POWR.L Regulatory News (POWR)

4 May 2011

POWERFLUTE OYJ

Preliminary announcement

for the year ended 31 December 2010

Powerflute Oyj ("Powerflute" or the "Group"), the packaging and paper group with positions in Nordic semi-chemical fluting and coated woodfree papers, today announces its preliminary results for the year ended 31 December 2010. Powerflute is quoted on the AIM market of the London Stock Exchange (Ticker: POWR) and on the First North list, the alternative market of the OMX Nordic Exchange Stockholm AB (Ticker POW1V).

Powerflute Chairman, Dermot Smurfit commented:

"Powerflute faced considerable challenges during the last year. These were well managed and we started 2011 as a more resilient and focused organisation with improving performance trends in both business areas.

We are pleased to announce the disposal of the Graphic Papers businesses and believe this represents a successful outcome for both the customers and employees of Scheufelen and for Powerflute's shareholders. Scheufelen will benefit as part of an integrated pulp and paper group and will continue to prosper under new ownership. On completion of the disposal, the Group will be debt free on a net basis and will have significant cash resources available to enable it to pursue its strategy of organic and acquisitive growth.

We are delighted to announce that subject to completion of the disposal of Graphic Papers, the Board has decided to recommend the payment of a dividend of 1.0 cents per share, representing a yield of approximately 6% based on the Group's share price on 2 May 2011.

We expect market conditions to remain broadly favourable for Packaging Papers for the remainder of the year, supporting good volumes and attractive pricing levels. We have made a strong start to the year and currently expect that 2011 will be a much better year for the Group."

For further information, please contact:

About Powerflute

Powerflute Oyj ("the Company" or "Powerflute") is a packaging group with established positions in Nordic semi-chemical fluting. Through its subsidiary Savon Sellu Oy, the Group operates a paper mill in Kuopio, Finland which produces a specialised form of semi-chemical fluting made from locally sourced birch. Corrugated boxes manufactured using Nordic semi-chemical fluting demonstrate strength and moisture resistance and are used for transportation of fruit and vegetables, high-value industrial goods such as electrical appliances and automotive components. The Kuopio mill has the capacity to produce up to 300,000 tonnes per annum and is one of three suppliers of Nordic semi-chemical fluting in Europe.

PRELIMINARY ANNOUNCEMENT

FOR THE YEAR ENDED 31 DECEMBER 2010

CHAIRMAN'S STATEMENT

Powerflute faced considerable challenges during 2010 as markets recovered from the low activity and pricing levels which prevailed during the economic slowdown. These challenges were well managed and the Group started 2011 as a more resilient and focused organisation with improving performance trends in both of its business areas.

On 3 May 2011, the Group announced the disposal of its Graphic Papers businesses for total consideration of €38.5m, comprising cash consideration of €32.5m and the assumption of €6.0m of debt by the purchaser. The transaction is transformational for Powerflute, delivering a significant return on the Group's original cash investment and improving our capital structure from indebtedness to a net cash position. It also demonstrates Powerflute's ability to transform underperforming assets and deliver substantial value for shareholders.

Financial

Our Packaging Papers business performed strongly during 2010, particularly in the second half of the year, as higher operating rates and recovering prices restored profitability. In contrast, Graphic Papers encountered more challenging conditions and was unable to fully offset the impact of a dramatic rise in raw material costs.

Revenue for the year ended 31 December 2010 increased by 22% to €310.6m (2009: €253.7m) due to increased volumes and higher selling prices in both Graphic Papers and Packaging Papers.

The Group reported a loss for the period of €23.4m (2009: €29.2m profit). However, this included a net impairment charge of €22.1m to reduce the value of the Scheufelen net assets to their recoverable value, whereas the profit reported for the prior year included a gain on acquisition of €33.0m. On an underlying basis, the Group reported an operating profit of €0.9m (2009: €0.1m) which represented a small improvement on the prior year as benefits from improved volumes and pricing in Packaging Papers were largely offset by raw material cost inflation in Graphic Papers. The underlying loss before tax of €3.2m was an improvement on the prior year (2009: €5.0m loss).

In November 2010, the Group completed a rights issue and placing raising net proceeds of €18.3m for investment in capital projects which are expected to deliver rapid returns, debt reduction and general working capital purposes.

The financial position of the Group improved considerably during the year as net debt reduced by €23.0m to €29.1m at 31 December 2010 (2009: €52.1m), representing only 2.3 times the Group's EBITDA in 2010.

Disposal of Graphic Papers

Shortly after the completion of the rights issue and placing in November 2010, an approach was received for the Graphic Papers business and on 3 May 2011, Powerflute announced that it had reached agreement on the sale of the businesses that comprise Graphic Papers to Paper Excellence BV, a producer of pulp and paper registered in the Netherlands. The total consideration for the disposal is €38.5m before disposal costs, consisting of cash consideration of €32.5m and the assumption of €6.0m of debt by the purchaser.€25.0m of the consideration is payable on completion, with the balance due six months after completion.

The disposal is consistent with Powerflute's strategy to create value for shareholders through the acquisition and restructuring of underperforming paper and packaging businesses. The cash consideration of €32.5m represents a significant return for Powerflute on its cash investment in Scheufelen and following receipt of the proceeds, the Group will be debt free on a net basis.

As at 31 December 2010, the Group restated the carrying amounts of the assets and liabilities of Graphic Papers at their fair value less costs to sell in accordance with the provisions of IAS 36 Impairment of assets and recognised an impairment charge of €22.1m net of deferred taxes in the income statement for the year ended 31 December 2010.

Dividend

Subject to the satisfactory completion of the disposal of the Graphic Papers businesses, the directors intend to propose the payment of a dividend for the year ended 31 December 2010 of 1.0 cents per share to the Annual General Meeting to be held in Kuopio, Finland on 27 May 2011. The proposed dividend would represent a yield of 6% based on the Group's share price on 2 May 2011. The record date for the proposed dividend would be 1 June 2011 and payment would be made on or about 14 June 2011. The ex-dividend date for First North, the alternative market of the OMX Nordic Exchange Stockholm AB, will be Monday 30 May 2011 and for the AIM market of the London Stock Exchange the ex-dividend date will be Tuesday 31 May 2011.

People

There were a number of changes to senior management and the Board of Directors during the year. Marco Casiraghi joined the Group as its Chief Executive on 1 January 2010 and has made a significant contribution during his first year. At the Annual General Meeting held on 29 April 2010, the Board was strengthened by the addition of Marco Casiraghi and Dermot Smurfit Jr., while Ian Halliday who had served as a director since the formation of Powerflute, retired and did not offer himself for re-election.

On behalf of the Board and our shareholders, I would like to thank all of our employees for their contribution to the progress made during these challenging times. We recognise that the future success of the Group is based upon the continuing development of a talented and committed workforce.

Strategy

The Group continues to explore opportunities for organic and acquisitive growth and to invest in the development of its existing businesses. Recent capital expenditure at Packaging Papers has both improved product performance and increased capacity and further significant investment is planned in 2011 using the proceeds from the rights issue and share placing. We continue to actively search for opportunities for further acquisitions in the paper and packaging sectors.

Outlook

We expect market conditions to remain broadly favourable for Packaging Papers for the remainder of the year, supporting good volumes and attractive pricing levels, and are confident that the planned investment in capital projects will help deliver improved returns. Following receipt of the proceeds from the sale of the Graphic Papers businesses, the Group will be debt free on a net basis and will have significant cash resources available to enable it to pursue its strategy of organic and acquisitive growth. We have made a strong start to the year and currently expect that 2011 will be a much better year for the Group.

CHIEF EXECUTIVE'S STATEMENT

As world economies emerged from the after effects of the economic slowdown, rapid recovery was evident in both packaging and graphic paper markets. Most paper grades experienced robust demand driven by a combination of restocking and recovery to normal levels of activity and producers took advantage of this to achieve price recovery and restore operating margins. As the year progressed, demand stabilised but cost inflation, particularly on raw materials and energy, emerged as a threat to the industry.

Our Packaging Papers business, Savon Sellu, benefited from a recovery in market conditions and enjoyed a particularly strong end to the year. In Graphic Papers, although volumes recovered to normal levels attempts to increase prices to restore margins and offset cost inflation met with more limited success and the considerable increase in pulp costs which occurred during the first half of the year eroded margins.

Despite the challenging market conditions in the Graphic Paper market and their impact on the financial performance of the Group, there were many notable achievements during the last year. Both of our businesses worked very hard to improve their market position and strengthen their customer relationships and each achieved a good degree of success. We are endeavouring to develop strategic alliances and long-term partnerships with our major customers based upon a better mutual understanding and a shared value proposition. Each business also achieved major steps forward in product performance and manufacturing efficiency.

In November 2010, the Group successfully completed a rights issue and placing which raised net proceeds of €18.3m for investment in capital projects, debt reduction and general working capital purposes. The fundraising was very well supported by both existing shareholders and new investors, demonstrating confidence in our strategy and management team. Several capital projects have already been completed and are yielding operational and financial benefits and more projects will be completed during the first half of 2011.

In December 2010, we announced that Vapo Oy, a leading supplier of renewable fuels, bioelectricity, bioheat and environmental business solutions which is 50.1% owned by the Finnish government, would be joining Powerflute and Myllykoski as an equal partner in Harvestia Oy, the Group's wood procurement venture. The participation of Vapo is expected to result in significant growth and a considerable strengthening of the strategic position of Harvestia, which is the main provider of raw materials to Savon Sellu.

On 3 May 2011, the Group announced that it had reached agreement on the sale of its Graphic Papers businesses to Paper Excellence BV, a privately owned producer of pulp and paper, for total consideration of €38.5m before disposal costs. The Scheufelen companies, which represent the whole of the Graphic Papers business segment, were acquired in January 2009 and during two years of ownership, good progress was made with restructuring, improving performance and restoring profitability. The business was heavily impacted by developments in worldwide pulp markets during 2009 and 2010 and we currently expect these challenging conditions to prevail for the foreseeable future. Accordingly, although the Group would normally expect to own a business for a longer period, we have concluded that Scheufelen would be better placed to withstand the challenges it faces as part of an integrated pulp and paper group. The cash consideration of €32.5m represents a significant return for Powerflute on its cash investment in Scheufelen. Following receipt of the proceeds, the Group will be debt free on a net basis and will have considerable cash resources available to fund capital investment or future acquisitions.

We expect market conditions for Packaging Papers to remain favourable and believe that continuing strong underlying demand, market discipline and the high cost of alternative products will result in good capacity utilisation and attractive prices. We are confident that the actions we have taken and the initiatives we are pursuing will yield benefits in 2011.

GROUP STRATEGY

The Group's strategy is to create value for its shareholders through continuing growth and development of its existing businesses, and through the acquisition and restructuring of underperforming paper and packaging businesses, with a strong focus on cash flow and return on invested capital.

In Packaging Papers, the key priorities are to improve product performance and quality, increase penetration into more attractive markets and enhance service levels. Increased emphasis will be placed on selling and marketing the superior performance characteristics and cost effectiveness of Nordic semi-chemical fluting relative to alternative products. Capital expenditure will be targeted primarily at projects which improve efficiency and reduce production costs.

Powerflute seeks to acquire businesses where it can create value through the application of management discipline and production expertise, together with the establishment of a more entrepreneurial and performance oriented culture. Returns for shareholders will be generated by acquiring businesses which are not fulfilling their potential at attractive prices and then divesting them once their performance has been improved and their value enhanced.

REVIEW OF 2010

Powerflute faced considerable challenges during the last year as markets recovered from the low activity and pricing levels which prevailed during the economic slowdown. These challenges were well managed and the Group started 2011 as a more resilient and focused business with improving performance trends in both of its businesses.

Revenue

Revenue increased by 22% to €310.6m (2009: €253.7m) due to increased volumes and higher selling prices in both business areas. In Graphic Papers, sales increased by 16% to €205.1m (2009: €177.6m) as demand recovered from the very low levels experienced in prior year. Continuing overcapacity resulted in increased competition for volumes and average selling prices increased only slightly compared with the prior year despite significant cost inflation. In Packaging Papers, sales increased by 38% to €105.4m (2009: €76.1m). Deliveries increased in most markets due to a combination of restocking and strong underlying demand and this, together with the rising cost of recycled fluting, resulted in a significant improvement in average selling prices.

Operating profit

Excluding the impairment charge related to the disposal of Graphic Papers, underlying operating profit improved to €0.9m (2009: €0.1m, excluding the gain recognised on the acquisition of Graphic Papers), but represented only a small improvement on the prior year as benefits from improved volumes and pricing in Packaging Papers were largely offset by raw material cost inflation in Graphic Papers.

Expenditure on raw materials and consumables increased by 31% to €205.1m (2009: €156.0m) due to a combination of higher production volumes in both businesses and a significant increase in the cost of hardwood and softwood pulp (the principal raw material in Graphic Papers). The cost of other raw materials and energy were broadly comparable with the prior year.

Employee benefits expenses increased by 10% to €45.6m (2009: €41.4m) due principally to the absence of extended production standstills and layoffs which were a feature of the prior year. Other operating expenses increased by 8% to €49.3m (2009: €45.6m) as volume and price related increases in freight, distribution and other sales expenses were only partially offset by an 18% reduction in other operating and administrative expenses.

SEGMENTAL REVIEW OF 2010

Graphic Papers

Graphic Papers which represented 66% of the Group's revenue had a challenging year achieving EBITDA of only €1.3m (2009: €16.4m) on sales up 16% to €205.1m (2009: €177.6m) as pulp costs in particular increased by 55% compared with the prior year.

Demand recovered from the very low levels experienced in 2009, but was still some way below that experienced prior to the economic slowdown. We were able to increase deliveries by 14% compared with the prior year and operated at close to 95% of normal activity levels. However, overcapacity in the market resulted in competition among producers for available volumes and consequently, average selling prices rose by only 1% compared with the prior year despite significant cost inflation.

Raw material costs per tonne of production increased by 34% compared with the prior year. Pulp costs in particular increased by 55% compared with the prior year (with a profit impact of almost €30m), remaining close to historical high levels for much of the year, and were the major cause of the reduction in profitability.

During the year, we completed the final stages of an internal reorganisation which enabled the business to achieve the same production output as it did prior to acquisition by Powerflute, but with a substantially reduced workforce. Good progress was also made with consolidation of sales into a smaller geographical radius of the mill, where we enjoy both a service advantage and benefit from lower distribution costs.

Packaging Papers

Packaging Papers performed strongly achieving EBITDA of €14.4m (2009: €0.2m) on sales up 38% to €105.4m (2009: €76.1m). Performance in the second half of the year was particularly strong with EBITDA of €10.1m (2009 H2: €0.7m) on sales of €54.6m (2009 H2: €40.5m).

Demand remained robust throughout most of the year and this resulted in a 23% increase in deliveries. Initially, we benefited from restocking throughout the supply chain while later in the year good fruit harvests throughout most of Europe resulted in strong underlying demand. The increase in deliveries could have been greater but for industrial action in Finnish ports during the first half and a fire in the wood handling area of the mill during the second half, both of which resulted in production stoppages.

Packaging Papers was able to increase its selling prices by more than 30% over the course of the year in response to strong demand from users of Nordic semi-chemical fluting. Average selling prices increased by 12% when compared with the prior year, while raw material and other input costs were stable.

During the year, we completed a major investment in the pulp mill which has eliminated a bottleneck, improved product performance and quality and also increased production capacity. Good progress was also made with penetration into new geographical markets and new applications for our products, both of which offer the potential for improved margins.

FINANCE INCOME AND EXPENSES

The Group had finance income of €1.6m (2009: €0.0m) and finance expenses of €5.8m (2009: €5.2m). Finance income included €1.5m of gains arising from the treatment of certain elements of the subscription rights offered in the rights issue and placing completed in November 2010 as derivative financial instruments in accordance with the provisions of IAS 32 Financial Instruments: Presentation and IAS 39 Financial Instruments: Recognition and Measurement. Finance expenses included interest on bank loans and other borrowings (including finance leases) of €3.7m (2009: €3.6m) reflecting stable interest rates and borrowings throughout the period.

LOSS BEFORE TAX

The loss before tax was €34.7m (2009: €28.0m profit). However, this included an impairment charge of €31.4m to reduce the value of the net assets of Graphic Papers to their recoverable amount, while the 2009 result included a gain on acquisition of €33.0m. On an underlying basis, the loss before tax was €3.2m (2009: €5.0m loss), which represented an improvement on the prior year.

TAXATION

The tax gain of €1.9m (2009: €1.2m) is based upon the weighted average annual tax rate for the year applied to the underlying profit or loss before taxation after adjusting for the impact of disallowable items of income and expenditure and profits or losses generated in countries where the corporate tax rates are higher than in Finland. The adjustment to deferred taxation of €9.4m relating to the impairment of non-current assets of €31.4m recognised within operating profit has been shown separately. The underlying tax rates on profits before taxation are 26% in Finland and 30% in Germany.

EARNINGS PER SHARE AND DIVIDENDS

The basic loss per share was 13.3 cents (2009: 18.0 cents profit). Excluding the impact of the non-cash impairment of non-current assets and the gain recognised on the acquisition of Scheufelen, the underlying loss per share was 0.8 cents loss (2009: 2.3 cents loss).

Subject to the satisfactory completion of the disposal of the Graphic Papers businesses, the directors intend to propose the payment of a dividend for the year ended 31 December 2010 of 1.0 cents per share to the Annual General Meeting to be held in Kuopio, Finland on 27 May 2011. The record date for the proposed dividend would be 1 June 2011 and payment would be made on or about 14 June 2011. The ex-dividend date for First North, the alternative market of the OMX Nordic Exchange Stockholm AB, will be Monday 30 May 2011 and for the AIM market of the London Stock Exchange the ex-dividend date will be Tuesday 31 May 2011.

BALANCE SHEET

The Group had total assets and total equity and liabilities of €158.4m at 31 December 2010 (2009: €169.9m). Total equity reduced to €52.8m (2009: €56.2m) as the increase in reserves attributable to the rights issue and placing completed in November 2010 which raised net proceeds of €18.3m was offset by the net charge of €22.1m related to the impairment of the net assets of the Graphic Papers business. The number of shares in issue increased to 289.8m (2009: 144.8m) as a result of the rights issue and placing and net assets per share reduced to €0.18 (2009: €0.39).

Capital expenditure net of disposal proceeds increased to €9.2m (2009: €5.1m) and included a major investment in the pulp production area at Savon Sellu.

CASH FLOW

At the start of the year, the Group had net debt of €52.1m consisting of interest bearing loans and borrowings of €54.2m less cash and short term deposits of €2.1m.

During the year, the Group generated net cash inflow from operating activities of €16.3m (2009: €10.5m). EBITDA was €12.4m (2009: €13.5m). Net working capital reduced by €4.4m (2009: €4.3m increase) as activity related increases in inventories and receivables were more than offset by an improvement in payment terms with key suppliers of Graphic Papers.

In November 2010, the Group completed a right issue and placing which raised proceeds of €20.2m. The expenses of the issue were €1.9m, of which €0.6m were paid in the year ended 31 December 2010. In addition, the Group received €4.8m from new loans (2009: €8.3m).

The principal payments made during the year were:

·; €11.0m of loan repayments (2009: €5.5m)

·; €9.2m of capital expenditure (2009: €5.1m)

·; €5.1m of interest and similar costs (2009: €4.5m)

·; €0.6m of expenses related to the rights issue and placing (2009: nil)

At 31 December 2010, the Group had net debt of €29.1m consisting of interest bearing loans and borrowings of €47.8m (2009: €54.2m) and cash and short term deposits of €18.7m (2009: €2.1m). The majority of the improvement of €23.0m compared with the prior year is attributable to the proceeds of the rights issue and placing of €20.2m and to the €4.4m reduction in net working capital.

BORROWING FACILITIES

The maturity profile of the Group's bank and other borrowing facilities at 31 December 2010 was as follows:

Other interest bearing loans and borrowings includes liabilities under revolving credit, invoice finance and leasing arrangements. While certain of these facilities are classified as current liabilities due to their short-term nature, most are expected to remain available to the Group for period in excess of one year. In addition to the total borrowings summarised above, the Group had factored or discounted trade receivables with a value of €20.2m (2009: €17.2m).

At 31 December 2010, the Group had bank and other borrowing and financing facilities of €73.9m (2009: €79.9m) comprising amortising term loans of €23.9m (2009: €29.9m) and revolving credit and invoice financing facilities of €50.0m (2009: €50.0m). At 31 December 2010, the Group was utilising €70.1m of these facilities (2009: €72.8m).

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

·; Ratio of net debt to EBITDA

·; Ratio of EBITDA to total net cash interest

·; Debt service cover

At 31 December 2010, the Group was in full compliance with the provisions of its banking agreements.

GOING CONCERN

The Board has undertaken a recent and thorough review of the Group's budget, forecasts and associated risks and sensitivities and has concluded that the Group has adequate resources to enable it to continue its activities for the foreseeable future, being a period of at least twelve months from the date of approval of the financial statements.

KEY PERFORMANCE INDICATORS

The key financial and non-financial performance indicators ("KPIs") used by the Board to monitor progress are listed in the table below. KPIs are reviewed on both a Group and segmental basis.

The sources of data and the methods of calculation are consistent on a year-on-year basis. Except where otherwise stated, the marked change in certain of the measures compared with the prior year is attributable to the transformational impact of the Scheufelen acquisition on the results of the Group.

FOREIGN EXCHANGE

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

The Group sells and distributes its products and purchases raw materials in international markets and has transactional exposure to a number of other currencies and in particular, to the US Dollar. Approximately 10-15% of the Group's sales by volume and value and approximately 20-25% of its expenditure on raw materials, consumable and other expenses are denominated in US Dollars.

The relative movement of the US Dollar against the Euro during 2010 when compared to 2009 is summarised below:

·; Movement in average exchange rate between 2009 and 2010 - 5% negative impact

·; Movement in exchange rate at Balance Sheet date between 2009 and 2010 - 8% negative impact

TREASURY MANAGEMENT AND CURRENCY RISK

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

PRINCIPAL RISKS AND UNCERTAINTIES

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

Macro economic environment

The majority of the Group's products are utilised in packaging and promotional materials within extended supply chains. Both in the short and medium term, demand for the Group's products is susceptible to economic cycles and levels of business confidence. By virtue of its position in the supply chain, the Group's visibility of order intake and profitability is quite short and tends to reduce further during periods of economic downturn.

Competition

The Group operates in well-defined and structured markets where there are a limited number of producers and consumers. The capital intensive nature of the business and high operational gearing can lead to the adoption of a marginal pricing philosophy by some participants in the pursuit of maximum machine utilisation. This can lead to downward pressure on prices and margins for all participants.

Technology

There is steady and constant technical evolution in each of the Group's principal markets as participants seek to improve the functionality and performance of their products while simultaneously reducing manufacturing costs. While step changes in either product performance or production cost are rare, small incremental changes can lead to clearly discernable differences necessitating constant investment in development and product evolution, even in times of economic uncertainty and weak demand.

People

Due to its relatively small size, there are certain areas where the Group is dependent upon the contribution of a number of key individuals, either collectively or individually. The Group seeks to mitigate this risk through succession planning, competitive pay and remuneration policies and the encouragement of regular and routine exchanges of information and ideas throughout the businesses, including regular opportunities for key personnel to visit other facilities.

Financial

The Group operates in markets where goods are often supplied or purchased on 60 to 90 day terms and where the use of credit insurance is commonplace. The recent economic uncertainty has resulted in a tightening of the market for credit insurance with the result that many insurance limits have been reduced or withdrawn. This creates liquidity challenges for the Group in the operation of its production activities and in particular, funding the purchase of raw materials and inventory. From a sales perspective, the Group is increasingly being forced to accept more financial risk in connection with its customers.

SUMMARY AND OUTLOOK

Powerflute has faced considerable challenges during the last year as markets recovered from the low activity and pricing levels which prevailed during the economic slowdown. Our Packaging Papers business, Savon Sellu, benefited from favourable market conditions and enjoyed a particularly strong end to the year, operating at full capacity and achieving good prices. In Graphic Papers, although volumes recovered to normal levels attempts to increase prices to restore margins and offset cost inflation met with more limited success and the considerable increase in pulp costs which occurred during the first half of the year eroded margins.

The disposal of the Graphic Papers business is a transformational event for Powerflute and we believe that the Scheufelen companies will benefit from being part of an integrated pulp and paper group. Powerflute has achieved a significant return on its cash investment and following receipt of the proceeds will be debt free on a net basis. The Group will have considerable cash resources available to fund capital investment and will be well positioned to pursue future acquisition opportunities.

We currently expect market conditions to remain favourable for Packaging Papers for the remainder of the year, supporting good volumes and attractive pricing levels, and are confident that the planned investment in capital projects will help deliver improved returns. We have made a strong start to the year and continue to expect that 2011 will be a much better year for the Group.

for the year ended 31 December 2010

for the year ended 31 December 2010

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

at 31 December 2010

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

for the year ended 31 December 2010

 CONSOLIDATED CASH FLOW STATEMENT

for the year ended 31 December 2010

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1. Corporate Information

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

The consolidated financial statements of the Company for the year ended 31 December 2010 were authorised for issue by resolution of the Company's Board of Directors on 4 May 2011.

The principal activity of the Group during the year ended 31 December 2010 was the manufacture and sale of coated woodfree papers and Nordic semi-chemical fluting. The Group's products were sold globally, with the main market being Europe.

2 Accounting Policies

2.1 Basis of preparation

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.

Statement of compliance

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.

Basis of consolidation

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

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

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

2.2 Changes in accounting policy and disclosures

The accounting policies adopted are consistent with those of the previous year except as follows:

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 2010:

IFRS 2 Share-based Payment - Group- cash-settled share-based payment transactions

IFRS 3 Business Combinations (Revised) and IAS 27 Consolidated and Separate Financial

Statements (Amended)

IAS 32 Financial Instruments: Presentation - Classification of rights issue

IAS 39 Financial Instruments Recognition and Measurement - Eligible Hedged Items

IFRIC 15 Agreements for the Construction of Real Estate

IFRIC 16 Hedges of a Net Investment in a Foreign Operation

IFRIC 17 Distributions of Non-cash Assets to Owners

IFRIC 18 Transfers of Assets from Customers

Improvements to IFRSs (April 2009)

Where the adoption of the standard or interpretation is deemed to have an impact on the financial statements or performance of the Group, its impact is described below:

IFRS 3 Business Combinations (Revised) and IAS 27 Consolidated and Separate Financial Statements (Amended)

A revised standard IFRS 3 Business Combinations continues to apply the acquisition method to business combinations, with some significant changes. Changes affect the valuation of a non-controlling interest, the accounting for transaction costs, the initial recognition and subsequent measurement of contingent consideration and business combinations achieved in stages. These changes will impact the amount of goodwill recognised, the reported results in the period that an acquisition occurs and future reported results.

IAS 27 (Amended) requires that a change in the ownership interest of a subsidiary (without loss of control) is accounted for as a transaction with owners in their capacity as owners. Therefore, such transactions will no longer give rise to goodwill, nor will they give rise to a gain or loss. Furthermore, the amended standard changes the accounting for losses incurred by the subsidiary as well as the loss of control of a subsidiary. The changes required by IFRS 3 (revised) and IAS 27 (Amended) affect acquisitions or loss of control of subsidiaries and transactions with non-controlling interests.

IAS 32 Financial Instruments: Presentation - Classification of rights issue

Powerflute has adopted the amendment to IAS 32 with effect from 1 January 2010. The amendment altered the definition of a financial liability in order to classify rights issues as equity instruments in cases where such rights are given pro rata to all of the existing owners of the same class of an entity's non-derivative equity instruments, or to acquire a fixed number of the entity's own equity instruments for a fixed amount in any currency. This had an impact on the accounting for the rights issue in 2010. Further information is presented in Note 18.

Adoption of other new and amended IFRS and IFRIC interpretations did not have any impact on the accounting policies, financial position or performance of the Group.

2.3 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 purchase method. Under the purchase method the cost of acquisition is allocated to the acquired identifiable assets, liabilities and contingent liabilities (net assets) based on their fair values at the date of acquisition. Any difference between the cost of acquisition and the fair value of the acquired net assets is recognised as goodwill in the consolidated statement of financial position or income (referred to as negative goodwill) in the consolidated income statement.

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

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

b) Investment in associated companies

Associated companies are entities in which the Group has significant influence but no control. The Group's investment in its associate is accounted for using the equity method.

Under the equity method, the Group's investment in its associate is initially recorded in the statement of financial position at cost and is later adjusted for post-acquisition changes in the Group's share of net assets of the associate. Goodwill relating to the associate is included in the carrying amount of the investment and is neither amortised nor individually tested for impairment.

The Group's share of the results of operations of the associate is recognised in the income statement and its share of any changes in the equity is recognised and disclosed, when applicable, in the statement of changes in equity. Unrealised gains and losses on transactions between the Group and its associates are eliminated to the extent of the Group's interest in the associated company, unless the loss provides evidence of an impairment of the asset transferred.

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

The financial statements of the associate are prepared for the same reporting period as the parent company. Accounting policies have been changed where necessary to ensure consistency with the policies adopted by the Group.

At each reporting date, the Group determines whether there is any objective evidence that the investment in the associate is impaired. If this is the case, the Group calculates the amount of impairment as the difference between the recoverable amount of the associate and its carrying value and recognises the impairment loss in the income statement.

Equity accounting is discontinued when the Group has lost its significant influence over the associate or when the carrying amount of the investment in an associated company reaches zero, unless the Group has incurred or guaranteed obligations in respect of the associated company.

c) Non-current assets held for sale

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

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

d) Foreign currency translation

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

Transactions denominated in foreign currency are translated into the functional currency using the exchange rate 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

Revenue is recognised in the income statement as interest accrues using the effective interest method.

f) Taxes

(i) Current income tax

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

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

(ii) Deferred tax

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

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

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

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

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

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

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

The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilised. Unrecognised deferred tax assets are reassessed at each reporting date and are recognised to the extent that it has become probable that future taxable profit will allow the deferred tax asset to be recovered.

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the year when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the reporting date.

Deferred tax relating to items recognised outside profit or loss is recognised outside profit or loss. Deferred tax items are recognised in correlation to the underlying transaction either in other comprehensive income or directly in equity.

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

(iii) Sales tax

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

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

·; Receivables and payables that are stated with the amount of sales tax included.

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

g) Government grants

Government grants are recognised where there is reasonable assurance that the grant will be received and all attaching conditions will be complied with. When the grant relates to an expense item, it is recognised as income over the period necessary to match the grant on a systematic basis to the costs that it is intended to compensate. Where the grant relates to an asset, it is recognised as deferred income.

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

h) Pensions and other post-employment benefits

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

(i) Defined contribution plans

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

(ii) Defined benefit plans

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

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

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

(iii) Other post-employment benefits

The Group participates in a number of industry or country specific early retirement schemes which provide eligible employees with the opportunity to retire before they reach normal retirement date. The Group regards such schemes as unfunded post-employment 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.

The Group's German employees are eligible to participate in the Altersteilzeit (ATZ) early retirement program which allows them to retire up to six years before normal retirement date. While participation in the program is at the discretion of the employee and not the employer, the Group has followed the current recommendation of the Accounting Standards Committee of Germany and treated the ATZ scheme as a termination benefit and not a post-employment benefit. The present value of future costs associated with employees who have already elected to join the scheme and employees whose participation is considered probable, has been recognised in the income statement and provision for future liabilities has been made in the statement of financial position.

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').

In situations where equity instruments are issued and some or all of the goods or services received by the entity as consideration cannot be specifically identified, the unidentified goods or services are measured as the difference between the fair value of the share-based payment and the fair value of any identifiable goods or services received at the grant date. This is then capitalised or expensed as appropriate.

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 profit or loss charge or credit for a period represents the movement in cumulative expense recognised as at the beginning and end of that period.

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

Financial assets

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.

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

(i) 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.

(ii) Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. After initial measurement, they are subsequently measured at amortised cost using the effective interest rate (EIR) method, less impairment. Amortised cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are an integral part of the EIR. The EIR amortisation is included in finance income in the income statement. The losses arising from impairment are recognised in the income statement in finance costs.

Derecognition

A financial asset is derecognised when:

·; The rights to receive cash flows from the asset have expired

·; 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 recognises 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.

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 assets original effective interest rate and if a loan has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate.

The carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognised in the income statement. Loans together with the associated allowance are written off when there is no realistic prospect of future recovery and all collateral has been realised or has been transferred to the Group. If, in a subsequent year, the amount of the estimated impairment loss increases or decreases because of an event occurring after the impairment was recognised, the previously recognised impairment loss is increased or reduced by adjusting the allowance account. If a future write-off is later recovered, the recovery is credited to finance costs in the income statement.

Financial liabilities

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 recognized initially at fair value and in the case of loans and borrowings, plus 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.

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

(i) 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.

(ii) 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 twelve 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.

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.

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

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 the 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 unrecognised 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.

The Group did not have any fair value hedges or hedges of net investments at 31 December 2010 and 2009.

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 it 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 separated into a current or non-current portion based on an assessment of the facts and circumstances.

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

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

l) Property, plant and equipment

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

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

Plant and equipment 2-20 years

Buildings 10-50 years

Other capitalised expenses 5-20 years

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

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

m) Leases

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

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

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

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

n) Borrowing costs

Borrowing costs directly attributable to the acquisition, construction or production of an asset that necessarily takes a substantial period of time to get ready for its intended use or sale are capitalised as part of the cost of the respective assets. The Group did not have any respective assets at 31 December 2010 and 2009 and no borrowing costs were capitalised.

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

o) Investment properties

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

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

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

p) Intangible assets

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

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

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

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

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

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

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

Research and development costs

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

q) Inventories

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

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

Net realisable value is the estimated selling price in the ordinary course of business, less estimated costs of completion and the estimated costs necessary to make the sale.

r) Impairment of non-financial assets

The Group assesses at each reporting date whether there is an indication that an asset may be impaired. If any such indication exists, or when annual impairment testing for an asset is required, the Group estimates the asset's recoverable amount. An asset's recoverable amount is the higher of an asset's or cash-generating unit's (CGU) fair value less costs to sell and its value in use and is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets. Where the carrying amount of an asset or CGU exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount.

In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessment of the time value of money and the risks specified to the asset.

Impairment losses of continuing operations are recognised in the income statement in those expense categories consistent with the function of the impaired asset.

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 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 cash-generating unit to which the goodwill relates. Where the recoverable amount of the cash-generating unit is less than their carrying amount an impairment loss is recognised. Impairment loss relating to goodwill cannot be reversed in future periods.

Intangible assets with indefinite useful lives

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

s) Cash and short-term deposits

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

t) Provisions

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 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 policy of applying 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 judgments, estimates and assumptions

The preparation of the Group's financial statements requires management to make judgments, 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.

Judgments

Estimates are based on historical experience and various other assumptions that are believed to be reasonable, though actual results and timing could differ from the estimates. Management believes that the accounting policies below represent those matters requiring the exercise of judgment where a different opinion could result in the greatest changes to reported results.

Estimates and assumptions

The key assumptions concerning the future and other key sources of estimation uncertainty at the reporting date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below.

(i) Business combinations

The Group's consolidated financial statements include the assets and liabilities of Papierfabrik Scheufelen which was acquired on 1 January 2009. Where appropriate, the Group engaged independent valuation specialists to determine the fair values of the acquired assets as at 1 January 2009 and to advise on assessments of their remaining useful lives.

In reaching their conclusions on the fair values, the valuation specialists used a range of methods including market valuations, indexation of original purchase cost, replacement cost and discounted cash flow models. The Group's management believes that the assigned values and useful lives, as well as the underlying assumptions, are reasonable, though different assumptions and assigned lives could have a significant impact on the reported amounts. For further details see Note 5.

(ii) 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 cash generating unit 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. The key assumptions used to determine the recoverable amount for the different cash generating units, including a sensitivity analysis, are further explained in Note 14.

(iii) Share-based payments

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.

(iv) Taxes

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

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

(v) Environmental Remediation Costs

Environmental expenditures resulting from the remediation of an existing condition caused by past operations and which do not contribute to current or future revenues, are expensed as incurred. Environmental provisions are recorded, based on current interpretations of environmental laws and regulations, when it is probable that a present obligation has arisen and the amount of such liability can be reliably estimated. However, establishing the precise nature of any contingent liability for environmental liabilities is by its very nature extremely subjective, thus the Group's management can only make its best estimate based on the facts known at the time and by external advice where appropriate.

(vi) Pension benefits

The cost of defined benefit pension plan and the present value of the pension obligation are determined using actuarial valuations. An actuarial valuation involves making various assumptions. These include the determination of the discount rate, future salary increases, mortality rates and future pension increases. Due to the complexity of the valuation, the underlying assumptions and its long term nature, a defined benefit obligation is highly sensitive to changes in these assumptions. All assumptions are reviewed at each reporting date. Further details about the assumptions used are given in Note 21.

4. Standards issued but not yet effective

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

IAS 24 Related party disclosures (Amendment)

IFRIC 14 Prepayments of a minimum funding requirement

IFRIC 19 Extinguishing Financial Liabilities with Equity Instruments

Annual Improvements to IFRSs (May 2010)

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

5. Business combinations

Acquisitions in 2010

The Group did not make any acquisitions during the year ended 31 December 2010.

Acquisitions in 2009

Papierfabrik Scheufelen

On 1 January 2009, the Group acquired the business and assets of Papierfabrik Scheufelen, a manufacturer of coated woodfree papers based in Lenningen, Germany. The acquisition has been accounted for using the purchase method of accounting. The consolidated financial statements include the results of Papierfabrik Scheufelen from the acquisition date.

The fair value of the identifiable assets and liabilities of Papierfabrik Scheufelen as at the date of acquisition were:

Papierfabrik Scheufelen filed for insolvency protection in July 2008 and was actively marketed for sale by an Administrator appointed by the creditors of Scheufelen. In October 2008, the Group was selected as the preferred acquirer and reached agreement to acquire the business and assets of Scheufelen, but not the liabilities for total cash consideration of €31,950,000. The principal alternative to acceptance of the Group's offer was cessation of the business and sale of the assets.

The excess of the net fair value of the identifiable assets, liabilities and contingent liabilities acquired over their cost amounted to € 33,005,000 which has been reported within operating profit as a gain recognised on acquisition.

Papierfabrik Scheufelen contributed €177,573,000 of revenue and a profit of €5,236,000 to the net profit before tax of the Group for the year ended 31 December 2009 and €205,128,000 of revenue and a loss of €39,771,000 (including a non-cash impairment of non-current assets of €31,443,000) to the net loss before tax of the Group for the year ended 31 December 2010.

Lenninger Instandhaltungsgesellschaft mbH (LIG)

On 1 July 2009, the Group acquired the previously outsourced maintenance activities of Papierfabrik Scheufelen. The acquisition has been accounted for using the purchase method of accounting. The consolidated financial statements include the results of LIG from the acquisition date.

The fair value of the identifiable assets and liabilities of LIG as at the date of acquisition were:

The goodwill of €214,000 comprises the value of expected synergies arising from the acquisition.

6. Interest in an associated company

The Group has a 33% interest in Harvestia Oy ("Harvestia"), a wood procurement company based in Finland. Harvestia is a private limited company that is not listed on any public exchange.

Harvestia is accounted for using the equity method. The Group's share of the assets, liabilities, income and expenses of the associated entity at 31 December 2010 and for the year then ended are as follows:

7. Operating segment information

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

·; Graphic Papers, which is involved in the production and sale of coated woodfree papers for use in premium-quality printing applications.

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

·; Central, which includes the costs of corporate and other central services.

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

Management monitors the operating results of the business units separately for the purpose of making decisions about resource allocation and performance assessment. The principal measure used to monitor and evaluate segmental performance is earnings before interest, tax, depreciation and amortisation ("EBITDA"). EBITDA is stated before the gain on acquisition and impairment of non-current assets.

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

Inter-segment revenues are eliminated on consolidation and are not shown as adjustments or eliminations.The Group's share of the profit or loss of Harvestia is reported within the Packaging Papers segment.

Segment operating profit does not include finance income and finance costs.

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

Geographical information

Management considers the principal geographic segments based on customer location to be Countries in the EU, Other countries in Europe, Asia, South and North America and other countries.

8. Other income, expenses and adjustments

8.1 Other operating income

8.2 Employee benefits expense

The average total number of employees during the year was 788 (2009: 792).

8.3 Other operating expenses

8.4 Research and development costs

Research and development costs recognised as an expense in the income statement during the financial year amount to €73,000 (2009: €1,179,000).

8.5 Finance income

8.6 Finance expenses

8.7 Components of other comprehensive income

9. Income tax

Consolidated income statement

The major components of income tax for the years ended 31 December 2010 and 2009 are:

A reconciliation between the tax expense/(income) and the product of accounting profit multiplied by the domestic tax rate in Finland of 26% for the years ended 31 December 2010 and 2009 is as follows:

Deferred tax

Deferred tax in the income statement relates to the following:

The change in the deferred tax liability recognised in other comprehensive income is a charge of €639,000 (2009: charge of €360,000) which arises from the revaluation of forward contracts to fair value. The total change in net deferred tax liabilities was a reduction of €11,139,000 (2009: increase of €10,248,000).

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