For Tamro Group the year 2003 was challenging with slow market growth and a tight competition on market shares in a number of countries. The company met this challenge with a continued strong focus on the efficiency of the operations and by strengthening its cost leadership position. Regular benchmarking with PHOENIX, the main owner of Tamro Group, helped to reach the efficiency targets. Further, the work was continued to constantly improve the customer service. In the Baltic countries, the forward integration efforts were intensified.

As a result, Tamro Group is able to report its best annual profit in the history of the company. Profits and performance clearly improved in most parts of the Group.

Markets and operating environment

The growth of the Nordic pharmaceutical market slowed down from 9% in 2002 to 4% in 2003. The two major reasons were the efforts to cut the public spending on pharmaceuticals and the patents expirations of several high-selling products.

The 2003 market growth was highest in Finland, 7%, and lowest in Sweden, 2%. The value of the pharmaceutical wholesale market in the Nordic countries was EUR 6.7 billion measured in pharmacy purchasing prices. In the Baltic States, the pharmaceutical wholesale grew by approximately 8%, with significant differences per country. Latvia had the highest growth, 11%, followed by Lithuania, 8%, while Estonia grew around 5%.

4Q net sales and financial performance

Tamro Group’s net sales during the fourth quarter rose to EUR 1,101.6 (1,078.2) million, up 2.2% compared to the fourth quarter in the previous year.

The group operating profit amounted to EUR 27.2 (13.6) million, up 100% from last year. The operating margin for the quarter was 2.5%. In 2002, the Q4 operating profit included an EUR 2.6 million provision for the non-recurring accounting cost of joining the Russian wholesale coalition. In 2003, the Q4 operating profit includes a one-time adjustment reducing the pension cost in Norway by EUR 4.5 million. In Q4 2003, the company also fully expensed the impact of detected irregularities in a small Danish subsidiary Unikem A/S.

The group pre-tax profit during the fourth quarter was EUR 26.1 million and earnings per share were EUR 0.16.

Full-year net sales and financial performance

The Tamro Group net sales for the fiscal year 2003 amounted to EUR 4,169.4 (4,102.7) million, up 1.6% on the previous year. Most of the growth was attributed to Denmark and Lithuania. Tamro MedLab reported sales growth due to the transfer of the Healthcare business from Tamro Sweden to MedLab in the beginning of 2003.

The consolidated operating profit was EUR 78.0 (55.1) million, and the full-year operating margin was 1.9%. The year 2003 operating profit includes capital gains on the sale of real estates mainly in Denmark with the total gain of EUR 1.8 million, a one-time adjustment reducing the pension cost in Norway by EUR 4.5 million, and the cost from the irregularities in Unikem A/S. In 2002 operating profit included an EUR 2.6 million provision for the non-recurring accounting cost of joining the Russian wholesale coalition.

The operating profit reached the target. All business units except Tamro Denmark and Tamro Lithuania were able to improve their operating profits compared to the previous year. The biggest improvements in operating profit were reported by Norway and Finland.

The consolidated ordinary profit before taxes was EUR 69.0 (41.3) million, up 67% compared to previous year.

The tax rate was reported as 28.8%. Tax refunds from earlier accounting years amount to less than EUR -0.1 million, and they are reported in 2003.

The Group’s total net profit for 2003 was EUR 47.2 (30.0) million.

The return on capital employed was 16.1 (10.6)%. The return on equity was 12.9 (7.6)% and earnings per share EUR 0.41 (0.26).

Financing

During 2003, the financial position of Tamro Group was improved through increased operational profitability, lower investment level and a stronger funding structure.

In September, Tamro Corporation entered into EUR 200 million committed revolving credit facility agreements with the Group's core banks. At year-end these unutilised, bi-lateral, back-stop facilities for the EUR 200 million Commercial Paper Programme ensured funding for an average period of 1.6 years. The free limit in the SEK 1,200 (EUR 132) million Asset Securitisation arrangement was SEK 510 (EUR 56) million at year-end. In April, external loans in Apokjeden Group were replaced with internal funding.

The mortgages and pledges securing interest-bearing debt were reduced actively during the year. At year-end there was no material outstanding collateral in Tamro Group.

The net debt on the balance sheet was reduced to EUR 71.4 (96.6) million at year-end. Effective net debt, including the EUR 74.2 (65.9) million receivables sold in December, totalled EUR 145.6 (162.3) million. The average effective net debt in 2003 was EUR 219 (227) million.

The liquid assets contracted to EUR 22.3 (45.6) million. The Group's net gearing was reduced to 18.4 (26.0)% and the equity ratio improved to 35.4 (32.7)%.

Free cash flow and net working capital

The free cash flow after capital investments was EUR 40.4 (86.7) million positive. A clear improvement can be seen, if EUR 139 million of positive one-off items are excluded from last year’s figure. The main improvement came from a better operational cash flow and significantly lower investments.

The operational cash flow before net working capital changes improved from the previous year to EUR 79.1 (51.3) million because of stronger profitability during the year 2003. The cash flow of the net working capital changes was a moderate EUR -5.3 (126.9) million. The value of receivables sold through the Asset Securitisation programme was EUR 74.2 (65.9) million at year-end. The net working capital amounted to EUR 143.9 (132.9) million at year-end. The gross investments were reduced to about one third compared to the previous year and totalled EUR 33.4 (91.5) million.

The free cash flow after capital investments in the fourth quarter was EUR 53.9 (114.7) million. The net investments amounted to EUR -5.9 (-14.6) million, and the decrease in the net working capital was EUR 34.6 (117.7) million. The positive operational cash flow before the above items was EUR 25.2 (11.6) million. The net interest-bearing debt on the balance sheet decreased in the fourth quarter by EUR 50.2 million to EUR 71.4 million.

Financial expenses

The Group’s net financial expenses in 2003 contracted to EUR -9.3 (-14.1) million. The main savings came from lower net interest expenses of EUR -8.7 (-14.3) million. The exchange rate differences were EUR -0.6 (0.3) million, and other financial expenses and income were EUR 0.0 (-0.1) million.

The Group had a relatively short interest duration throughout the year 2003, and interest-rate cuts especially in Norway and the euro area were reflected quickly in the net interest expenses. The refinancing of Apokjeden AS in April with a less costly internal funding structure created additional long-term cost savings.

Foreign currencies and translation differences

The majority of the Group’s net sales are denominated in local currencies. The currency split of the Group’s net sales was SEK 37 (37)%, DKK 25 (24)%, EUR 17 (17)%, NOK 15 (15)% and LVL, RUR, LTL and EEK together 6 (7)% of the Group’s net sales.

The major part of the Group’s purchases is also denominated in local currency. Only 3%, or EUR 131 (86) million, of the purchases are exposed to a currency risk. The currency split for that amount was 86 (29)% in euros, 8 (55)% in USD and, 6 (16)% in other currencies.

The foreign-currency-denominated shareholders’ equity and equity type loans were EUR 344 (273) million at year-end 2003. Equity exposure was altered towards a more equally diversified portfolio and at year-end NOK represented 38 (27)%, SEK 32 (36)%, DKK 24 (31)%, and others 6 (6)% of the total exposure. The translation differences from the foreign-currency-denominated shareholders’ equity and the equity type loans of the overseas subsidiaries were EUR -14.0 (6.3) million at year-end 2003. This amount affects directly the consolidated equity of the Group.

Capital expenditure and acquisitions

The Group’s gross investments amounted to EUR 39.6 (93.9) million. A majority of these investments were related to pharmacy acquisitions especially in Norway but also in the Baltic countries. This expansion is in line with the forward integration strategy. The other investments were made for renewing and maintaining the asset base.

Major changes in the group structure

The financial statements of Pharm Tamda 77 (Russia) have been consolidated to Tamro Group figures until 30.04.2003.

In December 2002 the restructuring of Tamro’s wholesale operations in Russia was disclosed. To support geographical expansion in Russia, combined with smaller financial risks, Tamro swapped its holding in Pharm Tamda 77 for an 18% minority holding in ZAO ROSTA, a new federal wholesale company formed as a coalition of three strong regional pharmaceutical wholesalers.

Research and development

Tamro continued to focus its limited research and development efforts on different IT and Internet based information solutions for customers and principals. In Denmark already 30% of the pharmacies use Vendor Managed Inventory systems developed by Nomeco Group. Sweden launched new versions of the value-added Internet based business information service that assists customers in developing their operations and efficiency. Finland introduced the Tamro Web Direct network service, which provides pharmacies with real-time information about stock availability.

Personnel and organisation

Tamro’s payroll averaged 3,820 (3,438) employees during the financial year. Of the total staff, 17% worked in Denmark, 12% in Finland, 15% in Sweden, 39% in Norway and 17% in the Baltic States and Russia. Of the total staff, an average of 1,491 employees (32%) worked in retail operations in Estonia, Latvia, Lithuania and Norway. At year-end the group personnel numbered 3,858, of which 1,625 (42%) worked in the retail business.

The wages and salaries paid by the Group during 2003 totalled EUR 129 (123) million, including EUR 13 (14) million paid by the parent company Tamro Corporation. The remuneration paid to Tamro Corporation’s Board of Directors and CEO amounted to EUR 0.9 (0.4) million.

Redemption procedures of Tamro's shares and warrants

According to the notification received on 14 August 2003, PHOENIX International Beteiligungs GmbH had concluded a share purchase agreement on 13 August 2003, with fulfilment of which the entire holding of Apoteket AB in Tamro Corporation was transferred to PHOENIX. The holding of Apoteket AB in Tamro Corporation decreased from 19.3% to zero and the holding of PHOENIX increased from 39.6% to 58.9%. PHOENIX also informed that the fulfilment of the share purchase agreement had triggered the redemption obligation under the Articles of Association of Tamro Corporation.

On 8 October 2003, PHOENIX informed that a total of 40,642,904 shares and 5,311,000 warrants had been tendered in the tender offer.

On 15 October 2003, Phoenix informed Tamro Corporation that its holding of shares and votes in Tamro had exceeded nine-tenths (9/10). On 7 November PHOENIX informed that it will commence the mandatory redemption procedure pursuant to the Finnish Securities Market Act. The acceptance period ended on 10 December 2003.

On 16 December PHOENIX informed that it had decided to exercise its redemption right under the Finnish Companies Act and to redeem the shares held by other shareholders in Tamro. By the year end the holding of PHOENIX in Tamro Corporation was 99.0%.

Tamro's shares

Share capital

The share capital of Parent Company Tamro Corporation on 31 December 2003 amounted to EUR 114,837,083, and it was divided into a total of 114,837,083 shares with a nominal value of EUR 1. Tamro Corporation shares are listed on the Helsinki Exchanges.

On 31 December 2003 PHOENIX Group held 113,714,106 shares, or 99.0% of all the shares of Tamro Corporation. At year-end, the company held 341,000 repurchased own shares corresponding to 0.3% of the year-end share capital. During 2003 the company had no authorisation from the Annual General Meeting to repurchase or sell its own shares.

The amount of outstanding shares not held by PHOENIX Group was 781,977, representing 0.7% of the share capital.

Share option rights and warrants

The Group has issued option schemes and policies as incentives for its key employees and personnel in 1997 and in 2000. At year-end, 213,000 or 3.1% of the outstanding 6,882,000 option rights and warrants, were held by others than companies in the Tamro Group or in the PHOENIX group. Tamro Group owned 1,278,000 or 18.6% and companies in the PHOENIX group held 5,391,000 or 78.3% of all warrants and option rights.

Share performance

The closing price of Tamro’s share for 2003 stood at EUR 4.51 (3.80), up 18.7% from the end of 2002. The year’s trading high was EUR 4.60 and trading low EUR 3.77. During 2003, a total of 50.8 (17.5) million shares changed hands in the Helsinki Stock Exchange, equivalent to 44.3% of the average number of all Tamro shares; this share turnover represented a market value of EUR 227.9 (66.7) million. Turnover amounts are not comparable with last year’s figures, as they include the purchases made by PHOENIX in connection of the redemption offers and claims.

Tamro’s market capitalisation at year-end 2003 was EUR 516.4 million compared with EUR 435.1 million at the close of 2002. The market capitalisation figure does not include own shares.

Permanent insiders’ share holdings and options

At year’s end, the Board Members, Group management and permanent insiders did not own Tamro Corporation shares, warrants or option rights.

Board of Directors and Auditors

The annual general meeting of 8 April 2003 elected six members to Tamro’s board of directors. Dr Bernd Scheifele (CEO, Phoenix Group) was elected chairman. As other Board members were re-elected Mikael von Frenckell, Reimund Pohl and Dr Lorenz Näger and as new Board members were elected Göran Hultman, Apoteket AB's marketing director and member of the management team, and Matti Elovaara, commercial counsellor and Tamro Group's previous CEO.

The Authorised Public Accountants PricewaterhouseCoopers Oy and Johan Kronberg, APA, were elected to continue as Tamro's external auditors.

Group Management

In July 2003 Ms Dita Martinsone was appointed as the Managing Director of Tamro SIA in Latvia. She had worked as the acting managing director since January. Also in July, Mr Stefan Pflug, the Group Logistics Director and a member of the Group management team, was appointed as acting managing director for UAB Tamro Lithuania. In October, Mr Stefan Åkesson resigned from the position of Managing Director of Tamro Sweden. Mr Jo Langmoen, the Group President and CEO, took the role as acting managing director for Tamro Sweden.

Events after the financial year

In January 2004 Mr Hans Wahlén (56) was appointed as the Managing Director of Tamro Sweden, the Group's pharmaceutical distribution unit in Sweden. Hans Wahlén took over his new position in Gothenburg as from 12 January 2004. Tamro's Group Logistic Director and member of Tamro's Group management Mr Stefan Pflug, resigned from the position of Acting Managing Director in UAB Tamro Lithuania and Mr Gytis Bendorius was appointed as Managing Director in the beginning of March.

Outlook for the near future

The growth of the pharmaceutical market is expected to remain slow in the Nordic countries during 2004. Due to the slow market development, Tamro Group’s net sales are expected to grow only at an annual rate of 3-5% in 2004. Despite the slow sales development, the Company expects to retain in 2004 its strongly improved profitability through further gains in operational efficiency.