OJSC “Pharmacy Chain 36.6” reports a turnaround in 2008 full year EBITDA to USD 33 million dollars and a reduction of underlying net loss of 42%

29.04.2009

APRIL 29, 2009, MOSCOW – OJSC Pharmacy Chain 36.6 [RTS:APTK; MICEX:RU14APTK1007] the leading Russian pharmaceutical retailer announces audited 2008 financial results prepared in accordance with the International Financial Reporting Standards (IFRS). The comparison with 2007 financial results includes the effect of 2007 restated financial accounts.

Group highlights of full year 2008:

Group revenue increased by 20.7% to USD 1 051.2 mln;
Gross profit increased by 37.2% to USD 362.8 mln, 34.5 % of consolidated revenues;
EBITDA reached USD 33.2 mln from –USD 30.8 in the previous year;
Net loss decreased by 53.5 % from -USD 121.3 in 2007 to -USD 56.4 mln in 2008;
Underlying Net loss (excluding goodwill impairment charge, gains on sale of investments, disposal of discontinued operations and foreign exchange effect) decreased from USD 115.6 mln in 2007 to USD 66.6 mln in 2008, a 42.4% improvement y-o-y;
The retail unit opened organically 86 and closed 183 stores in 2008.

$ mln.	period ends

	Q4				FULL YEAR

	2007 Previously reported	2007 Restated	2008	Ch %	2007 Previously reported	2007 Restated	2008	Ch %

Revenue	280,5	280,5	238	-15,2%	871,1	871,1	1051,2	20,7%
Retail	215,8	215,8	186,0	-13,8%	673,4	673,4	841,3	24,9%
Veropharm	47,5	47,5	44,9	-5,5%	139,5	139,5	172,9	23,9%
other	17,2	17,2	7,1	-58,7%	58,2	58,2	37,0	-36,4%
Gross profit	81,7	68,7	89,4	30,1%	277,5	264,5	362,8	37,2%
Retail	44,3	31,3	56,9	81,8%	171,0	158,0	236,2	49,5%
% of sales	20,5%	14,5%	30,6%		25,4%	23,5%	28,1%
Veropharm	31,4	31,4	30,2	-3,8%	86,7	86,7	113,9	31,4%
% of sales	66,1%	66,1%	67,3%		62,2%	62,2%	65,9%
other	6,0	6,0	2,3	-61,7%	19,8	19,8	12,7	-35,9%
EBITDA	-19,9	-43,7	12,9	-129,5%	-7,0	-30,8	33,2	-207,8%
Retail (inc. Corp. center)	-38,0	-61,8	-0,9	-98,5%	-55,0	-78,8	-21,5	-72,7%
% of sales	-17,6%	-28,6%	-0,5%		-8,2%	-11,7%	-2,6%
Veropharm	18,9	18,9	13,3	-29,6%	42,5	42,5	52,7	24,0%
% of sales	39,8%	39,8%	29,6%		30,5%	30,5%	30,5%
other	-0,8	-0,8	0,5	-161,2%	5,4	5,4	2,0	-63,1%
Net profit	-57,6	-79,5	-51,9	-34,7%	-99,4	-121,3	-56,4	-53,5%
Retail (inc. Corp. center)	-68,2	-90,1	-62,8	-30,3%	128,9¹	-150,8¹	-94,1²	-37,6%
Veropharm	12,7	12,7	10,8	-15,0%	27,7	27,7	36,9	33,2%
other	-2,1	-2,1	0,1	-104,8%	1,8	1,8	0,8	-55,6%

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

“Our 2008 financial results demonstrate a significant year over year improvement; progress in our retail operations coupled with the strong performance of our manufacturing arm returned the Group to a positive EBITDA for 2008. We made healthy progress in reducing the Group’s debt and have substantially improved our financial reporting capability which has resulted in a restatement of our 2007 accounts. Nevertheless, we continue to face extraordinary pressures associated with the global economic decline which translates for us into a challenging operating environment and difficulty in finding sources of funding. The Company’s management continues to focus on streamlining operations while working with the Board of Directors to find solutions for financing.”

Retail unit:

Revenue

As compared to the relative period the year before, in 2008 sales of the retail unit grew by 24.9% from USD 673.4 mln to USD 841.3 mln including organic opening activity (+2.5%). Sales in the fourth quarter of 2008 decreased by 13.8% versus Q4 2007 driven by both the closure of non-performing stores as well as a decline in customer traffic.

Like-for-like sales^[1] increased by 10.2% year over year and decreased by 9.7% in the fourth quarter.

In ruble terms, revenue grew by 25,2% year on year and 4,6% in Q4.

Gross margin

The retail operations posted a gross margin increase from 23.5% in 2007 to 28.1% in 2008 as improvements in private label penetration, centralized purchasing and pricing management took effect. Gross margin in Q4 2008 has improved to 30.6% on the back of private label growth, better pricing management and assortment optimization.

$ mln.	period ends, RETAIL UNIT

	Q4			FULL YEAR

	2007	2008	ch %	2007	2008	ch %

Sales	215,8	186,0	-13,8%	673,4	841,7	25,0%
Gross profit	31,3	56,9	81,8%	158,0	236,2	49,5%
% of sales	14,5%	30,6%		23,5%	28,1%

Selling, general and administrative expenses

Selling, general and administrative expenses increased to USD 273.4 mln in 2008 from SD 250.0 mln in 2007 with key items represented by personnel costs (USD 117.7 mln of which USD 3.0 mln relates to redundancy costs) and rent (USD 80.1 mln). As a percentage of sales, SG&A expenses dropped from 37% to 32% year over year.

$ mln.	period ends, RETAIL UNIT

	Q4			FULL YEAR

	2007	2008	ch %	2007	2008	ch %

SG&A	97,9	61,3	-37,5	250,0	273,4	9,36
% of sales	45,4%	32,9%		37,1%	32,5%

Financial performance of like-for-like stores in 2008 demonstrated the following dynamics excluding corporate overheads and logistics costs:

$ mln.	Q4 2007		Q4 2008		2007		2008

	Moscow	Regions	Moscow	Regions	Moscow	Regions	Moscow	Regions

Net Sales	55,9	76,8	53,9	65,9	202,1	266,3	227,2	289,3
Gross profit	17,7	17,8	18,9	17,0	66,2	62,3	77,1	72,2
%	31,7%	23,2%	35,1%	25,9%	32,7%	23,4%	33,9%	25%
Key store level expenses	12,8	10,4	12,7	10,0	44,3	37,8	51,6	42,6
%	23%	13,6%	23,5%	15,1%	21,9%	14,2%	22,7%	14,7%
Rent	6,2	3.1	4,9	3.1	21,2	11,7	20,1	13,0
Personnel	5,1	5,3	5,6	5,0	17,3	18,7	23,6	21,5
Operational profit, store level	4,9	7,4	6,3	7,1	21,8	24,5	25,5	29,7
%	9%	10%	12%	11%	11%	9,2%	11,2%	10,3%
Nr comparable stores	193	410	193	410	193	410	193	410

Accounts payable

Accounts payable reached USD 192.9 mln at the end of Q4 2008 as compared to USD 179.7 mln 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. In Q4 2008 accounts payable decreased by USD 33.8 mln from USD 226.7 mln at the end of Q3 2008 to USD 192.9 mln at the end of Q4 2008. Accounts payable decrease in Q4 is primarily attributable to exchange rate effect.

Inventory

Inventory average days turnover decreased from 83 days at the beginning of 2008 to 65 days in Q4 2008. Inventory has been reduced to USD 91.1 mln at the end of Q4 2008 compared with USD147.8 mln at the end of 2007 and USD 132.3 mln at the end of Q3 2008. Such significant reduction resulted from dedicated program aimed at reducing goods for resale on the store level across all network which contributed USD 19.2 mln to the reduction and USD 22.0 mln was due to the exchange rate effect.

Other businesses

Veropharm

For the latest update on 2008 performance please refer to the official press release of the company as of April 22^th 2009.

ELC

Early Learning Center delivered positive results in 2008 despite the effect of the global economic down turn which is creating a challenging environment going forward.

Early Learning Center revenue consolidated by the Group (which is 50% of the total revenue) reached USD 5.3 mln, a 78% year on year growth rate driven primarily by organic store openings. As of the end of Q4, the unit operated 11 stores and was fully funded to meet its store rollout plan. Fourth quarter gross margin amounted to 65.2% versus 62.3 % in Q4 2007. Full year gross margin increased from 60.7% in 2007 to 66.5% in 2008 driven by expansion and mix of assortment.

Group financial debt

As of the end of 2008, the Group’s financial debt decreased to USD 149.4 mln (of which Veropharm debt is USD 21.4 mln and retail debt is USD 128.0 mln) from USD 292.0 mln the year before and USD193.7 mln on September 30th, 2008. The debt reduction has been achieved through reduction of inventory levels, usage of operating cash flows, exchange rate effect, profitable sale of the European Medical Center and a partial disposal of the Group’s retail property fund.

Group financial costs and foreign exchange revaluation

Regardless of reduction in the Group’s financial debt, quarterly financial costs remained almost flat at USD 13.6 mln in Q4, 2008 versus USD 14 mln in Q4, 2007. On a full year basis, the Group’s financial costs grew by 16.5% to USD 43.4 mln as a result of increased cost of debt servicing and additional expenses related to our Glazar 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 2008 foreign currency loss amounted to USD 16.9 mln compared with USD 4.0 mln loss in 2007 of which USD 9.7 mln relates to Q4 2008 as a result of the weakening of the ruble against the dollar.

Goodwill impairment

The retail segment recorded a non-cash goodwill impairment charge in the fourth quarter of 2008. In accordance with the provisions of IAS 36, Pharmacy Chain 36,6 assessed the recoverable amount of the goodwill, and determined that goodwill associated with certain of the Group’s regional pharmacy chains purchased in prior years was impaired by USD 23.4 mln of which USD 6.1 mln relates to acquisitions in Moscow region and USD 17.3 mln in other regions of Russian. This charge reflects the expected reduction of future cash flows for such networks resulting from store closures. Goodwill impairment is not a cash item and will not affect Group financial obligations.

Investments

In 2008 Group invested a total of USD 27.0 mln of which the main items represent: USD 5.1 mln in modernization of Veropharm production base and USD 12.8 mln in paying off obligations related to acquisitions of regional pharmacy chains back in 2007.

Group net profit

Net loss decreased by 53.5% to USD 56.4 mln from USD 121.3 mln in 2007.

Underlying Net loss (excluding goodwill impairment charge,gains on sale of investments, disposal of discontinued operations and foreign exchange effect) decreased from 115.6 in 2007 to USD 66.6 mln in 2008, a 42.4% improvement y-o-y. The reduction of losses was achieved through solid performance of the manufacturing unit and reduced losses in the retail segment.

(PDF, 153,13 КБ)

Press-release

(MP3, 2Mb) Audio-conference

(PDF, 62,36 КБ)	Script for conference call, Jere Calmes, CEO Pharmacy Chain 36.6
(PDF, 64,91 КБ)	Script for conference call, Dmitry Anisimov, CFO Pharmacy Chain 36.6