The year 2004/2005 marked another year of slow market growth and intense competition over market shares. Tamro met this challenge with a continued focus on the efficiency of the operations and by strengthening its cost leadership position. Tamro was delisted from the Helsinki Stock Exchange and became a fully owned subsidiary of PHOENIX in May 2004, which allowed for wider benchmarking of processes with the best in business. In Sweden and Finland, structural changes in warehouse logistics were decided to improve efficiency. Apokjeden further strengthened its position as the leading pharmacy chain in Norway. A number of retail acquisitions helped us improve our market position in the Baltic countries.

Due to the measures Tamro is able to publish a record result. Operations clearly improved in most parts of the Group.

Markets and operating environment

The growth of the Nordic pharmaceutical market in 2004 was modest compared to recent years, being slightly below 5% at constant exchange rates (CER). The main reasons for the slow growth are patent expiries of some high-selling substances in 2003, generic substitution and a drop in prices due to the intensified generic competition.

Furthermore, cost containment actions favour generics and parallel imports, and reimbursement decisions have become tougher. However, the ageing population remains a key growth driver.

Pharmaceutical market growth varied within the Nordic countries: The Finnish pharma market grew fastest, as in previous year, with an almost 8% increase. The lowest growth was recorded in Sweden, where the market is recovering at a growth rate of 2.3%. The biggest increase in terms of monetary value took place in Finland, followed by Norway and Sweden.

The value of the aggregated pharmaceuticals sales by wholesalers in the Nordic countries was EUR 6.6 billion measured in pharmacy purchasing prices (PPP). Tamro kept its strong position in the Nordic pharmaceutical wholesale market. Tamro’s pharmaceuticals wholesale in the Nordic region amounted to EUR 3,349 million in PPP, producing an average market share of 51%, up 3.5 percentage points from the previous year.

The total wholesale value of pharmaceuticals in the Baltic countries amounted to EUR 524 million, surpassing the previous year’s sales by 15% at CER. Estonia had the highest growth, 20%, followed by Lithuania, 14%, while Latvia grew by around 11%.

Full-year net sales and financial performance

The Tamro Group net sales for the financial year ending 31.1. 2005 amounted to EUR 4,857 million. Comparable sales for the calendar year 2004 were 4,488 (4,169) million, an increase of 7.6%. Excluding the effects of the extended financial year, the positive sales development is mainly due to the new exclusive distribution contracts won in Finland, and it is augmented by growth in Norway and Denmark.

The consolidated operating profit was EUR 93 (78) million, and the 13-month operating margin was 1.9% (1.9%). The overall improvement in operating profit was mainly a result of stronger sales and improved efficiency. All business units were able to improve their performance, except Lithuania, which continued to suffer from the fierce competition.

The consolidated ordinary profit before taxes was EUR 89 (69) million. The effective tax rate for the Group was 25.9 % (28.9 %).

The Group’s total net profit in the 13 months 2004/2005 was EUR 66 (47) million. The return on capital employed increased to 19 (16)%, while the return on equity rose to 16 (13)%.

Financing

The delisting of Tamro’s shares from the Helsinki Stock Exchange in May 2004 did not change the Group’s financing principles. Tamro continues to provide transparent financial information to the investors as well as to the public.

In June Tamro’s treasury department was incorporated into a separate legal unit called Tamro Finance Ltd. The main part of the internal treasury activities has already been transferred to the new company, and external activities will be transferred during the financial year 2005/2006. In connection with the incorporation, the role of the treasury department did not change and Tamro Corporation will guarantee all material transactions made by Tamro Finance Ltd.

In January 2005 the Group entered into a new securitisation arrangement that allows the Danish subsidiary Nomeco A/S to sell its trade receivables to an external counterpart on a non-recourse basis up to the facility amount of DKK 1,050 million (EUR 141 million). The arrangement was made proactively to secure sufficient and cost efficient funding for Tamro Group. All up-front fees related to the arrangement were fully deducted as other financial expenses in January 2005.

The Group’s financial position remained excellent and solid throughout the financial year. The net debt on the balance sheet was reduced to EUR 60.1 (71.4) million at the end of the financial year. The effective net debt, including as debt the EUR 133.1 (74.2) million receivables sold in January, totalled EUR 193.2 (145.6) million. EUR 50 million in additional dividend was paid in January. The average effective net debt in the financial year 2004/2005 was EUR 165 (219) million. At the financial year-end Group had at its disposal EUR 200 (200) million free committed revolving credit facilities. At the financial year-end arrangement ensured funding for an average of one year and three months. The total available purchase limit in Asset Securitisation programs were EUR 124 (56) million at the financial year-end.

The liquid assets contracted to EUR 13.2 (22.3) million. The Group’s net gearing was reduced to 17.0 (18.4)%, and the equity ratio decreased to 33.6 (35.4)%.

Free cash flow and net working capital

The 13-month free cash flow of EUR 101.5 (40.4) million improved clearly. The operative cash flow before net working capital changes and investments improved to EUR 107.7 (79.1) million. The cash flow from the net working capital changes was EUR 56.5 (-5.3) million. The change in the sold receivable amount affected the reported cash flow positively by EUR 67.1 (8.3) million. The net investments increased clearly to EUR 62.7 (33.4) million during the period. At the end of the period the net working capital was EUR 85.6 (143.9) million and the sold receivable amount EUR 133.1 (74.2) million.

Financial expenses

The Group’s 13-month net financial expenses were EUR -4.0 million compared with EUR -9.3 million for the previous 12 months last year. The main reduction came from lower net interest expenses of EUR -4.0 (-8.7) million. The exchange rate gains represented EUR 0.3 (-0.6) million, and the other financial expenses and income were EUR -0.3 (0.0) million.

The Group’s net financial items were the lowest, both in absolute euro amounts and in relative per cent terms, since 1997. The good development in the net financial items was partially due to the applied short interest rate duration combined with the historically very low short-term interest rates. Additionally, re-financing arrangements made already during 2003 now created full annual 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 net sales was SEK 34 (37)%, DKK 24 (25)%, EUR 22 (17)%, NOK 14 (15)% and EEK, LVL, and LTL together 6 (6)% of the Group’s net sales.

The major part of the Group’s purchases is also denominated in local currency. Only 4%, or EUR 163 (131) million of the purchases are exposed to a currency risk. The currency split for that amount was EUR 89% (86), USD 5% (8), and, in other currencies 6% (6).

The foreign-currency-denominated shareholders equity and equity type loans were EUR 442 (344) million at the financial year-end 31.1.2005. Currency split of the equity exposure was at year-end; NOK 39 (38) %, SEK 27 (32)%, DKK 23 (24)% and others 11 (6)%. The translation differences from the foreign-currency-denominated shareholders’ equity and the equity type loans of the overseas subsidiaries were EUR 1.8 (-14.0) million at the financial year-end 31.1.2005. This amount affects directly the consolidated equity of the Group.

The foreign currency and other financial risks are managed according to the finance policy of the Group.

Capital expenditure and acquisitions

The investments of EUR -64.1 (-39.6) million turned into growth and were above depreciation level during the last part of the financial year 2004/2005. Materially all investments were made directly or indirectly through minority redemption to the retail sectors in Norway, Estonia and Lithuania.

Major changes in the group structure

Tamro Group’s ownership in Apokjeden rose from 80.0% to 99.3% in 2004. The shares were purchased from Coop NKL, the holding company of the co-operative retail organisation in Norway, and from Norwegian pharmacists. The redemption in Norway was the main factor in reducing the Group’s minority interest.

In August 2004, Tamro acquired Farmacijos Projektai with 46 pharmacies in Lithuania. In addition to the chain, several smaller acquisitions were completed.

Tamro Finance Ltd., a new fully owned subsidiary for the group treasury function, was founded in June 2004.

Research and development

Tamro continued to develop and enhance IT- and Internet-based business information services to support customers in developing their business operations. Upgraded versions of business information services with new features were launched in Sweden and Finland. Nomeco’s VMI concept (Vendor Managed Inventory), in which a pharmacy’s inventories are continuously replenished based on the pharmacy’s sales data, has been welcomed by pharmacies. Approximately 40% of Denmark’s pharmacies are now covered by the concept. In Norway, a similar Demand Chain Replenishment concept (DCR) is being developed to decrease the logistics workload for pharmacy personnel.

Personnel and organisation

Tamro’s payroll averaged 3,909 (3,820) employees over the financial year. Of the total staff, 39% worked in Norway, 16% in Denmark, 12% in Sweden, 8% in Finland, 7% in Latvia, 6% in Lithuania and 4% in Estonia. MedLab Group employed 7% of the personnel.

Of the total staff, an average of 1,834 employees (46%) worked in retail operations in Estonia, Latvia, Lithuania and Norway. At the end of January 2005, the group personnel numbered 4,045.

Redemption procedures of Tamro's shares and warrants

An application for the removal of the company’s shares and 2000A warrants was submitted to Helsinki Securities and Derivatives Exchanges, Clearing House Ltd., on 12 March, and the share was delisted on 10 May 2004.

On 10 May the Arbitral Tribunal appointed by the Finnish Central Chamber of Commerce confirmed that PHOENIX International Beteiligungs GmbH has an indisputable right to redeem the minority shares in Tamro Corporation and that PHOENIX International Beteiligungs GmbH has the right to gain title to the minority shares by placing a security approved by the Arbitral Tribunal for the payment of the redemption price.

PHOENIX International Beteiligungs GmbH placed a security for the payment of the redemption price on 10 May and gained title to all shares in Tamro Corporation in accordance with Chapter 14, Section 21 of the Finnish Companies Act.

PHOENIX International Beteiligungs GmbH paid the redemption price to the minority shareholders of Tamro Corporation according to the arbitral award dated 7 July 2004.

Tamro's shares

Share capital

The share capital of Parent Company Tamro Corporation amounted to EUR 114,837,083, and it is divided into a total of 114,837,083 shares with a nominal value of EUR 1. On 31 January 2005 PHOENIX Group held 100% of the shares of Tamro Corporation.

Board of Directors and Auditors

The Annual General Meeting of 29 April 2004 elected five members to Tamro’s Board of Directors. Dr. Bernd Scheifele was re-elected Chairman. The other Board members re-elected were Mikael von Frenckell, Reimund Pohl, Dr. Lorenz Näger and Matti Elovaara.

The Authorised Public Accountants Ernst&Young Oy and Anna-Maija Simola, APA, were elected Tamro’s external auditors.

Group Management

On 7 January 2004 Mr Hans Wahlén was appointed the new Managing Director for Tamro Sweden. Hans Wahlén was previously head of Pharmacia’s market company in Sweden. On 4 March 2004 Mr Gytis Bendorius was appointed the Managing Director of UAB Tamro in Lithuania.

Events after the financial year

In December 2004, Tamro announced the purchase of the Viruplatsi pharmacy chain that operates 8 pharmacies in the capital area of Estonia. This transaction was closed 1 February 2005. On 7 February 2005, UAB Tamro signed an agreement to purchase the Lithuanian pharmacy chain Vogne&Telsiu. The chain operates 13 pharmacies with 63 employees in northwestern Lithuania.

A redemption process to acquire the oustanding 0.7% of the shares of Apokjeden AS in Norway has been initiated, and Tamro expects to gain full ownership of Apokjeden by the end of this year.

Outlook for the near future

The growth of the pharmaceutical market is expected to remain slow in the Nordic countries in 2005. Due to the slow market development, Tamro Group’s net sales are expected to grow only at an annual rate of 5–6% in 2005. Despite the slow sales development, the company expects to retain its profitability through continuous development of productivity and quality.