Tamro Group’s financing activities were incorporated into a separate entity called Tamro Finance Ltd in 2004. The incorporated treasury unit carries out the financing activities, including liquidity and risk management, of the Group in accordance with the finance policy. Tamro Finance Ltd acts as an internal bank and provides financing, trading and consulting services to other Group companies. The incorporated treasury unit also administers the Group-level master insurance policies.

The principal aim of the financing activities is to ensure sufficient and cost-efficient funding to support implementation of the Group’s strategy and to decrease the volatility and unpredictability in the Group’s financial performance that is caused by financial risk, to the extent that it can be justified economically and competition-wise.

Refinancing risk

The refinancing risk is managed through diversification of the funding sources and the ability to provide alternative credit risk to investors. At the year-end the Parent Company had at its disposal free committed revolving credit facilities worth EUR 200 million. These back-stop arrangements are made with the Group’s core banks. The arrangement ensured funding for an average of one year and three months.

At year-end the Group also had at its disposal a portfolio of free short-term credit facilities and account overdrafts worth EUR 267 (210) million and a EUR 195 (200) million available limit in a EUR 200 million Finnish Commercial Paper programme. Bank relations are handled at frequent meetings with the Group’s core banks, and the Commercial Paper programme has been in active use.

As an alternative off-balance-sheet funding source, the Group has Asset Securitisation programmes that enable accounts receivable to be sold without recourse up to the limit of SEK 1,200 million (EUR 132 million) in Sweden and up to the limit of DKK 1,050 million (EUR 141 million) in Denmark. The available purchase limits at the end of the year were EUR 124 (56) million.

Liquidity risk

The target is to maintain a good liquidity position under all circumstances with sufficient account overdrafts, credit facilities and cash in hand. Liquidity management is handled with cash pools in Finland, Sweden, Norway and Denmark. Excess liquidity is concentrated in the treasury unit by using internal account overdrafts and internal credit facilities. Excess liquidity is primarily used to reduce short-term interest bearing debt. The residual excess liquidity is invested in short-term and liquid money market instruments in accordance with the counterpart list.

Foreign exchange risk

The Group’s customers are mainly local pharmacies, hospitals and consumers. The net sales are almost exclusively denominated in the local currency in each country. In 2004 the currency split of the net sales was SEK 34%, DKK 24%, EUR 22%, NOK 14% and other currencies 6%.

On the supplier side the Group’s main partners are international pharmaceutical companies. In the Nordic countries the suppliers carry almost exclusively the existing foreign exchange risk. In Estonia, Latvia, Lithuania and in Tamro MedLab-Group the foreign exchange risk is to some extent carried by the distributor or wholesaler. About 4%, or EUR 163 million, of the Group’s purchases are exposed to the currency risk. The currency split for that amount was: EUR 89 %, USD 5 % and other currencies 6%.

The transaction risk in purchases is reduced by targeting to the agreement currency that correlates to the local currency, by using currency clauses in the supplier agreements, by active sales pricing and by entering into fwd-rate agreements. According to the principal policy, the purchases exposed to a foreign exchange risk are hedged if that can be found to be economically justified, at the point when the balance sheet position opens. Depending on the commitment level of the corresponding sales, the purchases can also be hedged on a rolling basis up to 24 months ahead.

According to the main policy, the internal loans of Group Companies are denominated in the subsidiaries’ local currency. The open position in the lending company is selectively hedged to the extent that these loans are not considered equity-type loans and the hedging is found to be justified economically, taking into account the expected volatility of the currency.

The Group does not hedge foreign-currency-denominated shareholders’ equity and equity type loans. The foreign-currency-denominated shareholders’ equity and equity-type loans at financial year-end 2004/2005 were EUR 442 million. Of the total amount, NOK represented 39%, SEK 27%, DKK 23% and others 11% at the year-end.

The euro-value movements of the shareholders’ equity and equity-type loans are reported as consolidation differences in the Group shareholders’ equity.

Interest rate risk

The Group’s interest rate risk is defined as an adverse change to the value of the Group caused by interest-rate fluctuations. The target interest-rate duration and currency diversification are defined by taking into consideration the amount of interest-bearing loans, interest-bearing investments, derivative instruments and cyclicality of the operational cash flows.

Credit risk

The credit risk of the financial investments and derivative instruments is handled in accordance with the frequently updated counterpart list. The counterpart list is drawn up so that the risk nominal amount and maturity of each instrument and counterpart is limited. The policy is to include only low-credit-risk instruments and names to the counterpart list.

The credit risk inherent in the accounts receivable is handled in the business units and monitored at Group-level. Historically the risk has not been relevant in the main business areas.

Derivative instruments

According to the policy, the derivative instruments are used only to hedge the underlying business within the risk limits. The derivative instruments used have to be liquid enough and effectively priced in the market. The derivative instruments are included when measuring the counterpart risk.

The Group’s open derivative instruments are presented in tabular form in the Notes to the Financial Statements.

Insurances

The Group aims to reduce property damage, crime and liability risks by active risk reduction measures. The main responsibility for identifying, reducing and covering risks is held by the business units. Group-wide master insurance policies are used to cover the property damage, liability and crime risks. Additionally numerous local insurance policies are used to supplement the specific risk coverage needs arising from the assets and operations of the business units.