OJSC Pharmacy Chain 36.6 reports 1st half 2008 unaudited IFRS results

Consolidated group net loss halves

SEPTEMBER 11, 2008, MOSCOW – OJSC Pharmacy Chain 36.6 [RTS:APTK; MICEX:RU14APTK1007] the leading Russian pharmaceutical retailer announces unaudited financial results prepared in accordance with the International Financial Reporting Standards (IFRS) for 1^st half of 2008.

Group highlights:

• Y-o-Y in 1H 2008 Group’s consolidated sales increased by 43% and reached US$ 558,8 million.
• Sales in the retail unit grew by 48% and reached US$ 448,2 million, sales of the production unit, Veropharm, reached US$ 86,5 million (annual growth 45%), sales of other non-core businesses decreased by 14%, including ELC sales growth of 129% to reach US$ 2,1 million (50% consolidation).
• Consolidated Gross profit increased by 39% to reach US$ 182,2 million, 32,6% of consolidated revenues; Gross profit in retail unit reached 25,6% of sales;
• Consolidated EBITDA of the Group amounted to US$ 9,7 million;
• Consolidated Net loss amounted to -US$ 8,1 million;
• Retail unit closed 71 stores:

Commenting on the 1H 2008 results Jere Calmes, President of OAO Pharmacy Chain 36.6 and General Director of the Managing Company, said:

“…In the first half of 2008 the Group executed its pre stated strategy of divesting non-core assets, refinancing its short term obligations, and focusing on the turn-around and foundation for growth of its retail operations.  While the retail environment remains challenging, the new team has been formed and is committed to substantial improvements in profitability over the coming 6 months and beyond…”

Retail unit:

As compared to the relative period the year before, in 1H 2008 sales of the retail unit grew by 48% including the effect from M&A (+18%) and organic opening activity (+8%). The decrease of sales from US$ 230,1 in Q1 to US$ 218,1 in Q2 2008 is attributable primarily to store closings (on net basis 12 stores closed in Q1 and 21 in Q2) as well as seasonal factors.  

In 1H 2008 gross margin reached 25.6% of sales, as compared to 27.5% which is 1.9% less than the comparable result in 2007. As previously discussed the gross margin was affected by lower gross margin in the Moscow operating unit and the higher proportion of regional sales. The Company posted a gross margin increase from 25.2% in Q1 to 26% in Q2 as the management’s activities to improve the margin take effect.

Sales, general and administrative expenses reached US$ 144,1 million in 1H 2008 (32,2% of sales) with key items represented by personnel costs (US$ 57,9 million) and rent (US$ 44,0 million), up 73% and 69% respectively as compared to 1H 2007. The increases include consolidation effect from store openings and aggressive acquisitions in 2007.

In absolute terms SG&A expense in Q2 was US$ 3,5 million less than in Q1  as a result of management’s efforts to reduce costs:

Financial costs in retail unit grew by 80% Y-o-Y to US$ 19,2 million as a result of increased debt servicing.

Financial performance of comparable stores

The Company utilizes comparable stores approach as a measure of L-F-L performance calculation[1]. The L-F-L sales growth in comparable stores in 1H 2008 reached 16% in US$ terms as compared to 1H 2007 while the traffic decreased by 5%. Excluding corporate overheads and logistics costs, financial store-level performance in 1H 2008 showed as follows:

Other businesses

Veropharm

For the latest update on 1H 2008 performance please refer to the official press release of the company as of August 7^th 2008.

ELC

The project is fully self-funded with sales growth figures (+129% y-o-y) driven by organic store openings (+60%) as well as seasonal factors. The business posted positive increase in gross margin in Q2 to 67,6% from 66,2% in Q1 2008. Compared to 1H 2007, in 1H 2008 gross margin increased from 58,6% to 67%.

Financial debt and cashflow

As of the end of 1H 2008, the Group’s total debt decreased to US$ 242,4 million, including total debt of Veropharm US$ 18,2 million.

As part of the Company’s announced funding strategy, in May 2008 the healthcare unit of the Group (European Medical Center) was successfully divested. Proceeds from disposal in amount of US$ 106,5 million were fully available to the Company by the end of June 2008.  The financial result of this transaction affected the profit and loss statement of retail unit by positive amount of US$ 35,5 million.

In 1H 2008 the Group cash inflow from operational activity totaled US$ 60 million as the retail segment accumulated cash to meet short term obligations. US$ 9,1 million was spent on repayment of obligations related to M&A activities in late 2007, US$ 6 million on purchase of plant, property and equipment. The Group posted US$ 111,1 million cash inflow from disposal of assets, to bring net cash inflow from investing activities up to US$ 95,6 million as compared to outflow of US$ 41 million the year before. Net cash outflow from financial activities totaled US$ 63 million to bring the cash balance at the end of 1H 2008 to US$ 128,3 million.

Net profit

In 1H 2008 the Group’s net loss was –US$ 8,1, a 52% improvement as compared to 1H 2007, driven by the profitable sale of the European Medical Center and the improved profitability of our production unit OJSC “Veropharm”.

¹ Including financial result from asset disposal in amount of US$ 35,5 million

² The L-F-L reporting is executed for a selection of comparable stores, which are:

• opened or acquired 24 months from the current reporting period, and
• neither rebranded nor reformatted or somehow significantly changed during last 24 months, and
• not closed in the current reporting period.

As of the end of 1H 2008 the company operates 406 comparable stores which make 45% of sales and 36% of traffic in the retail unit.

(PDF, 60,92 ÊÁ)

Press-release

(MP3, 6MB) Audio-conference

(PDF, 28 ÊÁ)	Official comments by Jere Calmes, President at Pharmacy Chain 36.6, CEO of the 36.6 Management Company
(PDF, 24,11 ÊÁ)	Official comments by Dmitry Anisimov, CFO at Pharmacy Chain 36.6