POWR.L Regulatory News (POWR)

8 September 2015

Powerflute

Unaudited Interim Results

For the six months ended 30 June 2015

Powerflute Oyj ("Powerflute" or the "Group") today announces its unaudited interim results for the six month period year ended 30 June 2015.

HIGHLIGHTS

Results excluding non-recurring items (1)

· Revenues increased to €179.7 million (2014: €72.7 million)

· EBITDA from operating activities increased to €26.5 million (2014: €10.4 million)

· Underlying EPS increased to 4.4 cents per share (2014: 1.9 cents)

Results including non-recurring items

· Non-recurring items recognised in the six months to 30 June 2015 include (2014: nil):

− €2.5 million of restructuring and other costs related to the Corenso acquisition

− €2.1 million gain on sale of shares in Kotkamills Oy

· Operating profit increased to €21.1 million (2014: €7.4 million)

· Profit before tax increased to €18.2 million (2014: €6.9 million)

· EPS increased to 4.3 cents per share (2014: 1.9 cents)

· Net debt of €52.0 million (€61.5 million at 31 December 2014)

Like-for-like segmental performance (2)

· Packaging Papers

− Revenues increased by 2% to €74.3 million (2014: €72.7 million)

− EBITDA from operating activities increased 40% to €14.5 million (2014: €10.4 million)

· Coreboard and Cores

− Revenues increased by 8% to €105.4 million (2014: €97.5 million)

− EBITDA from operating activities increased 16% to €12.3 million (2014: €10.6 million)

(1) Non-recurring items include restructuring costs and other costs related to the acquisition of Corenso in December 2014 and a gain arising on the sale of shares in Kotkamills in March 2015.

(2) Information on "Like-for-like segmental performance" is provided for illustrative purposes only and the results of Corenso are only consolidated with those of the Group with effect from 1 December 2014.

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

"I am pleased to report that the Group has performed strongly during the first half of the year. Both Packaging Papers and Coreboard and Cores achieved considerable improvements on their prior year performances and the integration of the recently acquired Corenso businesses is progressing in line with our expectations.

While the second half will be impacted by planned annual maintenance shutdowns in several of the paper and coreboard mills during which we will complete a number of major projects and upgrades that are not without operational risk, in the absence of any material production challenges or any significant change in market conditions, we expect the strong underlying performance of the Group to continue for the remainder of the year."

For further information, please contact:

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 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 sourced 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

I am pleased to report that the Group has performed strongly during the first half of the year. Both Packaging Papers and Coreboard and Cores achieved considerable improvements on their prior year performances and the integration of the recently acquired Corenso businesses is progressing in line with our expectations.

Paper, packaging and containerboard markets have remained relatively buoyant throughout much of the last eighteen months and recent trends in exchange rates have further contributed to create a favourable operating environment for the Group. I am particularly pleased that strong operational performances from each of our businesses have allowed us to capitalise on these conditions. For many years, the Group has pursued a long-term strategy of investing in the development of its businesses and the returns on this investment are now clearly evident in the current level of financial performance.

The acquisition of Corenso in December 2014 has been transformational for the Group in many ways. Not only has it increased the range of products that the Group offers, it has also considerably increased the scale and geographical footprint of the Group's activities. I am particularly pleased to see how our existing leadership and management teams have risen to these new opportunities and am delighted with the commitment and enthusiasm demonstrated by our new colleagues in Coreboard and Cores.

Results

Revenue from continuing operations for the six months ended 30 June 2015 increased by €107.0 million (147%) to €179.7 million (2014: €72.7 million), principally due to the inclusion of revenues of €105.4 million from the recently acquired Corenso businesses in the Coreboard and Cores activity (2014: nil). However, revenues from Packaging Papers also increased by €1.7 million (2%) to €74.3 million (2014: €72.7 million).

EBITDA from operating activities before non-recurring items increased by €16.1 million (155%) to €26.5 million (2014: €10.4 million). The main reason for the increase was the contribution of €12.3 million from the Corenso businesses in the Coreboard and Cores activity (2014: nil), while in Packaging Papers profits increased by €4.1 million (40%) to €14.5 million (2014: €10.4 million).

Both business areas benefited from broadly favourable market conditions throughout the period, although conditions in the core converting markets in central Europe continued to be somewhat challenging. Healthy underlying demand in most major markets contributed to positive trends in order intake and pricing, while raw material and other input costs remained relatively stable. The recent movements in a number of major currencies against the Euro positively impacted average selling prices in Packaging Papers and increased the value on translation of profits from Coreboard and Cores businesses in the US and China. Further details of the performance in each business area are provided below.

Non-recurring items in the six months ended 30 June 2015 included costs of €1.4 million related to a implementation of the planned restructuring programme in the loss-making German core converting operations, costs of €1.1 million related to the separation of Corenso from its former parent and its integration into the Powerflute Group and a gain of €2.1 million realised on the sale of the Group's 10% investment in Kotkamills Oy (2014: nil).

EBITDA from operating activities increased by €13.6 million (131%) to €24.0 million (2014: €10.4 million) and operating profit increased by €13.7 million (185%) to €21.1 million (2014: €7.4 million).

Net finance expenses increased by €2.5 million to €2.9 million (2014: €0.4 million), reflecting the increase in underlying borrowings as a result of the Corenso acquisition. Profit before tax increased by €11.3 million to €18.2 million (2014: €6.9 million).

Net cash inflow from operating activities increased by €9.0 million to €15.2 million (2014: €6.2 million inflow). The net cash flow generated from trading activities increased to €25.9 million (2014: €10.3 million) in line with the increase in profitability, but this was offset by an increase in working capital of €7.7 million (2014: €3.5 million increase) and higher taxes paid of €2.9 million (2014: €0.6 million). Capital expenditure of €2.1 million (2014: €1.4 million) was in line with the estimates previously provided and the Group paid a dividend of 1.50 cents per share, equivalent to €4.3 million, in June 2015 (2014: 1.35 cents per share, €3.8 million).

The Group remains in a strong financial position, with net debt of €52.0 million (31 December 2014: net debt of €61.5 million, 30 June 2014: net cash of €5.6 million), representing approximately one times annualised EBITDA (based on EBITDA from operating activities excluding non-recurring items generated in the first half of the year).

Summary and Outlook

The financial statements for the six months ended 30 June 2015 include the results of the Corenso businesses acquired by the Group in December 2014 and the significant increases in both revenues and profits compared with the prior year are principally attributable to the impact of the acquisition. Notwithstanding this, both Packaging Papers and Coreboard and Cores achieved considerable improvements on their prior year performances.

The results for the first half were affected by non-recurring items related to the acquisition and integration of Corenso. However, these items are generally in line with or lower than the estimates previously provided and the integration of Corenso is progressing well.

While the second half will be impacted by planned annual maintenance shutdowns in several of the paper and coreboard mills during which we will complete a number of major projects and upgrades that are not without operational risk, in the absence of any material production challenges or any significant change in market conditions, we expect the strong underlying performance of the Group to continue for the remainder of the year.

Dermot Smurfit

Chairman

8 September 2015

BUSINESS REVIEW

Packaging Papers

Packaging Papers enjoyed favourable market conditions throughout the period and demand for Nordic semi-chemical fluting was robust in all major markets, due principally to the strength of paper, packaging and containerboard markets worldwide.

Deliveries reduced slightly, but this was due mainly to delays to long-distance shipments made close to the period end and on an underlying basis activity levels were comparable with the prior period. Average selling prices increased by 5% compared with the prior year due largely to healthy market conditions and the impact of favourable currency movements on sales denominated in US dollars.

In Europe, strong demand from major customers meant that price improvements were possible in certain markets. In US dollar denominated markets, prices in local currency generally remained stable or increased slightly, but the Group benefited considerably on translation of these revenues into Euros. Elsewhere, while demand remained strong, currency fluctuations in some markets made Nordic semi-chemical fluting more expensive relative to locally sourced alternatives creating a degree of pricing pressure. However, continuing strong demand and the superior performance characteristics of our product helped to mitigate the impact of this and in Euro terms prices remained broadly stable. There was also only limited evidence of the normal seasonal slowdown over the summer months and accordingly, the outlook for demand and pricing in the second half remains positive.

Production volumes increased slightly compared with the prior year's already very good performance, providing further confirmation of the success of the investments made in recent years in the pulp mill and elsewhere. Raw materials and variable costs per tonne were virtually unchanged compared with the prior year, while fixed costs were also tightly controlled and the impact of modest wage and cost inflation was largely offset by operational improvements.

Coreboard and Cores

The Corenso businesses which comprise the Coreboard and Cores activity were acquired by the Group in December 2014. The comparative information provided above has been extracted from the information sent to shareholders in connection with the acquisition and the application for re-admission to AIM made at that time. It is provided for illustrative purposes only and the results of these businesses were not consolidated with those of the Group for the six months ended 30 June 2014.

Coreboard deliveries increased slightly compared with the prior year, principally due to a strong performance from the North American coreboard mill, while deliveries of cores remained virtually unchanged. Modest growth in core volumes in Europe was offset by some loss of volume in North America and Chinese volumes remained stable.

North America

The North American coreboard operations enjoyed good market conditions during the first half with favourable trends in demand, selling prices, raw material and other input costs. We were able to capitalise on these favourable conditions with a particularly strong production performance which contributed to improved profitability compared with the prior year.

In contrast to this, the core converting operations continued to face tough competition and margins remained under pressure. A programme of investment, operational restructuring and cost reduction was initiated during the first half and we expect some improvement in performance in the remainder of the year.

Europe

The coreboard mills in Finland and France faced somewhat challenging market conditions and experienced reduced demand from a number of customers, but despite this both businesses met their financial targets and the French mill in particular delivered a healthy improvement on its prior year performance. The core converting operations performed in line with our expectations, despite facing tough competition and structural overcapacity in certain markets.

In Germany, we completed a restructuring and cost reduction program which resulted in a number of loss-making activities being discontinued and a significant reduction in total headcount. The cost of this initiative was in the region of €1.4 million, but we are optimistic of achieving a return on this investment in only a little over 12 months.

The relationship with Stora Enso, the former owner, largest single customer and a continuing provider of services in many areas to Corenso, has started well, with good co-operation between both companies in all areas ensuring a smooth transition to an independent supplier relationship.

Asia-Pacific

The core converting businesses in China continue to perform well. However, the general slowdown in economic activity in China meant that underlying market growth was not as strong as in previous years and the business faced increasing competition for volumes from both local and international core converters. Despite this, volumes were maintained at prior year levels and while there were early signs of downward pressure on prices and some inflationary increases in raw materials and employment costs, margins were also maintained at levels comparable with the prior year.

In addition to the underlying improvement in performance in local currency terms, the results of businesses in North American and China also benefited on translation into Euros from the impact of favourable movements in foreign exchange rates.

Marco Casiraghi

Chief Executive Officer

8 September 2015

FINANCIAL REVIEW

Revenue

Revenue from continuing operations increased by 147% to €179.7 million (2014: €72.7 million), and included revenues of €105.4 million (2014: nil) from the recently acquired Coreboard and Cores activity.

Revenue from Packaging Papers increased by 2% to €74.3 million (2014: €72.7 million) as the benefit of higher average selling prices was partially offset by slightly lower delivery volumes due to shipment delays at the period end. Average selling prices improved by 5% to €547 per tonne (2014: €519 per tonne) due to a combination of favourable movements in exchange rates and strong underlying demand.

EBITDA from operating activities and Segment EBITDA

EBITDA from operating activities before charging non-recurring expenses related to the Coreboard and Cores activity increased by €16.1 million (156%) to €26.5 million (2014: €10.4 million). This included EBITDA of €12.3 million (2014: nil) from the recently acquired Coreboard and Cores segment and €14.3 million (2014: €10.4 million) from Packaging Papers.

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.

Non-recurring expenses of €2.5m (2014: nil) have been separately identified in the above analysis but are reported within the results of the Coreboard and Cores activity in the segmental information presented in the financial statements. A restructuring programme was completed during the first half at the core converting operation in Germany at a cost of €1.4 million (2014: nil) involving cessation of several loss-making activities and a significant reduction in headcount. Together, these actions are expected to lead to performance improvement during the second half and the cost of the programme should be recovered in a little over 12 months. The remaining €1.1 million of non-recurring expenses relate to costs incurred finalising the acquisition of Corenso (including payment of real estate and transfer taxes) and costs incurred on separation activities, the majority of which are approaching completion.

The costs of central functions, including the costs of corporate and other central services, are allocated to the reportable operating segments using appropriate cost allocation methodologies. Following the acquisition of Corenso, the extent and cost of services provided centrally has increased. However, changes in the overall level of expenses or the methodology used for allocation did not have a material impact on the amount charged against the results of Packaging Papers for the current period when compared with the prior year.

The improvement in performance in Packaging Papers was attributable to the increase in average selling prices, due to combination of both underlying price increases and also the impact of favourable movements in the US dollar relative to the Euro.

EBITDA and Operating Profit

EBITDA increased by €16.1 million to €26.1 million (2014: €10.0 million). The majority of the increase was due to the increase in EBITDA from operating activities. However, the Group also recognised a gain of €2.1 million on the disposal of its 10% shareholding in Kotkamills Oy (2014: nil).

Operating profit improved by €13.8 million to €21.1 million (2014: €7.3 million) and is stated after charging depreciation of €5.0 million (2014: €2.8 million).

Finance income and expenses

Net finance expenses were €2.9 million (2014: €0.4 million), consisting of finance income of €0.3 million (2014: nil) and finance expenses of €3.2 million (2014: €0.4 million). The increase in finance expenses is due to the increase in gross borrowings following the acquisition of Corenso. At 30 June 2015, the Group had total interest-bearing loans and borrowings of €108.7 million, compared with only €22.7 million at 30 June 2014.

Profit before tax from continuing operations

Profit before tax from continuing operations improved by €11.3 million to €18.2 million (2014: €6.9 million) due to a combination of the contribution from Coreboard and Cores and an improvement in Packaging Papers.

Taxation

The income tax charge of €5.2 million (2014: €1.5 million) represents an effective tax rate of 28% (2014: 22%) and has been determined using an estimate of 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% (2014: 20%). The difference between this and the estimated rate arises principally because several of the Group's businesses operate in jurisdictions where higher rates of tax apply.

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 of the tax warranties and accordingly a provision against future claims of €0.7 million has been retained (2014: €0.7 million).

Earnings per share and dividends

Basic earnings per share was 4.3 cents (2014: 1.9 cents) and diluted earnings per share was 4.1 cents (2014: 1.8 cents).

On an underlying basis, excluding the impact of non-recurring expenses relating to the integration of the Coreboard and Cores activity and the gain arising on the disposal of the Group's shareholding in Kotkamills Oy, basic earnings per share increased to 4.4 cents per share (2014: 1.9 cents).

A dividend of 1.50 cents per share was paid for the year ended 31 December 2014 (2013: 1.35 cents per share). The record date for the dividend was 5 June 2015 and the payment was made on 19 June 2015 at a total cost of €4.3 million (€3.8 million).

Dispute with Finnish Tax Administration

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 interim condensed consolidated financial statements and annual financial statements for period since this date, the Group has assumed that the resulting gains are exempt from corporate taxes under the substantial shareholder exemptions available to industrial companies in Finland.

The Finnish Tax Administration has contested this approach and issued tax assessments for the year ended 31 December 2011 including €3.6 million of taxes relating to the share transactions. While the taxes have been paid to avoid the risk of interest and other penalties, the amounts have not been recognised in the income statement, but have been recorded as a current financial asset in the balance sheet and the matter is the subject of an on-going dispute between the Group and the Finnish Tax Administration.

In March 2015, the Administrative Court in Helsinki ruled in favour of the Tax Administration and upheld the original tax assessments. Following review of the decision in conjunction with its advisers, the Group continues to believe that it has strong and defensible arguments to support its position and has requested permission to appeal the decision of the Administrative Court to the Supreme Court. In view of this, the financial statements for the six months ended 30 June 2015 continue to be prepared on the basis that the Group is an industrial company and that the gains arising on the disposals will be exempt from corporate taxes.

In the event that the Group does not prevail in its appeal against the tax assessment, then additional taxes of €3.6 million 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 as the taxes and related penalties have already been paid in full.

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 under which the business was to be sold to a new investor who has plans for its further development and expansion. The transaction was completed on 24 March 2015 and the Group received cash consideration of €3.7 million for its shares.

In the financial statements for the year ended 31 December 2014, the Group recognised an increase in the fair value of its investment of €2.1 million within other comprehensive income. The gain arising on sale of shares of €2.1 million has been recognised in the income statement for the six months ended 30 June 2015.

Financial position

The total assets and total equity and liabilities of the Group increased by €15.8 million to €279.9 million (31 December 2014: €264.1 million, 30 June 2014: €123.0 million), while total equity increased by €12.6 million to €90.7 million (31 December 2014: €78.1 million, 30 June 2014: €65.0 million).

The principal reason for the increase in total assets, total equity and liabilities and total equity was retained profit for the period in excess of the dividend paid for the prior year.

Capital expenditure of €2.1 million (2014: €1.4 million) was lower than depreciation of €5.0 million (2014: €2.8 million). However, this was largely due to the timing of completion of projects. Several of the board and paper mills have annual maintenance stops scheduled for the second half of the year and the level of expenditure in the second half will be higher. Excluding expenditure on replacement of IT systems, capital expenditure for the full year should be broadly comparable with depreciation.

Cash flow, borrowings and liquidity risk

Cash flow

The net cash inflow for the period of €9.2 million (2014: €0.6 million inflow) arose principally as a result of the strong operational performance during the first half of the year.

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

· €15.2 million net cash inflow from operating activities (2014: €6.1 million)

· €3.7 million net proceeds from disposal of Kotkamills shares

· €4.3 million dividends (2014: €3.8 million)

· €2.6 million net cash interest expense (2014: €0.3 million)

· €2.1 million capital expenditure (2014: €1.4 million)

The net cash inflow from operating activities of €15.2 million consists of profits from trading activities after adjusting for non-cash items of €25.9 million (2014: €10.3 million), an increase in net working capital of €7.7 million (2014: €3.5 million increase) and payment of income taxes of €2.9 million (2014: €0.6 million).

Borrowings and liquidity risk

At 30 June 2015, the Group had balance sheet net debt of €52.0 million (31 December 2014: €61.5 million, 30 June 2014: €5.6 million cash surplus) consisting of cash and cash equivalents of €56.7 million (31 December 2014: €47.5 million, 30 June 2014: €28.3 million) and interest bearing loans and borrowings, stated net of capitalised finance expenses, of €108.7 million (31 December 2014: €109.0 million, 30 June 2014: €22.7 million), of which €5.0 million was due for repayment within one year (31 December 2014: €2.4 million, 30 June 2014: €11.2 million).

The maturity profile of the Group's bank and other borrowing facilities 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 short-term in nature, the facilities themselves remain available to the Group for a period in excess of one year.

On 30 September 2014, the Group entered into a 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, and 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.

At 30 June 2015, the Group had committed borrowing facilities of €121.5 million (31 December 2014: €122.2 million, 30 June 2014: €23.0 million), of which it was utilising €111.5 million (31 December 2014: €112.2 million, 30 June 2014: €22.7 million).

At 30 June 2015, the Group had cash and short-term deposits of €56.7 million (31 December 2014: €47.5 million, 30 June 2014: €28.3 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 six month period ended 30 June 2015, approximately 30% of the Group's sales by volume and value and up to 23% 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 2015 when compared to 2014 was as follows:

· Movement in average exchange rate between six months ended 30 June 2014 and 30 June 2015 - 19% favourable

· Movement in exchange rate at balance sheet date between 31 December 2014 and 30 June 2015 - 8% favourable

It is the policy of the Group to hedge a portion of its foreign currency exposures for a period of up to 12 months using forward exchange contracts. Therefore, it may take some time for the effect of movements in foreign exchange rates to be reflected in the performance of the Group.

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 have not changed from those presented on pages 20 to 21 of the 2014 Annual Report, which is available for download from the Group's website.

Going concern

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.

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.

David Walton

Chief Financial Officer

8 September 2015

RESPONSIBILITY STATEMENT

The directors are responsible for preparing the interim condensed consolidated financial statements in accordance with applicable law and regulations.

In preparing the financial statements, the directors are required to:

· select suitable accounting policies and then apply them consistently;

· make judgements and estimates that are reasonable and prudent;

· state whether they have been prepared in accordance with IFRSs as adopted by the EU; and

· prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group and the parent company will continue in business.

International Accounting Standard 1 requires that directors:

· properly select and apply accounting policies;

· present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information;

· provide additional disclosures when compliance with the specific requirements of an IFRS is insufficient to enable users to understand the impact of particular transactions, other events and conditions on the entity's financial position and performance; and

· make an assessment of the Group's ability to continue as a going concern.

The directors confirm that to the best of their knowledge:

· the interim condensed consolidated financial statements of the Group for the six months ended 30 June 2015, have been prepared in accordance with IAS 34 Interim Financial Reporting;

· the interim management report includes a fair review of the development and performance of the business and of the position of the undertakings included in the consolidation, taken as a whole, together with a description of the principal risks and uncertainties that they face; and

· the interim condensed consolidated financial statements and interim management report, taken as a whole, are presented in a fair, balanced and understandable manner.

Approved by the Board and signed on its behalf by:

8 September 2015

REPORT ON REVIEW OF INTERIM FINANCIAL INFORMATION

To the Board of Directors of Powerflute Oyj

Introduction

We have reviewed the accompanying condensed consolidated interim financial information of Powerflute Oyj ("Powerflute" or "the Company") for the six months ended 30 June 2015, consisting of the Income Statement, Statement of Comprehensive Income, Statement of Financial Position, Statement of Changes in Equity and Cash Flow Statement, together with related Notes 1 to 19.

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

Scope of Review

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

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the condensed consolidated interim financial information for the six months ended 30 June 2015 is not prepared, in all material respects, in accordance with International Accounting Standard 34.

Helsinki, 8 September 2015

ERNST & YOUNG OY

Authorised Public Accountant Firm

Erkka Talvinko

Authorised Public Accountant

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

for the six months ended 30 June 2015

The notes on pages 21 to 33 form an integral part of this condensed consolidated interim financial information

for the six months ended 30 June 2015

INTERIM CONSOLIDATED STATEMENT OF FINANCIAL POSITION

At 30 June 2015

INTERIM CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

for the six months ended 30 June 2015

INTERIM CONSOLIDATED CASH FLOW STATEMENT

for the six months ended 30 June 2015

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

1 Corporate Information

Powerflute Oyj (the "Company") is a public limited company incorporated and domiciled in Finland. The Company's shares are listed on the Alternative Investment Market ("AIM") of the London Stock Exchange.

The principal activities of the Company and its subsidiaries (collectively, the "Group") are the manufacture of paper and packaging products and are described in more detail in Note 7.

The address of the Company's registered office is Sorsasalo/Box 57, FI-70101 Kuopio, Finland.

The interim condensed consolidated financial statements of the Group for the six months ended 30 June 2015 were approved for issue by the Company's Board of Directors on 8 September 2015.

These interim condensed consolidated financial statements have been reviewed, not audited.

2 Basis of preparation

The interim condensed consolidated financial statements for the six months ended 30 June 2015 have been prepared in accordance with IAS 34 Interim Financial Reporting. The interim condensed consolidated financial statements do not include all the information and disclosures required in annual financial statements, and should be read in conjunction with the Group's annual financial statements for the year ended 31 December 2014.

3 Significant accounting policies

The accounting policies adopted in the preparation of the interim condensed consolidated financial statements are consistent with those followed in the preparation of the Group's annual consolidated financial statements for the year ended 31 December 2014, except for the adoption of new standards and interpretations as of 1 January 2015, noted below:

Amendments to IAS 19 Defined Benefit Plans: Employee Contributions

Annual Improvements 2010-2012 Cycle

Annual Improvements 2011-2013 Cycle

Amendments to IAS 19 Defined Benefit Plans: Employee Contributions

IAS 19 requires an entity to consider contributions from employees or third parties when accounting for defined benefit plans. Where the contributions are linked to service, they should be attributed to periods of service as a negative benefit. The amendments clarify that if the amount of the contributions is independent of the number of years of service, an entity is permitted to recognise such contributions as a reduction in the service cost in the period in which the service is rendered, instead of allocating the contributions to the periods of service.

This amendment is effective for annual periods beginning on or after 1 July 2014 and is relevant to the Group, but does not have a material impact on the on the accounting policies, financial position or performance of the Group.

Annual Improvements 2010-2012 Cycle

These improvements are effective from 1 July 2014 and the Group has applied them for the first time in these interim condensed consolidated financial statements. They include changes and improvements to the following:

IFRS 2 Share-based Payment

IFRS 3 Business Combinations

IFRS 8 Operating Segments

IAS 16 Property Plant and Equipment

IAS 38 Intangible Assets

IAS 24 Related Party Disclosures

The adoption of these changes and improvements did not have any material impact on the accounting policies, financial position or performance of the Group.

Annual Improvements 2011-2013 Cycle

These improvements are effective from 1 July 2014 and the Group has applied them for the first time in these interim condensed consolidated financial statements. They include changes and improvements to the following:

IFRS 3 Business Combinations

IFRS 13 Fair Value Measurement

IAS 40 Investment Property

The adoption of these changes and improvements did not have any material impact on the accounting policies, financial position or performance of the Group.

The Group has not early adopted any other standard, interpretation or amendment that has been issued but is not yet effective.

4 Significant accounting judgements, estimates and assumptions

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

In preparing these interim condensed consolidated financial statements, the significant judgements made by management in applying the Group's accounting policies and the key sources of estimation uncertainty were the same as those that applied to the consolidated financial statements for the year ended 31 December 2014.

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

Taxation of gains arising on disposal of shares

During the year ended 31 December 2011, the Group sold a portion of its shareholding in Harvestia and sold its entire interest in the Graphic Papers businesses, realising a profit on both disposals. In preparing its interim condensed consolidated financial statements and annual financial statements for periods since this date, 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 Finnish Tax Administration that it is considered to be a venture capital company and is 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 issued tax 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, 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 with the Assessment Adjustment Board (AAB). In December 2013, the Group's appeal against the original tax assessments was upheld by the AAB.

In March 2014, the Group received notification that the Tax Administration had filed an appeal against the decision of the AAB with the Administrative Court in Helsinki. In March 2015, the Administrative Court ruled in favour of the Tax Administration and upheld the original tax assessments. Following review of the decision in conjunction with its advisers, the Group continues to believe that it has strong and defensible arguments to support its position and has requested permission to further appeal the decision to the Supreme Court. In view of this, the financial statements for the six months ended 30 June 2015 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.

While the taxes have been paid to avoid the risk of interest and other penalties, the taxes 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. In the event that the Group does not prevail in its appeal against the 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.

5 Principal risks and uncertainties

The principal risks and uncertainties faced by the continuing operations of the Group have not changed from those described in the 2014 Annual Report. Changes in the macroeconomic environment, competition, technology, people, and financial conditions all have the potential to adversely impact on the Group's operating and financial performance. A more detailed explanation of these risks and uncertainties is set out on page 14 of the Annual Report for the year ended 31 December 2014, a copy of which is available on the Group's website.

6 Seasonality of operations

The Group's business activities are seasonal in nature and higher revenues, operating profits and cash generation are generally expected in the second half of the year, although this can be affected significantly by the timing of annual maintenance shutdowns which reduce production availability, or changes in market conditions which can impact demand and average pricing levels.

7 Segmental information

For management purposes, the Group is organized into business units based upon the products and services which it supplies. The Group currently has two reportable operating segments:

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

· Coreboard and Cores, which is involved in the manufacture of high performance coreboard and cores, with coreboard mills in the Europe and the United States and a network of core producing facilities in Europe, the United States and China.

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

The joint ventures and associated companies in which the Group has an interest form an integral part of its principal operating activities and the Group's share of the profits or losses of such joint ventures and associated companies are reported within the relevant operating segment.

Until the acquisition of Corenso group in December 2014, the Group had only one reportable operating segment within continuing operations.

Management monitors the operating results of business units separately for the purpose of making decisions about resource allocation and performance assessment. The principal measure used to monitor and evaluate segmental performance is earnings before interest, tax, depreciation and amortisation ("EBITDA"). The measurement basis for Segment EBITDA excludes the effects of equity-settled share-based payments and unrealised gains or losses on financial instruments. The costs of central functions, including the costs of corporate and other central services, are allocated to the reportable operating segments using appropriate cost allocation methodologies. Interest income and expenditure are not allocated to operating segments.

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

Adjustments, eliminations and unallocated items

Inter-segment revenues are eliminated on consolidation and are not shown as adjustments or eliminations. There were no revenues arising from intra-segment trading activities during the year ended 30 June 2015 that require adjustment or elimination (2014: nil). Segment operating profit does not include acquisition-related expenses or income, or finance income and finance costs, which are reported separately within Not Allocated.

8 Impairment testing of goodwill and intangible assets

The Group reviews the valuation of its assets and tests for impairment on an annual basis in December of each year and where appropriate considers the requirement for impairment. Impairment testing of goodwill and intangible assets with indefinite lives is based on value-in-use calculations. The methodologies and key assumptions used to determine the recoverable amount for different cash generating units were disclosed where relevant in the annual consolidated financial statements for the year ended 31 December 2014.

The Group considers the relationship between its market capitalisation and the book value of its assets and liabilities, among other factors, when reviewing for indicators of impairment. As at 30 June 2015, the market capitalisation of the Group was significantly higher than the book value of its equity and no triggering events regarding the impairment of Group's assets were identified. Therefore, the Group has not performed any impairment testing on its assets or business units as at 30 June 2015.

9 Income tax

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

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

10 Components of other comprehensive income

Deferred tax items recognised in other comprehensive income during the period:

11 Dividends

A dividend of 1.50 cents per share for the year ended 31 December 2014 was proposed by the directors and approved by shareholders at the Annual General Meeting held on 28 May 2015. The record date for the dividend was 5 June 2015 and payment was made on 19 June 2015.

12 Earnings per share

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

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

Authority to repurchase shares

On 28 May 2015, the Annual General Meeting granted authority to the Board of Directors to decide on the repurchase of up to 28,000,000 Powerflute's shares pursuant to Chapter 15, Section 5(2) of the Finnish Companies Act by using funds in the company's unrestricted equity. The proposed amount of shares corresponded to approximately 9.9 % of all shares and votes of the company then in issue. The authority remains effective until 30 June 2016 unless revoked or amended before this date by a General Meeting of Shareholders, and replaces any previous similar authorities granted to the Board of Directors.

Authority to issue new shares

On 28 May 2015, the Annual General Meeting granted authority to the Board of Directors to resolve on the issuance of up to 28,000,000 shares through a share issue or granting of options or other special rights granting entitlement to shares pursuant to Chapter 10, Section 1 of the Finnish Companies Act. This authority may be utilised in one or several issues. The Board of Directors may resolve to give either new shares or shares in the company's possession. The proposed amount of shares corresponded to approximately 9.9 % of all shares and votes of the Company then in issue. This authority provides the right to deviate from the shareholders' pre-emptive subscription right. The authority remains effective until 30 June 2016 unless revoked or amended before this date by a General Meeting of Shareholders, and replaces any previous similar authorities granted to the Board of Directors.

13 Property, plant and equipment

The Group acquired assets with a cost of €2,065,000 during the six months ended 30 June 2015 (2014: €1,439,000).

Assets (other than those classed as held for sale) with a net book value of €1,662,000 were disposed of during the six months ended 30 June 2015 (2014: nil) resulting in a net gain on disposal of €2,064,000 (2014: nil).

14 Financial assets and liabilities

Set out below is a summary of the financial assets and financial liabilities of the Group as at 30 June 2015, 31 December 2014 and 30 June 2014.

Available for sale investment

In February 2015, the Group entered into a conditional sale agreement for the disposal of its 10% interest in Kotkamills for cash consideration of €3,724,000. Accordingly, the fair value of this investment was reassessed and the Group recorded a gain of €2,064,000 in the statement of comprehensive income with respect to Level 3 financial instruments as at 31 December 2014. The transaction completed on 24 March 2015 and the realised gain has been recorded in the interim consolidated statement of profit or loss for six months ended 30 June 2015.

Derivative financial instruments

Amounts recorded within financial assets and liabilities relating to derivative financial instruments were as follows:

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

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

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

Contingent consideration

As part of the purchase agreement for the acquisition of the Corenso businesses completed in December 2014, the Group agreed to make additional payments to the previous owner contingent upon the occurrence of certain future events. In particular, in the event that the Group is able to:

· recover deferred consideration relating to an earlier sale of shares in Mandriladora Alpesa SL, then such consideration must be paid over to the previous owner up to a maximum amount of €1,000,000; and

· utlise accumulated tax losses of the North American operations to offset future taxable profits, then an amount equivalent to the net cash tax saving must be paid over to the previous owner up to a maximum amount of €2,000,000.

The Group has not attached any value to the assets which are the subject of the contingent consideration arrangements and any liability to make payments to the former owner of Corenso will be financed directly from realisation of the assets concerned.

Fair value hierarchy

All financial instruments for which fair value is recognised or disclosed are categorized within the fair value hierarchy, based on the lowest level input that is significant to the fair value measurement as a whole as follows:

· Level 1 - Quoted (unadjusted) prices in active markets for identical assets or liabilities

· Level 2 - Valuation techniques for which all inputs which have a significant effect on the recorded fair value are observable, either directly or indirectly

· Level 3 - Valuation techniques which use inputs which have a significant effect on the recorded fair value that are not based on observable market data

For assets and liabilities that are recognised at fair value on a recurring basis, the Group determines whether transfers have occurred between levels in the hierarchy by re-assessing categorisation (based on the lowest level input that is significant to the fair value measurement as a whole) at the end of each reporting period. There were no transfers between Level 1 and Level 2 fair value measurements and no transfers into or out of Level 3 fair value measurements during the six month period ended 30 June 2015.

The Group considers that the carrying amount of its financial assets and liabilities are a reasonable approximation of their fair values in all instances and accordingly, has not provided any further disclosure on fair values.

15 Cash and short-term deposits

For the purpose of the interim condensed statement of cash flows, cash and cash equivalents are comprised of the following:

16 Share-based payments

For the six months ended 30 June 2015, the Group has recognised a share-based payment expense of €218,408 in the income statement (30 June 2014: €164,000). No share options were granted during the six months ended 30 June 2015 (2014: none).

17 Borrowings and loans

Movements in borrowings are analysed as follows:

18 Commitments and contingencies

Mortgages

The Group has pledged the assets and shares of its principal trading subsidiary companies as security for interest-bearing borrowing facilities provided by Nordea and Finnvera.

Capital commitments

At 30 June 2015, the Group had capital commitments of €4,646,000 (31 December 2014: €484,000) relating to investment in plant and equipment.

19 Related Party Transactions

Certain of the Group's directors and members of its executive management team have significant beneficial and non-beneficial interests in the ordinary share capital of the Group. Full details of these interests are disclosed in the annual financial statements for the year ended 31 December 2014.

a) Transactions with related parties

Savon Sellu Oy, a subsidiary of Group, purchases a proportion of its raw materials from Harvestia Oy. The goods are purchased on normal market terms.

Transactions with related parties for the six months ended 30 June 2015 and 30 June 2014 were as follows: