POWR.L Regulatory News (POWR)

25 March 2015

Powerflute

Preliminary results for the year ended 31 December 2014

Powerflute Oyj ("Powerflute" or the "Group") today announces its preliminary results for the year ended 31 December 2014. Powerflute is quoted on the AIM market of the London Stock Exchange (POWR).

HIGHLIGHTS

· Acquisition of Corenso for cash consideration of €101.6 million completed in December 2014

· Increase in dividend to 1.50 cents per share (2013: 1.35 cents)

Results excluding non-recurring items (1)

· Revenues increased 16% to €150.1 million (2013: €129.4 million)

· EBITDA from operating activities increased 20% to €20.9 million (2013: €17.4 million)

· EPS increased by 17% to 3.8 cents per share (2013: 3.3 cents)

Like-for-like performance (2)

· Revenues from Packaging Papers increased 4% to €134.4 million (2013: €129.4 million)

· EBITDA from operating activities increased 8% to €18.7 million (2013: €17.4 million)

· Operating profit increased by 7% to €13.0 million (2013: €12.1 million)

Results including non-recurring items

· Operating profit of €10.1 million (2013: €10.9 million) after charging transaction costs of €6.2 million (2013: €1.2 million) and gain on acquisition of €1.4 million (2013: nil)

· Profit before tax of €8.6 million (2013: €10.0 million)

· EPS of 2.2 cents per share (2013: 2.8 cents)

· Net debt of €61.5 million, representing less than 1.5 times pro-forma historical EBITDA (3)

(1) Results excluding non-recurring items exclude expenses related to and the gain arising on the Corenso acquisition

(2) "Like-for-like" performance excludes the impact of the Corenso acquisition on revenues and earnings

(3) EBITDA assuming Corenso had been acquired at the beginning of the year and excluding non-recurring items

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

I am pleased to report that 2014 was another successful year for Powerflute, with improvement in the underlying profit and earnings per share from our Packaging Papers businesses. We were delighted to complete of the acquisition of the Corenso group of companies in December 2014, and remain excited about the future potential of the business and expect it will make a significant contribution to earnings per share in 2015 and beyond.

Packaging Papers has made an encouraging start to the year, with a good operational performance backed by favourable market conditions and exchange rates, resulting in earnings growth compared with the same period of the prior year. The new Coreboard and Cores segment is also performing well and good progress has been made with integration activities.

Despite the increase in borrowings resulting from the Corenso acquisition, the Group continues to have only moderate leverage and a strong balance sheet and is well positioned to pursue opportunities for the development of its businesses as they arise.

- Ends-

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About Powerflute

Powerflute is a paper and packaging group quoted on the AIM market of the London Stock Exchange (Ticker: POWR) which seeks to acquire businesses with strong fundamentals whose performance can be improved through a combination of management focus and targeted investment.

The Group currently has two main activities; Packaging Papers which trades under the name Powerflute and operates a paper mill in Kuopio, Finland producing a specialised form of Nordic semi-chemical fluting used in the manufacture of high-performance corrugated board; and Coreboard and Cores, which trades under the name Corenso and is a leading international manufacturer of high performance coreboard and cores, with coreboard mills in the United States and Europe and a network of core producing facilities in Europe, North America and China.

Nordic semi-chemical fluting is made from locally soured birch and boxes manufactured using it demonstrate superior strength and moisture resistance and are used for transportation of fruit and vegetables, high-value industrial goods such as electrical appliances and automotive components. The Kuopio mill is one of only three suppliers of Nordic semi-chemical fluting in Europe.

Cores and coreboard are manufactured from recycled paper and are used for applications in paper, packaging, textiles, steel, aluminium and many other industries. Coreboard and cores produced by Corenso demonstrate superior strength and rigidity and are suitable for use in the most demanding applications.

For further information, please visit www.powerflute.com.

CHAIRMAN'S STATEMENT

Year in review

I am pleased to report that 2014 has been another successful year for Powerflute, with the executive management team delivering improvement in the underlying profit and earnings per share from our Packaging Papers businesses and also completing the acquisition of the Corenso group of companies in December 2014, an acquisition which we expect will be transformational for the Group.

In Corenso, we have secured one of the world's leading manufacturers of coreboard and cores. We have a tough year of separation and integration activities ahead of us, but are confident that the business will continue to perform strongly during this period. Four months after completing the acquisition we remain excited by the potential for improvement and further development of this business.

Although the economic situation across Europe was challenging, Packaging Papers continued to enjoy broadly favourable conditions and was able to improve its position in key markets. Good progress was also made further increasing penetration into markets outside Europe despite the relative weakness of the US dollar against the Euro during the early stages of the year. Further progress was made with the multi-year investment program in the pulp mill during the latter stages of the year and the resulting improvements in pulp yield, quality and consistency are already having a positive impact on financial performance.

In February 2015, the majority owner of Kotkamills Oy exercised its rights under the shareholder agreement to acquire the Group's minority interest in the company as part of a larger transaction that will see the business sold to a new investor who has plans for further development and expansion. The transaction completed on 24 March 2015 and we are pleased that the Group has generated a significant return on its original investment and also that the business will benefit from significant investment under new ownership.

The strength of any organisation depends not only on the products and services that it offers, but also on the quality and commitment of its people. On behalf of the Board, I would like to acknowledge the efforts and contribution made by our management team and all of our employees to the significant progress made during the year.

Governance

Powerflute is committed to supporting the highest standards of Corporate Governance and to conducting and operating its businesses in an ethical, responsible and sustainable manner. Governance is about ensuring that we have the right strategy to deliver value for our shareholders and other stakeholders, an executive management team that is leading and managing the business effectively and delivering on our objectives and goals and that the risks and challenges faced by the Group are well understood and appropriately managed and controlled. During 2014, we undertook a comprehensive review of our approach to governance and risk management as part of the Corenso acquisition and we will be introducing a number of changes and improvements during the course of 2015 to reflect the increased complexity and scale of the Group's activities.

Directors

We have continued to review the composition of the Board to ensure that the executive management have the level of support and challenge appropriate for a company of our size. In April 2014, we were pleased to announce the appointment of Teresa Presas as an independent non-executive director. Mrs Presas recently retired after ten years as Director General of CEPI, the Confederation of European Paper Industries, and has more than 30 years of experience and knowledge of the packaging and paper industry. I am confident that she will make a valuable contribution to the Board and the continuing development of Powerflute.

Tony Smith, who has served as a director of Powerflute or its predecessor companies since 2005. has informed the Board of his decision not to offer himself for re-election at the forthcoming Annual General Meeting ("AGM") to be held in Kuopio on 28 May 2015. We would like to sincerely thank him for his support and contribution to the Group during his ten years as a director and to offer him our best wishes for the future. The Group has already initiated a search for a replacement with appropriate knowledge and experience and it is expected that an appointment will be made at the forthcoming AGM.

Dividends, Dividend Policy and TSR

For the year ended 31 December 2014, the Board intends to propose a dividend of 1.50 cents per share (2013: 1.35 cents). This represents an increase of 11 per cent on the prior year, reflecting the increase in underlying earnings per share, and a dividend cover of approximately 2.5 times based on underlying earnings per share excluding the impact of non-recurring items, which is in line with our policy.

The Board considers payment of an attractive dividend to be an important component of Total Shareholder Return (TSR) and as such has a policy of pursing a progressive approach to dividends linked to improvements in underlying earnings per share and to providing shareholders with an attractive dividend yield provided this can be done while maintaining underlying dividend cover of at least two times. This approach will continue to be adopted following the Corenso acquisition which we expect will make a significant contribution to earnings and earnings per share in 2015, providing scope for future increases in the dividend.

Outlook

The Corenso acquisition will have a transformational impact on Powerflute and we expect to report a significant increase in profits and earnings per share as a result of the contribution to earnings from the newly created Coreboard and Cores segment.

Packaging Papers has made an encouraging start to the year, with favourable market conditions and exchange rates and a good operational performance resulting in earnings growth compared with the same period of the prior year.

The Coreboard and Cores activity is also performing well and good progress has already been made with separation and integration activities. The results for 2015 will be impacted by the costs of such activities and also by a number of operational restructuring and profit improvement initiatives that have already been commenced. However, the underlying trading performance remains encouraging and the outlook for both revenue growth and further profit improvement following completion of these projects remains positive.

Despite the increase in borrowings as a result of the Corenso acquisition, the Group continues to have only moderate leverage and a strong balance sheet and is well positioned to pursue opportunities for the development of its businesses as they arise.

Dermot F Smurfit

Chairman

CHIEF EXECUTIVE'S REVIEW

2014 Overview

2014 was a year in which Powerflute continued to deliver on all of its financial targets and made significant progress with the implementation of its strategy to grow through acquisition and pursue the improvement and development of its existing businesses. The acquisition of Corenso in December 2014 was a transformational event, increasing both the scale and geographical reach of the Group's activities. However, considerable progress was also made during the year in Packaging Papers and we consider that both businesses have bright futures and are optimistic of further improvement during 2015.

The Group remains strongly committed to its strategy of identifying and acquiring speciality paper and packaging businesses with established positions in attractive markets. The acquisition of Corenso, which will be reported within the newly established Coreboard and Cores segment, fits perfectly with this strategy as Corenso is one of the world's leading producers of coreboard and cores, with modern, well-equipped and well-positioned operations in North America, China and throughout Europe. We have a challenging period ahead of us as we work to separate the business activities of Corenso from those of its previous owner, a large integrated multinational corporation, and absorb them into our own Group. However, a good start has been made and I am very encouraged by the enthusiasm, competence and commitment demonstrated by the leadership and workforce of Corenso.

The Packaging Papers business performed well during the year and was able to capitalise on continuing favourable market conditions and stable raw material and other input costs. We enjoyed a particularly strong start to the year, achieving record levels of production and a substantial increase in EBITDA from operating activities during the first half. While we were not able to maintain this performance into the second half, EBITDA from operating activities for the full year of €18.7 million still represented a healthy improvement on the prior year (2013: €17.4 million). More importantly, the performance in the first half clearly demonstrates the potential of the Packaging Papers business and confirms that the benefits from recent investments in the pulp mill and other areas are being realised and converted into higher profits.

Investment, sustainability and innovation

Alongside the delivery of improvements in operating performance, we continued to invest in the production assets of the Packaging Papers business. During 2014, €5.4 million was spent on projects intended to improve both the quality and consistency of the paper that we produce, including further projects as part of the multi-year programme of upgrades to the pulp mill (2013: €7.2 million). We continue to pursue our objective of increasing nominal capacity at the Kuopio mill to 300,000 tonnes and have a series of projects planned for 2015 and beyond designed to move us closer to this goal.

Powerflute is committed to providing its employees with a safe and productive working environment and I am pleased to report that we achieved a further improvement in our safety record and a reduction in absenteeism, with both now significantly better than the Finnish national average and the normal levels for our industry. This reflects our on-going commitment to best practice in health and safety, which is supported by investment where necessary.

With its presence in paper-based packaging and forest products, Powerflute is part of the sustainable economy. Packaging Papers' products are produced from raw materials sourced only from suppliers practicing sustainable forestry practices and they are used in the production of corrugated board, which once used is suitable for recycling. Coreboard and Cores manufactures its products principally from recycled raw materials, and once used its products are suitable for either reuse or further recycling. In recent years, we have made considerable investments to improve our own environmental performance and are pleased to say that we have reduced energy consumption, reducing CO2 emissions relative to production, and significantly improved performance in a number of other areas.

Capital expenditure in 2015 will continue to be focused principally on delivering improvements in operational effectiveness and on reducing both variable and fixed costs. In Coreboard and Cores, we have committed to a programme of upgrades in the coreboard mills intended to improve quality and lower costs, while in the core plants investment will be focused largely on increasing the degree of automation with a view to entering new markets, improving productivity and capacity utilisation and lowering costs. The total cost of this programme is expected to be approximately €15.0 million over the next three years, with expenditure of approximately €5.0 million anticipated in 2015. In Packaging Papers, we will continue the multi-year programme of upgrades and mill refurbishment started in 2011 and during 2015 will complete the final stage of the separation of the two pulp lines and carry out a number of essential replacement projects. We expect expenditure in this business to be consistent with the level incurred in prior years.

In addition to investment in operational initiatives, the Group will be required to make a significant commitment to replacement and upgrading of its information technology and production management systems as part of the separation of the Corenso businesses from their former owner, Stora Enso. The cost of this programme is expected to be in the region of €7.0 million over the next three years. We will take advantage of this opportunity to review and where appropriate upgrade the systems and procedures in use in our other businesses to "best in class".

People

Powerflute's key competitive advantage is the quality of its people, both individually and collectively, and our continued focus is on recruiting, developing, motivating and retaining the best people possible. I would like to acknowledge the efforts and contribution of the whole of our workforce to the progress made by the Group in recent years, and in particular during 2014. I would also like to welcome our new colleagues in Coreboard and Cores. We look forward to facing the challenges and opportunities presented by 2015, working together in a more collaborative and entrepreneurial environment that exists in a smaller more focused organisation such as Powerflute.

Outlook

The current year has started well, with both Coreboard and Cores and Packaging Papers performing strongly. While we expect that the economic environment in Europe will remain challenging, our continuing focus on servicing and supporting our customers, on delivery of operational improvements within our own businesses and on investing in improving the quality and performance of our products provides us with confidence for the future.

Marco Casiraghi

Chief Executive

OPERATING REVIEW

The divisional results set out below for the year ended 31 December 2014 include only a one month contribution from the Coreboard and Cores reporting segment. They do not include any costs related to the acquisition of Corenso and all central expenses have been allocated to the Packaging Papers reporting segment in both the current and prior years.

Packaging Papers

Packaging Papers enjoyed another successful year, although some production issues were experienced in the second half which impacted performance.

During the first half of the year, deliveries of 140,000 tonnes were achieved and this represented a new record performance for the mill, demonstrating the potential that now exists following completion of the recent investment programmes and the increased focus on preventative maintenance to improve equipment availability. However, during the third quarter we experienced an unexpected failure of a pulp storage tank and this, together with the impact of the planned maintenance stop in September, resulted in deliveries falling to only 119,000 tonnes in the second half.

Despite periods of some weakness in Europe, conditions continued to be broadly favourable in most major markets throughout the year and further progress was made with the strategic realignment of the customer mix and geographic distribution of sales. We continued to grow the proportion of sales made to customers outside of Europe, and within Europe we further increased volumes in countries where competition is less intense and margins are higher.

Average selling prices remained virtually unchanged compared with the prior year, reflecting both a greater degree of underlying price stability and lower seasonal fluctuations, together with the benefit of an improved sales mix. Although prices for recycled alternatives exhibited a degree of fluctuation, particularly in Southern European markets, this was not evident in prices for Nordic SC-fluting which remained at good levels throughout the year.

An increasing proportion of Packaging Papers' sales are denominated in US dollars and although there was considerable volatility during the year, the average rate for the year was virtually unchanged compared with the prior year and this, together with the hedging in place, meant that the impact of currency fluctuations on average selling prices was limited.

Raw material and other variable costs reduced slightly compared with the prior year due principally to lower wood and other fibre costs attributable to improved yield from the pulp mill. Fixed operating costs increased by 5% due to additional maintenance expenditure related to the failure of the pulp storage tank during the third quarter and the results for the year are stated after charging non-recurring provisions for restructuring the sales network in Europe which commenced in 2014 and will be completed in 2015.

Packaging Papers began 2015 with a strong forward order book and the outlook for both demand and average selling prices remains positive. The US dollar has moved strongly in our favour and notwithstanding the hedging in place, there should be some benefit from this during the first half. Production and deliveries during the first few months of the year have been in line with our expectations and are currently slightly ahead of the same period of the prior year.

Coreboard and Cores

Despite the inevitable uncertainty and disruption surrounding the change of ownership which occurred on 1 December 2014, Coreboard and Cores continued to perform well during the final months of the year and this is reflected in the healthy result achieved in the month of December. The coreboard mills all exceeded their production and sales targets for the month and the core operations performed broadly in line with our expectations.

The initial separation of Corenso from its former parent was completed smoothly and the business is now operating independently, albeit still with a heavy dependence on services provided under transitional arrangements in a number of areas. Work on separation activities and integration of the business into the Powerflute Group will continue throughout much of 2015. However, good progress has already been made and the achievements to date have been very encouraging.

From a trading perspective, the year has started positively with good volumes in both coreboard mills and core plants and stable pricing in most markets. The North American operations are performing well and further improvement is expected to occur as the year progresses. In the Nordic region, the transition to supply of Stora Enso under the new five year supply agreement has gone smoothly and financial performance should be broadly comparable with the prior year. In the underperforming Central European businesses, a number of operational improvement initiatives have commenced with a view to reducing costs and improving operational effectiveness, and there have already been some early signs of improvement. While the costs of these programmes will largely offset any benefits in the current year, we are confident that the returns will be evident in improved performance from 2016 onwards. In China, increased competition has impacted slightly on both volumes and price but the business continues to perform strongly and a number of opportunities for growth and expansion in partnership with major customers are currently under consideration.

The Group recently made a commitment to a major programme of investment in Coreboard and Cores, which is expected to result in total expenditure of approximately €15.0 million over a three year period. Each of the coreboard mills and core plants has unutilised capacity and accordingly, much of the expenditure is targeted at projects to improve quality, increase production efficiency and reduce cost, all of which offer the prospect of rapid returns on investment.

In addition to capital expenditure on operational projects, over the next three years we will invest €7.0 million in replacement of production, financial and other IT systems, the majority of which are currently still running on systems provided by Stora Enso under transitional service agreements. This will provide us with an opportunity to review, challenge and streamline operational procedures in many areas and will provide a platform to support the future growth and development of the Group in Coreboard and Cores and elsewhere.

We remain pleased with the acquisition of Corenso and although there are challenges ahead, not least of which is completing the separation of the business from its former parent, we are more than satisfied with the progress made during the first few months of ownership and continue to believe there are opportunities to improve performance and further grow and develop the business.

Kotkamills

In February 2015, the majority owner of Kotkamills Oy exercised its rights under the shareholder agreement to acquire the Group's minority interest in the company as part of a larger transaction that will see the business sold to a new investor who has plans for further development and expansion.

At that time, the Group entered into a conditional agreement for the sale of its investment in Kotkamills Oy for cash consideration of €3.7 million, compared with an original cost of investment in July 2012 of €1.6 million. The transaction was successfully completed on 24 March 2015.

The shareholding in Kotkamills was recorded as an investment held for sale and not consolidated or equity accounted. Accordingly, the results of Kotkamills had no impact on the income statement of the Group for the year ended 31 December 2014 and no further commentary is provided on its performance during the year.

FINANCIAL REVIEW

Revenue

Revenue from continuing operations increased by 16% to €150.1 million (2013: €129.4 million), and included revenues of €15.8 million (2013: nil) from the newly acquired Coreboard and Cores activity.

Revenues from Packaging Papers increased by 4% to €134.4 million (2013: €129.4 million) due to a combination of modest improvements in both delivered volumes and average selling prices. Deliveries increased to 259,000 tonnes (2013: 256,000 tonnes), while average selling prices improved by 3% to €519 per tonne (2013: €505 per tonne).

During the year ended 31 December 2014, approximately 25% of the Group's revenues were denominated in US Dollars (2013: 30%). However, despite considerable volatility the average US Dollar exchange rate for the year remained virtually unchanged at 1.3291 (2013: 1.3281).

EBITDA from operating activities

EBITDA from operating activities, which is stated before charging non-recurring expenses and recognising income related to the acquisition of Corenso, increased by €3.5 million (20%) to €20.9 million (2013: €17.4 million). This included EBITDA of €2.2 million (2013: nil) from one month of trading in the newly acquired Coreboard and Cores segment, while on a "like-for-like" basis, the EBITDA generated from the Packaging Papers activity improved by €1.3 million (8%) to €18.7 million (2013: €17.4 million).

Segment EBITDA

Segment EBITDA is stated before recognising unrealised gains and losses on derivative financial instruments used to hedge currency risk and before the cost of share-based payment schemes, both of which are non-cash items, and is the best representation of the underlying operating performance of the Group's business activities.

Segment EBITDA increased by €4.4 million (25%) to €22.0 million (2013: €17.6 million). This included EBITDA of €2.2 million (2013: nil) from Coreboard and Cores segment, while on a "like-for-like" basis, the Segment EBITDA generated by Packaging Papers improved by €2.1 million (12%) to €19.8 million (2013: €17.6 million).

The improvement in Packaging Papers was principally due to the increase in deliveries and average selling prices, although there was also some reduction in variable costs and fixed expenses were tightly controlled. Selling and distribution expenses reduced by 9% due to a combination of lower sales costs following changes made to the sales organisation and the impact of lower oil prices on bulk shipping rates. Raw materials and other variable costs were 2% lower than the prior year, due principally to improvements in yield achieved in the pulp mill following completion of a number of capital investment projects. The result for the year is also stated after charging €0.6 million (2013: nil) relating to the cost of reorganisation of the sales network.

EBITDA and Operating Profit

Reported EBITDA remained virtually unchanged at €16.2 million (2013: €16.2 million). However, this was the net result of a €3.5 million increase in EBITDA from operating activities, recognition of a gain of €1.4 million on the acquisition of Corenso and charging of €6.2 million of acquisition-related expenses (compared with €1.2 million charged in the prior year).

The gain on acquisition of €1.4 million (2013: nil) relates to the acquisition of Corenso and represents the difference between the purchase consideration transferred to the vendor of €101.6 million and the fair value of the separately identifiable net assets acquired.

Operating profit from continuing operations reduced by €0.8 million to €10.1 million (2013: €10.9 million) due to a combination of the factors outlined above and to an increase in the depreciation charge in Packaging Papers following higher levels of capital expenditure in recent years.

Finance income and expenses

Net finance expenses were €1.5 million (2013: €0.9 million), consisting of finance income of €0.2 million (2013: €0.3 million) and finance expenses of €1.7 million (2013: €1.2 million). Finance expenses included €0.2 million relating to amortisation of costs incurred restructuring of the Group's borrowing facilities in connection with the acquisition of Corenso (2013: nil).

Profit before tax from continuing operations

Profit before tax from continuing operations reduced by €1.4 million to €8.6 million (2013: €10.0 million) due to a combination of factors. The improvement in underlying trading performance in Packaging Papers, together with the contribution from Coreboard and Cores, was offset by the acquisition-related expenses charged against profit, a higher depreciation charge and higher net finance costs.

On an underlying basis, excluding the impact of non-recurring income and expenses related to the Corenso acquisition, profit before tax increased by approximately €2.2 million (20%) to €13.5 million (2013: €11.3 million).

Taxation

The income tax charge of €2.3 million (2013: €2.0 million) represents an effective tax rate of 27% (2013: 20%) and is based upon the weighted average annual tax rate for the year applied to the underlying profit before taxation after adjusting for the impact of disallowable items of income and expenditure.

The underlying rate of tax on profits before taxation in Finland during the year was 20.0% (2013: 24.5%) and the difference between this and the effective rate arises principally as a result of the non-deductibility of acquisition-related expenses.

Dispute with Finnish Tax Administration

In preparing its financial statements for the year ended 31 December 2011, the Group assumed that gains arising on the sale of shares of the Graphic Papers business and Harvestia were exempt from corporate income taxes under the participation or substantial shareholder exemptions available to industrial companies.

During the year ended 31 December 2012, the Tax Administration division of Vero, the Finnish taxation authority determined that the Group was a venture capital company and confirmed tax assessments for the year ended 31 December 2011 which included €3.6 million of taxes relating to the gains realised on the share transactions. While these taxes were paid to avoid the risk of interest and other penalties, the Group strongly disagreed with the decision of the Tax Administration and did not recognise the taxes paid in its income statement but instead recorded the amount as a recoverable non-current financial asset in its balance sheet.

During the year ended 31 December 2013, the Group filed an appeal against the tax assessments with the Assessment Adjustment Board (AAB) of Vero and in December 2013, the appeal was upheld and the original assessments overturned. In March 2014, the Group received notification that the Tax Administration has filed a further appeal with the Administrative Court in Helsinki against the decision of the AAB to overturn the original assessments. The appeal process is still on-going.

In the event that the Group does not prevail in its appeal against the assessment of taxes on the gains, then additional taxes of €3.6 million would need to be recognised within the results of discontinued operations. There would be no impact on the net cash position of the Group, or on the results of continuing operations.

Earnings per share and dividends

Basic earnings per share was 2.2 cents (2013: 2.8 cents).

On an underlying basis, excluding the impact of expenses relating to and the gain arising on the acquisition of Corenso, basic earnings per share increased by 17% to 3.8 cents per share (2013: 3.3 cents).

The directors intend to propose an increased dividend of 1.50 cents per share for the year ended 31 December 2014 at the Annual General Meeting of Shareholders to be held in Kuopio, Finland on 28 May 2015 (2013: 1.35 cents per share). The ex-dividend date for the proposed dividend would be Thursday, 4 June 2015, the record date would be Friday, 5 June 2015 and the payment would be made on or about Friday, 19 June 2015.

Acquisition of Corenso

On 1 December 2014, the Group completed the acquisition of Corenso for initial cash consideration of €102.3 million. On 18 March 2015, the Group reached agreement with the vendor on the closing accounts and on the related closing and adjustments statement and the purchase consideration was reduced by €0.7 million to €101.6 million, with the difference to be refunded to the Group.

The fair values of the identifiable assets and liabilities of Corenso group as at the date of acquisition are summarised below and compared with the purchase consideration transferred to the vendor:

The excess of the fair value of identifiable assets, liabilities and contingent liabilities acquired, after deduction of non-controlling interest measured at fair value, over the purchase consideration transferred of €1.4 million has been recognised as a gain arising on acquisition and reported within operating profit for the year (2013: nil). From the date of acquisition, Corenso contributed €15.8 million of revenue and €1.9 million to operating profit from continuing operations of the Group.

The cash flows related to the acquisition may be summarised as follows:

Sale of investment in Kotkamills

In February 2015, the Group entered into a conditional agreement for the sale of its investment in Kotkamills Oy ("Kotkamills") to Opengate Capital LLC, the majority owner of Kotkamills, as part of a larger transaction that will see the business sold to a new investor who has plans for further development and expansion. Under the terms of this agreement, the Group will receive cash consideration of €3.7 million for its shares. The transaction was completed on 24 March 2015.

The Group's shareholding in Kotkamills is recorded as an investment held for sale and not consolidated or equity accounted. In the financial statements for the year ended 31 December 2014, the Group has recognised an increase in the fair value of its investment of €2.0 million within other comprehensive income. Subject to completion of the sale occurring, the gain arising on sale of shares will be recognised in the income statement for the year ending 31 December 2015.

Discontinued operations

In May 2011, the Group disposed of its interests in the Graphic Papers business for consideration of €38.5 million before disposal costs. Although the initial period during which claims could be made by the purchaser under warranties and indemnities has expired, there remains the possibility of claims under certain circumstances and accordingly a provision against future claims of €0.7 million has been retained (2013: €0.7 million).

Financial position

The total assets and total equity and liabilities of the Group increased by €141.2 million to €264.1 million (2013: €122.9 million), while total equity increased by €14.8 million to €78.1 million (2013: €63.3 million).

The principal reason for the increase in total assets and total equity and liabilities is the inclusion of the assets and liabilities of Corenso in the consolidated results of the Group. The increase in total equity was due to retained profit for the period exceeding the dividend paid for the prior year, recognition of the revaluation to fair value of the Kotkamills investment within other comprehensive income and inclusion of the non-controlling interests acquired with Corenso, principally attributable to the Corenso joint venture in China.

Capital expenditure of €6.5 million (2013: €7.2 million) continued to be broadly comparable to depreciation of €6.0 million (2013: €5.2 million). Continuing investment in pulp production at the Kuopio mill accounted for more than 50% of the expenditure. The major project completed during the year was the separation of the two NSSC pulp lines, which is expected to increase flexibility, optimising both pulp yield and quality, and also to result in a greater degree of protection from mechanical failure. In addition, a programme of refurbishments and replacements was competed in the power station and wood handling areas.

Cash flow, borrowings and liquidity risk

Cash flow

The net cash outflow for the period of €70.1 million (2013: €5.8 million outflow) arose principally as a result of the purchase consideration attributable to the Corenso acquisition on a cash free debt free basis of €72.3 million.

At the start of the year, the Group had net cash of €5.1 million, consisting of cash and short term deposits of €28.9 million, less interest-bearing loans and borrowings of €23.8 million.

The principal sources and uses of cash during the year were as follows:

· €23.4 million net cash inflow from operating activities (2013: €7.3 million) before acquisition-related expenses

· €9.3 million of expenses directly related to the Corenso acquisition (2013: €1.2 million)

· €5.7 million capital expenditure (2013: €7.2 million)

· €3.8 million dividends (2013: €3.7 million)

· €1.5 million net cash interest expense (2013: €1.1 million)

· €73.0 million of payments related to the acquisition of the assets of Corenso, excluding any consideration paid for net cash balances (2013: nil).

The net cash inflow from operating activities before acquisition-related expenses of €23.4 million consists of profits from trading activities after adjusting for non-cash items of €22.4 million (2013: €17.6 million), an inflow from net working capital of €2.6 million (2013: €6.0 million outflow) and payment of income taxes of €1.7 million (2013: €4.6 million).

The net cash outflow for the period of €70.1 million was financed principally through utilisation of the new facilities of €120.0 million put in place to allow the completion of the Corenso acquisition.

At 31 December 2014, the Group had balance sheet net debt of €61.5 million (2013: €5.1 million net cash surplus) consisting of cash and cash equivalents of €47.5 million (2013: €28.9 million) and interest bearing loans and borrowings of €108.9 million (2013: €23.8 million), of which €2.4 million was due for repayment within one year (2013: €11.5 million).

Borrowings and liquidity risk

On 30 September 2014, the Group entered into a new three-year financing arrangement for the provision of up to €120.0 million of facilities for the purpose of financing the acquisition of Corenso and refinancing its existing borrowings. The facilities consist of an amortising term loan of €80.0 million and a revolving credit facility of €40.0 million, both of which remain available to the Group throughout the period to 30 September 2017. The facilities are subject to normal banking covenants including the ratios of total net debt to equity, total net debt to EBITDA and EBITDA to interest expense.

The maturity profile of the Group's bank and other borrowing facilities at 31 December 2014 was as follows:

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

At 31 December 2014, the Group had committed borrowing facilities of €122.2 million (2013: €23.0 million), of which it was utilising €112.2 million (2013: €23.0 million). At 31 December 2014, the Group had cash and short-term deposits of €47.5 million (2013: €28.9 million).

Foreign currency risk

The functional and reporting currency of the Group is the Euro. The Group sells and distributes its products in international markets and has transactional exposure to a number of other currencies and in particular, to the US Dollar. Following the acquisition of Corenso, the Group also operates businesses in countries which use currencies other than the Euro. In particular, it now has operations in countries using the Swedish Krone, US Dollar, British Pound and the Chinese Renminbi.

In the year ended 31 December, approximately 25% of the Group's sales by volume and value and up to 5% of its expenditure on raw materials, consumables and other expenses were denominated in US Dollars. The relative movement in the US Dollar against the Euro during 2014 when compared to 2013 was as follows:

· Movement in average exchange rate between 2013 and 2014 - no material change

· Movement in exchange rate at balance sheet date between 2013 and 2014 - 12% favourable

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. Where possible the Group takes advantage of natural hedges and only considers hedging the net exposure. Decisions on the implementation of the hedging policy are made by the senior management of the Group and are discussed with and reported to the Board on a regular basis. Amendment of the hedging policy itself is a matter reserved for the Board. The Group does not designate currency derivative contracts as hedges for the purpose of hedge accounting and does not engage in currency speculation.

Risks and uncertainties

The principal risks and uncertainties facing the business and the activities of the Group and the steps that are taken to mitigate these are summarised below.

Going concern

The Group's business activities, together with the factors likely to affect its future development, performance and position are set out in the Strategic Report, as is the financial position of the Group, its cash flows, liquidity position and borrowing facilities. In addition, Note 26 of the financial statements includes further information on the Group's objectives, policies and processes for managing its capital, its financial risk management objectives, details of its financial instruments and hedging activities and its exposure to credit risk and liquidity risk.

Relative to its size, the Group has considerable financial resources and long term contracts and relationships with its key customers and suppliers. As a consequence, the Directors consider that the Group is well placed to manage its business risks successfully despite the current uncertain economic outlook.

After making diligent enquiries, the Directors have a reasonable expectation that that 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, and accordingly, continues to adopt the going concern basis in preparing the financial statements.

PRINCIPAL RISKS AND UNCERTAINTIES

The Group's businesses and the execution of its strategy are subject to a number of risks attributable to its specific operations and to the macroeconomic environment. The principal risks and uncertainties which could impact on the Group's operating and financial performance are summarised below.

for the year ended 31 December 2014

for the year ended 31 December 2014

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

at 31 December 2014

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

for the year ended 31 December 2014

CONSOLIDATED CASH FLOW STATEMENT

for the year ended 31 December 2014

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 is listed on the Alternative Investment Market (AIM) of The London Stock Exchange.

The consolidated financial statements of the Company for the year ended 31 December 2014 were approved for issue by resolution of the Company's Board of Directors on 25 March 2015.

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 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 policies 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 2014:

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

Offsetting Financial Assets and Financial Liabilities - Amendments to IAS 32

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

IFRIC 21 Levies

Annual Improvements 2010-2012 Cycle

Annual Improvements 2011-2013 Cycle

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

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 and joint ventures

Associated companies are entities over which the Group has significant influence but not control. Significant influence is the power to participate in the financial and operating policy decisions of the investee, but is not control or joint control over those policies.

A joint venture is a type of joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the joint venture. Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require unanimous consent of the parties sharing control.

The considerations made in determining significant influence or joint control are similar to those necessary to determine control over subsidiaries.

The Group's investments in associated companies and joint ventures are accounted for using the equity method.

Under the equity method, the investment in an associate or a joint venture is initially recognised at cost. The carrying amount of the investment is adjusted to recognise changes in the Group's share of net assets of the associate or joint venture since the acquisition date. Goodwill relating to the associate or joint venture is included in the carrying amount of the investment and is neither amortised nor individually tested for impairment.

The statement of profit or loss reflects the Group's share of the results of operations of the associate or joint venture. Any change in OCI of those investees is presented as part of the Group's OCI. In addition, when there has been a change recognised directly in the equity of the associate or joint venture, the Group recognises its share of any changes, when applicable, in the statement of changes in equity. Unrealised gains and losses resulting from transactions between the Group and the associate or joint venture are eliminated to the extent of the interest in the associate or joint venture.

The aggregate of the Group's share of profit or loss of an associate and a joint venture is shown on the face of the statement of profit or loss outside operating profit and represents profit or loss after tax and non-controlling interests in the subsidiaries of the associate or joint venture.

The financial statements of the associate or joint venture are prepared for the same reporting period as the Group. When necessary, adjustments are made to bring the accounting policies in line with those of the Group.

After application of the equity method, the Group determines whether it is necessary to recognise an impairment loss on its investment in its associate or joint venture. At each reporting date, the Group determines whether there is objective evidence that the investment in the associate or joint venture is impaired. If there is such evidence, the Group calculates the amount of impairment as the difference between the recoverable amount of the associate or joint venture and its carrying value, then recognises the loss as 'Share of profit of an associate and a joint venture' in the statement of profit or loss.

Upon loss of significant influence over the associate or joint control over the joint venture, the Group measures and recognises any retained investment at its fair value. Any difference between the carrying amount of the associate or joint venture upon loss of significant influence or joint control and the fair value of the retained investment and proceeds from disposal is recognised in profit or loss.

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 or joint ventures.

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. Management periodically evaluates positions taken in the tax returns with respect to situations in which applicable tax regulations are subject to interpretation and establishes provisions where appropriate.

(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 or joint ventures, 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 or joint ventures, 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

(i) Defined contribution pension plans

The Group operates a number of defined contribution 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.

(ii) Defined benefit pension plans

The Group operates a number of defined benefit pension plans which require contributions to be made into separately administered funds.

The cost of providing benefits under defined benefit plans are determined using the projected unit credit method.

Re-measurements, comprising of actuarial gains and losses, the effect of the asset ceiling, excluding net interest and the return on plan assets (excluding net interest), are recognised immediately in the statement of financial position with a corresponding debit or credit to retained earnings through OCI in the period in which they occur. Re-measurements are not reclassified to profit or loss in subsequent periods.

Past service costs are recognised in profit or loss on the earlier of:

§ The date of the plan amendment or curtailment, and

§ The date that the Group recognises related restructuring costs

Net interest is calculated by applying the discount rate to the net defined benefit liability or asset. The Group recognises the following changes in the net defined benefit obligation under 'cost of sales', 'administration expenses' and 'selling and distribution expenses' in consolidated statement of profit or loss (by function):

§ Service costs comprising current service costs, past-service costs, gains and losses on curtailments and non-routine settlements

§ Net interest expense or income

(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 22.

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 10).

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.

Available-for-sale financial investments

Available-for-sale financial investments include equity investments. Equity investments classified as available for sale are those that are neither classified as held for trading nor designated at fair value through profit or loss.

After initial measurement, available-for-sale financial investments are subsequently measured at fair value with unrealised gains or losses recognised as other comprehensive income in the available-for-sale reserve until the investment is derecognised, at which time the cumulative gain or loss is recognised in other operating income, or the investment is determined to be impaired, when the cumulative loss is reclassified from the available-for sale reserve to the income statement in finance costs

Listed investments are measured at the market price at the end of the reporting period. Investments, for which fair values cannot be measured reliably, such as unlisted equities, are reported at cost or at cost less impairment. If the available-for-sale asset is impaired, impairment loss is recognized immediately in profit or loss.

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.

Available for sale financial investments

For available-for-sale financial investments, the Group assesses at each reporting date whether there is objective evidence that an investment or a group of investments is impaired.

In the case of equity investments classified as available-for-sale, objective evidence would include a significant or prolonged decline in the fair value of the investment below its cost. 'Significant' is evaluated against the original cost of the investment and 'prolonged' against the period in which the fair value has been below its original cost. When there is evidence of impairment, the cumulative loss - measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that investment previously recognised in the income statement - is removed from other comprehensive income and recognised in the income statement. Impairment losses on equity investments are not reversed through profit or loss; increases in their fair value after impairment are recognised directly in other comprehensive income.

(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 an unrecognised 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 2014 and 2013.

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.

§ 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 13 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 residual values, useful lives and methods of depreciation or property, plant and equipment 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 2014 and 2013 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) 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 5-10 years

Trademarks 5-20 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.

p) 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.

q) 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.

r) 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.

s) 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 22.

Taxes

Taxation of gains arising on disposal of shares

During the year ended 31 December 2011, the Group sold a portion of its shareholding in Harvestia and sold its entire interest in the Graphic Papers businesses, realising a profit on both disposals. In preparing its financial statements for the year ended 31 December 2014 and 2013, the Group has assumed that the resulting gains are exempt from corporate taxes under the substantial shareholder exemptions available to industrial companies in Finland.

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

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

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

While the taxes have been paid to avoid the risk of interest and other penalties, the financial statements for the twelve months ended 31 December 2014 continue to be prepared on the basis that the Group is an industrial company and that the gains arising on the disposals will be exempt from corporate taxes. The taxes originally assessed by the Tax Administration and paid by the Group have not been recognised in the income statement, but have been recorded as a current financial asset in the balance sheet. Full provision has been made against the estimated future costs of the handling the dispute within the results of discontinued operations.

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

In view of this, the financial statements for the twelve months ended 31 December 2014 continue to be prepared on the basis that the Group is an industrial company and that the gains arising on the disposals will be exempt from corporate taxes.

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. The Group intends to adopt these standards, if applicable, when they become effective.

IFRS 9 Financial Instruments

IFRS 14 Regulatory Deferral Accounts

Amendments to IAS 19 Defined Benefit Plans: Employee Contributions

Annual improvements 2010-2012 Cycle

IFRS 15 Revenue from Contracts with Customers

Amendments to IFRS 11 Joint Arrangements: Accounting for Acquisitions of Interests

Amendments to IAS 16 and IAS 38: Clarification of Acceptable Methods of Depreciation and Amortisation

Amendments to IAS 16 and IAS 41 Agriculture: Bearer Plants

Amendments to IAS 27: Equity Method in Separate Financial Statements

The standards issued but not yet effective and their interpretations are not expected to have any impact on the Group's financial statements.

5. Business combinations and acquisition of non-controlling interests

On 1 December 2014, the Group completed the acquisition of 100% of the Corenso group of companies. Corenso is a leading international producer of coreboard and cores with operations throughout Europe, in the USA and in China. Further details of the legal entities acquired or established in connection with this acquisition can be found in Note 24.

The purchase price agreed with the vendor was based on a cash free debt free enterprise valuation of €90.0 million, which was to be subject to various adjustments including adjustments to reflect the presence of minority interests in certain of the acquired businesses, normalisation of net working capital to an agreed target amount and adjustments to reflect the presence of net debt or net cash at the time of acquisition. The initial cash consideration to be paid at completion was based on estimates of the above, which remained subject to further adjustment following preparation of closing accounts and completion of a customary closing and adjustments process.

The initial cash consideration paid by the Group on 1 December 2014 was €102.3 million. Following completion of the closing accounts and preparation and agreement of the closing and adjustments statement, the purchase consideration was reduced to €101.6 million and on 18 March 2015, the Group entered into a final agreement with the vendor for the return of €0.7 million of the initial cash consideration.

The financial statements for the year ended 31 December 2014 have been prepared on the basis of the final agreed purchase price of €101.7 million and the refund of initial cash consideration due of €0.7 million has been recorded as an amount receivable from the vendor. The Group has elected to measure the non-controlling interests in the acquired businesses at fair value.

Assets acquired and liabilities assumed

The fair values of the identifiable assets and liabilities of Corenso group as at the date of acquisition were:

The fair value of the trade and other current receivables amounts to €29,649,000. None of the trade receivables have been impaired and it is expected that the full contractual amounts can be collected.

Provisions comprises post-employment pension provisions and reorganisation provisions (Note 20). Prior to completion of the acquisition, Corenso had commenced implementation of a number of restructuring plans and the restructuring provision recognised was a present obligation that had arisen immediately prior to the business combination. The execution of the restructuring plan was not conditional upon Corenso being acquired by the Group.

The deferred tax liability mainly comprises the tax effect of the accelerated depreciation for tax purposes of tangible and intangible assets.

The excess of the fair value of identifiable assets, liabilities and contingent liabilities acquired, after deduction of non-controlling interest measured at fair value, over the purchase consideration transferred has been recognised as a gain arising on acquisition and reported within operating profit for the year. The gain on acquisition arises principally as a result of the valuation at fair value attributed to the supply agreement entered into between Corenso and the vendor, under which Corenso will continue to supply not less than 95% of the vendor's core requirements for a period of five years.

The fair value of the non-controlling interests in Hangzhou Corenso Hualun Paper Core Co. Ltd and Corenso Tolosana S.A, both unlisted companies, is based on the agreed deduction of €8,142,000 from the purchase price to reflect the presence of minorities and the possible future obligations of the Group to pay dividends to or otherwise distribute reserves to these minorities.

From the date of acquisition, Corenso contributed €15,774,000 of revenue and €1,864,000 to profit before taxation from continuing operations of the Group. If the combination had taken place at the beginning of the year, revenue from continuing operations would have been €330,396,000, EBITDA excluding non-recurring items would have been €39,502,000, profit before taxation from continuing operations excluding non-recurring items would have been €22,600,000 and profit before taxation for the Group would have been €17,837,000.

Purchase consideration

The adjustment to the initial purchase price was agreed following completion of the closing and adjustment process and was confirmed in a post-closing agreement made between the parties on 18 March 2015. The amount of the adjustment has been included as a receivable in the balance sheet at 31 December 2014.

Analysis of cash flows on acquisition

Transactions costs of €6,196,000 have been expensed in the year ended 31 December 2014 and are included in administrative expenses. Transaction costs of €1,209,000 relating to the acquisition had already been expensed during the year ended 31 December 2013.

Expenses of €3,489,000 relating to the new borrowing facilities of €120 million required to finance the purchase consideration are included within cash flows from financing expenses in interest and similar costs paid. The expenses have been capitalised in interest bearing loans and borrowings and will be amortised over the remaining life of the facilities. The amount included within finance expenses in the income statement for the year ended 31 December 2014 was €205,000 (2013: nil).

The Group did not make any acquisitions during the year ended 31 December 2013.

6. Investment in a joint venture or an associate

The Group has a 47.4% interest in Harvestia Oy ("Harvestia"), a wood procurement company incorporated and domiciled in Helsinki, Finland. Harvestia is a private limited company that is not listed on any public exchange.

Through its acquisition of Corenso, the Group has acquired a 25% interest in Mandriladora Alpesa S.L. ("Alpesa"), a manufacturer of cardboard cores, mandrels and tubes incorporated and domiciled in Valencia, Spain. Alpesa is a private limited company that is not listed on any public exchange.

Prior year information

On 15 February 2013, one of the founding management shareholders of Harvestia left the company and under the terms of his departure surrendered shares in the company previously held by him representing 5% of the total issued share capital. These shares were subsequently cancelled and as a result of this change, the Group's effective interest in Harvestia increased from 45.0% to 47.4%.

Harvestia

Harvestia is accounted for using the equity method in the consolidated financial statements. Summarised financial information of the joint venture at 31 December 2014 and reconciliation with the carrying amount of the investment in the consolidated financial statements are set out below:

Summarised statement of profit or loss of Harvestia

The Group has unrecognised purchasing obligations towards Harvestia under contracts for wood procurement and Harvestia itself has related obligations towards third parties. The Group's share of the contingent liabilities of the joint venture amounted to €6,545,000 at 31 December 2014 (2013: €6,803,000).

7. Material partly-owned subsidiaries

Financial information for subsidiaries that are considered to be material to the Group and which have material non-controlling interests is provided below.

Proportion of equity interest held by non-controlling interests: