Financial Risk Management

Tamro Group’s financing and risk management activities are centralised into a separate entity called Tamro Finance Ltd. The treasury company 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 Tamro group-level master insurance policies and provides operational risk management services to business units.

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.

The objective of Tamro Group’s operational risk management practices is to identify and minimise risks associated with operations, assets, the environment and personnel. The remaining risks are covered with insurances to the extent defined by the Tamro Group management and the Board of Directors.

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 four months. At year-end the Group also had at its disposal a portfolio of free short-term credit facilities and account overdrafts worth EUR 252 (267) million and a EUR 291 (195) million available limit in a EUR 300 million Tamro Finance Ltd. 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 right of recourse up to the limit of SEK 1,200 million (EUR 130 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 67 (124) 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 2005/2006 the currency split of the net sales was SEK 33%, DKK 25%, EUR 22%, NOK 15% and other currencies 5%.

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 Tamro MedLab Group the foreign-exchange risk is to some extent carried by the distributor or wholesaler. About 3%, or EUR 136 million, of the Group’s purchases are exposed to the currency risk. The currency split for that amount was EUR 89%, USD 6% and other currencies 5%.

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 2005/2006 were EUR 519 million. Of the total amount, NOK represented 40%, SEK 25%, DKK 25% and other currencies 10% 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 in 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 material 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.

Operational risks and insurances

The Group aims to reduce the risk involved in the business by active risk-reduction measures. The main operational risks are property damage, business interruption and liability risks. The objective of Tamro Group’s operational risk management practices is to identify and minimise risks associated with operations, assets, the environment and personnel. The remaining risks are covered with insurances to the extent defined by the Tamro Group management and the Board of Directors.

Risk management is handled both on the corporate and the business unit level. The responsibility to manage and reduce the operational risks and to have an appropriate contingency plan in place lies with the local business units.

Group-level and local insurance policies are used to cover the main risks financially. The business units see to it that sufficient insurance coverage in accordance with the Group guidelines is in place, and that any loss or damage is reported to the appropriate insurance company. Master insurance policies are administered at Group level.