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Miniaturka

Financial results

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We manage to maintain positive profitability ratios

Following new legal regulations for the reimbursements of medicines (on January 1, 2012 the Act of May 12, 2011 on the reimbursement of medicines, special purpose foodstuffs and medical devices entered into force), a difficult period for all participants of the pharmaceutical market started. The Act introduced the most significant changes in the market of reimbursable medicines over the past several years.

Despite these changes, in 2014 NEUCA GROUP once again recorded solid results. In 2014, NEUCA GROUP recorded sales revenue growth of 13% and the pharmacy wholesale market rose by 5%.. The Group's revenue growth rate above the market average resulted among others from the April acquisition of ACP PHARMA Group companies.

The combined share of NEUCA GROUP companies in the domestic pharmaceutical wholesale market as at the end of 2014 reached 30.1%.

Our gross sales margin equalled 8.92% and was lower as compared to 2013 by 0.6 p.p. The main reason for the decline in profitability was legal changes in margins for reimbursable medicines, lowering their level by 1 percentage point as against the previous year, as well as lower average margins realised in the acquired wholesale companies from ACP PHARMA Group . The factors that contributed to stabilisation of the margin included sales profitability improvements due to first synergy effects after the acquisition, and in particular increasing benefits from suppliers in the context of the increased scale of operations and a better efficiency of trade marketing and category management activities as well as a growing importance of services provided to manufacturers.

The acquisition in April 2014 of ACP PHARMA Group companies provoked significant changes in costs of sales and overhead expenses. In 2014, cost of sales amounted to PLN 331.1 m and were higher than in the same period last year by 17%. In 2014, overhead expenses reached PLN 164.1 m and were higher by 13% as compared to 2013.

Vast restructuring efforts were undertaken in order to integrate ACP PHARMA Group companies in the structures of NEUCA GROUP. A full integration was completed at the end of 2014 and in 4Q 2014 the Group reported the first effects of the acquisition-driven financial synergy.



 

We improve financial flows

In 2014, NEUCA GROUP generated EBITDA +PLN 104.5 m and disclosed positive cash flows from operating activities in the amount of + PLN 202.6 m. These funds were used among others for the acquisition of shares in subsidiaries (PLN -202.7 m). As part of its financial activities, the Group recorded positive cash flows in the amount of PLN 40.2 m, mainly due to the issuance of debt securities (PLN 47.5 m), proceeds associated with the use of loans and borrowings (PLN 56.8 m) which permitted among others to repay finance lease liabilities (PLN -14.4 m) and interest (PLN -16.7 m). Additionally, the Group allocated PLN -17.4 m for the purchase of its own shares and the payment of dividends PLN -17.2 m. In 2014, there were no threats for NEUCA GROUP's ability to service its liabilities.

We improve liquidity

In 2014, there was an increase by about 21 days in the turnover of liabilities and extension of the operating cycle by 16 days which translated into a cash conversion cycle being by 5 days shorter than in 2013.

WORKING CAPITAL TURNOVER

  AS AT
31.12.2014
AS AT
31.12.2013
Inventory turnover cycle (1) 58 48
Receivables turnover cycle (2) 53   47
Liabilities turnover cycle (3)  104  83
Operating cycle (1+2) 111   95
Cash conversion cycle (4-3)  7  12

 

Debt ratios

  AS AT
31.12.2014
AS AT
31.12.2013
Total debt ratio 0,82   0,79
Debt/equity ratio 4,50   3,67
Fixed capitals to fixed assets ratio 1,22   1,17
Short-term debt ratio 0,75  0,75
Long-term debt ratio  0,07  0,04

 

Structure of the balance sheet (amounts stated in PLN '000)

  AS AT
31.12.2014
AS AT
31.12.2013
Fixed assets 520 885 20% 413 454 22%
Current assets 2 048 689 80% 1 504 212 78%
Total assets 2 569 574 1 917 666
Equity 467 421 18% 410 656 21%
Liabilities and provisions for liabilities 2 102 153 82% 1 507 010 79%
Total equity and liabilities 2 569 574 1 917 666

 

Ratio calculation methods

gross sales margin gross profit on sales ÷ sales revenues
EBITDA margin EBITDA for the period ÷ sales revenues
margin on operating
activities (EBIT)
profit on operating activities for the period ÷ sales revenues
net margin net profit for the period ÷ sales revenues
return on assets (ROA) net profit ÷ average assets
return on equity (ROE) net profit ÷ average equity
inventory turnover cycle (closing balance of inventory/sales revenues) x number of days in the period
receivables turnover cycle [(closing balance of trade receivables) ÷ sales revenues] x number of days in the period
liabilities turnover cycle (closing balance of trade liabilities ÷ sales revenues) x number of days in the period
total debt ratio (long- and short-term liabilities + provisions for liabilities) ÷ total equity and liabilities
debt to equity ratio (long- and short-term liabilities) ÷ equity
fixed capitals to fixed assets ratio (equity + long-term liabilities) ÷ fixed assets
short-term debt ratio short-term liabilities ÷ total equity and liabilities
long-term debt ratio long-term liabilities ÷ total equity and liabilities

 

OPERATING RESULT AND PROFIT

Financial costs increased compared to the same period last year by 4% and amounted to PLN 17.2 m. The main reason for the increase in financial costs was a more intensive use of external financing. In 2014, financial revenues reached PLN 19.2 m and rose by 4% compared to the corresponding period last year.

The operating result was influenced by the rise in other operating revenues in 2014 to PLN 14.1 m from PLN 11.8 m in 2013. Principal items affecting operating revenues in 2014 include but are not limited to released impairment write-offs on receivables of 3.6 m, revenues from other sales of PLN 1.5 m and a released impairment write-off on inventory of PLN 1.2 m. Other operating expenses decreased by 14% in 2014 to PLN 27.9 m. Other operating expenses were lower as compared to the last year among others due to less significant costs for the disposal of assets (PLN 11.3 m in 2014).

In 2014, profit from operating activities amounted to PLN 76.6 m and was by 25% lower than the profit achieved in 2013. After excluding one-off items, the profit from operating activities was PLN 84.2 m and was lower than the profit of 2013 by 16%.

In 2014, the Group produced net profit of PLN 93.4 m; after taking into account one-off items, net profit amounted to PLN 86.3 m (increase by 7% YoY).

Sales revenues (amounts stated in PLN m)

  2014 2013 CHANGE
NEUCA GROUP 6 569 5 795 13%
NEUCA SA 6 250 5 722 9%
Share in the pharmacy wholesale market
at the year-end
30,1% 25,9%  

 

Key financial data for 2014 (amounts stated in PLN '000)

  YEAR 2014 Q4 2014 YEAR 2013 Q4 2013 CHANGE DURING THE YEAR CHANGE IN 4Q
Sales revenues 6 568 700 1 779 689 5 795 092 1 409 682 13% 26%
Gross profit on sales 585 605 158 933 551 855 135 210 6% 18%
Gross sales margin 8,92% 8,93% 9,52% 9,59%  

Sales expenses 331 140 92 314 283 249 73 089 17% 26%
Overhead expenses 164 114 44 903 145 648 38 235 13% 17%
Other operating revenues 14 118 5 012 11 834 2 007 19% 150%
Other operating expenses 27 856 7 281 32 337 8 826 -14% -18%
Profit on operating activities 76 613 19 447 102 455 17 067 -25% 14%
Margin on operating activities 1,17% 1,09% 1,77% 1,21%    
EBITDA 104 536 28 640 126 740 23 135 -18% 24%
EBITDA margin 1,59% 1,61% 2,19% 1,64%    
Financial revenues 19 240 7 560 18 527 3 918 4% 93%
Financial expenses 17 165 4 315 16 559 4 150 4% 4%
Other profit (loss) on investment activities     110 (6)    
Gross profit 78 688 22 692 104 533 16 829 -25% 16%
Net profit 93 357 34 110 85 342 13 879 9% 146%
Net profit margin 1,42% 1,92% 1,47% 0,98%    
Return on assets 4,16%   4,51%      
Return on equity 21,26%   22,72%      

 

Description of one-time factors and items

Impact of one-time items on EBIT, EBITDA and net profit

  YEAR 2014 Q4 2014 YEAR 2013 Q4 2013 CHANGE DURING THE YEAR CHANGE IN 4Q
EBIT 76 613 19 447 102 455 17 067 -25%  14%
EBITDA   104 536 28 640   126 740 23 135  -18%  24% 
 One-time items (gross) 7 537   2 500  -4 880 -129     
including negative goodwill: -203  -129     
restructuring expenses  7 537  2 500  0    
valuation of the contingent liability   0 -4 677   0    
One-time items (net)* 6 105   2 025  -4 880  -129    
including negative goodwill:  0  0 -203  -129     
restructuring expenses  6 105  2 025  0  0    
valuation of the contingent liability 0   -4 677      
Adjusted EBIT 84 150 21 947 97 575 16 938 -14% 30%
Adjusted EBITDA 112 073 31 140 121 860 23 006 -8% 35%
Net profit 93 357 34 110 85 342 13 879 9% 146%
asset for the tax on interest on bonds -13 151          
Adjusted net profit 86 311 36 135 80 462 13 750 7% 163%

In 4Q 2014, the Group created a tax loss asset in the amount of PLN 16.0 m.

In 2014, besides the ones listed above, there were no other extraordinary items with a significant impact on the financial result of NEUCA GROUP.

WE ACTIVELY MANAGE OUR OPERATING RISK

Macroeconomic risk

An economic slowdown in Poland may contribute to a lower growth rate of the pharmaceutical market, and ultimately may also adversely affect our sales. In particular, sales growth is likely to deteriorate in the segment of OTC drugs where the Group earns a higher gross sales margin which as a consequence could lead to worse financial results. The Group monitors conditions on the pharmaceutical market and its development perspectives on an ongoing basis and accordingly undertakes appropriate adaptations and adjustments corresponding with the anticipated demand for goods, products and services we sell.

Growing competition risk

Any possible decrease in average margins earned on the pharmacy wholesale market may adversely impact the Group's financial results. The uniform sales structure which is currently in place in the entire Group combined with centralized management of commercial terms and conditions should enable to actively manage levels of margins earned by all the Group's Companies.

Bank credit servicing expenses

The Group's financial debt contributes to sensitivity to interest rate changes. Any rise in the banks' lending costs following interest rate hikes or higher bank margins may have an adverse impact on the financial results. The Group actively monitors conditions on the financial markets, analyses available instruments to hedge against an increase in interest rates and if considered important, has an option to use them. The Company has diversified funding sources, with maturity dates well spread. At the same time, our nominal debt and the level of debt in relation to significant profit and loss account and balance sheet parameters are gradually being reduced. In addition, the Group has in place IRS hedging arrangements contracted in 2013 (interest rate swap),establishing a fixed cost of financing up to PLN 100 m in a 5-year period allowing for the partial reduction of the interest rate risk.

Liquidity risk

The need to finance operating activities with bank credits exposes the Group to liquidity risk if such external funding is lost. The Group optimises working capital turnover on a current basis and keeps significant liquidity reserves in the form of unused credit limits. The Group did not either have any difficulties in being granted and maintaining credit limits.

Financial position of pharmacies

Too intense competition among the pharmacies (growing number of chain pharmacies), the deterioration of access to financing and a rather slight rise in economic growth and the changes introduced by the new Act on the reimbursement of medicines may worsen the financial situation of pharmacies and limit their ability to service their obligations which might negatively affect activities of NEUCA GROUP. The Group actively monitors the financial position of our customers and offers them all necessary financial, IT and marketing support.

Legal changes with regard to official margins, including standards and regulations applicable in the European Union

The new Act on the reimbursement of medicines (Act of May 12, 2011 on the reimbursement of medicines, special foodstuffs and medical devices) introduced significant changes in the legal environment of the Group. The Act provides among others for a reduction in the wholesale margin for reimbursable medicines to 5.66% in 2013 and 4.76% in 2014 and new retail margins, as well as a total ban on the use of any incentives when selling reimbursable medicines. Those legal changes may still largely affect the financial position of pharmacies and pharmaceutical distributors. A drop in the margins adversely affects the entire pharmaceutical industry, and smaller, independent pharmacies in particular. The decline in wholesale margins on reimbursable medicines drastically limited the profitability of this segment within the Group. The legal changes apply to all entities on the market, thus they do not worsen the Group's competitive position.

We deliver on our financial forecasts

NEUCA SA Board of Directors on May 12, 2014 publicly presented forecasts of net profit of NEUCA GROUP in 2014.

Assumptions of the forecast

1) Forecasted results of the Group (in PLN m):
The Group expects the net profit of PLN 90 m (excluding one-time items).

2) Period covered by the forecast:
The forecast covered the period from January 1, 2014 to December 31, 2014.

3) Forecast basis and essential assumptions:

  • growth in the pharmacy wholesale market by 2-4% in 2014,
  • consolidation of the results of all of the wholesale warehouses of ACP PHARMA Group by the end of 2014. Pursuant to the decision of the Office of Competition and Consumer Protection the Company is obliged to sell a wholesale warehouse of ACP PHARMA in Bydgoszcz. For purposes of this forecast, the Company assumes operation of the warehouse within the Group by the end of 2014.

4) How the Company monitored the feasibility of the forecasted results of the Group.
The Company will monitor feasibility of the forecast by current analyses of the implementation of the Group's financial budget and analyses of the main external factors affecting the results of the issuer (including growth of the pharmacy wholesale market).

5) Periods in which the Company will evaluate the possibility of achieving forecasted results and make adjustments, if any, to the forecasts presented, together with the description of the criteria used.

Forecast results of the Group (amounts stated in PLN m)

  FORECAST ACTUAL DIFFERENCE CHANGE IN %
Net profit* 90 86,3 3,7 -4%

* excluding one-time items

We pursue our investment plans

In 2015, the Group intends to carry out investment plans for ca. PLN 50.0 m in total.

Planned investments include but are not limited to developing medicine manufacturing facilities, and in particular purchases of medicine registers, acquisition of entities from outpatient care and clinical trial areas, automation of a subsequent warehouse, implementation of changes to modernise and streamline operations of the other warehouses (access roads, ventilation and heating systems), IT systems supporting warehouse management, transportation and customer relations. At the moment, NEUCA GROUP does not see any threats which may jeopardize our investment plans.

INTERNAL FACTORS IMPORTANT FOR DEVELOPMENT OF THE COMPANY

The ability to keep market shares and continue organic growth

NEUCA GROUP's strategy does not provide for its own chain of pharmacies in order to refrain from competing with its customers and to gain their loyalty.

Effectiveness of reorganisation processes

As the Company's operations are characterised by low net margins, a strict control over expenses and an effective management of customers' profitability are of critical importance for the results. Efficiency improvements should also stem from the successful integration of the companies from ACP PHARMA Group.

Producing a satisfactory return on investments in drug distribution-related activities

We manage to consistently improve financial performance of NEUCA GROUP by further developing our own brand products, launching the medicine packaging process in SYNOPTIS INDUSTRIAL SP. Z O.O. and integrating operations of the acquired outpatient care clinics in order to benefit from synergy effects. An important contribution will also come from the operations of NEKK advertising agency and ILC IT business.

EXTERNAL FACTORS IMPORTANT FOR DEVELOPMENT OF THE COMPANY

Growth of the pharmaceutical market in Poland translating directly into NEUCA Group sales growth

In recent years, the rate of growth of the market of pharmaceutical products was stable and exceeded 5% per annum. In 2012, the market fell by ca. 6% due to the introduction of significant legal changes in such areas as e.g. medicine reimbursement rules and maximum margins applied by the entities active in the wholesale and retail trading in medicines. 2013 marked a growth in the pharmacy wholesale market by 10%. In 2014, the growth rate returned stabilised at 5%. The forecasts indicate that a rising trend will continue on the pharmacy wholesale market due to a number of factors. The most important is the process of "aging" of the society (demographic factor) and a rising awareness (social factor).

Changes in laws on trading in reimbursable medicines

Changes in the rules and principles for financing reimbursable medicines may substantially affect the Company's operations through, among others, fixed wholesale margins and capped margins of pharmacies.

Plans for 2015

NEUCA SA Board of Directors publicly presented forecasts of net profit of NEUCA Group in 2015.

1) Forecasted results of the Group (in PLN m):
The Group expects the net profit of PLN 100 m (excluding one-time items).

2) Period covered by the forecast:
The forecast covers the period from January 1, 2015 to December 31, 2015.

3) Forecast basis and essential assumptions:

growth in the pharmacy wholesale market by 4% in 2015.

4) How the Company monitored the feasibility of the forecasted results of the Group.
The Company will monitor feasibility of the forecast by current analyses of the implementation of the Group's financial budget and analyses of the main external factors affecting the results of the issuer (including growth of the pharmacy wholesale market).

5) Periods in which the Company will evaluate the possibility of achieving forecasted results and make adjustments, if any, to the forecasts presented, together with the description of the criteria used.