Helping people look and feel their best

Transcription

1 Helping people look and feel their best 2008/09 Annual Review for the year ended 31 March 2009

2 Alliance Boots Annual Review 2008/09 Contents 01 Group highlights 02 Our mission, purpose and values 04 Our Group 08 Executive Chairman s statement 10 Market and business environment 12 Group strategy and objectives Operating and financial review 22 Overview 24 Health & Beauty Division 30 Pharmaceutical Wholesale Division 34 Other activities 36 Financial review 40 Risk management 42 Our people 44 Corporate social responsibility Governance 48 Board of Directors 50 Board report on corporate governance 52 Board report on remuneration 55 Audit committee report 56 Directors responsibilities statement 57 Statutory auditor s statement Summarised consolidated financial statements 58 Group income statement 58 Group statement of recognised income and expense 59 Group balance sheet 60 Group cash flow statement Additional information 61 Glossary of key terms 62 Principal businesses, associates and joint ventures Group highlights Group Continued strong financial performance 100 million merger cost synergy target achieved 18 months ahead of schedule Secure financing and robust financial position Health & Beauty Division Revenue up 4.4% up 2.9% in constant currency Trading profit up 11.6% Boots UK Revenue up 3.2% Like for like revenue up 1.3% Over 450 stores now trading as your local Boots pharmacy Boots Opticians merger with Dollond & Aitchison completed after year end Pharmaceutical Wholesale Division Challenging markets Revenue up 17.8% up 3.8% in constant currency Trading profit up 4.4% Division-wide business improvement programme underway Key acquisitions in Germany and France Associates and joint ventures Share of earnings of associates and joint ventures up 25.0% to 75 million Cash flow 1,045 million cash generated from operations The 2008/09 Consolidated Financial Statements are published on our website A glossary of key terms and a list of principal businesses, associates and joint ventures are included on pages 61 to 64.

3 Group highlights 1 Alliance Boots is a leading international, pharmacy-led health and beauty group delivering a range of products and services to customers. Working in close partnership with manufacturers and pharmacists, we are committed to improving health in the local communities we serve and helping our customers and patients to look and feel their best. Revenue (including share of revenue of associates and joint ventures) +15.5% 20.5 billion EBITDA (including share of EBITDA of associates and joint ventures) +11.3% 1,245 million Trading profit (including share of trading profit of associates and joint ventures) +11.6% 953 million To assist in understanding the performance of the Group, all references to year on year performance (unless otherwise stated) are based on comparative pro forma financial information for the year ended 31 March 2008 as if the acquisition of Alliance Boots plc by AB Acquisitions Limited on 26 June 2007 had taken place prior to 31 March million Revenue 17,195 EBITDA 1 1,096 Underlying depreciation and amortisation 2 (255) Trading profit Share of post tax earnings of associates and joint ventures 75 Underlying net finance costs 4 (705) Underlying tax credit 5 25 Underlying profit A reconciliation of underlying profit to statutory profit for the year is set out below: million Underlying profit Amortisation of customer relationships and brands (80) Net exceptional items before tax 7 (58) IAS 39 timing differences (60) Tax credit on items not in underlying profit 63 Profit for the year EBITDA comprises trading profit before underlying depreciation and amortisation. 2 Underlying depreciation and amortisation excludes depreciation and amortisation within exceptional items and amortisation of customer relationships and brands. 3 Trading profit comprises profit from operations before exceptional items, amortisation of customer relationships and brands, and share of post tax earnings of associates and joint ventures. 4 Underlying net finance costs comprise net finance costs adjusted to exclude exceptional items and IAS 39 timing differences. 5 Underlying tax credit excludes tax on exceptional items, amortisation of customer relationships and brands, and IAS 39 timing differences. 6 Underlying profit excludes exceptional items, amortisation of customer relationships and brands, IAS 39 timing differences and related tax. 7 Net exceptional items before tax mainly comprised costs in relation to the Pharmaceutical Wholesale Division restructuring programme, merger synergies and the second phase of integration projects, impairment of goodwill, investment in associate and an available-forsale investment, and discounts on the repurchase of acquisition borrowings.

4 2 Alliance Boots Annual Review 2008/09 Our mission, purpose and values Our mission is to become the world s leading pharmacy-led health and beauty group. We seek to develop our core businesses of pharmacy-led health and beauty retailing and pharmaceutical wholesaling across the world and become a significant player in many major international markets. Our purpose Our purpose is to deliver products that help people look and feel their best. Our values We believe in making a difference and are proud of the contribution we make to the wellbeing of the communities we serve. Our core values are: Partnership Includes respect, understanding and working together. We create and build value through partnerships and alliances, inside and outside the business. Together we can achieve more. Trust The essence of the way we do business. We are trusted because we deliver on our promises. Service We hold ourselves to high standards of care and service, for our customers and our people. Entrepreneurship We are innovators, seeking new challenges and having a winning spirit. Simplicity We are proud of being lean and efficient, uncomplicated and easy to do business with.

5 Our mission, purpose and values 3 Partnership Trust Service Alliance Healthcare is the leading provider of direct to pharmacy distribution and related services for branded pharmaceutical manufacturers in the UK. Boots is the UK s most trusted pharmacy brand. Customer service and care is at the heart of our business strategy. Entrepreneurship Leadership is devolved to local levels, with managers empowered to drive business performance. Simplicity We continually seek ways of simplifying working practices to improve service, efficiency and productivity. These values are alive throughout our Group. They are tangible influences on the way we manage and grow our businesses.

6 4 Alliance Boots Annual Review 2008/09 Our Group 115, ,000+ over 115,000* employees delivering to over 140,000* pharmacies, doctors, health centres and hospitals 3, operating more than 3,200* health and beauty retail stores, of which just under 3,000* have a pharmacy operating over 370* pharmaceutical wholesale distribution centres million+ presence in over 20* countries dispensing more than 230 million* items each year * Figures stated are as at 31 March 2009, are approximate and include associates and joint ventures.

7 Our Group 5 Alliance Boots is a leading international, pharmacy-led health and beauty group with a presence in over 20 countries. Owned businesses Associates and joint ventures Branded products and franchises Associates and joint ventures:

8 6 Alliance Boots Annual Review 2008/09 Our business activities Pharmacy-led health and beauty retailing Alliance Boots, including our associates and joint ventures, has pharmacy-led health and beauty retail businesses in nine countries, each focused on helping people look and feel better. Together with our associates and joint ventures, we operate more than 3,200 health and beauty retail stores, of which just under 3,000 have a pharmacy. In Europe we are the clear market leader in pharmacy with stores in the UK, Norway, Republic of Ireland, The Netherlands, Italy and Russia and we also have pharmacies in Thailand. Our associates and joint ventures operate pharmacies in Switzerland, China and Italy. In addition, more than 35 Boots stores operate on a franchised basis in the Middle East. Our principal retail brand in the Health & Beauty Division is Boots, which we trade under in the UK, the Republic of Ireland, Norway and Thailand and which we have just started to trial in The Netherlands. The Boots offering is differentiated from that of competitors due to the product brands which we own and only at Boots exclusive products, together with our long established reputation for trust and customer care. Our stores are located in convenient locations and put the pharmacist at the heart of healthcare. Our pharmacists are well placed to provide a significant role in the provision of healthcare services, working closely with other primary healthcare providers in the communities we serve. In addition, Boots Opticians has around 685 optical practices in the UK following completion of its merger with Dollond & Aitchison on 5 May 2009, of which around 205 operate on a franchised basis. We recognise the special status of Boots as the UK s most trusted pharmacy brand and continue to enhance our position as a leading provider of healthcare, beauty advice and services in local communities, through investment in existing stores and by expanding our store portfolio. Our products Both Divisions are increasingly enhancing their customer offering through accelerating the development of differentiated products. In our Health & Beauty Division, we have highly regarded and long established product brands such as Boots, No7, Soltan and Botanics. Our product development, packaging and product marketing capabilities are very important but often unrecognised strengths of the Group. We continue to successfully launch exciting products, including most recently No7 Protect & Perfect Intense Beauty Serum, the clinically proven skincare product which

9 Our Group 7 Pharmaceutical wholesaling and distribution Our pharmaceutical wholesale businesses, together with our associates and joint ventures, supply medicines, other healthcare products and related services to over 140,000 pharmacies, doctors, health centres and hospitals from over 370 distribution centres in 16 countries. In addition, our associates themselves have associates in a further five countries. Our businesses provide high core service levels to pharmacists in terms of frequency of delivery, product availability, delivery accuracy, timeliness and reliability at competitive prices. We also offer our customers innovative added-value services which help pharmacists develop their own businesses. We consistently deliver high standards of efficiency and effectiveness. In addition to the wholesale of medicines and other healthcare products, we provide services to pharmaceutical manufacturers who are increasingly seeking to gain greater control over their product distribution while at the same time outsourcing non-core activities. These services include pre-wholesale and contract logistics, direct deliveries to pharmacies, and specialised medicine delivery including related home healthcare. Scale is very important in pharmaceutical wholesaling. Alliance Boots ranks as one of the top three pharmaceutical wholesalers/ distributors in almost all the Western European markets in which we operate and in recent years we have entered the fast growing Russian and Chinese markets. We continually seek to grow our wholesale and related distribution activities organically and through acquisitions, including investments in associates and joint ventures. These acquisitions are either in current or complementary business areas in countries in which we already operate or in new geographical markets which are typically large, fast growing and where we see the potential for market consolidation. provides genuine long term anti-ageing benefits. This product has generated considerable media coverage and strong consumer demand. In addition, we continue to manufacture a significant proportion of the own brand products that we sell, including the No7 Protect & Perfect range. Almus, our exclusive range of generic medicines, is sold in four countries and is shortly to be launched in Spain, and in Portugal through our associate. Our Pharmaceutical Wholesale Division also markets our range of Alvita healthcare products and has recently launched Boots Laboratories Serum7 in France, and in Portugal through our associate. In addition, the Division sells Boots brands directly to third party retailers in the US and other countries.

10 8 Alliance Boots Annual Review 2008/09 Executive Chairman s statement I am pleased to report that Alliance Boots continued to perform well in 2008/09, despite the increasingly challenging business environment. This reflects the underlying strength of our two core business activities, the continuing importance of health and wellbeing to both individuals and governments and, most importantly, the benefits we are realising from transforming our Group. Welcome to the second Annual Review of Alliance Boots as a privately owned healthcare company. This, together with the Consolidated Financial Statements which we have simultaneously published, provides you with a comprehensive review of the Group s activities and financial results for the year ended 31 March Alliance Boots continues to perform well in what is an increasingly challenging business environment. This reflects the underlying strength of our two core business activities, the continuing importance of health and wellbeing to both individuals and governments and the benefits we are realising from transforming our Group. Delivering accelerated performance In 2008/09 our Group has again reported strong growth in revenue, EBITDA and trading profit, while at the same time benefiting from historically low interest rates. This, together with tight management of working capital, has resulted in a healthy operating cash flow. We continue to invest in developing our pharmacy-led health and beauty customer offering and on expanding the scope of our pharmaceutical wholesaling activities, all of which is focused on driving future growth. There remains a great deal of potential to unlock value from our leading brands and market positions. In our Health & Beauty Division we delivered double digit growth in trading profit, despite the difficult retail environments in all the countries in which we operate. We attribute this success to the passion and commitment of our people. This has enabled us to deliver excellent customer care, execute our comprehensive business transformation programme, carry out a major store investment programme and develop exciting new products. In 2008/09 our Pharmaceutical Wholesale Division experienced the most difficult market conditions I have seen. This was due to significant regulatory changes in a number of countries, tough competition in part due to currency movements and evolving ways in which prescription medicines are supplied to pharmacies. Alliance Healthcare is at the forefront of adapting its business model to better meet the needs of governments, pharmaceutical manufacturers and pharmacy customers. This, together with acquisitions and tight cost controls, enabled the Division to increase its trading profit year on year, albeit

11 Executive Chairman s statement 9 We are on track to become the world s leading pharmacy-led health and beauty group with the strength, ability and drive to deliver for our customers, our people, and the communities in which we operate. at a lower rate than has historically been the case. A Division-wide business improvement programme to further adapt our wholesale businesses to meet the changing expectations of customers and payors is now well underway, the full benefits of which will be realised over the next two years. We have a strong track record of delivering cost savings. I am pleased to report that in January 2009 we reached our initial 100 million pre tax cost saving target set when the merger of Alliance UniChem and Boots Group was first announced. This milestone was achieved 18 months ahead of schedule, with significant further savings still to be made. Corporate development As I reported last year, we have expanded and broadened the scope of our corporate development activities to progress opportunities open to us. During 2008/09 key acquisitions were Megapharm, a specialised German distributor of oncology products, and Depolabo, a leading provider of pharmaceutical pre-wholesale and contract logistics services in France. Since the year end, we have completed the merger of Boots Opticians with Dollond & Aitchison to create the second largest optical chain in the UK. Despite the challenging economic environment, we have again achieved strong growth in revenue, EBITDA and trading profit. Board and corporate governance In January 2009, Alex Gourlay was appointed to the Board on becoming Chief Executive of our Health & Beauty Division, having previously been Managing Director of Boots UK. At the same time, Ornella Barra, a Board member since the creation of Alliance Boots, became Chief Executive of our Pharmaceutical Wholesale Division, having previously been Wholesale & Commercial Affairs Director. Ornella Barra continues to be responsible for the development of commercial affairs across the Group. In addition to myself, the Board now comprises five executive Directors, three Kohlberg Kravis Roberts (KKR) appointed Directors and four non-executive Directors. In April 2009 an executive committee, with responsibility for the day to day management of the Group, replaced the Group operating committee. The new committee, chaired by myself, comprises the executive Directors and two Directors representing KKR. Corporate social responsibility We remain as committed as ever to maintaining our long tradition of excellence in corporate social responsibility, both in terms of performance and reporting. We have a comprehensive programme of activity which is in line with our core values and supports our objective of building a sustainable world-leading group. To supplement the section in this review, as in previous years, we will publish our more detailed 2008/09 Corporate Social Responsibility Report in September. Our people Our people across the Group have worked very hard this year and again delivered more than many commentators and observers thought possible. On behalf of the Board, I would like to take this opportunity to thank them for their excellent work and commitment. We understand the key challenges that lie ahead and have the people and skills in our organisation to meet them. As a private company, over 100 senior managers across the Group participate in our management equity plan which is designed to enable them, as investors, to share in the future financial success of the Group through an investment of personal capital. Foundation for future success The current economic times are such that we are facing the most difficult consumer and wholesale market conditions in recent memory. We are as focused as ever on meeting our financial targets, through concentrating our energies even more aggressively on continuing to grow and transform our businesses, making them more efficient and making them more responsive to customers evolving needs. At the same time we continue to seek new opportunities for value-enhancing corporate transactions. This is a great Group, with great brands and market leading positions. Since our year end, Alliance Boots has continued to perform well, reflecting the underlying strength of our two core business activities, the markets in which we operate and the further benefits we are generating through transforming the Group. As a result we remain confident about our prospects for the year ahead. The Group s financial position remains strong, reflecting a continuing focus on profit generation and working capital management, combined with secure long term funding arrangements. We have a strong cash flow and in addition are benefiting from historically low interest rates. As I have said on many occasions, this is a great Group with great brands and market leading positions in attractive markets. We are fully committed to the development and growth of Alliance Boots and believe that we are on track to become the world s leading pharmacy-led health and beauty group with the strength, ability and drive to deliver for our customers, our people, and the communities in which we operate - whoever and wherever they may be. Stefano Pessina Executive Chairman 15 May 2009

12 10 Alliance Boots Annual Review 2008/09 Market and business environment Alliance Boots operates in highly attractive markets with potential for significant long term growth. We expect increasing life expectancies and product innovation to continue to drive demand for prescription medicines and related healthcare services. At the same time, we believe that a growing customer focus on personal wellbeing will drive demand for health and beauty consumer products and related services. The key trends and market developments we expect to see over the coming years are as follows: New and innovative prescription medicines will continue to be developed. These include medicines which may require special handling (for example, temperature control) or administration to patients (for example, injections by nurses or by trained patients). Megapharm and Central Homecare, both acquired in 2008/09, provide specialist services for particular categories of medicines. Continuing price cuts on established branded prescription medicines. Governments benchmark prices in similar countries and look at the cost effectiveness of alternative branded medicines, cutting reimbursement prices when they identify price differentials or lower cost alternatives. Accordingly, we expect continuing price cuts on established branded prescription medicines over time.

13 Market and business environment 11 Key factors World population forecasts ( ) Population (millions) World pharmaceutical market forecasts (at ex-manufacturer prices using constant exchange rates*) Value (US$ billion) Healthcare expenditure as a percentage of GDP (average across OECD countries) Percentage 7,000 6,800 6,600 6,400 6, , Source: IMS Market Prognosis Global Source: IMS Market Prognosis Global * Constant exchange rates based on average rates for quarter as recorded by IMS Health Source: OECD Factbook 2009: Economic, Environmental and Social Statistics An increasing proportion of prescriptions to be lower cost generic medicines. Governments are implementing measures to encourage doctors to prescribe more generic medicines in order to reduce costs. Alliance Healthcare, our Pharmaceutical Wholesale Division, uses its scale and international sourcing capabilities to secure lower prices and better cash margins on generics in a way which legislation typically does not permit for branded products, making us well placed to take advantage of this continuing trend. An increasing number of medicines to be available for retail purchase. Governments are increasing the number of medicines available for retail purchase to encourage consumers to pay for medicines for minor ailments, rather than going to their doctor for a prescription. With its healthcare expertise, Boots is well placed to secure a large share of this new market, in part through developing better value own brand product ranges which customers trust as substitutes for leading brands. More healthcare services to be provided in the community. Governments are seeking to provide more healthcare services in the community in a cost effective way. Pharmacy is well placed to provide many services, such as medicine checkups, weight management programmes, smoking cessation advice and flu vaccinations. In addition, we also expect the market for homecare services to grow rapidly. Deregulation of pharmacy ownership to happen over time in more European countries. In time we believe that cost pressures on governments are likely to lead to deregulation of pharmacy ownership in more European countries, to allow multiple ownership alongside wholesale, although the timing of this remains highly uncertain. Latent consumer demand for beauty products with proven pharmaceutical benefits. The huge success of No7 Protect & Perfect Beauty Serum highlights the latent consumer demand for beauty products which are validated by scientific evidence. We, along with certain other leading manufacturers of beauty products, continue to focus our product development activities in this select area of the beauty marketplace. Branded pharmaceutical manufacturers to seek further control over their distribution channels. An increasing number of branded pharmaceutical manufacturers are seeking further efficiencies and control by switching from selling via multiple pharmaceutical wholesalers to either selling direct to pharmacies (using relatively few wholesalers as distributors, such as Alliance Healthcare, to deliver the product, invoice customers and collect payments), or selling via a select number of national wholesalers, such as Alliance Healthcare. We expect this trend to continue in the coming years. Further consolidation of the pharmaceutical wholesaling distribution sector. In our core European pharmaceutical wholesaling markets, we expect consolidation amongst wholesalers to accelerate as regulatory and market changes put increasing pressure on small regional wholesalers.

14 12 Alliance Boots Annual Review 2008/09 Group strategy and objectives The Group s strategy is to focus on its two core business activities of pharmacy-led health and beauty retailing and pharmaceutical wholesaling and distribution. This includes growing our core businesses in existing markets, continuing to deliver productivity improvements and other cost savings, and pursuing growth opportunities in selective new high growth markets. This strategy is underpinned by our continued focus on patient/customer needs and service, the Group s portfolio of excellent and well trusted brands and products, and our strong financial disciplines. Pharmacy-led health and beauty retailing Boots is the largest pharmacy chain in Europe with an excellent reputation for differentiated health and beauty products and customer care. Our strategy is to develop Boots into the world s leading pharmacy-led health and beauty retail brand, focused on helping people look and feel their best. The key steps we are taking in the UK to execute our strategy are: Making Boots more convenient and accessible for our customers. We are re-branding over 1,000 outlets into your local Boots pharmacy and relocating more Boots stores/pharmacies to improved locations. We are also increasing the number of Boots stores through new openings and pharmacy acquisitions and doubling the number of Boots Opticians practices through the re-branding of Dollond & Aitchison. Developing our people to be at their very best for our customers. We are improving the product knowledge of our people through weekly e-learning sessions. We operate our leadership development programme and have recently established a Boots commercial academy to ensure that we have the best people supporting and developing our customer offering. We have also increased the number of pharmacists and beauty consultants to provide fast, friendly service and expert customer care. Improving our customers in-store shopping experience by consistently providing best in class customer care and service. This is being partly achieved by operating efficient walk-in prescription services staffed by friendly, knowledgeable and accessible pharmacists, and faster till service. Our customers experiences are being further enhanced by better in-store product availability through investment in a more efficient logistics network, refitted older stores, and redesigned store layouts to make it easier for customers to find what they want. We are also differentiating our retail formats and product offering to better meet our customers needs. Creating a compelling multi-channel health and wellbeing consumer offering. Initiatives include making shopping at boots.com easier, expanding product ranges available on-line and rolling out our order-on-line collect-in-store concept. We have also recently announced that we are to launch later in 2009 a BootsWebMD consumer health and wellness information portal in partnership with WebMD, the leading US healthcare information portal. Increasingly differentiating our product offering. We are achieving this by enhancing our ranges of leading consumer and specialist health and beauty brands. In addition, we are increasing the rate of product innovation for our own market leading brands such as No7 and launching new and enhanced own brand and only at Boots product ranges. Continuing to provide customers with excellent value by providing trusted ranges of Boots branded products, executing strong promotional offers and rewarding customer loyalty with Boots Advantage Card points.

15 Group strategy and objectives 13 The key steps we are taking in our International health and beauty markets to execute our strategy are: Opening new stores in markets where Boots is already well established, including the Republic of Ireland, Norway and Thailand. Developing country specific Boots branded trading formats to meet local needs, including the roll-out of the successful Boots apotek pharmacy concept in Norway. We have also started to test a Boots apotheek pharmacy concept in The Netherlands. Selective franchising of the Boots pharmacy-led health and beauty retail proposition in areas such as the Middle East. In addition we will consider, over time, establishing Boots pharmacy chains in new countries where legislation permits and it makes economic sense to do so. Pharmaceutical wholesaling and distribution Alliance Healthcare is one of Europe s largest pharmaceutical wholesalers with an excellent reputation for service. Our strategy for Alliance Healthcare is to be the world s leading wholesaler and distributor of pharmaceutical products, working in partnership to provide added-value services for pharmacy and manufacturer customers. The key steps we are taking to execute our strategy include: Ensuring that we continue to deliver an excellent core service to all our customers. Typically we deliver prescription medicines to pharmacies at least twice a day on a just-in-time basis to meet patients needs. In-stock availability, accuracy of picking and reliable van deliveries within set time periods are essential to achieve this consistently. Evolving our business model to meet changing demands from manufacturer and pharmacy customers for new services. We aim to do this through winning direct-to-pharmacy distribution contracts, achieving preferred status for selective wholesaler contracts, expanding our pre-wholesale and contract logistics services, developing our contract sales forces, and developing innovative added-value services such as the Alphega Pharmacy concept. Increasing efficiency and driving down costs by growing market share where it proves cost effective to do so, continuing to implement our Division-wide business improvement programme and acquiring businesses to increase scale, such as Depolabo in 2008/09. Differentiating our product offering. We are achieving this through a series of initiatives which include the development of Almus, our exclusive range of generic medicines, and the extension of Alvita, our branded healthcare product range. We have also successfully launched the Boots Laboratories Serum7 skincare range for independent pharmacy customers in France, and in Portugal through our associate, and are planning to launch this range in other countries in 2009/10. Alphega Pharmacy is a leading network of independent pharmacists, now operating in six countries with around 2,200 members. Extending our capabilities into high growth specialty medicine/homecare markets, which included the acquisitions of Megapharm and Central Homecare in 2008/09. Entering new geographical markets where stable regulatory environments, large populations, growing healthcare expenditure, scope for wholesaler consolidation and the right management can be found, such as in Russia and China in recent years.

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17 Group strategy and objectives 15 Driving the Boots brand The Boots brand is a vital asset and a key part of the Group s strategy is to maximise its value. Building on its long established reputation for trust and customer care, we are expanding the Boots brand in new and established markets. Significant progress was made during the year. In the UK, the roll-out of the your local Boots pharmacy branded format continues and today the number of Boots branded stores in the UK has never been higher. In the Republic of Ireland we opened our 50th Boots store in July 2008, while in Thailand store numbers have increased to 150 at the year end, making Boots one of the largest health and beauty pharmacy chains in the country. Following the success of the Boots apotek trial in Norway, we are rolling out this new format across the country and by the year end we had 36 Boots apotek stores. As part of a pilot in The Netherlands we have recently re-branded two stores as Boots apotheek, which have been well received by our customers. In the Middle East our franchise partner opened 10 Boots branded stores in 2008/09 with more planned in the coming year.

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19 Group strategy and objectives 17 Driving efficiency Alliance Boots has a strong track record of delivering cost savings. Our 100 million cost saving target set at the time of the merger was achieved 18 months ahead of schedule, with significant scope remaining for further savings to be made. Additional efficiency innovations include our new central distribution centre in the UK for health and beauty products, which is on track to become fully operational by the end of This large automated centre will simplify our retail supply chain, improve in-store stock availability and customer proposition, replace regional distribution centres with cross docking facilities, reduce working capital and increase productivity. We have recently embarked on a Pharmaceutical Wholesale Division-wide improvement programme to adapt our businesses to better meet the expectations of payors and customers. The principal aims of this programme are to anticipate changes in the marketplace, make the most of future opportunities and support businesses in individual countries to implement our new wholesale business model. In addition, our expertise in margin management and the scale of our operation continues to enable the Group to obtain productivity savings and remain price competitive.

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21 Group strategy and objectives 19 Driving product development and growth The Group has an extensive portfolio of high quality product brands, which we continue to improve and develop. Our brands, such as Boots, No7, Soltan and Almus, enable us to significantly differentiate our offering and help drive profitability. During 2008/09, the Group launched a number of exciting and innovative products, including: No7 Protect & Perfect Foundation range, building on the success of our popular skincare range. Boots Laboratories Serum7, a new anti-ageing skincare range, which we launched in France, and in Portugal through our associate, and is now among the best selling skincare products sold in pharmacies in these countries. In addition, we will shortly be launching Almus in Spain, and in Portugal through our associate, and have broadened its product ranges in France, Italy and the UK. In April 2009, the University of Manchester announced clinical trial results which showed that Boots No7 Protect & Perfect Intense Beauty Serum has genuine long term anti-ageing benefits. Since the launch, this product has generated considerable media coverage and strong consumer demand. Other new product launches announced since the year end include: Boots Skin Clear, specially created by Boots skincare experts to tackle problem skin. Boots Vitamin E, a new skincare range harnessing the antioxidant powers of Vitamin E.

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23 Group strategy and objectives 21 Driving growth in pharmaceutical wholesaling and distribution To drive organic growth, we continually seek to add value to our offering and find new ways of working with all our customers pharmacists, payors and manufacturers. We have continued to respond to the developing needs of branded ethical pharmaceutical manufacturers in the UK, who are increasingly adapting and changing their approaches to distribution across this market. This trend is growing and several companies have already made the switch from selling via all pharmaceutical wholesalers to either selling direct to pharmacies using relatively few wholesalers as distributors, or selling only through a small number of selected wholesalers. We have long established strong relationships with many of these manufacturers. In addition, our responsiveness in meeting their changing requirements as well as our highly efficient and reliable logistics network have rapidly established Alliance Healthcare as the UK market leader and the partner of choice for pharmaceutical manufacturers. In addition, during the year we made a number of strategic acquisitions in the high growth specialty medicine/homecare markets: Megapharm, a specialised German provider of wholesaling and logistical services for the high growth oncology market, was acquired in October Central Homecare, which provides home healthcare services to patients in the UK who require management of complex drug therapies, was acquired in April 2008.

24 22 Alliance Boots Annual Review 2008/09 Operating and financial review Overview To assist in understanding the performance of the Group, all references to year on year performance (unless otherwise stated) are based on comparative pro forma financial information for the year ended 31 March 2008 as if the acquisition of Alliance Boots plc by AB Acquisitions Limited on 26 June 2007 had taken place prior to 31 March In 2008/09 the Group has again reported strong growth in revenue, EBITDA and trading profit, while at the same time benefiting from historically low interest rates. This, together with tight management of working capital, has resulted in a healthy operating cash flow. We continue to invest in developing our pharmacy-led health and beauty customer offering and on expanding the scope of our pharmaceutical wholesaling activities, all of which is focused on driving future growth. Divisional highlights for the year ended 31 March 2009 Revenue million Trading profit million Revenue In this review, the Health & Beauty Division results are further split between the UK and International businesses, given the relative size of our UK activities. Year on year growth A glossary of key terms and a list of principal businesses, associates and joint ventures are included on pages 61 to 64. Trading profit Health & Beauty 7, % +11.6% Pharmaceutical Wholesale 11, % +4.4% Contract Manufacturing & Corporate Costs 106 (47) +1.0% Intra-group (1,323) Group 1 17, % +9.1% Share of revenue & trading profit of associates and joint ventures 3, % +34.9% 20, % +11.6% 1 Group trading profit comprises profit from operations before exceptional items, amortisation of customer relationships and brands, and share of post tax earnings of associates and joint ventures. Financial highlights Revenue increased year on year by 12.4% to 17,195 million. Trading profit (which comprises profit from operations before exceptional items, amortisation of customer relationships and brands, and share of post tax earnings of associates and joint ventures) increased by 9.1% to 841 million and EBITDA on the same basis by 6.7% to 1,096 million. On a constant currency basis, revenue increased by 3.0% in total, an increase of 1.1% on a like for like basis. For associates and joint ventures our share of post tax earnings before exceptional items increased by 25.0% to 75 million. Revenue, including our share of revenue of associates and joint ventures, increased by 15.5% to 20.5 billion. On the same basis, EBITDA increased by 11.3% to 1,245 million and trading profit by 11.6% to 953 million. Cash generated from operations was strong at 1,045 million, including a net working capital and provisions inflow of 89 million. This has enabled us to fund investment to grow our businesses. We invested a net 272 million of cash on capital expenditure, largely on upgrading retail stores and on logistics. In

25 Operating and financial review 23 addition, a net 61 million of cash was invested in acquisitions, net of cash and borrowings acquired, the key transactions being the purchase of Megapharm in Germany and Depolabo in France. Net borrowings at the year end were 9,034 million and shareholders equity was 4,182 million. Business transformation Following the move to private ownership in June 2007, we are continuing to dedicate much of our efforts to accelerating the transformation of the Group. Key transformation priorities during the year were our cost saving programme, the development and expansion of the Boots health and beauty pharmacy-led retail brand and the exploitation of our product development capability and brands. Cost savings in 2008/09 were primarily delivered through exploiting cost synergies between our UK businesses. In January 2009 we reached our initial 100 million pre tax cost saving target set when the merger of Alliance UniChem and Boots Group was first announced. This milestone was achieved 18 months ahead of schedule with significant further savings still to be made, while ensuring at all times that we continue to meet customer expectations in terms of products and service. We expect these savings to be higher in 2009/10, when we will also start to see initial benefits from completing the reconfiguration of the Boots UK supply chain. In 2008/09 we further developed and expanded the Boots brand through completing the integration of Boots the Chemists and Alliance Pharmacy businesses and rolling out the re-branding of Alliance Pharmacy outlets as your local Boots pharmacy in the UK. In addition we started to roll out the new Boots apotek pharmacy concept in Norway and, towards the end of the year, began to test the Boots apotheek pharmacy concept in The Netherlands. We continue to work towards exploiting the full potential of our product development capability and brands. In 2008/09 new developments included the extension of our No7 range and the launch of the Boots Laboratories Serum7 skincare range in France, and in Portugal through our associate. Since the year end we have successfully launched No7 Protect & Perfect Intense Beauty Serum, the clinically proven skincare product which provides genuine long term anti-ageing benefits. We are rolling-out the successful Boots apotek pharmacy concept in Norway.

26 24 Alliance Boots Annual Review 2008/09 Health & Beauty Division

27 Operating and financial review 25 Performance overview In our Health & Beauty Division we delivered double digit growth in trading profit, despite the difficult retail environments in all the countries in which we operate. We attribute this success to the passion and commitment of our people. This has enabled us to deliver excellent customer care, execute our comprehensive business transformation programme, carry out a major store investment programme and develop exciting new products. Financial highlights for the year ended 31 March 2009 Revenue UK: Total million Reported Constant currency Year on year growth Like for like Boots UK 6, % +3.2% +1.3% Boots Opticians % -1.3% +1.7% 6, % +3.1% +1.3% International: Norway % +3.4% +1.1% Republic of Ireland % +0.4% -2.9% The Netherlands % -5.3% -6.4% Thailand % +11.4% +4.6% Italy % -3.6% -3.6% Russia % +65.4% +52.7% % +1.3% -1.3% 7, % +2.9% +1.1% Trading profit UK % +11.2% International % +1.9% % +10.5% Trading margin UK 9.9% +0.7pp +0.7pp International 5.6% +0.1pp 9.4% +0.6pp +0.7pp

28 26 Alliance Boots Annual Review 2008/09 Health & Beauty Division continued Boots UK revenue by product category for the year ended 31 March 2009 Lifestyle Beauty & Toiletries million Dispensing & Related Income Retail Health Year on year growth Dispensing & Related Income 2, % Retail: Retail Health % Beauty & Toiletries 2 2, % Lifestyle 3 1, % 3, % 6, % Comparatives have been restated to exclude optical revenue, as Boots Opticians is now reported as a separate business, and to reflect the transfer of accessories from Lifestyle to Beauty & Toiletries where it is now managed. 1 The Retail Health category comprises sales of non-prescription medicines and other health related products. 2 The Beauty & Toiletries category comprises the cosmetics & fragrances, accessories and toiletries sub-categories. 3 The Lifestyle category comprises the baby, nutrition, photography, electrical, seasonal and other lifestyle sub-categories. In our Health & Beauty Division we delivered double digit growth in trading profit, despite the difficult retail environments in all the countries in which we operate. We attribute this success to the passion and commitment of our people. This has enabled us to deliver excellent customer care, execute our comprehensive business transformation programme, carry out a major store investment programme and develop exciting new products. Revenue increased year on year by 4.4% to 7,147 million, trading profit increased by 11.6% to 673 million and trading margin increased by 0.6 percentage points to 9.4%. On a constant currency basis revenue increased by 2.9% in total, up 1.1% on a like for like basis, and total trading profit increased by 10.5%. Health & Beauty Division UK In the UK, total revenue increased year on year by 3.1% to 6,343 million, like for like revenue increasing by 1.3%. Trading profit increased by 11.2% to 628 million and trading margin by 0.7 percentage points to 9.9%. Boots UK performed well throughout the year, including the important Christmas period, growing both revenue and trading margin. Benefits from the business transformation programme were increasingly realised, which in particular enabled costs to be saved. Dispensing & Related Income increased by 7.5%, due to dispensing volume growth and increased Related Income, partially offset by a slightly lower average revenue per prescription mainly as a result of lower generic reimbursement prices. Total dispensing volumes increased year on year by 8.5% to 204 million items. Volume growth on a like for like basis increased by 5.0%, our growth being particularly strong in prescriptions collected on behalf of patients from doctors practices and in prescriptions supplied in patient specific packs to care homes. Related Income from pharmacy services, which currently comes primarily from medicine checkups (formerly called medicine use reviews) and other locally commissioned pharmacy services, whilst still relatively modest, increased year on year by over 30%. Our pharmacists in England and Wales carried out 560,000 medicine checkups during the year, a year on year increase of over 45%. We have a market leading position in the provision of such services with more than 80% of our pharmacies now incorporating private consultation facilities. As the leading operator of retail pharmacies in the UK, we remain committed to making high quality healthcare more available and accessible. At the year end we had six doctors surgeries operating in Boots stores, utilising space surplus to retail requirements. As previously stated we intend to increase the number of such surgeries over the coming years. Revenue in the Retail Health category, where we are the market leader, increased by 1.6% to 756 million. Sales of both non-prescription medicines and healthcare products such as vitamins increased year on year. The gross margin increased substantially due to improved product mix and more effective use of promotions. We continue to develop our differentiated healthcare product offering, including our extensive range of Boots branded healthcare products, building on our excellent reputation for customer care and trust. The Boots Health Club, which enables customers to receive targeted healthcare information on specific health issues, increased its membership by nearly 30% during the year and now has 4.8 million members. Revenue in the Beauty & Toiletries category, where we have leading market positions and exclusive product brands, increased by 0.4% to 2,056 million, growth in toiletries being partially offset by lower sales of cosmetics and fragrances. Sales of accessories were at a similar level to last year. No7, our cosmetics and skincare brand, maintained its market leading position in the UK, the previous year s sales having been particularly good due to the exceptional demand for our award-winning No7 Protect & Perfect Beauty Serum in

29 Operating and financial review 27 the early months of 2007/08. We continue to invest in new product development of No7, launching a number of new products throughout the year including No7 Dual Protection Tinted Moisturiser, No7 Extreme Length Mascara and a new No7 Protect & Perfect Foundation range. We are committed to ensuring that No7 continues to provide customers with market leading innovative products at attractive prices. Since the year end we have successfully launched a number of exciting No7 products, including No7 Protect & Perfect Intense Beauty Serum, the clinically proven skincare product which provides genuine long term anti-ageing benefits. This product has generated considerable media coverage and strong consumer demand. In the toiletries sub-category, growth was spread across almost all our product groupings, suncare increasing the most strongly. Better buying and mix enabled us to improve our gross margin in every product group while at the same time continuing to offer our customers excellent value and choice. Revenue in the Lifestyle category increased by 0.9% to 1,039 million, which was a particularly strong performance given the difficult retail environment. We achieved good revenue growth in the baby and nutrition sub-categories, with seasonal and electrical also increasing year on year. This more than compensated for a continuing decline in photographic. As in 2007/08 we had good seasonal gift sales, assisted again by an award winning advertising campaign, Here come the girls, and an excellent post Christmas sale. Our own product brands, such as Boots, No7, Soltan, Botanics and 17, together with our exclusive ranges, continue to enable us to materially differentiate our retail offering from that of our competitors and are very important drivers of revenue and margin. In addition to the new No7 product ranges, other new developments during the year included the launch of Boots Original Beauty Formula in January This new range of indulgent preparations for face, hands and body uses traditional ingredients in packaging inspired by the Boots archive. Since the year end we also announced the launch of a number of new ranges, including Boots Skin Clear, Boots Expert Orthodontic dental products and Boots Vitamin E skincare range. We attribute much of the Boots success again this year to our passionate focus on customer service and care, with the customer very much at the heart of our business strategy. We continue each week to analyse over 25,000 customer responses to in-store marketing surveys to better understand customers evolving needs. Part of this process includes asking respondents whether they would strongly agree to the likelihood of recommending Boots as a place to shop. We are pleased that the positive responses received progressively increased throughout the year. We recruited around 950 pharmacists during the year and we continued to invest in our people, with over 2,500 employees attending our leadership development programme. We have introduced e-learning into our stores, enabling product knowledge training to be undertaken every week by our people. In addition, a Boots commercial academy has been recently established to ensure that we have the very best people supporting and developing our customer offering. The Boots Advantage Card loyalty scheme, where customers earn points on purchases for redemption at a later date, continues to be a key element of our offering. During the year the number of active Boots Advantage Card holders (which we define as members who have used their card at least once in the last 12 months) increased by 6.5% to 16.4 million, reflecting its position as one of the largest and most valued loyalty schemes in the UK. During the year we carried out a major upgrade of the boots.com website to make it easier for our customers to use. The website is now more closely integrated with our retail offering with order-on-line collect-in-store available in over 1,300 Boots stores at the year end. This new We continue to invest in new product development.

30 28 Alliance Boots Annual Review 2008/09 Health & Beauty Division continued feature in particular gives your local Boots pharmacy customers convenient access to the extended Boots product range, including the full seasonal gift offerings. Further enhancements to the website are planned over the coming months. In addition we are jointly developing a consumer health and wellness information portal with WebMD, the leading provider of health information services in the US. The portal, which will be branded BootsWebMD, will be launched later in The roll-out of the your local Boots pharmacy branded format is now well underway, with 401 stores re-branded during the year. At the year end 451 pharmacies were trading under the new format. The programme is scheduled to be completed by the end of 2009, at which point we will have well over 1,000 your local Boots pharmacy stores. Post conversion we continue to consistently see substantial increases in both retail sales and dispensing volumes, with a higher mix of our own products than in our other formats. In 2008/09 we relocated 51 stores, the majority of which were local pharmacies, and opened 21 new Boots stores, of which 17 incorporated a pharmacy. In addition to the your local Boots pharmacy programme we refitted a further 57 stores and also acquired 18 pharmacies. The number of acquisitions was less than in previous years, partly as a result of restricted availability in the first half of the year following the change in UK capital gains tax rules in April 2008 which meant that a larger than usual number of transactions took place in March Currently we are prioritising direct investment in new and existing stores. In July 2008 we sold 44 of our footwear outlets (which traded as Scholl), closing the remaining five stores shortly thereafter, as these were not part of our core health and beauty retail proposition. At the year end, in the UK we had 2,591 health and beauty stores, of which 2,375 included a pharmacy. Our major supply chain reconfiguration programme, announced just over three years ago, remains on track for completion later in By the year end our automated central distribution centre was handling around half of our retail volume. Boots Opticians, which we now manage as a separate business, increased trading profits substantially in the year as a result of like for like revenue growth, lower costs and increased franchise income. Like for like revenue from owned practices increased by 1.7%, total revenue declining by 1.3% due to more franchising. During the year we successfully switched 10 practices to our franchise model and also relocated two standalone owned Boots Opticians practices to within Boots UK stores, utilising space surplus to our retail requirements. On 5 May 2009 we completed the merger of Boots Opticians with Dollond & Aitchison to create the second largest optical chain in the UK. The combined business, which trades as Boots Opticians, had at that date 684 practices, including 207 franchises. It is envisaged that the Dollond & Aitchison practices will, in due course, adopt the Boots Opticians brand. Both businesses have a strong heritage and an excellent reputation for service and customer care, providing a great opportunity to combine these strengths under one brand with a differentiated product offering. De Rigo, a worldwide leader in the design, manufacture and marketing of high quality eyewear, exchanged its ownership of Dollond & Aitchison for a 42% shareholding in the combined business. Health & Beauty Division International Total revenue in countries outside the UK increased year on year by 15.7% to 804 million. Trading profit increased by 18.4% to 45 million, mainly as a result of currency translation and strong profit growth in the Republic of Ireland, which was partially offset by lower profits in The Netherlands and Norway. Trading margins increased by 0.1 percentage points. On a constant currency basis, revenue increased by 1.3%, like for like revenue decreasing by 1.3%, and trading profit increased by 1.9%. In total a net seven stores were added during the year, the number of stores with pharmacies increasing by 10 to 443. In Norway, revenue increased by 3.4% on a constant currency basis. Like for like revenue increased by 1.1%, good retail sales growth, particularly in converted stores, and higher dispensing volume, more than compensating for lower average prescription reimbursement prices. Profitability was adversely impacted by higher employee costs due to a national shortage of pharmacists. By the year end 36 stores were successfully trading as Boots apotek, our new branded format specifically developed for the Norwegian market, which sells a targeted range of Boots beauty products in addition to other health and beauty products. The conversion programme will continue throughout 2009/10. In the Republic of Ireland, where we trade as Boots, revenue increased by 0.4% on a constant currency basis. Like for like revenue decreased by 2.9%, lower retail sales resulting from the fragile state of the Irish economy, being partially offset by excellent growth in dispensing which was well ahead of the market. Profits increased mainly due to improved margins. Three stores were added during the year, including one retail pharmacy acquisition. In The Netherlands, revenue decreased by 5.3% on a constant currency basis. Like for like revenue decreased by 6.4%, mainly as a result of substantially lower reimbursement prices for generic prescription medicines. These were as a result of Dutch healthcare insurers expanding the use of tenders for generic medicines from June 2008 onwards, referred to as the preference policy. This has substantially reduced the profitability of pharmacies across The Netherlands. As a result, like other major pharmacy chains, we have impaired part of the business goodwill, resulting in a non cash exceptional charge of 25 million. Following our success in Norway, in February 2009 we commenced a test of a new Boots apotheek pharmacy concept with a much stronger retail offering than typical in Dutch pharmacies. Initial results are promising with the targeted range of Boots branded health and beauty products being particularly popular.

31 Operating and financial review 29 Revenue by country for the year ended 31 March 2009 ( million) Russia 4 Italy 23 Thailand 57 Norway 338 The Netherlands 164 Republic of Ireland 218 Stores by country at 31 March 2009 Number Norway 149 Republic of Ireland 51 The Netherlands 77 Thailand 150 Italy 20 Russia In Thailand, where Boots is one of the largest health and beauty pharmacy chains, revenue increased by 11.4% on a constant currency basis. Like for like revenue increased by 4.6%, growth varying significantly throughout the year due to the continued political instability. Despite this, the business increased its trading profit year on year through a combination of sales and margin growth and cost efficiencies. A net nine pharmacies were added in the year, bringing the total at the year end to 150. Boots is one of the largest health and beauty pharmacy chains in Thailand. At the year end we also operated 20 retail pharmacies in Italy and 10 in Russia, with a further 36 stores operated by our franchise partner in the United Arab Emirates, Kuwait, Qatar and Bahrain.

32 30 Alliance Boots Annual Review 2008/09 Pharmaceutical Wholesale Division

33 Operating and financial review 31 Performance overview Alliance Healthcare is at the forefront of adapting its business model to better meet the needs of governments, pharmaceutical manufacturers and pharmacy customers. This, together with acquisitions and tight cost controls, enabled the Division to increase its trading profit year on year, albeit at a lower rate than has historically been the case. Financial highlights for the year ended 31 March 2009 Revenue Total million Reported Year on year growth Constant currency France 4, % -2.6% UK 2, % +10.8% Spain 1, % -3.6% Italy 1, % -1.0% The Netherlands % -2.3% Russia % +52.7% Czech Republic % +6.9% Norway % +2.3% Germany 149 n/a n/a Other 42 n/a Intra-segment (76) 11, % +3.8% Trading profit % -4.4% Trading margin 1.9% -0.3pp -0.2pp

34 32 Alliance Boots Annual Review 2008/09 Pharmaceutical Wholesale Division continued In 2008/09 our Pharmaceutical Wholesale Division experienced the most difficult market conditions we have seen. This was due to significant regulatory changes in a number of countries, tough competition in part due to currency movements and evolving ways in which prescription medicines are supplied to pharmacies. Alliance Healthcare is at the forefront of adapting its business model to meet the needs of governments, pharmaceutical manufacturers and pharmacy customers. This, together with acquisitions, enabled the Division to increase its trading profit year on year, albeit at a lower rate than has historically been the case. Revenue totalled 11,265 million, an increase of 17.8%, trading profits increasing by 4.4% to 215 million. Overall trading margins decreased by 0.3 percentage points. Adjusting for acquisitions and disposals, on a constant currency basis, like for like revenue increased by 2.2% and like for like trading profit decreased by 8.4%, almost entirely due to France and Spain, like for like trading margins decreasing by 0.2 percentage points. As in the previous year, our published like for like revenue growth was held back by branded ethical manufacturers switching to distributing product direct to pharmacies which, under International Financial Reporting Standards, we account for on an agency basis. This means that we do not report these goods going through our wholesale network as revenue, although we are required to include the related receivables and payables on our balance sheet due to timing differences. Adjusting for this accounting treatment, our more comparable underlying like for like sales growth was around 6%, which was significantly higher than the market growth rate. We have recently embarked on a Division-wide restructuring programme to further adapt our wholesale businesses to meet the changing expectations of customers and payors. The principal aims of this programme are to anticipate changes in the marketplace, make the most of future opportunities and support businesses in individual countries to implement our new wholesale business model. The programme affects all businesses in the Division and will result in a 10% reduction in headcount (of which a quarter had taken place by the year end). This reduction, which will be partially achieved through staff turnover, will be completed over the next 12 months. The programme is targeted to reduce operating costs by around 55 million per annum by 2011/12 and has resulted in exceptional charges of 60 million in 2008/09. Markets and products We estimate that the wholesale markets in which we operate grew year on year by around 3.5% in value on a constant currency basis, this growth being weighted on the basis of our wholesale revenue. This is lower than in the previous year, mainly as a result of lower growth in France due to measures taken by the French government to reduce high consumption levels of prescription medicines. Market growth from the introduction of higher priced new branded pharmaceuticals has continued to be partially offset by increased penetration of lower priced generic medicines and by reductions in generics prices. Generic penetration rates rose year on year in all our western European markets, with penetration levels still being typically lower in southern Europe. There has been a reduction in the overall level of the parallel trade market in Europe. This is due to manufacturers continuing to seek ways to curtail these activities, together with fewer material price differentials since the Euro strengthened versus Sterling. We have continued to respond to the developing needs of branded ethical pharmaceutical manufacturers in the UK, who are increasingly adapting and changing their approaches to distribution across this market. This trend is growing and several companies have already made the switch from selling via all pharmaceutical wholesalers to either selling direct to pharmacies using relatively few wholesalers as distributors, or selling only through a small number of selected wholesalers. We have long established strong relationships with many of these manufacturers. In addition, our responsiveness in meeting their changing requirements as well as our highly efficient and reliable logistics network have rapidly established Alliance Healthcare as the UK market leader and the partner of choice for pharmaceutical manufacturers. Across the Division we have also continued to expand the provision of pre-wholesale and contract logistics services to them. Almus, our exclusive range of generic medicines, continues to provide marketing and sourcing benefits aimed at offsetting the impact of patent expiries. In 2008/09 Almus broadened its product availability in France, Italy and the UK, and will shortly continue its international roll-out by launching in Spain. During the year we also expanded our range of Alvita branded healthcare products and launched in The Netherlands. We further differentiate our wholesale offering by continuing to develop the range of services offered to independent pharmacy customers. This includes membership of Alphega Pharmacy, which encompasses a comprehensive range of added-value services including branding, professional training and healthcare, retail support services and supply benefits together with pharmacy and IT support. During the year Alphega Pharmacy was launched in Russia and now operates in six countries, having more than doubled its membership year on year to around 2,200 pharmacies. In France, revenue decreased by 2.6% on a constant currency basis, a decrease of 3.0% on a like for like basis. Profitability was impacted by reduced volume throughput, mainly as a result of the growth in the proportion of product which manufacturers sell and distribute direct to pharmacies continuing to increase, and measures taken by the French government to reduce high consumption levels of prescription medicines. We continue to counter the trend in direct sales within the French market through actions such as our attractive generics offering.

35 Operating and financial review 33 In December 2008 we completed the acquisition of Depolabo, a leading provider of pharmaceutical pre-wholesale and contract logistics services in France to wholesalers, pharmacies and hospitals on behalf of more than 50 manufacturers. The acquisition enables us to accelerate the expansion of such services in Europe as well as enhancing our range of added-value services for pharmaceutical manufacturers. In the UK, revenue increased by 10.8% to 2,311 million, like for like revenue increasing by 10.2%. This was mainly due to a number of branded ethical pharmaceutical manufacturers switching to selling through a select number of national wholesalers, including ourselves, which more than offset lower revenue from manufacturers selling direct to pharmacies. Throughout 2008/09 we maintained our market leading position in the UK for the provision of direct deliveries to pharmacies on behalf of manufacturers. Year on year we increased volume through our logistics network by over 8.0%, an increase over the last two years of close to 30%. Profitability was, however, impacted by higher costs in a number of areas. Actions have recently been taken to reduce costs as part of the Division-wide restructuring programme. UniChem, our principal UK pharmaceutical wholesale business, was re-branded as Alliance Healthcare (Distribution) on 1 April In April 2008 we acquired Central Homecare, which provides home healthcare services to patients in the UK who require management of complex drug therapies. This acquisition gives us a presence in what we see as a highly attractive segment of the market with excellent long term growth potential. In Spain, total revenue decreased by 3.6% on both a constant currency and like for like basis. Domestic competition remained strong, with profits from commercial activities adversely impacted by changes in the market. During the year manufacturers continued to curtail export sales and increase direct distribution to pharmacies. Costs continued to be tightly managed and in February 2009 we rationalised our distribution facilities in the Catalonia region. In Italy, revenue decreased by 1.0% on both a constant currency and like for like basis. Manufacturers continued to increase direct distribution to pharmacies, which, together with strong regional competition, adversely impacted profitability. In The Netherlands, revenue decreased by 2.3% on both a constant currency and like for like basis, mainly as a result of substantially lower reimbursement prices for generic prescription medicines. This was mainly due to Dutch healthcare insurers expanding the use of tenders for generic medicines from June 2008 onwards, referred to as the preference policy and regulatory price reductions on branded ethical products. Costs and margins were tightly managed throughout the year, enabling the business to increase profitability. In Russia, revenue increased by 52.7% on both a constant currency and like for like basis. Significant market share gains were made, mainly as a result of higher sales to retail pharmacies and hospitals. This enabled the business to deliver strong year on year profit growth. In the Czech Republic, revenue increased by 6.9% on both a constant currency and like for Customer service and care is at the heart of our business strategy. like basis, reflecting a strong performance in the hospital channel where we gained market share. This, together with lower operating costs, enabled the business to increase profits year on year. In February 2009, we opened a new building on our existing Prague distribution site, which expanded our capacity to handle additional pre-wholesaling and contract logistics services volume. In Norway, revenue increased by 2.3% on both a constant currency and like for like basis, profitability being impacted by higher freight and employee costs. Holtung, our principal business, was re-branded as Alliance Healthcare Norge on 31 March Germany is reported as a separate country for the first time, following the October 2008 acquisition of 90% of Megapharm, which provides a range of specialised wholesaling and logistics services for oncology products. This acquisition further extends the range of specialist added-value services we offer our manufacturer and pharmacist customers and is in line with our strategy of broadening our wholesaling services beyond traditional pharmaceutical wholesaling. Since being acquired, Megapharm has traded in line with our expectations at the time of purchase. Other revenue mainly comprises own brand exports to third parties.

36 34 Alliance Boots Annual Review 2008/09 Other activities Contract Manufacturing & Corporate Costs Revenue from Contract Manufacturing for third party health and beauty brands, which utilises manufacturing capacity not required for internal supply, increased year on year by 1.0% to 106 million, a decrease of 0.2% on a like for like and constant currency basis. Third party volumes increased significantly as a result of new contracts to manufacture proprietary brands for leading consumer goods companies. The profit contribution from Contract Manufacturing was allocated to Boots UK as in prior years. During 2008/09 we embarked on a programme to establish our Contract Manufacturing business, BCM, as a standalone business within the Group with effect from 1 April We believe that this change will enable it to compete more effectively, both internally and externally, by ensuring greater transparency and accountability, and by speeding up and improving the effectiveness of decision taking. Corporate Costs increased year on year to 47 million due to higher expenditure on resources necessary to drive key programmes across the Group. Associates and joint ventures Investment in associates and joint ventures, almost all of whom wholesale and distribute pharmaceuticals, remains an important component of our Group s activities. Our share of revenue of associates and joint ventures increased year on year by 34.8% to 3,348 million. Our share of trading profit at 112 million increased year on year by 34.9%, our share of post tax earnings before exceptional items increasing by 25.0% to 75 million, there being no exceptional items in the year we are reporting on. On a constant currency basis, adjusting for changes in associate and joint venture interests, like for like revenue increased by 5.7%, like for like trading profit by 13.1% and like for like post tax earnings before exceptional items by 6.3%. After a strong year on year performance for many years, the earnings of Hedef Alliance were lower, mainly as a result of lower gross margins due to product mix and reduced supplier discounts. During the year Hedef Alliance reduced headcount in its Turkish business in order to improve efficiency and performance. Alliance Healthcare Portugal continued to perform well, increasing both trading margin and profit. In China, Guangzhou Pharmaceuticals Corporation, our joint venture established in January 2008, has performed in line with our original expectations, substantially growing like for like trading profits. We do not comment specifically on the performance of Galenica and ANZAG as both are quoted companies who report their own results separately on different year ends. The Group has recorded a non cash exceptional charge of 15 million to impair its investment in ANZAG, based on a comparison of ANZAG s carrying value and estimated recoverable amount. Galenica published its 2008 Annual Report in March 2009 in which they reported net profit (after tax) up 40.4% year on year on net sales up 6.9%. In August 2008 we announced that we had signed a conditional agreement to acquire an initial 25% equity shareholding in one of Brazil s leading pharmaceutical wholesalers. As the conditions were not met, we chose not to proceed with the investment.

37 Operating and financial review 35 BCM manufactures our No7 Protect & Perfect range under strict quality control procedures. Investment in associates and joint ventures, almost all of whom wholesale and distribute pharmaceuticals, remains an important component of our Group s activities.

38 36 Alliance Boots Annual Review 2008/09 Financial review Basis of preparation The summarised consolidated financial statements presented in the Annual Review have been extracted from the Group s audited Consolidated Financial Statements for the year ended 31 March 2009, prepared in accordance with International Financial Reporting Standards. Full details of the accounting policies adopted by the Group are included within the Consolidated Financial Statements, which are published on the Company s website at or from the Company s registered office at Alliance Boots GmbH, Baarerstrasse 94, CH 6300 Zug, Switzerland. Financial summary for the year ended 31 March 2009 Underlying million Exceptional items million Amortisation of customer relationships and brands million IAS 39 timing differences million Statutory million Trading profit/profit from operations before associates and joint ventures 841 (121) (80) 640 Share of post tax earnings of associates and joint ventures Impairment of investment in associate (15) (15) Net finance costs (705) 78 (60) (687) Tax credit Underlying profit/profit for the year 236 (34) (57) (44) 101 Exceptional items Exceptional items comprised the following charges: million Costs in relation to Pharmaceutical Wholesale Division restructuring programme (60) Costs in relation to merger synergies and second phase of integration projects (36) Impairment of goodwill (25) Impairment of investment in associate (15) Impairment of available-for-sale investment (28) Discounts on repurchase of acquisition borrowings 106 Tax credit on exceptional items 24 (121) (34) The costs in relation to the Pharmaceutical Wholesale Division restructuring programme, merger synergies and second phase of integration projects comprised non cash related items of 10 million and cash related items of 86 million, of which just over half will be paid in future years. All the impairment charges were non cash. The impairment of available-for-sale investment was for the Group s investment in Cegedim to reflect the market value of its quoted shares at 31 March The discounts on repurchase of acquisition borrowings were for borrowings (principally mezzanine debt) acquired from holders in the secondary market. The nominal value of acquisition borrowings acquired was 191 million and the total discount, net of the related prepaid financing fees, has been accounted for as a loan redemption, reducing net borrowings. The cash cost of the repurchase was financed by our immediate parent company, of which 60 million was by way of new investment in the Company s ordinary share capital. Subsequent to 31 March 2009, the Group has agreed to repurchase further acquisition borrowings. The nominal value to be repurchased is 227 million for a cash cost of 142 million.

39 Operating and financial review 37 Net finance costs Underlying net finance costs were 705 million, the Group having benefited during the year from low interest rates. Net interest paid of 623 million was lower than the income statement charge, mainly due to the amortisation of prepaid financing fees of 46 million and rolled up interest on mezzanine debt of 27 million which is payable when the debt itself is repaid. The other principal non cash items within underlying net finance costs were in relation to retirement benefit obligations, which netted to a 7 million cost. This comprised the expected return on defined benefit schemes assets of 234 million within finance income, and interest on schemes liabilities of 241 million within finance costs. Statutory gross finance costs, after adjusting for these principal non cash costs, were 738 million. Cash flow During the year the Group generated a strong operating cash flow which was used to fund investment in growth. million Trading profit 841 Underlying depreciation and amortisation 255 Profit on disposal of property, plant and equipment (2) Exceptional items (86) Net movement in working capital and provisions 89 Movement in net retirement benefit assets (52) Cash generated from operations 1,045 Interest (623) Tax (23) Acquisitions (61) Net capital expenditure (272) Other 92 Total cash inflow 158 Tax Underlying tax was a credit of 25 million. This credit was a result of the recognition of deferred tax on capital allowances that have not been claimed due to taxable losses and the recognition of prior period UK losses. Tax paid was 23 million. Cash generated from operations totalled 1,045 million. This included a net working capital and provisions inflow of 89 million reflecting a number of initiatives to improve working capital management, including a project to bring UK creditors terms in line with market. The movement in net retirement benefits included a 20 million payment into the principal UK pension fund, in accordance with the agreement entered into in 2007, in addition to regular contributions. A net 61 million of cash was invested in acquiring businesses, net of cash and borrowings acquired, the principal acquisitions being Megapharm in Germany, Depolabo in France and Central Homecare in the UK, all of which were in our Pharmaceutical Wholesale Division. 19 pharmacies were acquired in our Health & Beauty Division, mainly in the UK. 272 million of cash was invested on net capital expenditure, which was 17 million more than the underlying depreciation and amortisation charge. This demonstrates our continuing commitment to invest in the long term development of Alliance Boots. Over three quarters of this investment was in our Health & Beauty Division, primarily in the UK. The key areas of expenditure in the UK were the roll-out of the your local Boots pharmacy branded format and retail store openings, refits and relocations, other major projects being the new automated central distribution centre in Nottingham for the supply chain reconfiguration programme and information technology projects. Capital expenditure in our Pharmaceutical Wholesale Division was mainly on upgrading our distribution network and on information technology. Other net cash inflows included 34 million of dividends received from our associate investments and 60 million from the issue of ordinary share capital.

40 38 Alliance Boots Annual Review 2008/09 Financial review continued Financial position At the year end net borrowings (defined as cash and cash equivalents, restricted cash, derivative financial instruments and borrowings net of amortised prepaid financing fees) were 9,034 million. The movement in the year was as follows: million Total cash inflow 158 Discount on repurchase of bank loans 106 Finance leases entered into (9) Amortisation of prepaid financing fees (46) Capitalised finance costs (27) Currency translation differences (410) Fair value adjustments on financial instruments (60) Net movement in borrowings in the year (288) Net borrowings at 1 April 2008 (8,746) Net borrowings at 31 March 2009 (9,034) In accordance with International Financial Reporting Standards, fees incurred relating to the raising of finance were netted off the related borrowing. These prepaid fees are amortised over the term of the financing being provided, resulting in an increase of net borrowings. Capitalised finance costs relate to the rolled up interest on the subordinated debt, which is payable when the debt itself is repaid. Currency translation differences predominantly relate to the retranslation of elements of the acquisition borrowings drawn down in Euros and Swiss Francs. The strengthening of both of these currencies relative to Sterling over the year gave rise to an increase in net borrowings. In accordance with our currency risk treasury policy, borrowings were drawn in these currencies to partially hedge the translation exposures on the net assets of our significant businesses and investments denominated in Euros and Swiss Francs. Shareholders equity Shareholders equity increased during the year by 169 million to 4,182 million at the year end. The movement in the year was as follows: million Profit for the year 101 Income and expense recognised directly in equity: Currency translation differences 94 Defined benefit schemes net actuarial losses (152) Net movements on available-for-sale reserve 21 Tax on items taken directly in equity 45 Issue of share capital 60 Net movement in shareholders equity in the year 169 Shareholders equity at 1 April ,013 Shareholders equity at 31 March ,182 Currency translation differences arose on the retranslation of the net assets of our non-sterling denominated businesses and investments, net of currency borrowings drawn to partially hedge these translation exposures. The gains were a result of the relative weakening of Sterling during the year. The net actuarial losses on defined benefit schemes were a result of lower than expected returns on pension fund assets, partially offset by reductions in liabilities due to higher government gilt rates used to discount pension obligations. Capital structure Our policy as a privately owned Group is to have an appropriately geared balance sheet. When considering appropriate debt levels we take into account both the level of unfunded pension liabilities and ongoing operating lease commitments. The Company s objectives when managing capital are to safeguard the Group s ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital. We finance our operations through a combination of bank borrowings, leases, capital market funding and retained profits to ensure that the Group has access to liquidity at all times and can fund itself in a cost-effective manner. Treasury policies The Group s treasury policies, which were approved by the Board on 4 June 2008, are reviewed at least annually. Group treasury has responsibility for the Group s funding and cash management, and manages the Group s financial counterparty credit, interest rate and currency risks. It enters into financial instruments solely for the purpose of managing these risks. It does not act as a profit centre and is not allowed to undertake speculative transactions. Treasury risk management activities (principally currency and interest rate risk) are undertaken to protect the economic value of the Group. Where possible, the Group seeks to apply hedge accounting to financial instruments transacted for the purpose of hedging underlying exposures.

41 Operating and financial review 39 Liquidity risk management Access to cost-effective funding is managed by maintaining a range of committed and uncommitted facilities, sufficient to meet anticipated needs, arranging funding ahead of requirements, and developing diversified sources of funding. Group liquidity is optimised through cash pooling and deposits with or loans from Group treasury companies. The Group s core borrowing is provided through committed bank facilities, partially drawn in Euros and Swiss Francs. These facilities mature between 2014 and The Group also has access to a committed 820 million revolving credit facility, 194 million of which has been utilised in providing guarantees, mainly in relation to the Boots Pension Scheme, and 626 million of which was available at the year end. This facility provides access to funding in a range of currencies and is available until In addition, the Group has in issue a 300 million Eurobond which matures and will be repaid on 26 May The Group s net borrowings vary throughout the year in a predictable seasonal pattern. Net borrowings are typically at their highest in the period September to November due to the working capital requirements of Christmas trading. The Group continues to monitor its net borrowings position on a daily basis against both budget and a rolling two month cash forecast. Interest rate risk management The Board s policy is to protect its ability to service its debt obligations by ensuring that floating rate interest payments on not less than 50% of the principal outstanding under the facilities raised to finance the acquisition of Alliance Boots plc are hedged. Exposures are hedged through a combination of interest rate caps and interest rate swaps. At the year end 62% of the Group s total borrowings were at fixed or capped interest rates. Currency risk management The Group owns significant businesses and investments in continental Europe which cause a translation exposure on consolidation of their income statements and balance sheets. The Group partially hedges these translation exposures with borrowings denominated in the same currency. At the year end 2,271 million of the Group s net borrowings were in Euros. The Group has a policy of hedging material currency denominated transaction exposures, other than those offset by corresponding translation exposures, by entering into forward currency exchange contracts where such exposures arise. In the past year, general market conditions have created discontinuities in some foreign exchange markets which have made hedging uneconomic or unavailable. We have since seen a reversion to more normal markets and hedging activities have been resumed. The significant exchange rates relative to Sterling used in the preparation of financial information were as follows: Average 2008/09 At 31 March 2009 Pro forma average 2007/08 At 31 March 2008 Euro Turkish Lira Swiss Franc Credit risk management The Group protects itself against the risk of financial loss arising from failure of financial counterparties by setting ratings based limits to the maximum exposure to individual counterparties or their groups. Limits are set by reference to ratings issued by major rating agencies. Credit risk exposure to commercial counterparties is managed through credit control functions in each of our businesses. New customers are credit checked, customer limits are reviewed at least annually and aged debtor reviews are undertaken regularly. At the year end there were no significant concentrations of credit risk. The maximum exposure to credit risk is represented by the carrying amount of each financial asset, including derivative financial instruments, at the balance sheet date. Retirement benefit obligations The total charge before tax for retirement benefit obligations was 61 million. This comprised 54 million of costs within profit from operations and net finance costs of 7 million. At the year end the total net retirement benefit surplus on an accounting basis was 188 million before deferred tax. The principal scheme is the Boots Pension Scheme. This scheme, which is closed to new members, has continued with its investment strategy of planning to hold 15% of its assets in equity and property to back long term liabilities, and 85% of its assets in a diverse portfolio of high quality bonds to match liabilities up to 35 years. The other large scheme is the Alliance UniChem UK Group Pension Scheme. This scheme, which is also closed to new members, plans to hold 50% of assets in return-seeking asset classes such as equities and 50% in investments with cash flows which match projected pension obligations under a liability-driven investment strategy. Both schemes entered into Memoranda of Understanding during 2007/08 with the Group, the main elements of which were an agreement that conservative investment strategies would be maintained, and a commitment to pay additional contributions. The additional contributions comprised 102 million in 2007/08 with a further 366 million to be made over 10 years from August million was paid in 2008/09, with the same amount committed in each of the following four financial years.

42 40 Alliance Boots Annual Review 2008/09 Risk management Like all businesses, Alliance Boots continues to face a variety of risks. Here we provide an update on our approach to identifying, monitoring and assessing risks and the steps we take, where necessary, to mitigate them. Our risk management process Our executive Directors and the Director of Internal Audit & Risk Management play the leading role, monitoring the overall risk profile and regularly reporting to the Board through the audit committee. The process of risk identification is facilitated by the use of risk registers for each of our businesses. In addition, the Board through the executive Directors is responsible for determining clear policies as to what Alliance Boots considers to be acceptable levels of risk. These policies seek to enable people throughout our Group to use their expertise to identify risks that could undermine performance and to devise ways of bringing them to within acceptable levels. Where we identify risks that are not acceptable, we develop action plans to mitigate them with clear allocation of responsibilities and timescales for completion and ensure that progress towards implementing these plans is monitored and reported upon. The risks we face Impact of regulation Risk Alliance Boots operates in regulated markets and could be adversely affected by changes to existing regulation, new regulation and/or failure to comply with regulation. Businesses in our Health & Beauty Division could be adversely affected by changes to licensing regimes for pharmacies, prescription processing regimes or reimbursement arrangements. Businesses in our Pharmaceutical Wholesale Division are subject to a range of regulations relating to such things as product margins, product traceability and the conditions under which products must be stored. Changes to these could affect profitability. Mitigation We seek to control this type of risk through active involvement in policy-making processes, understanding and contributing to government thinking on regulatory matters and building relationships with regulatory bodies directly and through representation in relevant professional and trade associations. We also seek to mitigate the risk of regulatory changes in any particular market by operating in many countries. Changes and trends in consumer behaviour Risk Alliance Boots could be adversely affected by changes in consumer spending levels, shopping habits and preferences, including attitudes to our retail and product brands. Mitigation Our commercial skills and ability to respond flexibly to changing consumer demand are highly developed. Our strategy is to continue to enhance our market leading position in pharmacy-led health and beauty retailing in the UK, backed by differentiated brands and expert customer service. Competition Risk Changes in market dynamics or actions of competitors or manufacturers could adversely impact Alliance Boots. Businesses in our Health & Beauty Division have a wide variety of competitors, including other pharmacies, supermarkets and department stores. Businesses in our Pharmaceutical Wholesale Division face competition from direct competitors and alternative supply sources such as importers and manufacturers who supply direct to pharmacies. Mitigation In our Health & Beauty Division our strategy is to capitalise on the potential and strength of our leading brands and the trust in which they are held, and to build strong relationships with customers and suppliers. In our Pharmaceutical Wholesale Division we continue to expand the scope of our operations in response to a changing marketplace, including entering into distribution agreements with manufacturers who wish to sell direct to pharmacies. Our successful development of own brand generic medicines and added-value service differentiates our offering to pharmacists and strengthens our competitive position. Health, safety and environmental risks Risk Alliance Boots could suffer reputational damage caused by a major health and safety or environmental incident. Mitigation We set standards throughout the Group which are closely monitored and regularly audited. Health, safety and environmental incidents are logged and analysed in order to learn the necessary lessons. Any major incident is promptly reported to and investigated by the Group s executive committee. Product/services risk Risk Alliance Boots could be adversely impacted by the supply of defective products or provision of inadequate services. In particular, this could come from allowing the infiltration of counterfeit products into the supply chain, errors in re-labelling of products and contamination or product mishandling issues. Through our pharmacies, we are also exposed to risks relating to the professional services we provide. Mitigation Throughout our Group we have robust purchasing and manufacturing processes, well developed contractual controls in relation to suppliers and a cohesive product control framework. This includes specific controls for the identification of counterfeit product. In our pharmacies we have a rigorous governance framework in place and we conduct regular dispensing compliance reviews to ensure that individual pharmacies follow approved processes.

43 Risk management 41 Major operational business failures Risk Alliance Boots could be adversely impacted by a major failure of its distribution centres and logistics infrastructure, IT systems or operational systems of key third party suppliers. Mitigation We operate rigorously audited control frameworks, regularly update and test business continuity plans and continually seek to improve control of core business processes, both through self-assessment and through specific programmes relating to the delivery of key strategic projects. Increased costs Risk Operating costs may be subject to increases outside the control of our businesses which could adversely impact Alliance Boots. Mitigation We use procurement professionals and sophisticated procurement techniques to purchase goods and services on a national and international basis. We carefully control operating costs such as payroll and have a property management function to manage lease negotiations in the UK. Acquisitions Risk Failure to select suitable acquisitions at attractive prices, conduct appropriate due diligence and integrate into the Group, particularly where acquisitions are in new geographic markets, could adversely impact the performance of Alliance Boots. Mitigation We have extensive experience in identifying, making and successfully integrating acquisitions based on well established processes led by a dedicated mergers and acquisitions team. We closely monitor business performance of new acquisitions and conduct post-acquisition reviews. Impact of the global banking crisis on key suppliers Risk Alliance Boots could be affected adversely by the impact of the global banking crisis on our key suppliers. Mitigation We have a rigorous process of identifying and monitoring all business critical suppliers in order to assess risks faced by them and we develop appropriate contingency plans for suppliers we consider to be vulnerable. Currency exchange Risk Alliance Boots has transaction currency exposures relating to the import and export of goods in currencies other than businesses functional currencies. We also have translation currency exposures relating to profits and net assets denominated in currencies other than Sterling. Mitigation We have rigorous policies and procedures in place to manage and report transaction exposures. Translation exposures are partially mitigated by ensuring that borrowings are denominated in the major currencies in which we operate. Funding and interest rate risks Risk Alliance Boots could be adversely impacted by a failure to renew existing funding arrangements when they expire, a failure to meet banking covenants or by a failure to contain borrowing requirements within existing facilities. Mitigation We have rigorous treasury policies and procedures to ensure that we have funding in place at all times with appropriate covenants to meet the needs of the Group. We prepare long term cash/borrowings projections for each business and the Group which are periodically reviewed. We also prepare annual cash/borrowings budgets by day for each business and the Group and, similarly, every month we prepare cash/borrowings forecasts by day covering two months forward. We report and monitor actual cash/borrowings by business and for the Group on a daily basis, comparing this to budgets and short term cash/ borrowings forecasts. Tight controls are in place over the approval of capital expenditure and other long term investments, including the purchase of new businesses and investments in associates and joint ventures. We protect against interest rate escalation through proactive treasury management and forecasting, including the use of interest rate caps and fixed rate borrowing. Pension contributions Risk Alliance Boots could be required to increase the funding of its defined benefit pension schemes due to lower than expected pension fund investment returns and/or increased life expectancy of scheme members. Mitigation We retain independent actuaries to review investment performance, provide periodic investment advice and advise on appropriate actuarial assumptions and sensitivities. All UK defined benefit schemes are closed to new entrants. Data protection Risk Alliance Boots processes a significant volume of confidential personal and business data and could be adversely affected if any of this data was accidentally or maliciously lost. Mitigation We have rigorous Group information security policies and procedures such as strong perimeter controls, access controls and data encryption. We are committed to the Payment Card Industry Data Security Standards and ensure that all processing done by ourselves complies with data protection legislation.

44 42 Alliance Boots Annual Review 2008/09 Our people

45 Our people 43 We recognise that the success of Alliance Boots as a global organisation relies on the loyalty, passion and drive of our people. Alliance Boots is a major employer in the UK and many other countries. At the year end the Group, including our associates and joint ventures, employed over 115,000 people in more than 20 countries. We recognise that the success of our Group is a result of the loyalty, passion and drive of our people and greatly appreciate all their efforts. We are highly committed to the wellbeing of our people and wherever we operate seek to be recognised as an employer of choice. Our experience continues to demonstrate that motivated and enthusiastic people deliver great customer service and care. We aim to create a culture throughout the Group that fosters the commitment and trust to achieve this. Our aim is to ensure that all our people are informed about and engaged in their part of the business locally, augmented with deeper understanding about the Group overall and its future direction. We communicate with our people through a wide variety of channels, reflecting the diversity and geographical spread of our businesses. We have a variety of approaches to fulfil these aims including regular face-to-face team briefings, conference calls, magazines, newsletters and a number of intranet sites. Feedback is sought on the effectiveness of our communications and surveys have been instituted in a number of our businesses to gauge the opinions of our people and what is important to them. We continue to score highly in the Great Place To Work surveys covering the Boots activities in the UK, using feedback to gauge the effectiveness of our management in the way that our people are led. We are a diverse Group of many different nationalities and talents. It is critical to our future success that we continue to nurture this diversity and we have designed our employment policies to achieve this. We aim to provide equal opportunities, regardless of sex, race, religion or belief, sexual orientation, disability or ethnic origin. We do all that is practicable to meet our responsibilities towards the employment and training of disabled people. Where one of our people becomes disabled, every effort is made to provide continuity of employment in the same job or a suitable alternative. We believe in open dialogue on how our businesses are performing and in forging meaningful partnerships with our people to achieve this. We communicate closely with works councils and other employee forums around Europe and have two European Works Councils to brief and consult with representatives on pan-european issues. We encourage the further interest and involvement of our people in the Group s future through reward schemes that are linked to business and individual performance. For example, we have introduced new We continue to score highly in the Boots UK Great Place To Work surveys. We believe in open dialogue with our people as to how our businesses are performing. incentive schemes in the Boots UK stores organisation over the last year with an explicit link to the service provided to our customers. There are a number of other recognition schemes within our businesses to recognise and reward excellence, celebrating the particular commitment and achievements of our people.

46 44 Alliance Boots Annual Review 2008/09 Corporate social responsibility We are committed to excellence in our approach to corporate social responsibility, both in terms of what we do and how we communicate. Our approach is to ensure that our business practices are socially, environmentally and economically sustainable across the Group. Each year we set ourselves new targets and have established collaborative internal networks to share best practice. The social responsibilities committee keeps under review and advises the Board on the Group s policies and practices in the area of corporate social responsibility, including issues related to the environment, health and safety, diversity and equal opportunities, race relations, employment of people with disabilities, charitable giving and ethical matters and the Group s values and standards. We monitor our activities and progress through a corporate social responsibility scorecard, which is segmented into four areas: community; environment; marketplace; and workplace. In each of these areas our businesses have key objectives and priorities which are embedded into the daily activities of our people. The support of our people for this agenda is evidenced by the external recognition Alliance Boots continues to attain. In May 2008 we were awarded gold status for our achievements in the Sunday Times Business in the Community Companies that Count survey. In addition, our Spanish wholesale business won the Best Initiatives 2008 award in the corporate social responsibility category for its internal campaign, Actúa Ahora (Act Now), awarded by Correo Farmacéutico, the leading weekly Spanish pharmaceutical publication. In February 2009 we were delighted to welcome His Royal Highness The Prince of Wales on a visit to our Boots site in Nottingham. This tour gave His Royal Highness the opportunity to discover more about our corporate social responsibility activities, with a particular focus on environmental progress, given Boots commitment to The Prince s May Day Network on climate change. As in previous years, a separate 2008/09 Corporate Social Responsibility Report will be published on our website in September This will give a comprehensive overview of the Group s corporate social responsibility activities and will again be written following Global Reporting Initiative guidelines and criteria.

47 Corporate social responsibility 45 We were delighted to welcome His Royal Highness The Prince of Wales to our Boots site in Nottingham. This tour gave His Royal Highness the opportunity to discover more about our corporate social responsibility activities. Our high standards of social responsibility are instrumental in maintaining our reputation and standing as a leading pharmacy-led health and beauty group. We are committed to retaining the trust that is placed in us by all those we do business with. I have every confidence that we are on track to achieving our objective of building a sustainable world-leading group. Ornella Barra, Chairman of the social responsibilities committee

48 46 Alliance Boots Annual Review 2008/09 Corporate social responsibility continued In our 2007/08 Corporate Social Responsibility Report we set ourselves a series of targets to be achieved in 2008/09. A summary of progress against these targets is set out below: Community Target: To achieve take-up of Give As You Earn Schemes across the Group to 5% of employees (in countries where such schemes are allowed) Payroll giving schemes have now been introduced across all our UK businesses, with 3.1% of eligible employees now contributing to Give As You Earn Schemes. We are working to increase this number by promoting the schemes through various channels, ranging from articles in internal publications, messages on salary slips and details being included as part of the induction programme for new employees. In addition we shortly plan to introduce a Give As You Earn Scheme in our business in the Republic of Ireland, where such schemes are also common practice. Target: To work with health bodies and government departments where we operate to deliver initiatives that improve the health and wellbeing of people We work with governments and health bodies to support their relevant healthcare activities where we can. Key initiatives launched in 2008/09 include the promotion of suncare treatments in Spain and in the UK. Alliance Healthcare also continued to work with NHS Coventry in the UK to facilitate the expansion of weight management programmes in independent pharmacies. The success of the Coventry scheme has led to us securing further funding from the Department of Health for five other similar projects. In addition in 2008/09 around 600 of Boots pre-registration pharmacists were involved in community healthcare events around the UK, primarily through working with the Healthy Living Alliance. Target: To develop campaigns and information that support the public health agenda Alliance Boots, through its trusted brands and extensive networks, is well placed to provide information on a wide range of public health issues to the general public. For example, in the UK in 2008/09 we continued our work with The Eve Appeal to raise awareness of the signs and symptoms of ovarian cancer and in France our Alphega Pharmacy network ran a high blood pressure campaign. Target: To share knowledge and experiences across the Group at a corporate social responsibility meeting A network of individuals, known as corporate social responsibility champions, has been established throughout the Group and each champion is helped by an experienced corporate social responsibility buddy. The champions met regularly in 2008/09 to exchange information and best practice. In addition, a system was put in place during the year which enables queries to be raised with our corporate social responsibility team, with answers being shared across the network. Target: To develop charitable giving programmes in each country where Alliance Boots has a business By the year end each of our businesses had in place a charitable giving programme. The amounts contributed during 2008/09 varied from business to business, but the principle is now firmly established across the Group. Our people are encouraged to support their business charitable giving with their own fund-raising activities. Environment Target: To improve sustainability of our business operations. It is recognised that all businesses are at different stages on this journey and during the course of the year each will develop their own strategy which is appropriate to their circumstances and those prevailing in their country of domicile We are committed to reducing the carbon intensity of our businesses. In order to achieve this, we continue to put in place specific carbon reduction initiatives which incorporate our products, services and buildings. For example, during the year we refurbished and installed enhanced temperature management controls in over 45 of our larger Boots stores in the UK, which will reduce energy consumption. Boots continues to work with Loughborough University to find new and more sustainable ways of delivering our products and services to our customers, and in our Pharmaceutical Wholesale Division we utilise software which optimises delivery routes and improves fuel consumption and emissions. In making investment decisions, our people naturally seek to choose more carbon-efficient alternatives. In terms of energy use, store design and transport purchase decisions, lower carbon options are considered. The key to our approach is to continue to make prudent investments that deliver both cost savings and reduce our carbon footprint. In June 2008 Boots obtained a grant from The Technology Strategy Board in the UK, an executive non-departmental public body established by the Government in 2007, to develop, in collaboration with both academic and industrial partners, processes that could enable algae to be grown utilising carbon dioxide emissions from the energy centre in Nottingham. An important ambition for the project is that the algae will be used as an alternative starting point to where petrochemical sources of ingredients are currently used in our products. This technology is still in its early stages but, if successful, the energy centre s emissions could be significantly reduced. Around 50% of the waste we create as a Group is recycled. Although we are pleased with the progress we are making in terms of recycling, we believe the key is to reduce the overall amount of waste created, rather than simply recycling more. We continue to challenge ourselves in this area, which includes initiatives such as improving Boots product delivery processes enabling the removal of retail transit packaging at source.

49 Corporate social responsibility 47 We manage our businesses responsibly and continually seek to improve our impact on the environment through innovation and efficiency. Marketplace Target: For the directors and employees of Alliance Boots to continue to act in accordance with approved corporate governance directives and the Group s Code of Conduct We continue to promote and monitor our compliance with the Group s Code of Conduct. During the year we carried out a communications campaign to inform our people of the Code, which has also become an established part of the induction programme for new employees. In addition, key policy documents on issues such as health and safety are widely available to our people through our intranets. Target: To act with complete integrity in the development of new products and services and maintain existing standards of stewardship for those that already exist At all times we look to improve the sustainability of our products and services. For example, with our Botanics branded products we look to use plant-based rather than mineral ingredients where possible and work with the Royal Botanic Gardens in Kew, UK, to develop our understanding in this area. In addition, we are finding ways to make our product packaging more sustainable. As signatories to the Courtauld Commitment, Boots UK has worked with WRAP (Waste & Resources Action Programme) to design out the growth of packaging waste and increase the use of recycled materials. In addition, as part of Boots UK work with the Carbon Trust on product carbon footprinting, we have identified and are reducing the carbon impact of retail and transit packaging. Target: To raise over 1 million for charity partners across our businesses During 2008/09 we worked on a range of charitable initiatives in many countries, including BBC Children In Need and the Eve Appeal in the UK and Klokánek, a children s charity in the Czech Republic. In 2008/09 we raised around 1.5 million for our charity partners. Target: Extend the scope of our supplier verification programme beyond the existing Boots brand supplier framework to include the manufacturing sites of other suppliers of own label goods to Alliance Boots The first steps have been taken to broaden the scope of our existing supplier verification process. The verification programme was started to be rolled out for our Alvita products during the year. Workplace Target: To reinforce our approach to health and safety reporting across the Group Health and safety information relating to legally reported accidents, pharmacy dispensing errors and environmental incidents is collected on a monthly basis across our businesses using standardised criteria and definitions. This information is reported to the Board each month and reviewed at every Board meeting. Target: To deliver a workplace health programme that is aligned to the business and makes a positive contribution to the health and wellbeing of our people A number of our businesses have now established health leadership teams which aim to implement healthcare initiatives relevant to their people. These include healthy eating and fitness programmes as well as healthy heart campaigns. The key to this work has been Alliance Boots involvement with Business in the Community s Business Action on Health Leadership Team, which is chaired by Alex Gourlay, Chief Executive of our Health & Beauty Division. The lessons learned from this are being shared across the Group through our network of corporate social responsibility champions. Regular communication across the Group ensures that our teams are kept informed of all key events and announcements. Target: To introduce a localised form of Great Place To Work survey to all parts of the Group The Great Place to Work employee survey, which measures the level of engagement our people have within the workplace, was developed by Boots and remains an important element of their annual human resources programme. We have shared this knowledge and experience amongst human resources colleagues across the Group and, with sensitivity to cultural differences and national legislation, have implemented aspects of the programme where we can. Target: To continue to communicate regularly with all employees across the Group Regular communication across the Group ensures that our people are kept informed of all key events and announcements. There are various channels used to achieve this goal, which include newsletters, internal announcements and a number of intranet sites.

50 48 Alliance Boots Annual Review 2008/09 Board of Directors Stefano Pessina Executive Chairman Stefano Pessina was appointed Executive Chairman of Alliance Boots in July 2007 having previously been its Executive Deputy Chairman. Prior to the merger of Alliance UniChem and Boots Group he was Executive Deputy Chairman of Alliance UniChem, previously having been its Chief Executive for three years up until December Stefano was appointed to the Alliance UniChem Board in 1997 when UniChem merged with Alliance Santé, the Franco-Italian pharmaceutical wholesale group which he established in Italy in He is an engineer by profession. George Fairweather Group Finance Director George Fairweather was appointed Group Finance Director of Alliance Boots in July 2006 having joined Alliance UniChem in the same position in Previously he was Group Finance Director of Elementis and Dawson International and also worked for Dixons Group, Procter & Gamble and KPMG Thomson McLintock. He was also a non-executive director of Mitchells & Butlers for nearly six years up until December George is a member of The Institute of Chartered Accountants of Scotland. Marco Pagni Group Legal Counsel & Chief Administrative Officer Marco Pagni is Group Legal Counsel & Chief Administrative Officer having been appointed a director of Alliance Boots in July Previously he was General Counsel and Company Secretary of Alliance Boots having joined Alliance UniChem in the same position in Prior to this Marco held senior management positions in McDonalds and Texas Instruments having started his career as a law lecturer at Oxford University before being admitted to the Bar. Ornella Barra Chief Executive, Pharmaceutical Wholesale Division Ornella Barra was appointed Chief Executive of the Pharmaceutical Wholesale Division in January 2009, having previously been appointed to the Board of Alliance Boots in July 2006 as Wholesale & Commercial Affairs Director. Prior to the merger of Alliance UniChem and Boots Group she was executive Director of Alliance UniChem with wholesale and commercial affairs responsibilities, having been appointed to its Board in 1997 when Alliance Santé merged with Alliance UniChem. Before that she was a Director of Alliance Santé and General Manager of Alleanza Salute Italia. She is a pharmacist by profession and is a special professor at the University of Nottingham s School of Pharmacy. Steve Duncan Executive Chairman, Health & Beauty Division Steve Duncan was appointed Executive Chairman of the Health & Beauty Division in July 2007 having previously been Community Pharmacy Director. Prior to the merger of Alliance UniChem and Boots Group he was the Executive Director of Alliance UniChem responsible for its retail division. Previously he was Managing Director of Alliance Pharmacy, having joined the business in He is a pharmacist and a Fellow of the Royal Pharmaceutical Society of Great Britain. Alex Gourlay Chief Executive, Health & Beauty Division Alex Gourlay was appointed to the Board of Alliance Boots in January 2009 when he became Chief Executive of the Health & Beauty Division. He was previously Managing Director of Boots UK and a member of the Group operating committee following the acquisition of Alliance Boots plc by AB Acquisitions Limited in Prior to this he was Healthcare Director of Boots the Chemists, having held senior management positions in store operations and human resources. He is a pharmacist and a member of the Royal Pharmaceutical Society of Great Britain.

51 Governance 49 Dominic Murphy Kohlberg Kravis Roberts Dominic Murphy is a Partner of Kohlberg Kravis Roberts & Co. L.P. (KKR) and head of its healthcare industry team in Europe. Prior to joining KKR he was a Partner at Cinven, having previously worked for 3i. Mattia Caprioli Kohlberg Kravis Roberts Mattia Caprioli is a Director of Kohlberg Kravis Roberts & Co. L.P. (KKR). He is also a director of Legrand in which KKR has an investment. Prior to joining KKR in 2001 he worked for Goldman Sachs International. Sergio D Angelo Kohlberg Kravis Roberts Sergio D Angelo is a Principal of Kohlberg Kravis Roberts & Co. L.P. (KKR). Prior to joining KKR in 2005 he worked for BC Partners having previously worked for Citigroup Nick Land Non-executive Director Nick Land was appointed as a non-executive Director in March 2008, is Chairman of the audit committee and is a member of the social responsibilities committee. Nick is a non-executive director of Royal Dutch Shell, Vodafone Group, BBA Aviation and Ashmore Group. Previously he was a partner and Chairman of Ernst & Young in the UK and a member of its Global Executive Board. He is a member of the Institute of Chartered Accountants in England and Wales. 2. Chris Britton Non-executive Director Chris Britton was appointed as a non-executive Director in June 2008 and is a member of the social responsibilities committee. Chris was an Executive Board Member and President Baby Food Division of Royal Numico, the Netherlands based publicly listed multinational infant and clinical nutrition group, up until its acquisition by Danone in November Before that he worked for Diageo in various marketing and general management positions, latterly as Global Marketing Director. 3. Tony De Nunzio CBE Non-executive Director Tony De Nunzio was appointed as a non-executive Director in June 2008, is Chairman of the remuneration committee and is a member of the audit committee. Tony is Executive Chairman of Maxeda, a private Netherlands-based retail group with stores in 12 countries, in which KKR funds hold a significant investment. Prior to joining Maxeda in 2005 he was President and Chief Executive Officer of ASDA having previously been Chief Financial Officer. Tony also worked for Unilever, L Oréal and PepsiCo in various finance positions. 4. Etienne Jornod Non-executive Director Etienne Jornod was appointed as a non-executive Director in March Etienne, who is based in Switzerland, is Chairman and Chief Executive Officer of Galenica, an associate company, and was a non-executive director of Alliance UniChem for six years until its merger with Boots Group. He was also a non-executive Director of PubliGroupe up until April 2009.