OJSC “Pharmacy Chain 36.6” reports Q3 2008 EBITDA turnaround and cuts year over year net loss by 89% on sale of non-core assets

DECEMBER 2, 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 9 months of 2008.

Group highlights:

• Y-o-Y in 9M 2008 Group’s consolidated sales increased by 38% and reached US$ 813.2 million.
• Consolidated Gross profit increased by 40% to reach US$ 273.4 million, 33,6% of consolidated revenues;
• Consolidated EBITDA of the Group reached US$ 20.3 million;
• Consolidated Net loss decreased to -US$ 4.5 million, an 89% improvement y-o-y;
• Company sold approximately 43% of its Closed End Real Estate fund generating US$37.4 million in net cash proceeds;
• The retail unit closed 125 stores in the first 9M of 2008 and opened 67 organically.

Commenting on the 9M 2008 results Jere Calmes, President of OAO Pharmacy Chain 36.6 and General Director of the Management Company, said:

“We achieved some noteworthy successes over last year in our Q3 results.  In the latest reporting period, we have successfully sold a portion of our closed end real estate fund which improved our Q3 net profit result and reduced our debt.  In the retail unit, we were able to deliver a positive EBITDA on the back of a healthy recovery in our gross margin and a significant reduction of SG&A as a percentage of sales. However, the current business environment remains extraordinarily tenuous and operational results are being negatively impacted. The Company’s management is working with the Board of Directors to find solutions for financing the business through these difficult times and will continue to focus on addressing working capital needs and streamlining operations.”

Retail unit:

As compared to the relative period the year before, in 9M 2008 sales of the retail unit grew by 43%. The net retail sales^[1] reached US$ 642.1 million (+34.1%) including the effect from M&A (+8%) and organic opening activity (+5.5%). Sales in the third quarter of 2008 decreased by 5% versus Q2 driven by both the closure of non-performing stores as well as seasonal factors.

The retail operations posted a gross margin increase from 25.3% in Q1 to 26% in Q2 and further to 31.1% in the third quarter as improvements in private label penetration, centralized purchasing and pricing management took effect. The cumulative gross margin for 9M 2008  is 27.4%.

Sales, general and administrative expenses reached US$ 212,1 million in 9M 2008 (32% of sales as compared to 33% the year before) with key items represented by personnel costs (US$ 91,8 million) and rent (US$ 59,3 million), up 69% and 35% respectively as compared to 9M 2007. The increases were primary driven by consolidation effect from store openings and aggressive acquisitions in 2007.

In absolute terms, SG&A expense declined by US $2,4 million in Q3, 2008 versus Q2, 2008 continuing the positive trends from the first quarter of this year and delivering a significant improvement from 37.0% to 32.8% in SG&A to revenues over the same period last year.  Management continues to focus its efforts on streamlining the retail operations through closing non-performing stores, rationalizing its logistics infrastructure, and improving productivity of store and administrative personnel.

In dollar terms, like-for-like sales^[2] increased by 19.6% in the third quarter and by 17.6% percent year-to-date. Excluding corporate overheads and logistics costs, financial store-level performance in 9M 2008 demonstrated the following dynamics:

The retail unit’s accounts payable increased to US $226.7 million at the end of Q3, 2008 versus US$ 129.8 million in the similar period last year as total turnover increased, extended payment terms from manufacturers and suppliers were negotiated and working capital was used to meet financial debt obligations. 

Other businesses

Veropharm

For the latest update on 9M 2008 performance please refer to the official press release of the company as of November 12^th 2008.

ELC

Early Learning Center sales increased to US$3,3 million in the first 9M of 2008, an 111% year on year growth rate driven primarily by organic store openings. As of the end of Q3, this unit operated 10 stores and was fully funded to meet its store rollout plan.  Third quarter gross margin improved to 67.9%.  Compared to 9M 2007, the gross margin in 9M 2008 increased from 59,2% to 67,3% driven by better assortment pricing.

Group financial debt and cost of financing

As of the end of 9M 2008, the Group’s financial debt decreased to US$ 193,8 million from US$ 322,6 million the year before and $292 million on January 1^st, 2008. The debt reduction has been financed through operating cash flows and proceeds from non-core asset disposals.

In the third quarter of this year the Company sold back to the market a significant portion of its own bonds acquired at the put option event on July 3, 2008. The discount at which these bonds were sold to the market affected Q3 financial costs in the amount of US$ 0,9 million.

Quarterly financial costs decreased 20% from US$ 11,4 million in Q3, 2007 to US$ 9,0 million in Q3, 2008. On a year-to-date basis, the Group’s financial costs grew by 28% to US$ 29,8 million as a result of increased cost of debt servicing and additional expenses related to our  joint venture, created in 2007 to attract investments for the development of our retail operation.  In 2007 the bulk of financial expenses related to this joint venture were only charged to the P/L statement of the Company in the fourth quarter.

Group net profit

The Group reported a net profit in Q3 of US $3.6 million versus a loss of $25 million in the prior year period on the partial sale of its real estate fund, which generated a one time US$ 16,9 million profit, solid performance in the manufacturing unit, and reduced losses in the retail unit. Year to date, the Group’s net loss was US$ -4,5 million, an 89% improvement as compared to 9M 2007.

¹ Excluding wholesale operations.

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.

(PDF, 119,1 ÊÁ)	Press-release
(PDF, 48,71 ÊÁ)	Official comments by Jere Calmes, CEO at Pharmacy Chain 36.6
(PDF, 69,24 ÊÁ)	Official comments by Dmitry Anisimov, Chief Financial Officer at Pharmacy Chain 36.6