POWR.L Regulatory News (POWR)

26 March 2014

Powerflute Oyj

Preliminary results for the year ended 31 December 2013

Powerflute Oyj ("Powerflute" or the "Group"), the packing and paper group, today announces its preliminary results for the year ended 31 December 2013. Powerflute is quoted on the AIM market of the London Stock Exchange (Ticker: POWR).

Overview

The Group has made significant progress over the last twelve months, delivering solid growth in revenues and a significant increase in operating margins and profitability. We successfully completed a number of challenging investment projects and the returns from these are evident in our performance, which represents a marked improvement on the prior year.

Highlights

· Revenues increased 14% to €129.4 million (2012: €113.1 million)

· EBITDA from operating activities increased 41% to €17.4 million (2012: €12.3 million)

· Operating profit improved 58% to €10.9 million (2012: €6.9 million)

· Profit before tax of €10.0 million (2012: €6.3 million)

· EPS of 2.8 cents per share (2012: 1.9 cents)

· Strong balance sheet with net cash of €5.1 million

· 4% increase in dividend to 1.35 cents per share (2012: 1.30 cents)

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

"I am delighted to report on a year of positive change and achievement during which we have grown volumes, revenues and operating profits considerably. In addition, we have successfully completed a number of major investment projects that will further strengthen the market position of our packaging papers business. We are beginning to realise the benefits of a more focused marketing and product development strategy and achieve returns on the investment projects completed in recent years. We are confident that there is scope for further improvement in both operational and financial performance of our existing businesses.

Market conditions have continued to be broadly favourable and the Group has made a positive start to 2014, with volumes and prices both well ahead of the same period of the prior year. The Group has a solid foundation from which to pursue development of its existing businesses and to consider further strategic investments. We remain confident in our ability to create value for our shareholders."

- Ends -

For further information, please contact:

About Powerflute

Powerflute Oyj ("the Company" or "Powerflute") is a paper and packaging group quoted on the AIM market of the London Stock Exchange (Ticker: POWR). The Group operates a paper mill in Kuopio, Finland which produces a specialised form of semi-chemical fluting made from locally sourced birch. Corrugated boxes manufactured using Nordic semi-chemical fluting demonstrate strength and moisture resistance and are used for transportation of fruit and vegetables, high-value industrial goods such as electrical appliances and automotive components. The Kuopio mill is one of only three suppliers of Nordic semi-chemical fluting in Europe.

CHAIRMAN'S STATEMENT

I am delighted to report on a year of positive change and achievement during which we have grown volumes, revenues and operating profits considerably. In addition, we have successfully completed a number of major investment projects that will further strengthen the market position of our packaging papers business. We are beginning to realise the benefits of a more focused marketing and product development strategy and to achieve returns on the investment projects completed in recent years and are confident that there is scope for further improvement in both operational and financial performance of our existing businesses.

Highlights

Revenues increased by 14% to €129.4 million (2012: €113.1 million) due to a combination of higher volumes and better pricing. EBITDA from operating activities increased by 41% to €17.4 million (2012: €12.3 million), operating profit improved to €10.9 million (2012: €6.9 million) and profit before tax was €10.0 million (2012: €6.3 million). Basic earnings per share were 2.8 cents (2012: 1.9 cents) and the Board intends to recommend that the dividend is increased by 4% to 1.35 cents per share for the year ended 31 December 2013 (2012: 1.30 cents per share).

In marked contrast to the difficulties encountered during the final quarter of 2012, we achieved a strong performance in production and were able to capitalise on healthy demand with deliveries up by 10% on the prior year. Further progress was made with efforts to increase the diversity of both customer and geographical mix and this, together with broadly favourable market conditions, contributed to the 4% improvement in average selling prices. During the year, we also successfully completed a number of major projects in the pulp mill aimed at further increasing capacity and quality.

Despite an activity related increase in net working capital during the period and relatively high levels of capital expenditure, the Group continues to be in a strong financial position with net cash of €5.1 million (2012: €10.9 million) consisting of cash and cash equivalents of €28.9 million (2012: €35.1 million) and borrowings of €23.8 million (2012: €24.2 million).

Strategy

Our vision is to be one of the most innovative and successful organisations in our sector, injecting entrepreneurial spirit into the businesses in which we invest, delivering service and value to our customers, attracting and developing the best people and achieving superior returns for our shareholders and other stakeholders.

The industry in which we operate is constantly evolving due to growing demand for environmentally sustainable packaging solutions and increasing globalisation of the food supply chain. Our customers operate in a challenging competitive environment and demand superior service, cutting edge technology and continuous improvement in the balance between product performance and cost. We are responding to these challenges with a multi-year programme of targeted capital investment and research and development which has already been underway for several years. We are now in a much stronger position, better able to meet the demands of our customers and well-positioned to respond to the challenges and opportunities of the future.

Our business model for the long-term development of the Group continues to be based upon the acquisition of under-performing or non-core businesses and their development into successful and profitable organisations with diversified and resilient revenue streams, well invested manufacturing operations and decentralised and empowered organisations.

Corporate responsibility

Corporate responsibility underpins our business, driving decision-making processes and enabling us to achieve our strategic goals in a responsible and sustainable way. The Board is fully committed to the integration of corporate social responsibility into the Group's operating policies and procedures and to encouraging a greater focus on social and environmental issues to benefit the communities in which we operate or in which our products are used.

Shareholder returns

We remain committed to a policy of maintaining or increasing dividends and this year the Board will propose the payment of an increased dividend of 1.35 cents per share for the year ended 31 December 2013 at the Annual General Meeting of Shareholders to be held in Kuopio, Finland on 29 April 2014 (2012: 1.30 cents per share). The ex-dividend date for the proposed dividend would be Wednesday, 30 April 2014, the record date would be Monday, 5 May 2014 and the payment would be made on or about Friday, 23 May 2014.

Leadership and people

The Board is supported by an experienced and committed executive management team which is successfully delivering the Group's strategy and they in turn are supported by strong leadership teams and a committed workforce in each of our businesses. On behalf of the Board, I would like to take this opportunity to sincerely thank them for their continuing dedication, professionalism and commitment, and to add my personal thanks for what we have achieved together.

Summary and outlook

Powerflute has enjoyed a successful year, delivering solid growth in revenues and a significant increase in operating margins and profitability. Further progress was made in diversifying the customer mix and improving product performance and quality and the investments made during 2013 are expected to result in further increases in capacity into 2014 and beyond. Market conditions have continued to be broadly favourable and the Group has made a positive start to the year, with volumes and prices both well ahead of the same period of the prior year. The Group has a solid foundation from which to pursue development of its existing businesses and to consider further strategic investments. We remain confident in our ability to create value for our shareholders.

CHIEF EXECUTIVE'S STATEMENT

This has been a year of significant progress during which we have capitalised on the hard work and investments made in prior years and continued to push forward with an ambitious multi-year programme of product and operational development which should deliver further improvement in the future.

Markets

For much of the year, we enjoyed relatively favourable market conditions. Demand remained strong in all major markets and as a result of increased diversity in the sales mix the usual seasonal fluctuations were less evident than in prior years, resulting in a much greater degree of price stability. Against this background of strong demand and stable pricing, we were able to make further progress with marketing and business development programmes which place greater emphasis on value-based selling to reinforce our message that Nordic semi-chemical fluting is the best solution for long-distance transportation of fruit and vegetables in high humidity conditions, with a view to further improving the profitability and resilience of our business.

Research and development

We continued to invest in product development activities and this resulted in further performance improvements in a number of key areas which are of significance to our customers. We continue to target our efforts towards improving the balance between price and performance and further enhancing the superior strength, consistency and moisture resistant characteristics of our product.

Investment

For several years now, we have been engaged in a structured programme of investment, process modifications and development projects intended to improve the performance and quality of our products, lower production costs, increase capacity and reduce the environmental impact of our business.

During 2012 we made extensive modifications to the vacuum systems and winder station of the paper machine to reduce power consumption and increase production capacity. After some initial difficulties, both investments are now delivering returns ahead of our expectations. Modifications to the waste water treatment plant made ahead of the traditionally challenging winter period proved even more successful than anticipated and allowed production to continue at elevated levels during the first quarter of 2013, with waste discharges considerably below prior levels.

In May, we completed another major upgrade in the pulp mill modifying one of the digester lines to improve pulp quality and increase capacity, while during the September maintenance shutdown we completed the installation of a new drum washer which has further improved pulp quality and reduced our impact on the environment. Both of these complex projects were completed on time and in budget and each has delivered a measurable improvement in quality and an increase in production capacity.

During 2014, we will begin the next phase of our investment programme with a series of projects in the refining stage of the pulp mill and a number of important upgrades and modifications in the power plant.

People

Our management and workforce are critical to the continuing success of our business and throughout the year demonstrated a high degree of professionalism and commitment. I would like to take this opportunity to sincerely thank them for their efforts.

Summary and outlook

The Group has made significant progress over the last twelve months. We successfully completed a number of challenging projects and the returns from these are evident in our performance, which represents a marked improvement on the prior year. We have continued to strengthen our position as a leading producer of semi-chemical fluting and are confident that there is scope for further improvement. The Group has made a positive start to 2014, with volumes and prices well ahead of the same period of the prior year, and has a solid foundation from which to pursue development of its existing businesses and consider further strategic investments.

OPERATING REVIEW

Revenue from continuing operations increased by 14% to €129.4 million (2012: €113.1 million) due to a combination of higher volumes and an improvement in average selling prices. EBITDA from operating activities increased by 41% to €17.4 million (2012: €12.3 million) and operating profit from continuing operations increased by 58% to €10.9 million (2012: €6.9 million), but is stated after charging advisory expenses of €1.2 million (2012: €0.6 million) relating to the investigation of potential acquisitions.

Packaging Papers

Packaging Papers enjoyed a very successful year with substantial increases in production volumes, deliveries, revenues and profits compared with the same period of the prior year. A number of technically demanding investment projects were successfully completed and the benefits of these are already being realised.

Market conditions remained broadly favourable for most of the year and demand was strong in all major markets. There was no real evidence of seasonal weakness during the traditionally slower winter and mid-summer months and this resulted in positive pricing momentum for much of the year. Average selling prices increased by 4% despite a 3% weakening of the US Dollar against the Euro, as prices for semi-chemical fluting were supported by strong underlying demand, continuing efforts of producers of RCP-based fluting to achieve further price recovery and elevated prices of other grades traditionally used as benchmarks.

We continued to focus our efforts on value-based selling and diversifying the sales mix away from traditionally more competitive markets, where margins are less attractive, and into developing economies where there are opportunities to grow substantial volumes at attractive prices. Despite this, we were still able to increase deliveries to most major customers within Europe, increase our share of the important Southern European fruit markets and further grow our share of sales in the Nordic region.

We continue to work hard to improve the technical performance and characteristics of our product and feedback from customers suggests that the performance advantage of Nordic semi-chemical fluting from Powerflute over competing RCP-based products has been increased. Recent investments should result in a further improvement in the effectiveness of pulp washing leading to the potential for further enhancements in product quality and consistency.

Production performed well throughout the year and output increased to 259,000 tonnes (2013: 234,000 tonnes). We were able to capitalise on previous investments and the two major projects planned for the year, major upgrades to the pulp digesters and installation of a new drum washer, were both completed on time and in line with budget. The annual maintenance stop in September was well managed and in marked contrast to the prior year, production restarted early and quickly stabilised at normal levels. There has been a significant improvement in quality, productivity and consistency compared with prior years and we look forward to further improvement in 2014.

Harvestia and wood supply

Harvestia faced a number of operational challenges during the year, but there were some notable achievements and significant progress was made to improve the focus of the business and strengthen its management and organisation. The year was challenging from a market perspective due to a tightening of the balance between wood supply and demand as economic recovery continued. Saw mills enjoyed a much stronger year due to healthy export demand and as pulp and paper mills returned to full production, and in some cases migrated from graphic to packaging grades, domestic demand for wood outstripped supply at various times during the year leading to significant cost pressure.

Unseasonal weather conditions caused difficulties with wood supply towards the end of 2012 and inventories at the mill had reduced to only two or three days of production by the end of the year. The low level of wood inventories created challenges throughout much of the first quarter and it was a considerable achievement to rebuild reserves and secure wood deliveries at the increased levels required by the higher production activity, particularly at a time when domestic birch was in relatively short supply. In order to avoid a recurrence of the same problem during the recent winter months, a decision was taken to increase wood inventories at the mill during the final quarter and to secure additional volumes in the forests by increasing advance payments. While this has the advantage of providing certainty of supply, it has adversely impacted on working capital.

Deliveries to Kotkamills continue and increased compared with the prior year. The relationship is working well and Harvestia has played an important role not only in securing the availability of wood and other fibre, but also in providing a pricing benchmark for discussions with other suppliers.

Kotkamills

Kotkamills made considerable progress with improving operating efficiencies and productivity across all three of its business lines and reported a significant increase in profitability compared with the previous year. Although the structural decline in demand for publication papers continued to weigh heavily on overall performance, we are pleased with the progress that has been made under challenging circumstances.

The saw mill experienced strong demand from both domestic and export markets and was able to achieve a significant increase in volumes. This, together with favourable pricing momentum, translated into a greatly improved financial performance.

The laminating paper and films business continued to suffer from the general weakness in European construction markets, but despite this, performance improved considerably compared with the prior year. Operating efficiencies improved following a rationalisation of the product range and changes to the management and handling of raw materials benefited both quality and productivity.

In contrast, there was a marked deterioration in the performance of the publication papers activity. Although demand for Solaris range of high-bulk papers remained reasonably healthy and good progress was made improving operating efficiencies and reducing overheads, competition from other paper grades resulted in price erosion and a reduction in profitability.

FINANCIAL REVIEW

Revenue

Revenue from continuing operations increased by 14% to €129.4 million (2012: €113.1 million) due to a combination of higher volumes and an improvement in average selling prices. Demand was strong and production performed well throughout the period, resulting in a 10% increase in deliveries to 256,000 tonnes (2012: 234,000 tonnes). Average selling prices improved by 4% to €505 per tonne (2012: €484 per tonne). This was despite an adverse movement of 3% in the US Dollar exchange rate which applies to the 30% of the Group's revenues which are denominated in US Dollars.

EBITDA and Operating Profit

EBITDA from operating activities increased by 41% to €17.4 million (2012: €12.3 million), principally due to the increase in deliveries. The benefit of higher average selling prices was partially offset by an increase in variable costs. In particular, delivery costs increased by 6% due to both underlying cost inflation and changes in the geographical mix of sales, while wood costs increased by 6% due principally to a tight balance between supply and demand in Finland.

Operating profit from continuing operations increased by 58% to €10.9 million (2012: €6.9 million), but is stated after charging advisory expenses of €1.2 million (2012: €0.6 million) relating to the investigation of potential acquisitions.

Finance income and expenses

Net finance expenses were €0.9 million (2012: €0.6 million), consisting of finance income of €0.3 million (2012: €0.7 million) and finance expenses of €1.2 million (2012: €1.3 million) including amortisation of costs relating to the refinancing of the Group's borrowing facilities in 2012. The reduction in finance income of €0.4 million is attributable to a combination of lower cash balances and less favourable interest rates on cash deposits.

Profit before tax from continuing operations

Profit before tax from continuing operations increased by 59% to €10.0 million (2012: €6.3 million). On an underlying basis, the profit before tax from operating activities also increased by 58% to €11.0 million (2012: €7.0 million).

Taxation

The income tax charge of €2.0 million (2012: €1.7 million) represents an effective tax rate of 19.5% (2012: 26.8%) and is based upon the weighted average annual tax rate for the year applied to the underlying profit before taxation after adjusting for the impact of disallowable items of income and expenditure. The underlying rate of tax on profits before taxation in Finland during the year was 24.5% (2012: 24.5%) and the difference between this and the effective rate arises principally as a result of the reassessment of deferred tax liabilities to reflect the lower corporate income tax rates that will apply in future years.

Discontinued operations

In May 2011, the Group disposed of its interests in the Graphic Papers business for consideration of €38.5 million before disposal costs. Although the initial period during which claims could be made by the purchaser under warranties and indemnities has expired, there remains the possibility of claims under certain circumstances and accordingly a provision against future claims of €0.7 million has been retained (2012: €0.8 million).

Dispute with Finnish Tax Administration

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

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

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

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

Earnings per share and dividends

Basic earnings per share were 2.8 cents (2012: 1.9 cents). Basic earnings per share from continuing operations were also 2.8 cents (2012: 1.6 cents).

The directors intend to propose an increased dividend of 1.35 cents per share for the year ended 31 December 2013 at the Annual General Meeting of Shareholders to be held in Kuopio, Finland on 29 April 2014 (2012: 1.30 cents per share). The ex-dividend date for the proposed dividend would be Wednesday, 30 April 2014, the record date would be Monday, 5 May 2014 and the payment would be made on or about Friday, 23 May 2014.

Financial position

The total assets and total equity and liabilities of the Group increased by €8.2 million to €122.9 million (2012: €114.7 million), while total equity increased by €4.3 million to €63.2 million (2012: €58.9 million). The Group experienced a significant increase in both inventories and trade receivables during the year as a result of the higher level of operating activity and this was only partly offset by an increase in trade payables, resulting in an increase in net working capital and a reduction in net cash. Retained profit for the period was higher than expenditure on dividends and this was the main reason for the increase in total equity.

Capital expenditure of €7.2 million (2012: €8.3 million) continued to be higher than depreciation due principally to the level of investment in the pulp mill as part of the continuing efforts to improve product performance and quality and increase capacity. The major projects completed during the year were an extensive upgrade of one of the two digester lines and the installation of a new drum washer.

Cash flow, borrowings and liquidity risk

Cash flow

The net cash outflow for the period was €5.8 million (2012: €8.2 million outflow).

At the start of the year, the Group had net cash of €10.9 million, consisting of cash and short term deposits of €35.1 million, less interest-bearing loans and borrowings of €24.2 million. The principal cash flows during the year were as follows:

· €6.1 million net cash inflow from operating activities (2012: €13.3 million)

· €7.2 million capital expenditure (2012: €8.3 million)

· €3.7 million dividends (2012: €3.8 million)

· €1.1 million interest (2012: €1.2 million)

The net cash inflow from operating activities was €6.1 million (2012: €13.3 million). Although the strong operational performance resulted in EBITDA of €16.2 million (2012: €11.7 million), there was an increase in net working capital of €7.3 million (2012: €3.4 million decrease) and payment of corporate income taxes of €3.3 million (2012: €1.7 million).

The increase in net working capital was due to a combination of recovery of wood inventories from the very low level that existed at the end of 2012, an increase in advance payments to forest owners to secure the required higher levels of wood deliveries in 2014 and activity related increases in finished goods inventories and trade receivables which were only partially offset by an increase in trade payables.

The net change in interest-bearing loans and borrowings was a decrease of €0.3 million (2012: €2.3 million decrease).The Group repaid a shareholder loan of €1.0 million and made repayments under other amortising term loan arrangements of €1.5 million (2012: €1.5 million). However, these repayments were offset by an increase in borrowings under revolving credit and other short term facilities.

At 31 December 2013, the Group had a net cash surplus of €5.1 million (2012: €10.9 million) consisting of cash and cash equivalents of €28.9 million (2012: €35.1 million) and borrowings of €23.8 million (2012: €24.2 million).

Borrowings and liquidity risk

On 12 March 2013, the Group entered into a new financing arrangement for the provision of up to €20.0 million of non-amortising borrowing facilities throughout the period to 31 March 2016. The facilities were utilised to refinance existing obligations and are subject to normal banking covenants including equity ratio, ratio of net debt to EBITDA, ratio of EBITDA to interest expense and minimum liquidity.

The maturity profile of the Group's bank and other borrowing facilities at 31 December 2013 was as follows:

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

At 31 December 2013, the Group had committed borrowing facilities of €23.0 million (2012: €24.5 million). The facilities were fully utilised (2012: €23.1 million) but the Group had cash and short-term deposits of €28.9 million (2012: €35.1 million).

Foreign currency risk

The functional and reporting currency of the Group is the Euro. The Group sells and distributes its products in international markets and has transactional exposure to a number of other currencies and in particular, to the US Dollar. Approximately 30% of the Group's sales by volume and value and up to 5% of its expenditure on raw materials, consumables and other expenses are denominated in US Dollars. The relative movement in the US Dollar against the Euro during 2013 when compared to 2012 was as follows:

· Movement in average exchange rate between 2012 and 2013 - 3% adverse

· Movement in exchange rate at balance sheet date between 2012 and 2013 - 4% adverse

It is the policy of the Group to hedge a portion of its foreign currency exposures for a maximum period of up to 12 months using forward exchange contracts. Where possible the Group takes advantage of natural hedges and only considers hedging the net exposure. Decisions on the implementation of the hedging policy are made by the senior management of the Group and are discussed with and reported to the Board on a regular basis. Amendment of the hedging policy itself is a matter reserved for the Board. The Group does not designate currency derivative contracts as hedges for the purpose of hedge accounting and does not engage in currency speculation.

Risks and uncertainties

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

Going concern

The Group's business activities, together with the factors likely to affect its future development, performance and position are set out in the Strategic Report, as is the financial position of the Group, its cash flows, liquidity position and borrowing facilities. In addition, note 14 of the financial statements includes further information on the Group's objectives, policies and processes for managing its capital, its financial risk management objectives, details of its financial instruments and hedging activities and its exposure to credit risk and liquidity risk.

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

After making diligent enquiries, the Directors have a reasonable expectation that that Group has adequate resources to enable it to continue its activities for the foreseeable future, being a period of at least 12 months from the date of approval of the financial statements, and accordingly, continues to adopt the going concern basis in preparing the financial statements.

PRINCIPAL RISKS AND UNCERTAINTIES

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

SUMMARY AND OUTLOOK

The Group has made significant progress over the last twelve months, delivering solid growth in revenues and a significant increase in operating margins and profitability. We successfully completed a number of challenging investment projects and the returns from these are evident in our performance, which represents a marked improvement on the prior year. Further progress was made in diversifying the customer mix and improving product performance and quality and the investments made during 2013 are expected to result in further increases in capacity into 2014 and beyond. We have continued to strengthen our position as a leading producer of semi-chemical fluting and are confident that there is scope for further improvement.

Market conditions have continued to be broadly favourable and the Group has made a positive start to the year, with volumes and prices both well ahead of the same period of the prior year. The Group has a solid foundation from which to pursue development of its existing businesses and to consider further strategic investments. We remain confident in our ability to create value for our shareholders.

for the year ended 31 December 2013

for the year ended 31 December 2013

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

at 31 December 2013

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

for the year ended 31 December 2013

CONSOLIDATED CASH FLOW STATEMENT

for the year ended 31 December 2013

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1. Corporate information

Powerflute Oyj is a public limited company incorporated and domiciled in Finland. The address of the registered office is Sorsasalo/Box 57, FI-70101 Kuopio, Finland. The Company is listed on the Alternative Investment Market (AIM) of The London Stock Exchange.

The consolidated financial statements of the Company for the year ended 31 December 2013 were approved for issue by resolution of the Company's Board of Directors on 26 March 2014.

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

2. Accounting policies

2.1 Basis of preparation

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

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

2.2 Basis of consolidation

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

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

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

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

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

§ Derecognises the carrying amount of any non-controlling interest

§ Derecognises the cumulative translation differences recorded in equity

§ Recognises the fair value of the consideration received

§ Recognises the fair value of any investment retained

§ Recognises any surplus or deficit in profit or loss

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

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

2.3 Changes in accounting policies and disclosures

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

The Group has adopted all of the following new and amended IFRS and IFRIC interpretations that are relevant to its operations and effective as of 1 January 2013:

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

IAS 19 Employee Benefits (Revised)

IAS 28 Investments in Associates and Joint Ventures

IFRS 7 Financial Instruments - Disclosures - Offsetting Financial Assets and Financial Liabilities - Amendments to IFRS 7

IFRS 10 Consolidated Financial Statements, IAS 27 Separate Financial Statements

IFRS 11 Joint Arrangements

IFRS 12 Disclosure of Interests in Other Entities

IFRS 13 Fair Value Measurement

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

2.4 Summary of significant accounting policies

a) Business combinations and goodwill

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

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

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

b) Investment in associated companies and joint ventures

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

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

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

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

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

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

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

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

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

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

c) Non-current assets held for sale

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

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

d) Foreign currency translation

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

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

e) Revenue recognition

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

(i) Sale of goods

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

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

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

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

(ii) Interest income

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

f) Taxes

(i) Current income tax

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

Current income tax relating to items recognised directly in equity is recognised in equity and not in the income statement. Management periodically evaluates positions taken in the tax returns with respect to situations in which applicable tax regulations are subject to interpretation and establishes provisions where appropriate.

(ii) Deferred tax

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

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

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

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

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

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

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

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

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

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

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

(iii) Sales tax

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

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

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

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

g) Government grants

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

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

h) Pensions and other post-employment benefits

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

(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) Other post-employment benefits

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

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

i) Share based payment transactions

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

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

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

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

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

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

All cancellations of equity settled transaction awards are treated equally.

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

j) Financial instruments - initial recognition and subsequent measurement

(i) Financial assets

Initial recognition and measurement

Financial assets within the scope of IAS 39 are classified as financial assets at fair value through profit or loss, loans and receivables, held to maturity investments, available for sale financial assets, or as derivatives designated as hedging instruments in an effective hedge. The Group determines the classification of its financial assets at initial recognition depending upon the purpose for which the financial assets were acquired.

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

The Group's financial assets include cash and short term deposits, trade and other receivables, loan and other receivables and derivative financial instruments.

Subsequent measurement

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

Financial assets at fair value through profit or loss

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

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

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

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

The Group evaluates its financial assets at fair value through profit and loss (held for trading) to determine whether the intent to sell them in the near term is still appropriate. When the Group is unable to trade these financial assets due to inactive markets and management's intent to sell them in the foreseeable future significantly changes, the Group may elect to reclassify these financial assets in rare circumstances. The reclassification to loans and receivables, available for sale or held to maturity depends on the nature of the asset. This evaluation does not affect any financial assets designated at fair value through profit or loss using the fair value option at designation.

Loans and receivables

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

Available-for-sale financial investments

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

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

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

Derecognition

A financial asset is derecognised when:

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

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

When the Group has transferred its rights to receive cash flows from an asset or has entered into a pass through arrangement, and has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, the asset is recognised to the extent of the Group's continuing involvement in the asset. In that case, the Group also recognizes an associated liability. The transferred asset and the associated liability are measured on a basis that reflects the rights and obligations that the Group has retained.

Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration that the Group could be required to repay.

(ii) Impairment of financial assets

The Group assesses at each reporting date whether there is any objective evidence that a financial asset or group of financial assets is impaired. A financial asset or group of financial assets is deemed to be impaired if, and only if, there is objective evidence of impairment as a result of one or more events that has occurred after the initial recognition of the asset (an incurred loss event) and that loss event has an impact on the estimated future cash flows of the financial asset or the group of financial assets that can be reliably estimated. If there is objective evidence that an impairment loss has incurred, the amount of the loss is measured as the difference between the asset's carrying amount and the present value of estimated future cash flows (excluding future expected credit losses that have not yet been incurred). The present value of the estimated future cash flows is discounted at the financial asset's original effective interest rate and if a loan has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate.

Available for sale financial investments

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

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

(iii) Financial liabilities

Initial recognition and measurement

Finance liabilities within the scope of IAS 39 are classified as financial liabilities at fair value through profit or loss, loans and borrowings, or as derivatives designated as hedging instruments in an effective hedge. The Group determines the classification of its financial liabilities at initial recognition.

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

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

Subsequent measurement

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

Financial liabilities at fair value through profit or loss

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

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

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

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

Interest bearing loans and borrowings

After initial recognition, interest bearing loans and borrowings are subsequently measured at amortised cost using the effective interest method. Gains and losses are recognised in the income statement when the liabilities are derecognised as well as through the effective interest rate (EIR) method amortisation process. Amortised cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are an integral part of the EIR. The EIR Amortisation is included in finance cost in the income statement.

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

Derecognition

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

Where an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amounts is recognised in the income statement.

(iv) Offsetting of financial instruments

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

(v) Fair value of financial instruments

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

k) Derivative financial instruments and hedging

Initial recognition and subsequent measurement

The Group uses derivative financial instruments such as forward exchange contracts, interest rate swaps and commodity forward contracts to hedge its foreign currency risks, interest rate risks and commodity price risks. Such derivative financial instruments are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequently remeasured at fair value. Derivatives are carried as financial assets when the fair value is positive and as financial liabilities when the fair value is negative.

Any gains or losses arising from changes in fair value on derivatives are taken directly to the income statement, except for the effective portion of cash flow hedges, which is recognised in other comprehensive income.

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

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

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

§ hedges of a net investment in a foreign operation.

At the inception of a hedge relationship, the Group formally designates and documents the hedge relationship to which the Group wishes to apply hedge accounting and the risk management objective and strategy for undertaking the hedge. The documentation includes identification of the hedging instrument, the hedged item or transaction, the nature of the risk being hedged and how the effectiveness of the hedging instrument will be assessed. Such hedges are expected to be highly effective in achieving offsetting changes in fair value or cash flows and are assessed on an on-going basis to determine that they actually have been highly effective throughout the financial reporting periods for which they were designated.

Fair value hedges

The Group did not have any fair value hedges or hedges of net investments at 31 December 2013 and 2012.

Cash flow hedges

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

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

§ Amounts recognised as other comprehensive income are transferred to the income statement when the hedged transaction affects profit or loss, such as when the hedged financial income or financial expense is recognised or when a forecast sale occurs.

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

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

Current versus non-current classification

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

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

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

l) Property, plant and equipment

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

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

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

The residual values, useful lives and methods of depreciation or property, plant and equipment are reviewed and adjusted prospectively, if appropriate, at each financial year end.

m) Leases

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

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

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

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

n) Borrowing costs

Borrowing costs directly attributable to the acquisition, construction or production of an asset that necessarily takes a substantial period of time to get ready for its intended use or sale are capitalised as part of the cost of the respective assets. The Group did not have any such assets at 31 December 2013 and 2012 and no borrowing costs were capitalised.

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

o) Intangible assets

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

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

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

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

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

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

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

Research and development costs

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

p) Inventories

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

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

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

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

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

q) Impairment of non-financial assets

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

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

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

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

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

Goodwill

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

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

r) Cash and short term deposits

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

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

s) Provisions

General

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

Carbon dioxide emissions

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

3. Significant accounting judgements, estimates and assumptions

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

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

Impairment of non-financial assets

Impairment exists when the carrying value of an asset or cash generating unit exceeds its recoverable amount, which is the higher of its fair value less costs to sell and its value in use. The fair value less costs to sell calculation is based on available data from binding sales transactions in an arm's length transaction of similar assets or observable market prices less incremental costs for disposing of the asset. The value in use calculation is based on a discounted cash flow model. The cash flows are derived from the budget for the next five years and do not include restructuring activities that the Group is not yet committed to or significant future investments that will enhance the asset's performance of the CGU being tested. The recoverable amount is most sensitive to the discount rate used for the discounted cash flow model as well as the expected future cash inflows and the growth rate used for extrapolation purposes.

Share-based payment transactions

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

Taxes

Taxation of gains arising on disposal of shares

During the year ended 31 December 2011, the Group sold a portion of its shareholding in Harvestia and sold its entire interest in the Graphic Papers businesses, realising a profit on both disposals. In preparing its financial statements for the year ended 31 December 2013 and 2012, the Group has assumed that the resulting gains are exempt from corporate taxes under the substantial shareholder exemptions available to industrial companies in Finland.

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

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

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

While the taxes have been paid to avoid the risk of interest and other penalties, the financial statements for the twelve months ended 31 December 2013 continue to be prepared on the basis that the Group is an industrial company and that the gains arising on the disposals will be exempt from corporate taxes. The taxes originally assessed by the Tax Administration and paid by the Group have not been recognised in the income statement, but have been recorded as a non-current financial asset in the balance sheet. Full provision has been made against the estimated future costs of the handling the dispute within the results of discontinued operations.

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

4. Standards issued but not yet effective

Standards issued but not yet effective up to the date of issuance of the Group's financial statements are listed below. The Group intends to adopt these standards, if applicable, when they become effective.

IFRS 9 Financial Instruments

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

IAS 32 Offsetting Financial Assets and Financial Liabilities - Amendments to IAS 32

IFRIC Interpretation 21 Levies (IFRIC 21)

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

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

5. Business combinations

The Group did not make any acquisitions during the years ended 31 December 2013 and 2012.

6. Investment in a joint venture

The Group has a 47.5% interest in Harvestia Oy ("Harvestia"), a wood procurement company incorporated and domiciled in Helsinki, Finland. Harvestia is a private limited company that is not listed on any public exchange.

On 15 February 2013, one of the founding management shareholders of Harvestia left the company and under the terms of his departure surrendered shares in the company previously held by him representing 5% of the total issued share capital. These shares were subsequently cancelled and as a result of this change, the Group's interest in Harvestia increased from 45.0% to 47.5%.

Prior year information

On 2 January 2012, the Group increased its investment in Harvestia Oy ("Harvestia") from 30% to 45% through the acquisition of a further 15% of the equity of Harvestia for cash consideration of €1,432,000. The purchase of Harvestia shares was financed from the Group's own cash resources.

Harvestia is accounted for using the equity method in the consolidated financial statements. Summarised financial information of the joint venture at 31 December 2013 and reconciliation with the carrying amount of the investment in consolidated financial statements are set out below:

The Group has unrecognised purchasing obligations towards Harvestia under contracts for wood procurement and Harvestia itself has related obligations towards third parties. The Group's share of the contingent liabilities of the joint venture amounted to €6,803,000 at 31 December 2013 (2012: €6,311,000).

7. Operating segment information

For management purposes, the Group is organised into business units based upon the products and services which it supplies. The Group currently has only one reportable operating segment:

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

No operating segments have been aggregated to form the above reportable operating segment. The costs of central functions, including the costs of corporate and other central services, are allocated to the reportable operating segments using cost allocation methodologies appropriate to each category of expense and consistent with the methods used in management reporting.

Management monitors the operating results of business units separately for the purpose of making decisions about resource allocation and performance assessment. The principal measure used to monitor and evaluate segmental performance is earnings before interest, tax, depreciation and amortisation ("EBITDA"). The measurement basis for Segment EBITDA excludes the effects of non-recurring or exceptional income or expenditure from the results of the operating segments. It also excludes the effects of equity-settled share-based payments and unrealised gains or losses on financial instruments. Interest income and expenditure are not allocated to segments. Transfer prices between operating segments are on an arm's-length basis in a manner similar to transactions with third parties.

Following the disposal of the Graphic Papers businesses in May 2011, the Group has only one reportable operating segment within continuing operations.

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

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

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

Geographical information

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

The Group had a number of customers who each individually represented more than 10% of its revenues from continuing operations for the year ended 31 December 2013. Together, these customers accounted for revenues of €54,865,000 (2012: €35,628,000) for the Packaging Papers segment, of which €39,412,000 was reported within revenues from "Other countries in the EU" (2012: €35,628,000) and €15,453,000 within revenues from "Other countries" (2012: no reportable customers).

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 204 (2012: 201).

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 €140,000 (2012: €135,000).

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 2013 and 2012 are:

A reconciliation between the tax expense/(income) and the product of accounting profit multiplied by the domestic tax rate in Finland of 24,5% for the year ended 31 December 2013 (2012: 24.5%) is as follows:

In calculating income tax and deferred tax for the years ended 31 December 2013 and 2012, the Group has assumed that it is able to take advantage of participation or substantial shareholder exemptions and that gains arising on share disposals will be exempt from corporate taxes. For further details see Note 3.

Deferred tax

Deferred tax in the income statement relates to the following:

The change in the deferred tax liability recognised in other comprehensive income is a charge of €105,000 (2012: charge of €25,000) which arises from the revaluation of forward contracts to fair value. The change in net deferred tax liabilities was a decrease of €352,000 (2012: increase of €129,000).

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

10. Discontinued operations

On 3 May 2011, the Group announced that it had reached agreement on the sale of the businesses that comprise the Graphic Papers to an acquisition vehicle under the control of Paper Excellence BV, an integrated pulp and paper company registered in the Netherlands. The total consideration for the disposal was €38.5 million before disposal costs, consisting of cash consideration of €32.5 million and the assumption of €6.0 million of debt by the purchaser.

The initial period during which claims could be made by the purchaser under warranties and indemnities provided by the Group expired during the year ended 31 December 2012 without any claims being notified to the Group. Accordingly, the provisions against uncertainties established at the time of disposal were reassessed and the reduction in the amount of the provisions reported within the gain for the period after tax from discontinued operations during the year ended 31 December 2012.

There remains the possibility of claims under certain of the warranties and indemnities and as at 31 December 2013 has retained a provision of €690,000 (2012: €750,000) against the cost of potential claims. As at 26 March 2014, the Group had not received notification of any potential claims. Further details are provided in Note 21.

The impact of discontinued operations on earnings per share in the years ended 31 December 2013 and 2012 was as follows:

The Group does not have any other businesses in the Graphic Papers operating segment and this segment is no longer reviewed by management. Accordingly, financial information for Graphic Papers has not been separately disclosed in Note 7 - Segmental Information.

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

11. Earnings per share

Basic earnings per share amounts are calculated by dividing net profit for the year attributable to ordinary equity holders of the parent by the weighted average number of ordinary shares outstanding during the year.

Diluted earnings per share amounts are calculated by dividing the net profit for the year attributable to ordinary equity holders of the parent by the weighted average number of ordinary shares outstanding during the year plus the weighted average number of ordinary shares that would be issued on conversion of all the dilutive potential ordinary shares into ordinary shares.

The following reflects the income and share data used in the basic and diluted earnings per share computations:

The weighted average number of shares takes into account the weighted average effect of changes in treasury share transactions during the period.

Authority to repurchase of shares

On 25 April 2013, the Annual General Meeting granted authority to the Board of Directors to decide on the repurchase of up to 28,000,000 Powerflute's shares pursuant to Chapter 15, Section 5(2) of the Finnish Companies Act by using funds in the company's unrestricted equity. The proposed amount of shares corresponded to approximately 9.9 % of all shares and votes of the company then in issue. The authority remains effective until 30 June 2014 unless revoked or amended before this date by a General Meeting of Shareholders, and replaces any previous similar authorities granted to the Board of Directors.

Authority to issue new shares

On 25 April, 2013, the Annual General Meeting granted authority to the Board of Directors to resolve on the issuance of up to 60,000,000 shares through a share issue or granting of options or other special rights granting entitlement to shares pursuant to Chapter 10, Section 1 of the Finnish Companies Act. This authority may be utilised in one or several issues. The Board of Directors may resolve to give either new shares or shares in the company's possession. The proposed amount of shares corresponded to approximately 21.1 % of all shares and votes of the Company then in issue. This authority provides the right to deviate from the shareholders' pre-emptive subscription right. The authority remains effective until 30 June 2014 unless revoked or amended before this date by a General Meeting of Shareholders, and replaces any previous similar authorities granted to the Board of Directors.

12. Property, plant and equipment, investment properties