value through profit or loss

Financial liabilities at fair value through profit or loss includes financial liabilities held for trading and financial liabilities designated upon initial recognition as at fair value through profit or loss.

Financial liabilities are classified as held for trading if they are acquired for the purpose of selling in the near term. This category includes derivative financial instruments that are not designated as hedging instruments in hedge relationships as defined by IAS 39.

Gains or losses on liabilities held for trading are recognised in the income statement.

The Group has not designated any financial liabilities upon initial recognition as at fair value through profit or loss.

Interest bearing loans and borrowings

After initial recognition, interest bearing loans and borrowings are subsequently measured at amortised cost using the effective interest method. Gains and losses are recognised in the income statement when the liabilities are derecognised as well as through the effective interest rate (EIR) method 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 EIR. The EIR Amortisation is included in finance cost in the income statement.

Interest bearing liabilities are classified as non-current liabilities unless they are due to being settled within 12 months after the reporting date.

Derecognition

A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires.

Where 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 a derecognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amounts is recognised in the income statement.

(iv) Offsetting of financial instruments

Financial assets and liabilities are offset and the net amount reported in the consolidated statement of financial position if, and only if, there is a currently enforceable legal right to offset the recognised amounts and there is an intention to settle on a net basis, or to realise the assets and settle the liabilities simultaneously.

(v) Fair value of financial instruments

The fair value of financial instruments that are traded in active markets at each reporting date is determined by reference to quoted market prices, without any deduction for transaction costs. For financial instruments not traded in an active market, fair value is determined using appropriate valuation techniques. Such techniques include using recent arm's length market transactions; reference to the current fair value of another instrument, which is substantially the same; discounted cash flow analysis or other valuation models.

k) Derivative financial instruments and hedging

Initial recognition and subsequent measurement

The Group uses derivative financial instruments such as forward exchange contracts, interest rate swaps and commodity forward contracts to hedge its foreign currency risks, interest rate risks and commodity price risks. Such derivative financial instruments are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequently remeasured at fair value. 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 fair value on derivatives are taken directly to the income statement, except for the effective portion of cash flow hedges, which is recognised in other comprehensive income.

For the purposes of hedge accounting, hedges are classified as:

§ fair value hedges when hedging the exposure to changes in the fair value of a recognised asset or liability or anunrecognised firm commitment (except for foreign currency risk);

§ cash flow hedges when hedging exposure to variability in cash flows that is either attributable to a particular risk associated with a recognised asset or liability or a highly probable forecast transaction or the foreign currency risk in an unrecognized firm commitment; or

§ hedges of a net investment in a foreign operation.

At the inception 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 effectiveness of the hedging instrument will be assessed. Such hedges are expected to be highly effective in achieving offsetting changes in fair value or cash flows and are assessed on an on-going basis to determine that they actually have been highly effective throughout the financial reporting periods for which they were designated.

Fair value hedges

The Group did not have any fair value hedges or hedges of net investments at 31 December 2011 and 2010.

Cash flow hedges

Cash flow hedges which meet the strict criteria for hedge accounting are accounted for as follows:

§ the effective portion of the gain or loss on the hedging instrument is recognised directly as other comprehensive income in the cash flow hedge reserve, while any ineffective portion is recognised immediately in the income statement;

§ amounts recognised as other comprehensive income are transferred to the 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; and

§ if the forecast transaction or firm commitment is no longer expected to occur, the cumulative gain or loss previously recognised in other comprehensive income are transferred to the income statement. If the hedging instrument expires or is sold, terminated or exercised without replacement or rollover, or if the requirements of hedge accounting are no longer achieved, any cumulative gain or loss previously recognised in other comprehensive income remains in other comprehensive income until the forecast transaction or firm commitment affects profit or loss.

The Group uses currency forward contracts as hedges of its exposure to foreign currency risk in forecasted transactions and firm commitments, but does not apply hedge accounting. The Group uses commodity forward contracts as hedges of its exposure to commodity price risk. Refer to Note 14 for more details.

Current versus non-current classification

Derivative instruments that are not designated and effective hedging instruments are classified as current or non-current and separated into a current or non-current portion based on an assessment of the facts and circumstances.

§ Where the Group does not apply hedge accounting and will hold a derivative as an economic hedge for a period beyond 12 months after the reporting date, the derivative is classified as non-current consistent with the classification of the underlying item.

§ Derivative instruments that are designated as, and are effective hedging instruments, are classified consistent with the classification of the underlying hedged item. The derivative instrument is separated into a current portion and non-current portion only if reliable allocation can be made.

l) Property, plant and equipment

Property, plant and equipment is stated at cost, less accumulated depreciation and accumulated impairment losses, if any. Such cost includes the cost of replacing part of the plant and equipment when that cost is incurred, if the recognition criteria are met. When significant parts of property, plant and equipment are replaced, related costs are recognised as assets with specific useful lives and depreciation, respectively. All other repair and maintenance costs are expensed as incurred. The present value of the expected cost for the decommissioning of the asset after its use is included in the cost of the respective asset if the recognition criteria for provision are met.

Depreciation is calculated on a straight line basis over the useful life of the assets. Land and water areas are not depreciated as they are deemed to have indefinite life, but otherwise depreciation is based on the following expected useful lives:

Plant and equipment 2-20 years

Buildings 10-50 years

Other capitalised expenses 5-20 years

An item of property, plant and equipment is derecognised upon disposal or when no future economic benefits are expected from its use or disposal. Gains or losses arising from derecognition of an asset are measured as the difference between the net disposal proceeds and the carrying amount of the asset and are recognised in the income statement when the asset is derecognised.

The assets' residual values, useful lives and methods of depreciation are reviewed and adjusted prospectively, if appropriate, at each financial year end.

m) Leases

The determination of whether an arrangement is, or contains, a lease is based on the substance of the arrangement at inception date of whether the fulfilment of the arrangement is dependent on the use of a specific asset or assets or the arrangement conveys a right to use the asset.

Finance leases, which transfer to the Group substantially all the risks and benefits incidental to ownership of the leased item, are capitalised at the inception of the lease at the fair value of the leased item or, if lower, the present value of the minimum lease payments. Lease payments are apportioned between finance charges and reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are reflected in the income statement.

Capitalised leased assets are depreciated over the useful life of the asset. However, if there is no reasonable certainty that the Group will obtain ownership by the end of the lease term, the asset is depreciated over the shorter of the estimated useful life of the asset and the lease term.

Operating lease payments are recognised as an expense in the income statement on a straight line basis over the lease term.

n) Borrowing costs

Borrowing costs directly attributable to the acquisition, construction or production of an asset that necessarily takes a substantial period of time to get ready for its intended use or sale are capitalised as part of the cost of the respective assets. The Group did not have any such assets at 31 December 2011 and 2010 and no borrowing costs were capitalised.

All other borrowing costs are expensed in the period they occur. Borrowing costs consist of interest and other costs that an entity incurs in connection with the borrowing of funds.

o) Investment properties

Investment properties are measured initially at cost, including transaction costs. The carrying amount includes the cost of replacing part of an existing investment property at the time that cost is incurred if the recognition criteria are met; and excludes the costs of day to day servicing of an investment property. Subsequent to initial recognition, investment properties are stated at cost less accumulated depreciation and accumulated impairment losses, if any. Depreciation is calculated on a straight line basis over the useful life of the assets, which is estimated to be 15 years.

Investment properties are derecognised when either they have been disposed of or when the investment property is permanently withdrawn from use and no future economic benefit is expected from its disposal. The difference between the net disposal proceeds and the carrying amount of the asset is recognised in the income statement in the period of derecognition.

Transfers are made to or from investment property only when there is a change in use. If owner occupied property becomes an investment property, the Group accounts for such property in accordance with the policy stated under property, plant and equipment up to the date of change in use.

p) Intangible assets

Intangible assets acquired separately are measured on initial recognition at cost. The cost of intangible assets acquired in a business combination is fair value as at the date of acquisition.

Following initial recognition, intangible assets are carried at cost less any accumulated amortisation and any accumulated impairment losses. Internally generated intangible assets are not capitalised and expenditure is reflected in the income statement in the year in which the expenditure is incurred.

The useful lives of intangible assets are assessed to be either finite or indefinite.

Intangible assets with finite lives are amortised over the useful economic life and assessed for impairment whenever there is an indication that the intangible asset may be impaired. The amortisation period and the amortisation method for an intangible asset with a finite useful life are reviewed at least at each financial year end. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset is accounted for by changing the amortisation period or method, as appropriate, and treated as changes in accounting estimates. The amortisation expense on intangible assets with finite lives is recognised in the income statement in the expense category consistent with the function of the intangible asset.

The straight line amortisation of intangible assets with finite lives is based on the following estimates of useful life:

Customer contracts 5 years

IT software 1-5 years

Patents and licences 5-10 years

Other intangible assets 5-10 years

Intangible assets with indefinite useful lives are not amortised but are tested for impairment annually, either individually or at the cash generating unit level. The assessment of indefinite life is reviewed annually to determine whether the indefinite life continues to be supportable. If not, the change in useful life from indefinite to finite is made on a prospective basis.

Gains or losses arising from derecognition of an intangible asset are measured as the difference between the net disposal proceeds and the carrying amount of the asset and are recognised in the income statement when the asset is derecognised.

Research and development costs

Research and development costs are expensed as incurred. The Group has no development project expenditures that should be recognised as an intangible asset.

q) Inventories

Inventories are valued at the lower of cost or net realisable value.

Costs incurred in bringing each product to its present location and condition are accounted for as follows:

Raw materials Purchase cost on a first in, first out basis.

Finished goods Cost of direct materials and labour and a proportion of work in progress manufacturing overheads based on normal operating capacity but excluding borrowing costs.

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.

 r) Impairment of non-financial assets

The Group assesses at each reporting date whether there is an indication that an asset may be impaired. If any such 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. Where the carrying amount of an asset or CGU 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 assessment of the time value of money and the risks specified to the asset.

Impairment losses of continuing operations, including impairment on inventories, are recognised in the income statement in expense categories consistent with the function of the impaired asset, except for property which has been previously revalued where the revaluation was taken to other comprehensive income. In this case, the impairment is also recognised in other comprehensive income up to the amount of any previous revaluation.

For assets excluding goodwill, an assessment is made at each reporting date as to whether there is any indication that previously recognised impairment losses may no longer exist or may have decreased. If such indication exists, the Group makes an estimate of the asset's or CGU's recoverable amount. A previously recognised impairment loss is reversed only if there has been a change in the assumptions used to determine the asset's recoverable amount since the last impairment loss was recognised. The carrying amount after reversal cannot exceed the recoverable amount nor the carrying amount that would have been determined, net of depreciation, had no impairment loss been recognised for the asset in prior years. Such reversal is recognised in the income statement.

The following criteria are also applied in assessing impairment of specific assets:

Goodwill

Goodwill is tested for impairment annually as at 31 December and when circumstances indicate that the carrying value may be impaired.

Impairment is determined for goodwill by assessing the recoverable amount of each CGU to which the goodwill relates. Where the recoverable amount of the CGU is less than their carrying amount an impairment loss is recognised. Impairment loss relating to goodwill cannot be reversed in future periods.

Intangible assets with indefinite useful lives

Intangible assets with indefinite useful lives are tested for impairment annually as at 31 December either individually or at the CGU level, as appropriate and when circumstances indicate that the carrying value may be impaired.

s) Cash and short term deposits

Cash and short term deposits in the statement of financial position comprise cash at banks and on hand and short term deposits with an original maturity of three months or less.

For the purpose of the consolidated statement of cash flows, cash and cash equivalents consist of cash and short-term deposits as defined above, net of outstanding bank overdrafts.

t) Provisions

General

Provisions are recognised when the Group has a present legal or constructive obligation as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. When the Group expects some or all of a provision to be reimbursed, for example under an insurance contract, the reimbursement is recognised as a separate asset but only when the reimbursement is virtually certain. The expense relating to any provision is presented in the income statement net of any reimbursement. If the effect of time value of money is material, provisions are discounted using a current pre-tax rate that reflects the risks specific to the liability. Where discounting is used, the increase in the provision due to the passage of time is recognised as a finance cost.

Carbon dioxide emissions

The Group receives free carbon dioxide emission allowances as a result of the European Emission Trading Scheme. The allowances are granted on an annual basis and, in return, the Group is required to remit allowances equal to its actual emissions. The Group has adopted a net liability approach to the allowances granted. Therefore, a provision is only recognised when actual emissions exceed the emission allowances granted and still held. Where emission allowances are purchased from other parties, they are recorded at cost and treated as a reimbursement right.

3. Significant accounting judgements, estimates and assumptions

The preparation of the Group's consolidated financial statements requires management to make judgements, estimates and assumptions that affect 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.

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.

Impairment of non-financial assets

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 an arm's length transaction 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 next five years and do not include restructuring activities that the Group is not yet committed to or significant future investments that will enhance the asset's performance of the CGU being tested. The recoverable amount is most 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 for extrapolation purposes.

Share-based payment transactions

The Group measures the cost of equity settled transactions with employees by reference to the fair value of the equity instruments at the date at which they are granted. Estimating fair value for share based payment transactions requires determining the most appropriate valuation model, which is dependent on the terms and conditions of the grant. This estimate also requires determining the most appropriate inputs to the valuation model, including the expected life of the option, volatility and dividend yield and making assumptions about them. The assumptions and models used are disclosed in Note 23.

Taxes

The Group has a wide range of international business relationships and the nature and scale of its trading activities is inherently complex. The Group establishes provisions for payment of taxes in the countries in which it operates based on reasonable estimates. Various factors are taken into consideration when making such estimates, such as changes in legislation, experience of previous tax reviews and evidence of interpretations of tax regulations by the relevant authorities. The Group's management considers that adequate provision has been made for the Group's future tax liabilities based upon current facts, circumstances and tax law.

Deferred taxes are provided using the liability method to reflect the net tax effects of all temporary differences between the carrying amounts for financial reporting purposes and the tax bases of assets and liabilities. The principal temporary differences arise from depreciation on property, plant and equipment, fair valuation of net assets at acquisition, fair valuation of derivative financial instruments and tax losses carried forward. Deferred tax assets are recognised to the extent it is probable that future taxable profits will be available against which deductible temporary differences and unused tax losses may be utilised. Significant management judgement is required to determine the amount of such deferred tax assets that should be recognised, based upon the likely timing and level of future taxable profits and future tax planning strategies.

During the year ended 31 December 2011, the Group sold a portion of its shareholding in an associated company, Harvestia Oy, and sold its entire interest in the shares of the subsidiaries which comprised the Graphic Papers business segment, realising a profit on both disposals. The Group has assumed that as an industrial company, it will be able to take advantage of the participation or substantial shareholder exemptions available in Finland and that the gains arising on the disposals will be exempt from corporate taxes. If the Group is not able to take advantage of the exemptions, then taxes on profits would increase by €2,957,000.

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 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.

4. Standards issued but not yet effective

Standards issued but not yet effective up to the date of issuance of the Group's financial statements are listed below.

IAS 1 Financial Statement Presentation - Presentation of Items of Other Comprehensive Income

IAS 12 Income Taxes - Recovery of Underlying Assets

IAS 19 Employee Benefits (Amendment)

IAS 27 Separate Financial Statements (as revised in 2011)

IAS 28 Investments in Associates and Joint Ventures (as revised in 2011)

IFRS 7 Financial Instruments: Disclosures - Enhanced Derecognition Disclosure Requirements

IFRS 9 Financial Instruments: Classification and Measurement

IFRS 10 Consolidated Financial Statements

IFRS 11 Joint Arrangements

IFRS 12 Disclosure of Involvement with Other Entities

IFRS 13 Fair Value Measurement

With the exception of IFRS 11 Joint Arrangements, the standards issued but not yet effective and their interpretations are not expected to have any impact on the Group's financial statements. IFRS 11 Joint Arrangements may have an impact on the way in which the Group's investment in Harvestia Oy is accounted for and this is currently under review.

5. Business combinations

The Group did not make any acquisitions during the years ended 31 December 2011 and 2010.

6. Investment in an associate

The Group has a 30% 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 interest in Harvestia as at 1 January 2011 was 33%. On 21 December 2010, the shareholders of Harvestia reached agreement with Vapo Oy, a leading supplier of renewable fuels, bioelectricity, bioheat and environmental business solutions based in Finland, under which they each agreed to sell a portion of their shares in Harvestia to Vapo. Vapo also agreed to make a further direct investment in the equity of Harvestia. The transactions were completed on 19 January 2011 and the Group received aggregate net proceeds of €2,458,000 in cash from the sale of Harvestia shares to Vapo and from the repayment of working capital and equity contributions previously made to Harvestia. This resulted in a gain of €1,869,000 on partial disposal of an associate in the income statement for the year ended 31 December 2011. Following completion of the transactions, the Group's interest in Harvestia decreased to 30%.

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

On 2 January 2012, the Group completed the acquisition of a further 15% of the equity of Harvestia for cash consideration of €1.4m. The purchase of Harvestia shares was financed from the Group's own cash resources and following completion of the transaction the Group has an interest of 45%. Harvestia will continue to be accounted for using the equity method as an associated company. Further details are provided in Note 28.

7. Operating segment 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 and is presented as discontinued operations. See Note 10 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 31 December 2010 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").

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

Inter-segment revenues are eliminated on consolidation and are not shown as adjustments or eliminations.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.

Capital expenditure consists of additions of property, plant and equipment, intangible assets and investment properties but does not include additions arising directly from business combinations.

Geographical information

Management considers the principal geographic segments based on customer location to be Finland, other countries in the EU, other countries in Europe and the rest of the world.

8. Other income, expenses and adjustments

8.1 Other operating income

8.2 Employee benefits expense

The average total number of employees during the year in continuing operations was 196 (2010: 196). The average total number of employees during the year ended 31 December 2010 in discontinued operations was 592.

8.3 Other operating expenses

8.4 Research and development costs

Research and development costs recognised as an expense in the income statement during the financial year amount to €135,000 (2010: €73,000).

8.5 Finance income

8.6 Finance expenses

8.7 Components of other comprehensive income

9. Income tax

Consolidated income statement

The major components of income tax for the years ended 31 December 2011 and 2010 are:

A reconciliation between the tax expense/(income) and the product of accounting profit multiplied by the domestic tax rate in Finland of 26% for the years ended 31 December 2011 and 2010 is as follows:

In calculating income tax and deferred tax for the years ended 31 December 2011 and 2010, the Group has assumed that it is able to take advantage of participation or substantial shareholder exemptions and that gains arising on the disposals will be exempt from corporate taxes. Furthermore, it has been assumed that tax losses incurred in the years ended 31 December 2009 and 2010 remain available to the Group to relieve profits in subsequent years, notwithstanding any change in ownership of the Group's shares since the losses were incurred. In the event that either of these assumptions proves to be incorrect, there could be a material increase in the Group's income tax liabilities. For further details see Note 3.

Deferred tax

Deferred tax in the income statement relates to the following:

The change in the deferred tax liability recognised in other comprehensive income is an income of €652,000 (2010: charge of €639,000) which arises from the revaluation of forward contracts to fair value. The change in net deferred tax liabilities was an increase of €180,000 (2010: decrease of €11,139,000).

Deferred tax in the statement of financial position at 31 December relates to the following:

10. Discontinued operations

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 have been 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 profit/(loss) after tax for the period from discontinued operations was as follows:

The profit/(loss) from trading activities of the Graphic Papers business was as follows: