Board of Directors' Report

Tamro Group continued its stable performance throughout the financial year 2005/2006. The year was marked again by moderate market growth and intense competition over market shares, but this challenge was met by keeping sustained focus on cost efficiency, customer orientation and business development.

During the reporting year, Tamro expanded its business through several acquisitions especially in the Baltics.

Markets and operating environment

Measured at constant exchange rates (CER), the growth of the Nordic pharmaceutical market has remained at approximately 5% in the past three years. The long term trends have continued in 2005: Medicine prices are decreasing due to increasing price competition and more products coming off patent, which further increases the usage of generics.

Increasing demands from the ageing population and new treatments remain the key growth drivers. However, governments are fighting against medicine costs growth by introducing regulatory measures such as restrictions in the reimbursement schemes and price revisions.

For the full year 2005, total pharmaceuticals sales in the Nordic countries rose by 5.3% at CER to EUR 7.3 billion in pharmacy purchasing prices (PPP). Growth was distributed unevenly between the countries. The growth was fastest in Finland with 6.8%. Norway recorded slowest growth with an average of 2%, owing to cost-containment measures and the widening use of the stepped pricing system for generics. Sweden’s market growth recovered by two percentage points to 4.3% and the Danish pharmaceuticals wholesale sales grew by 5.8%.

Tamro further developed its position in the Nordic pharmaceutical wholesale market, owing largely to sales growth in Finland, Sweden and Denmark. Tamro’s pharmaceuticals wholesale in the Nordic area increased by 8% at CER to EUR 3,616 million in PPP. As a consequence, Tamro’s average market share of pharmaceuticals wholesale rose to 52.3% in the Nordic countries, 1.5 percentage points higher than in 2004.

For the full year 2005, the total wholesale value of pharmaceuticals sales in the Baltic countries rose to EUR 604 million in PPP, surpassing the previous year’s sales by 13 percent or EUR 71 million at CER. In spite of the relatively rapid growth in the recent years, pharmaceutical consumption in the Baltic countries is still significantly below the Nordic or EU average. Lithuania had the highest growth, followed by Latvia and Estonia. In Estonia, the growth was disappointing slow.

Full-year net sales and financial performance

The Tamro Group net sales for the fiscal year 2005/2006 amounted to EUR 4,857 million, which represents an increase of 8% compared to the sales in calendar year 2004 (EUR 4,488 million). Sales increased due to several retail acquisitions in the Baltics and Norway, the acquisition of Danpleje A/S in Denmark and exclusive distribution contracts won in Sweden and Finland (Sanofi-Aventis).

The consolidated operating profit was EUR 117 (93) million, and the operating margin was 2.4% (1.9%). The performance was driven by good performance in Norway, stable sales growth across several countries and strong control of operating and financial expenses. The result includes a one-time capital gain of EUR 7 million from a sale of property in Denmark.

The consolidated ordinary profit before taxes was EUR 111 (89) million. The return on capital employed increased to 28 (19)%, while the return on equity rose to 25 (16)%.

Financing

Stable operational performance improved Tamro Group’s debt capacity during the financial year and enabled further expansion of Tamro’s activities.

The amount of the Finnish commercial paper program was increased from EUR 200 million to EUR 300 million and the issuer of the commercial papers was changed from Tamro Corporation to Tamro Finance Ltd. in June 2005. Tamro Corporation guarantees the commercial papers issued by Tamro Finance Ltd.

The back stop arrangement made with the Group’s core banks had EUR 200 (200) million available limit at the end of the financial year. The arrangement ensured funding for an average one year and four months forward. The aggregate available limit in the Danish DKK 1,050 (EUR 141) million and in the Swedish SEK 1,200 (EUR 130) million Asset Securitisation programmes was EUR 67 (124) million.

The financial position remained solid throughout the financial year. The net debt on the balance sheet was EUR 83.0 (60.1) million at the year-end. Effective net debt, including as debt the EUR 176.3 (133.1) million receivables sold in January, totalled to EUR 259.2 (193.2) million. EUR 21 million dividend 2004/2005 was paid in May and EUR 101 million in August. The average effective net debt in financial year 2005/2006 was EUR 254 (165) million.

The liquid assets contracted to EUR 9.9 (13.2) million. The Group’s net gearing was 26.4 (17.0) % and the equity ratio decreased to 29.8 (33.6) %. Net effective debt / EBITDA ratio was 1.7 at the end of the financial year.

Free cash flow and net working capital

The full-year free cash flow was EUR 95.1 (101.5) million. The operative cash flow before net working capital changes was EUR 116.8 (107.7) million and it improved from the last year’s 13 months cash flow. The cash flow from the net working capital changes was EUR 32.7 (56.5) million. The change in the sold receivable amount affected the reported cash flow positively by EUR 43.2 (58.9) million. The net investments were EUR -54.4 (-62.7) million. The net working capital decreased to EUR 48.3 (85.6) million. The reduction is less than the amount of sold receivables increased and so effectively net working capital slightly increased to EUR 224.6 (218.7) million.

Financial expenses

The Group’s net financial expenses were EUR -5.7 (-4.0) million in the financial year 2005/2006. The increase came mainly from the higher average effective net debt and partly from the higher interest rates during the latter part of the year. The exchange rate gains represented EUR 0.3 (0.3) million and the other financial expenses and income were EUR 0.0 (-0.3) million. Total percentage cost of financing remained at the same level as during the last year 2.24 (2.24) %.

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 33 (34)%, DKK 25 (24)%, EUR 22 (22)%, NOK 15 (14)% and EEK, LVL, and LTL together 5 (6)% of the Group’s net sales.

The major part of the Group’s purchases is also denominated in local currency. Only 3 (4) %, or EUR 136 (163) million of the purchases are exposed to a currency risk. The currency split for that amount was EUR 89 (89) %, USD 6 (5)% , and, in other currencies 5 (6) %.

The foreign-currency-denominated shareholders equity and equity type loans were EUR 519 (442) million at the financial year-end 31.1.2006. Currency split of the equity exposure was at year-end; NOK 40 (39) %, SEK 25 (27)%, DKK 25 (23)% and others 10 (11)%. The translation differences from the foreign-currency-denominated shareholders’ equity and the equity type loans of the overseas subsidiaries were EUR +1.4 (+1.8) million during the financial year 2005/2006. This amount affects directly the consolidated equity of the Group.

Assesment of operational risks and uncertainities

The company is subject to strategic and operational risks, where the most prominent are legislative and regulatory measures imposed by the authorities. Operational risks include changes in the competitive environment, stable operation of IT-systems and availability of the transport infrastructure.

The foreign currency and other financial risks are managed according to the finance policy of the Group. Additional information about the risk and risk management activities can be found from the Financial Risk Management section.

Capital expenditure and acquisitions

The capital expenditures and acquisitions were EUR 71.8 (64.1) million, somewhat higher than last year in 13 months and about two times the depreciation level. Investments were made mainly to the retail sectors in Norway, Estonia and Lithuania. Tamro MedLab invested in Danpleje A/S, being active in the health care sector in Denmark. Tamro Corporation made an agreement to increase its shareholding in Russia’s third largest pharmaceutical wholesaler ZAO Rosta from 18% to 42.5% of the share capital. The deal is expected to receive approval from Russian competition authorities in April.

Major changes in the group structure

The fiscal year 2005/2006 was marked by several acquisitions.

In Denmark, Tamro MedLab signed an agreement 26 October 2005 to purchase Danpleje A/S, the second largest home care supply company in Denmark. Danpleje A/S was fully consolidated into Group figures from November 2005.

In Norway, Tamro expanded its leading position in retail through several pharmacy acquisitions during the year. Now Apokjeden’s Apotek1-chain consists of 218 pharmacies, and Tamro Group’s ownership in Apokjeden has reached 100% (99.34%).

In Estonia Tamro continued to build up its presence in the Estonian retail market by acquiring several pharmacies. Tamro’s pharmacy chain Apteek1 now consists of 185 pharmacies and is second largest in the market.

Investments into retail continued also in Latvia, where several pharmacies joined Tamro’s Gimenes Aptieka –chain. Through ownership and cooperation agreements Tamro now holds a 20% market share in the Latvian retail market.

In Lithuania Tamro continued expansion into retail by acquiring the pharmacy chain Ramuciu Vaistine in October 2005 and several other smaller units during the year. Tamro’s pharmacy chain Seimos Vaistine now includes 88 fully owned pharmacies.

On 29 November Tamro announced its entrance into the Polish pharmaceutical wholesale. The business responsibility is transferred from Tamro’s parent company Phoenix Group. Tamro acquires the company Phoenix Pharma Polska Sp. z o.o., which employs 277 people and has an annual turnover of EUR 145 million. The company is consolidated into Tamro Group from the beginning of the new fiscal year 1.2.2006.

Personnel and organisation

Tamro’s payroll averaged 4,223 (3,909) employees over the financial year. Of the total staff active in whole and retail of pharmaceuticals, 39% worked in Norway, 15% in Denmark, 11% in Sweden, 9% in Lithuania, 8% in Finland, 7% in Latvia and 5% in Estonia. Additionally MedLab Group employed 6% of the personnel.

Board of Directors and Auditors

The Annual General Meeting of 3 May 2005 elected six members to Tamro’s Board of Directors.
Dr Bernd Scheifele was re-elected as Chairman, and Mikael von Frenckell, Reimund Pohl, Dr Lorenz Näger and Matti Elovaara were re-elected as Board members. Dr. Reinhard Rupp, CFO of Phoenix Goup, was elected as a new member.

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

Events after the financial year

On 27 March Tamro announced the acquisition of a Polish pharmaceutical pre-wholesaler FarmPlus Sp z.o.o from Mediplus Incorporated. FarmPlus with net sales exceeding EUR 250 million will significantly increase Tamro’s presence in Poland and facilitate better service for its customers.

Outlook for the next financial year

The pharmaceuticals wholesale market in our operating countries grew by around 6% at CER in 2005. For 2006 we expect this growth to slow down to approximately 5% at CER.

In the Nordic countries we expect the market to grow at around 4% in 2006, mainly due to the falling price trend. Overall market growth in the Baltic countries is expected to continue in double digit figures in 2006. Our forecast for market growth in Poland is about 6%.

We expect Tamro's pharmaceutical wholesale business to grow beyond market average in 2006. The expansion into Poland will provide long-term growth potential.

Tamro Group continues its strategy based on cost leadership and customer orientation while expanding in emerging markets. We aim to offset the moderate market growth and tight competition by continuous operational improvements and active business development. With these measures we expect sustained profitability for the financial year 2006/2007.