Pihlajalinna Oyj

Vuosikertomus 2023 74370058MTRLEDOCHV67 2023-01-01 2023-12-31 74370058MTRLEDOCHV67 2023-12-31 74370058MTRLEDOCHV67 2022-12-31 74370058MTRLEDOCHV67 2022-01-01 2022-12-31 74370058MTRLEDOCHV67 2021-12-31 74370058MTRLEDOCHV67 2021-12-31 ifrs-full:IssuedCapitalMember 74370058MTRLEDOCHV67 2022-12-31 ifrs-full:IssuedCapitalMember 74370058MTRLEDOCHV67 2021-12-31 PIH:ReserveForInvestedUnrestrictedEquityMember 74370058MTRLEDOCHV67 2022-12-31 PIH:ReserveForInvestedUnrestrictedEquityMember 74370058MTRLEDOCHV67 2021-12-31 ifrs-full:RetainedEarningsMember 74370058MTRLEDOCHV67 2022-01-01 2022-12-31 ifrs-full:RetainedEarningsMember 74370058MTRLEDOCHV67 2022-12-31 ifrs-full:RetainedEarningsMember 74370058MTRLEDOCHV67 2021-12-31 ifrs-full:NoncontrollingInterestsMember 74370058MTRLEDOCHV67 2022-01-01 2022-12-31 ifrs-full:NoncontrollingInterestsMember 74370058MTRLEDOCHV67 2022-12-31 ifrs-full:NoncontrollingInterestsMember 74370058MTRLEDOCHV67 2023-12-31 ifrs-full:IssuedCapitalMember 74370058MTRLEDOCHV67 2023-12-31 PIH:ReserveForInvestedUnrestrictedEquityMember 74370058MTRLEDOCHV67 2022-12-31 ifrs-full:ReserveOfGainsAndLossesOnFinancialAssetsMeasuredAtFairValueThroughOtherComprehensiveIncomeMember 74370058MTRLEDOCHV67 2023-01-01 2023-12-31 ifrs-full:ReserveOfGainsAndLossesOnFinancialAssetsMeasuredAtFairValueThroughOtherComprehensiveIncomeMember 74370058MTRLEDOCHV67 2023-12-31 ifrs-full:ReserveOfGainsAndLossesOnFinancialAssetsMeasuredAtFairValueThroughOtherComprehensiveIncomeMember 74370058MTRLEDOCHV67 2023-01-01 2023-12-31 ifrs-full:RetainedEarningsMember 74370058MTRLEDOCHV67 2023-12-31 ifrs-full:RetainedEarningsMember 74370058MTRLEDOCHV67 2023-01-01 2023-12-31 ifrs-full:NoncontrollingInterestsMember 74370058MTRLEDOCHV67 2023-12-31 ifrs-full:NoncontrollingInterestsMember 74370058MTRLEDOCHV67 2022-01-01 2022-12-31 ifrs-full:ReserveOfGainsAndLossesOnFinancialAssetsMeasuredAtFairValueThroughOtherComprehensiveIncomeMember 74370058MTRLEDOCHV67 2023-12-31 PIH:Hybridbond 74370058MTRLEDOCHV67 2023-01-01 2023-12-31 PIH:Hybridbond iso4217:EUR iso4217:EUR xbrli:shares REPORT BY THE BOARD OF DIRECTORS |AUDITED FINANCIAL STATEMENTS 2 Report by the Board of Directors for the financial year 1 Jan–31 Dec 2023 CONTENTS Pihlajalinna’s strategy 2021–2025 3 The operating environment 3 Revenue by customer group 4 Seasonal variation 6 Consolidated revenue and result 6 Consolidated statement of financial position and cash flow 8 Hybrid Bond 8 Financing arrangements 8 Acquisitions and capital expenditure 9 Research and development 9 Personnel 9 Management Team 9 Board of Directors 9 Shareholders’ Nomination Board 10 Committees nominated by the Board 10 Remuneration of the members of the Board of Directors 10 Board authorisations 10 Auditors and auditing 10 Shares and shareholders 11 Risk management 11 Risks and uncertainties in business operations 11 Flagging notifications 13 Share-based incentive schemes 13 Repurchase of own shares 13 The Board of Directors’ proposal for profit distribution and the Annual General Meeting 2024 13 Pihlajalinna’s outlook for 2024 14 Corporate Governance Statement 14 Statement of non-financial information 14 Events after the financial period 22 Key financial figures 23 Share-related information, tables 23 Quarterly information 24 Calculation of key financial figures and alternative performance measures 25 Reconciliations of alternative performance measures 26 Shares and shareholders 29 Shareholding of the management 30 Signatures to the Report by the Board of Directors and the Financial Statements 85 REPORT BY THE BOARD OF DIRECTORS |AUDITED FINANCIAL STATEMENTS 3 Report by the Board of Directors for the financial year 1 Jan–31 Dec 2023 Pihlajalinna’s strategy 2021–2025 Pihlajalinna is one of the leading private social and healthcare service providers in Finland. The Group offers comprehensive, high-quality and impactful private clinic and hospital services, as well as occupa- tional healthcare and insurance cooperation services. Pihlajalinna’ s shares are listed on Nasdaq Helsinki Ltd. Pihlajalinna’s customers include private individuals, corporations, in- surance companies and wellbeing services counties, for whom the company provides a wide range of local and remote services. In the public sector, the company provides social and healthcare production models in which cooperation guarantees high-quality and impactful services. Pihlajalinna’ s mission is to help to live a better life. The company’s values are energy, ethics and open-mindedness. Strategic priorities Pihlajalinna’s two strategic priorities under the company’s strategy for 2021–2025 are the renewal of services for private customers and cooperation in social and healthcare services. We continuously develop the service experience for consumers, serve our customers on an increasingly multi-channel basis, and have an impactful presence where our customers are. In 2023, the wellbeing services counties significantly changed the op- erating environment in social and healthcare services. Our strong ex- perience of working as a partner to public healthcare helps us solve the future challenges of society in cooperation with the wellbeing services counties. The strategy is executed by enhancing digitalisation and the cus- tomer, employee and practitioner experience, and by focusing on the development of operational performance, impactful and sustainable business, and data orientation. Objectives for the strategy period Revenue growth of EUR 250 million by the end of 2025, using 2021 as the baseline (EUR 577.8 million). One-third of the growth is expected to arise from the public sector and the remaining two-thirds from cor- porate and private customers. Adjusted operating profit before the amortisation and impairment of intangible assets (EBITA) over 9 per cent of revenue in the long term. The long-term target for net debt is less than 3x adjusted EBITDA. In accordance with Pihlajalinna’s specified dividend policy, Pihla- jalinna aims to distribute dividend or capital repayment minimum of one-third of the earnings per share, taking into account the com- pany’s strategy and financial position. Performance indicators Operating ethically, sustainably and responsibly provides the founda- tion for achieving the strategic objectives. Their achievement is meas- ured by, for example, financial indicators, the increase in the number of appointment times and procedures available to customers, and Net Promoter Scores (NPS), which measure the customer experience and employee experience. The operating environment The demand for healthcare services in Finland The size of the Finnish healthcare service market is estimated to be about EUR 15 billion, of which approximately 75 per cent is funded and produced by the public sector. During 2023, the use of healthcare ser-vices was considerably higher than in the previous year (Nordea Kulutusmittari 12/2023). The demand for private medical expense in- surance is also continuing to grow. Over 1.3 million people are al- ready covered by private medical expenses insurance in Finland. Of these, approximately 466,000 are children, 556,000 adults and 285,000 insured through companies. REPORT BY THE BOARD OF DIRECTORS |AUDITED FINANCIAL STATEMENTS 4 Queues for treatment and the care guarantee Queues for non-urgent specialised care continue to grow in the public sector. According to the National Institute for Health and Welfare, nearly 178,000 patients were waiting for access to non-urgent spe- cialised care at the end of August 2023. Of these, 17 per cent had been waiting for access to care for over six months. The legislation concerning the care guarantee in primary care was amended on 1 September 2023. Following the amendment, patients must receive access to care within 14 days of the assessment of the need for care, compared to three months under the previous legisla- tion. This led to a levelling off in the trend of growing queues for treatment, which had continued for the two preceding years. Waiting times de-creased in October 2023. In outpatient care in October, 82 per cent of appointments took place within a week and 89 per cent within two weeks. From November 2024 onwards, patients must re- ceive access to care within seven days. Wellbeing services counties and ensuring the provision of so- cial and healthcare services for the population The responsibility for organising and producing social and healthcare services was transferred to the 21 wellbeing services counties and the City of Helsinki on 1 January 2023. The need for social and healthcare services will grow further due to the ageing of the population, and to address the situation, cooperation between public and private ser- vices is required. Private sector operators produce approximately 22 per cent of all social and healthcare services. Various studies have shown that the service production model with the highest efficiency in terms of costs and resources is the multi-producer model, which in- volves service production and provision through cooperation be- tween the public sector, the private sector and non-profit organisa- tions. The new government programme aims to control the increase of the costs of social and healthcare services, tighten the management of the wellbeing services counties, and increase the share of private companies in the provision of legally required social and healthcare services. In the government programme, a total of EUR 335 million has been allocated to reducing queues for treatment. The more ac- tive use of ser-vice vouchers and other outsourced services to shorten the queues for treatment is evident in the wellbeing services counties, for example in North Savo and Western Uusimaa. In the HUS area particularly queues for treatment in artificial joint and back surgery and neurosurgery are reduced. In September 2023, the Minis- try of Social Affairs and Health announced that the Kela reimburse- ments for private medical appointments will increase from EUR 8 to an average of EUR 30 for in-person consultations and EUR 25 for re- mote consultations. The change took effect at the beginning of 2024. Labour force availability and development of wages in the so- cial and healthcare sector The labour shortages in the social and healthcare sector make access to treatment slower, and the recruitment of competent personnel is challenging. The 2023 labour forecast for the municipal sector esti- mates that the shortage of social and healthcare service professionals in the public sector alone was nearly 38,000 persons in 2022. The Ministry of Finance estimates that as many as 200,000 new workers will be needed in social and healthcare services over the period 2020–2035. The implementation of the 0.7 staffing ratio for 24-hour elderly care is postponed from 2023 to 2028 due to the new government pro- gramme. The government programme also notes that the staffing ra- tio should be met by utilising all employee groups approved by law and leveraging the opportunities presented by technology. The two-year collective agreement for the private healthcare service sector (TPTES) will expire in the spring of 2024. In accordance with the current terms and conditions, the monthly wages and pay scales were increased by a total of 2.95 per cent in 2023. The collective bar- gaining negotiations are expected to be difficult in spring 2024, and industrial action is also likely. The collective agreement for the private social services sector (SOSTES) will remain in force until the end of 2025, and wages will increase by a total of 13.07 per cent during the agreement period. Economic forecasts and inflation Consumers' expectations regarding both their personal financial situ- ations and the Finnish economy improved slightly in 2023 compared to the previous year. In January 2024, the consumer confidence indi- cator balance was -9.1 (-12.7). The Finnish economy is in a recession, and the increase in prices, tighter monetary policy and weak export demand are weighing down economic growth. Inflation slowed down during 2023, partly due to the decrease in energy prices, which supports household purchasing power. High interest rates dampen the growth of both private con- sumption and investments in the coming years, and the economic growth forecast of Ministry of Finance for 2024 is only 0.7 per cent. In 2025, economic growth is projected to accelerate to 2.0 per cent. Revenue by customer group Pihlajalinna customer groups are corporate customers, private cus- tomers, and public sector customers. ● The Group corporate customers consist of Pihlajalinna occupa- tional healthcare customers, insurance company customers and other corporate customers. The number of people within the scope of the Group’s occupational healthcare services is over 200,000 in the corporate customers group. ● The Group private customers are private individuals who pay for services themselves and may subsequently seek compensation from their insurance company. ● The Group public sector customers consist of public sector organi- sations in Finland, such as municipalities, congregations, wellbeing services counties and the public administration when purchasing either social and healthcare outsourcing services or residential, oc- cupational healthcare and staffing services. The number of people within the scope of the Group’s occupational healthcare services is approximately 80,000 in the public sector customers group. REPORT BY THE BOARD OF DIRECTORS |AUDITED FINANCIAL STATEMENTS 5 January–December 2023 Revenue from corporate customers amounted to EUR 268.1 (225.3) million, an increase of EUR 42.8 million, or 19.0 per cent. Sales to in- surance company customers increased by EUR 37.4 million, or 38.0 per cent. M&A transactions increased revenue by EUR 7.1 million. Or- ganic growth was EUR 35.7 million, or 16 per cent. In the corporate customer group, revenue from COVID-19 services decreased by EUR - 7.5 million. The customer volumes of Pihlajalinna’s private clinics in- creased by 13 per cent year-on-year. Without the effect of M&A transactions, customer volumes would have increased by 9 per cent. Revenue from private customers amounted to EUR 102.1 (103.2) mil- lion, a decrease of EUR -1.2 million, or -1.1 per cent. The divestment of dental care services at the end of March decreased revenue from private customers by EUR -10.5 million. Revenue from COVID-19 ser- vices decreased by EUR -1.5 million. M&A transactions increased rev- enue from the private customers by EUR 4.6 million. Organic growth was EUR 4.8 million, or 4.6 per cent. The customer volumes of Pihla- jalinna’s private clinics increased by one per cent. Without the effect of M&A transactions, customer volumes would have decreased by 4 per cent year-on-year. The streamlining of insurance companies’ pay- ment authorisations and direct payment practices reduces reported sales to private customer segment. Revenue from the public sector amounted to EUR 426.0 (435.5) mil- lion, a decrease of EUR -9.5 million, or -2.2 per cent. M&A transac- tions increased revenue from the public sector by EUR 4.5 million. Revenue from COVID-19 services decreased by EUR -6.9 million. The removal of the cost liability for demanding specialised care in the wellbeing services county of Pirkanmaa and Central Finland de- creased revenue by EUR -32.1 million. The decrease is compensated by annual price increases in complete and partial out-sourcing ar- rangements, as well as the growth of revenue of reception center op- erations, occupational healthcare services and staffing services. The customer volumes of Pihlajalinna’s private clinics decreased by one per cent year-on-year. Without the effect of M&A transactions, cus- tomer volumes would have increased by 4 per cent. REPORT BY THE BOARD OF DIRECTORS |AUDITED FINANCIAL STATEMENTS 6 January-December 2023 EUR million 2023 2022 change change % Corporate customers 268.1 225.3 42.8 19.0 % of which insurance company customers 135.8 98.4 37.4 38.0 % Private customers 102.1 103.2 -1.2 -1.1 % Public sector 426.0 435.5 -9.5 -2.2 % of which complete and partial outsourcing agreements 283.2 303.9 -20.7 -6.8 % of which staffing 29.3 24.8 4.5 18.0 % of which occupational healthcare and other services 113.5 106.8 6.7 6.3 % Intra-Group sales -76.1 -73.5 -2.6 3.5 % Total consolidated revenue 720.0 690.5 29.5 4.3 % Seasonal variation Pihlajalinna’s business operations are to a certain extent influenced by seasonal fluctuations. Pihlajalinna’s complete outsourcing for so- cial and healthcare services and other fixed-price invoicing is accom- panied by a steady period of recognition of revenue as income. Dur- ing the summer holidays, especially in July, staff costs related to such agreements are reduced and profitability improves mainly due to wage accruals. On the other hand, service demand by Pihlajalinna’s private and corporate customers is lower and profitability is weaker during holiday seasons, especially in July–August and December. Consolidated revenue and result January–December 2022 Pihlajalinna’s revenue totalled EUR 720.0 (690.5) million, an increase of EUR 29.5 million, or 4.3 per cent. The divestment of dental care services and reduction in COVID-19 services and in the cost liability of demanding specialised care decreased consolidated revenue by EUR - 59.9 million, or -8.7 per cent. Without COVID-19 services and the re- moval of the cost liability for demanding specialised care, organic growth was EUR 72.9 million, or 10.6 per cent. M&A transactions amounted for EUR 16.2 million, or 2.3 per cent, of the growth in reve- nue. EBITDA was EUR 72.5 (54.4) million, an increase of EUR 18.1 million, or 33.2 per cent. Adjusted EBITDA was EUR 80.6 (64.2) million, an in- crease of EUR 16.4 million, or 25.5 per cent. EBITDA adjustments to- talled EUR 8.1 (9.8) million. Adjusted operating profit before the amortisation and impairment of intangible assets (EBITA) was EUR 37.8 (26.7) million, an increase of EUR 11.1 million, or 41.5 per cent. The adjusted EBITA margin was 5.2 (3.9) per cent. Profitability was negatively affected by the decreased COVID-19 ser- vices and the significantly increased and retrospective costs of de- manding specialised care. In the wellbeing services county of Pir- kanmaa, the cost liability for demanding specialised care ended on 1 January 2023, and in Central Finland, it ended on 1 July 2023. 34 % 13 % 35 % 18 % REVENUE BY CUSTOMER GROUP 2023, % Corporate customers Private customers Complete and partial outsourcing Other services to public sector 225 268 103 102 304 283 132 143 2022 2023 REVENUE BY CUSTOMER GROUP 2023, EUR MILLION Other services to public sector Complete and partial outsourcing Private customers Corporate customers +19 % -1 % -7% +9 % 690 720 +4,3 % REPORT BY THE BOARD OF DIRECTORS |AUDITED FINANCIAL STATEMENTS 7 We still have cost liability for demanding specialised care in the well- being services county of South Ostrobothnia. The efficiency improvement measures that started in 2022 in the public sector have improved the profitability of primary care and so- cial services in complete outsourcing arrangements. The profitability of private clinics improved due to price increases and the growth of supply. The profitability of occupational health services improved due to price increases and the growth of the customer base. The profita- bility of surgical operations improved due to higher net sales. A rec- ord-high number of over 800 joint replacement surgeries were per- formed at the Jokilaakso freedom-of-choice hospital during the finan- cial year. The divestment of dental care services has also had positive impact on profitability. EBITA adjustments totalled EUR 8.5 (9.7) million. As a result of the es- tablishment of the wellbeing services counties, Pihlajalinna aimed in 2023 to finalise the negotiations related to open receivables with pre- vious contract counterparties, namely the municipalities of Jämsä, Parkano and Mänttä-Vilppula. The negotiations did not lead to the desired outcome. The company has commenced legal actions for debt recovery with regard to some of the receivables and is consider- ing legal actions to recover the other receivables. Consequently, the items in question no long-er met the definition of contract assets at the end of the financial year, and Pihlajalinna has booked these items as expenses in the income statement. The items are classified as con- tingent off-balance sheet assets in accordance with IAS 37. Contin- gent assets are not recognised in the financial statements. The change in classification had the following effects on EBITDA: a de- crease of EUR 1.4 million for Jämsän Terveys Oy, a decrease of EUR 4.8 million for Mäntänvuoren Terveys Oy, a decrease of EUR 1.3 mil- lion for Kolmostien Terveys Oy, and a decrease of EUR 0.4 million for Pihlajalinna Terveys Oy. The items, which may have a delayed effect on the profitability of complete outsourcing agreements according to the management’s estimate, reduced EBITDA by a total of EUR 7.8 million and are presented as EBITDA adjustments. The entries also had a negative effect of EUR 0.4 million on financial items. The finan- cial year profit before taxes the entries reduced total of EUR 8.2 mil- lion and earnings per share by EUR 0.26. Complete and partial outsourcing agreements Company Pihlajalinna’s holding 31 Dec 2022 Pihlajalinna’s holding 31 Dec 2023 First year of service production under the current contract Duration of the origi- nal contract (years) Jokilaakson Terveys Oy 90% 90% internal service provision internal service provision Jämsän Terveys Oy 51% 51% 2015 10 Kuusiolinna Terveys Oy 97% 97% 2016 15 Mäntänvuoren Terveys Oy 91% 91% 2016 15 Kolmostien Terveys Oy 96% 96% 2015 15 Bottenhavets Hälsa Ab - Selkämeren Terveys Oy 75% 75% 2021 15–20 years * On 30 October 2023, the county council of the wellbeing services county of South Ostrobothnia decided to terminate the out- sourc-ing agreement with effect at the end of 2025, in accordance with the Act on the Implementation of the Reform of Health, Social and Rescue Services and on the Entry into Force of Related Legislation. The council’s decision is not yet legally binding, and an appeal has been lodged with the Supreme Administrative Court. Summary of the revenue and profitability of complete and partial outsourcing agreements (intra -Group sales eliminated): Complete and partial outsourcing agreements 2023 2022 INCOME STATEMENT Revenue, EUR million 259.4 281.4 EBITDA, EUR million 6.5 6.0 EBITDA, % 2.5 2.1 Adjusted EBITDA, EUR million 14.0 11.5 Adjusted EBITDA, % 5.4 4.1 Adjusted operating profit before the amortisation and impairment of intangible assets (EBITA), EUR million 11.5 8.8 Adjusted operating profit before the amortisation and impairment of intangible assets (EBITA), % 4.4 3.1 REPORT BY THE BOARD OF DIRECTORS |AUDITED FINANCIAL STATEMENTS 8 Pihlajalinna has carried out impairment testing concerning its non- current investments and its interests in associates and loan receiva- bles. Based on this, impairments of EUR 2.4 million were recognised. During the period under review, the impairments reduced EBITDA by a total of EUR 0.5 million and EBITA by EUR 1.1 million. The entries have been treated as adjustments to EBITDA and EBITA. The entries had a negative effect of EUR 1.2 million on financial items. Earnings per share in the financial year was reduced by EUR 0.11 due to the impairments. In the comparison period, a write-down of EUR -4.7 million recog- nised due to the outcome of the District Court hearing concerning the dispute between Jämsän Terveys Oy and the City of Jämsä, and costs of EUR 1.8 million arising from the integration of acquired businesses, were treated as an adjustment items. Pihlajalinna’s EBIT was EUR 20.6 (8.9) million, an increase of EUR 11.7 million. The Group’s net financial expenses amounted to EUR -12.4 (-7.4) mil- lion. The interest expenses increased due to the higher market inter- est rates and a one percentage point increase in the highest margin level in accordance with the waiver agreement related to the com- pany’s financing arrangement. The waiver terms expired at the end of April due to the issue of hybrid bond, the divestment of dental care services and Pihlajalinna’s improved profitability. Profit before taxes amounted to EUR 8.2 (1.5) million. Taxes in the income statement amounted to EUR -3.6 (6.1) million. The impairments recognised during the quarter are not fully tax-de- ductible. In the previous financial year, the Finnish Tax Administration granted Pihlajalinna the right to deduct Pohjola Hospital Ltd’s con- firmed tax losses for previous fiscal years and confirmed tax losses for the fiscal years 2021–2022. The deferred tax asset in question, amounting to EUR 6.2 million, was recognised through the income statement during the financial year 2022. Profit amounted to EUR 4.6 (7.7) million. Earnings per share (EPS) was EUR 0.19 (0.42). Impairments recognised during the financial year re- duced the company’s earnings per share by a total of EUR 0.37. Consolidated statement of financial position and cash flow Pihlajalinna Group’s total statement of financial position amounted to EUR 657.5 (661.6) million. Consolidated cash and cash equivalents amounted to EUR 24.5 (13.1) million. Net cash flow from operating activities during the financial year was EUR 79.0 (64.9) million. The change in net working capital was EUR 0.0 (16.8) million. Net cash flow from investing activities was EUR -18.5 (-83.4) million for the financial year. The M&A transactions had an impact of EUR - 1.5 (-52.3) million on net cash flow from investing activities. Invest- ments in tangible and intangible assets was EUR -22.9 (-29.0) million. The divestment of the Group’s dental care services improved net cash flow from investing activities in the financial year by EUR 5.7 million. The Group’s cash flow after investments (free cash flow) was EUR 60.5 (-18.6) million in the financial year. Net cash flow from financing activities during the financial year was EUR -49.2 (27.4) million. The change in financial liabilities, including changes in credit limits, amounted to EUR -29.0 (75.2) million. Pihla- jalinna issued EUR 20 million hybrid bond during the financial year. The net proceeds from the hybrid bond were used for the repayment of drawings under Pihlajalinna’s existing revolving credit facility. In- terests paid and other financial expenses was EUR -6.2 (-8.3) million. During the first quarter of 2023, the Group sold the interest swap that was effective on the financial statements date. The sale had an effect of approximately EUR 3.9 million on the net cash flow of interests paid and other financial expenses. Hybrid Bond Pihlajalinna issued EUR 20 million hybrid bond on 27 March 2023. The hybrid bond bears a fixed interest rate of 12.00 percent per annum until 27 March 2026 (“Reset Date”), and from the Reset Date, a float- ing interest rate as defined in the terms and conditions of the capital securities. The hybrid bond is instrument that is subordinated to the company’s other debt obligations. The hybrid bond does not have a specified maturity date. Pihlajalinna is entitled to redeem the hybrid bond on the Reset Date and thereafter on each interest payment date. The hy- brid bond will be treated as equity in Pihlajalinna’s IFRS consolidated financial statements. The hybrid bond does not confer to the holders the rights of a shareholder and do not dilute the holdings of the cur- rent shareholders. The net proceeds from the hybrid bond were used for the repayment of drawings under Pihlajalinna’s existing revolving credit facility and for general financing purposes. Financing arrangements Pihlajalinna’s financing arrangement comprises a long-term loan of EUR 130 million and a revolving credit facility of EUR 70 million for general financing needs and acquisitions. It also includes an oppor- tunity to later increase the total amount by EUR 100 million (to EUR 300 million), subject to separate decisions on a supplementary loan from the funding providers. Under the original agreement, Pihlajalinna’s financing arrangement was set to have a term of three years and a maturity date in March 2025. In December 2023, Pihlajalinna and the creditor banks agreed on re-structuring the financing arrangement. According to the new agreement, the financing arrangement will mature in March 2026, and the loan margin will change effective from 1 July 2024. The financing arrangement includes the customary financial cove- nants concerning leverage (ratio of net debt to pro forma EBITDA) and gearing. IFRS 16 lease liabilities are not considered in the calcula- tion of the covenants (Frozen GAAP). The loan margin of the financing is additionally linked to Pihlajalinna’s annual sustainability objectives related to patient satisfaction (NPS), employee engagement (eNPS) and access to surgical treatment within the target time. Sustainability objectives have a minor effect on the loan margin, depending on how many of the agreed-upon sustainability targets are achieved. REPORT BY THE BOARD OF DIRECTORS |AUDITED FINANCIAL STATEMENTS 9 In late 2022, Pihlajalinna and the creditor banks agreed on a tempo- rary increase to the covenants of the financing arrangement and in- creasing the highest margin by one percentage point from the begin- ning of 2023 until the third quarter of the year. The creditor banks waived off the increase to the highest margin and the other waiver terms in late April when the company demonstrated it would remain under the original covenants for the next 12 months. The original gearing covenant of the financing arrangement is 115 per cent and the leverage covenant is 3.75. At the end of the financial year, gearing in accordance with the financing arrangement was 93.6 per cent and leverage stood at 3.09. The Group has credit limit agreements valid until further notice, total- ling EUR 10 million. The notice period of the credit limit agreements is one month. At the end of the financial year, Pihlajalinna had EUR 70 million in unused committed credit limits. Unused credit limits consist of EUR 10 million credit limit agreement and EUR 60 million unused revolving credit facility. Furthermore, an additional credit limit of EUR 100 million, which is subject to a separate credit decision, is unused. The company has an interest rate swap agreement with a nominal value of EUR 65 million, which is used to convert the interest on a floating rate financing arrangement to a fixed rate. Cash flow hedge accounting is applied to the interest rate swap agreement, which means that the effective portion of the change in fair value is recog- nised in other comprehensive income. The interest rate swap entered effect in March 2023 and remain in effect until 25 March 2027. Acquisitions and capital expenditure Gross investments, including acquisitions, amounted to EUR 66.5 (234.5) million. Gross investments in M&A transactions including right-of-use assets (e.g. lease commitments) amounted to EUR 0.7 (176.6) million. The Group has not done any business acquisitions during the financial year. Acquisition items during the financial year were related to adjustments to the contingent considerations of the acquisitions made during the financial year 2022. The Group’s gross investments in property, plant and equipment and intangible assets, which consisted of development, additional and replacement invest- ments required for growth, amounted to EUR 26.0 (28.3) million. Gross investments in connection with the opening of new units amounted to EUR 0.0 (3.1) million. Gross investments in right-of-use assets amounted to EUR 40.5 (26.5) million. Gross investments in right-of-use assets were increased in the financial year due to exten- sions to business premises agreements and rent increases. Investment commitments for the Group’s development, additional and replacement investments amounted to approximately EUR 2.7 (3.5) million. The investment commitments are related to business premises investments, additional and replacement investments in clinical equipment and information system projects. Research and development Increases to intangible assets totalled EUR 7.4 (7.5) million during the financial year. During the financial year 2023, the digital appointment booking system was developed for both occupational healthcare cus- tomers and private customers. In services for private customers whose identity has been authenticated, new self-service opportuni- ties were introduced for customers both on the website and the Pihlajalinna health application, and chat appointment opportunities were developed. In chat appointments in occupational healthcare, a digital assessment of the need for care was deployed. In occupational health services, tools to support work ability and manage work ability risks were developed. Digital workplace surveys, automatic job lists and reporting were developed to support the work of occupational healthcare teams. In hospital operations, the use of the guidance system for surgical operations was expanded to new hospitals and the system was developed further in tandem with Pihla- jalinna’s surgical processes. The use of the PihlajalinnaPRO mobile ap- plication for healthcare professionals was also extended to new pro- fessional groups, and the range of mobile services available to profes- sionals was expanded. In addition, the Group invested in a new data centre environment and deployed a new HRM system as well as a new identity and access management solution. The development of Pihlajalinna’s services for customers and profes- sionals will continue in the financial year 2024. The website will be comprehensively updated from the perspectives of recruitment and private customers. In occupational health services, the development of tools to support work ability and manage work ability risks will continue, and the takeover of new occupational healthcare customer accounts and occupational healthcare communi- cations will also be developed. Chat appointments and remote service use will be developed in accordance with the needs of private cus- tomers, organisational customers and healthcare professionals. Pihla- jalinnaPRO will continue to be developed to facilitate smoother day- to-day work for professionals. In addition to the development of ser- vice channels and the harmonisation of services, Pihlajalinna’s digital and data platforms will be significantly renewed to even better re- spond to the requirements of customers and business development. Personnel At the end of the financial year, the number of personnel amounted to 6,880 (7,016), a decrease of -136 persons or -2 per cent. The Group’s personnel averaged 4,923 (4,851) persons as full-time equiv- alents, an increase of 72 persons or 1 per cent. The Group employee benefit expenses totalled EUR 322.8 (296.6) million, an increase of EUR 26.2 million or 9 per cent. In the financial year, sickness-related absences rate amongst the Group’s own personnel was 5.7 (6.7) per cent. At the end of the financial year, the number of practitioners was 2 208 (1 812), an increase of 396 or 22 per cent. Management Team The Management Team includes CEO Tuomas Hyyryläinen, CIO Antti- Jussi Aro, COO Private Clinic and Hospital Services Timo Harju, CFO Tarja Rantala, CMO Sari Riihijärvi, COO Public Services Eetu Salunen and CLO Marko Savolainen. Board of Directors The Annual General Meeting of 4 April 2023 resolved that the num- ber of the members of the Board of Directors shall be fixed at eight members instead of the previous seven. Heli Iisakka, Hannu Juvonen, Leena Niemistö, Seija Turunen and Mikko Wirén were re-elected to serve as members of the Board of Directors until the next Annual REPORT BY THE BOARD OF DIRECTORS |AUDITED FINANCIAL STATEMENTS 10 General Meeting. Kim Ignatius, Tiina Kurki and Jukka Leinonen were elected as new Board Members. The Annual General Meeting elected Jukka Leinonen as the Chair of the Board and Leena Niemistö as the Vice-Chair of the Board. Shareholders’ Nomination Board The Shareholders’ Nomination Board is comprised of Juha Koponen (LocalTapiola-Group), Mikko Wirén (MWW Yhtiö Oy), Tomi Yli-Kyyny (Fennia Mutual Insurance Company) and Carl Petterson (Elo Mutual Pension Insurance Company). The Chair of the Board of Directors of Pihlajalinna Plc Jukka Leinonen has been part of the Board as an ex- pert member. Committees nominated by the Board Pihlajalinna Plc Board of Directors appointed the following members to its committees: ● Audit Committee: Seija Turunen (chairman), Kim Ignatius, Heli Ii- sakka and Heli Tiina Kurki ● People and Sustainability Committee: Hannu Juvonen (chairman), Leena Niemistö, Jukka Leinonen and Mikko Wirén At its October meeting, the Board elected Mikko Wirén, who served as Pihlajalinna’s temporary CEO until 31 August 2023, as a member of the People & Responsibility Committee. It was agreed that all mem- bers of the Board of Directors may join any of the committee meet- ings. Remuneration of the members of the Board of Directors The Annual General Meeting of 4 April 2023 resolved that the follow- ing annual remuneration will be paid to the members of the Board of Directors elected for the term of office ending at the 2024 Annual General Meeting: EUR 60,000 per year to the Chairman of the Board of Directors, EUR 40,000 per year to the Vice-Chairman and to the Chairman of the Audit Committee and to the Chairman of the People and Sustainability Committee, and EUR 30,000 per year to the other members. The AGM resolved that annual remuneration shall be paid in com- pany shares and in cash, with approximately 40 per cent of the remu- neration used to acquire shares in the name and on behalf of the members of the Board of Directors, and the remainder paid in cash. The remuneration could be paid either entirely or partially in cash if the member of the Board of Directors was, on the day of the AGM, 4 April 2023, in possession of over EUR 1,000,000 worth of company shares. The company was responsible for the expenses and transfer tax arising from the acquisition of the shares. The share-based remu- neration can be paid by distributing company’s own shares to the members of the Board of Directors or by acquiring shares directly on behalf of the board members after three weeks of the release of the interim report for 1 January–31 March 2023. If this is not possible for legal or other statutory reasons, such as taking insider regulations into account, at the earliest possible time after this. Alternatively, the remuneration is then paid in cash. If the term of a Board member ends before the Annual General Meeting of 2024, the Board is enti- tled to decide on the possible recovery of the remuneration in a man- ner it deems appropriate. The AGM decided that each Board member shall be paid a meeting fee of EUR 600 for each Board and Committee meeting. Reasonable travel expenses will also be reimbursed to the members of the Board in accordance with the company’s travel policy. Board authorisations The Annual General Meeting of 4 April 2023 authorised the Board of Directors to decide on the acquisition of a maximum of 2,260,000 shares, which is approximately 10 per cent of the Group’s current number of shares. Own shares may be repurchased on the basis of the authorisation only by using unrestricted equity. Targeted share acquisition is possible. The authorisation is effective until the next An- nual General Meeting, or until 30 June 2024 at the latest. The Annual General Meeting also authorised the Board of Directors to decide on a share issue and other special rights conferring an entitle- ment to shares under Chapter 10, Section 1 of the Limited Liability Companies Act. The number of shares to be issued cannot exceed 2,260,000 shares, which corresponds to approximately 10 per cent of all the shares in the Group. The authorisation concerns both the issu- ance of new shares and the sale or transfer of the Group’s own shares. The authorisation permits a targeted share issue. The authori- sation is effective until the next Annual General Meeting, or until 30 June 2024 at the latest. Auditors and auditing At Pihlajalinna’s Annual General Meeting held on 4 April 2023, KPMG Oy Ab, a firm of authorised public accountants, was elected as the company’s auditor for the financial year 1 January–31 December 2023. Assi Lintula, APA, is the principal auditor. REPORT BY THE BOARD OF DIRECTORS |AUDITED FINANCIAL STATEMENTS 11 Share-related information, outstanding shares 10–12/2023 10–12/2022 2023 2022 No. of shares outstanding at end of period 22,566,155 22,549,644 22,566,155 22,549,644 Average no. of shares outstanding during period 22,563,931 22,549,741 22,557,957 22,560,271 Highest price, EUR 8.11 9.70 9.90 13.18 Lowest price, EUR 6.90 8.48 6.82 8.48 Average price, EUR ¹⁾ 7.19 8.88 8.20 11.06 Closing price, EUR 7.06 8.52 7.06 8.52 Share turnover, 1,000 shares 803 773 2 801 3 770 Share turnover, % 3.6 3.4 12.4 0.2 Market capitalisation at end of period, EUR million 159.3 192.1 159.3 192.1 ¹⁾ average rate weighted by trading level Shares and shareholders At the end of the financial period, Pihlajalinna Plc’s total number of shares was 22,620,135, of which 22,566,155 were outstanding and 53,980 were held by the company which corresponds to approxi- mately 0.26 per cent of all shares and votes. At the end of the finan- cial year, the company had 15,150 (15,811) shareholders. The trading code for the shares on the Nasdaq Helsinki main market is PIHLIS. Pihlajalinna Plc has been classified as a Mid Cap company in the Healthcare sector. Risk management In its risk management, Pihlajalinna’s aim is to operate as systemati- cally as possible and incorporate risk management in normal business processes. Furthermore, the group invests in management of occupa- tional safety and health risks and in quality management systems like ISO9001 and ISO14001. Pihlajalinna’s Risk Management Policy de- fines goals of risk management, risk management principles, operat- ing methods and responsibilities. Internal risk reporting is included in the regular business reporting as well as in business planning and decision-making. The material risks and their management are reported to stakeholders regularly and, when necessary, on a case-by-case basis. In 2023, Pihlajalinna reviewed and further specified the previously de- veloped and implemented comprehensive Enterprise Risk Manage- ment process, which involves classifying risks according to the 2021 strategy which are profitable growth, quality and impactfulness, cus- tomer and personnel experience and digitalisation of Pihlajalinna. In- side these themes risks are reviewed as strategic, operational and fi- nancial risks. In addition, the comprehensive risk management pro- cess includes a review of sustainability risks, which are reported as part of the section Statement of non-financial information. Under the profitable growth has been gathered strategic and busi- ness risks that refer to uncertainty related to the implementation of the Group’s short-term and long-term strategy. An example is struc- tural changes in society that can affect Pihlajalinna as a private pro- vider of social and healthcare services. In addition, risks related to profitability, business transactions, financing and other financial activ- ities, such as contractual partnerships, are processed under the theme. Under the theme of quality and impactfulness have been gathered comprehensive patient safety, operational quality and safety, as well as risks related to the uninterrupted continuity of operations, includ- ing unforeseen and surprising information security risks. Pihlajalinna has identified under the theme of customer and person- nel satisfaction, in particular, the risks related to the availability and retention of personnel, as well as the risks related to work ability and sickness absences. In addition, risks related to the company's values, ethics and uniform operating methods are taken into account under this theme. The use of digitalisation and the risks associated with the strong growth of multi-channel transactions have been gathered under to the theme of digitalisation of Pihlajalinna. In addition for example the compromise of risks related to data security or protection may lead to financial losses, claims for compensation and loss of reputation. The goal of Pihlajalinna risk management is to promote the achieve- ment the Group’s strategic and operational targets, shareholder value, the Group’s operational profitability and the realisation of re- sponsible operating methods. Risk management seeks to ensure that the risks affecting the company’s business operations are known, as- sessed and monitored as well as taking care of practical measures and real-time monitoring to anticipate and mitigate risks. The Group and operative management are responsible for risk man- agement according to reporting responsibilities. In addition, risk man- agement specialists guide and develop the group’s risk management. The Group Management Team regularly discusses the key risks re- lated to the Group’s business operations. Everyone working at Pihla- jalinna must also know and manage risks related to their responsibili- ties. The internal audit function evaluates the appropriateness and performance of the Company’s risk management as part of its annual audit plan. Risks and uncertainties in business operations Pihlajalinna’s operations are affected by strategic risks, operational, financial and damage risks. In its risk management, Pihlajalinna’s aim is to operate as systematically as possible and incorporate risk man- agement in normal business processes. The Group invests in quality management systems and the management of occupational safety REPORT BY THE BOARD OF DIRECTORS |AUDITED FINANCIAL STATEMENTS 12 and health risks. Pihlajalinna aims to limit the potential adverse im- pacts of risks. The assessment of sustainability-related risks plays an important role in risk management. Pihlajalinna operates only in Finland. Uncertainties in world politics, such as the Russia’s invasion of Ukraine and conflicts in the Middle East has indirect impacts on the Group’s operations due to the slow- ing of economic growth, supply chain disruptions, high inflation and rising market interest rates. Pihlajalinna will refrain from all business activities with parties subject to economic sanctions. In all its operations, Pihlajalinna considers data protection, infor- mation security and related requirements. Information security threats and jeopardised data protection can lead to significant repu- tational damage and claims for compensation, among other conse- quences. Pihlajalinna has taken steps to prepare for the elevated risk of cyber-attacks related to the war in Ukraine. High sickness-related absences among the personnel may reduce the company’s profitability and complicates service provision. The com- pany has also identified uncertainties related to the availability of personnel in the social and healthcare sector and development of wages. The costs of wage harmonisation in the social and healthcare sector in relation to the creation of the wellbeing services counties also remain uncertain to some degree. Pihlajalinna has recognised risks associated with projects related to the company’s growth, including acquisitions, digital development and information system projects. The successful implementation of these projects is a precondition for profitable growth in accordance with the company’s strategy. Monitoring and forecasting the covenants of the company’s financing agreements is a significant part of the company’s risk management. The company’s financing agreement and the hybrid bond issued on 27 March 2023 are described in more detail in the section Financing arrangements . The development of the Finnish economy, general cost inflation, wage inflation and rising market interest rates have a negative impact on the cost level and, consequently, on Pihlajalinna’s business opera- tions, profitability and potentially access to additional financing. In addition, inflation and high interest rates affect consumers' disposa- ble income and employment trends, which in turn have an impact on the demand for private healthcare services. The most significant risks and uncertainties in social and healthcare services are linked to the policies and legislation implemented in Finnish society. A company belonging to the Pihlajalinna Group is currently a subject of a tax audit pertaining to a remuneration scheme used by the com- pany. Complete and partial outsourcings Negotiations stipulated by the legislation concerning the reform of healthcare and social services have been carried out in cooperation with the wellbeing services counties. The negotiations were con- ducted in order to ensure the application of the service agreements as part of the organisation and production of services in the wellbe- ing services counties. Pursuant to the legislation concerning the re- form of social and healthcare services, the wellbeing services coun- ties were required to indicate by the end of October 2023 whether their subcontracting agreements will end. This affects the term of va- lidity of Pihlajalinna’s service agreements and the scope of the ser- vices provided. The service agreements between the wellbeing services county of Pir- kanmaa and Mäntänvuoren Terveys and Kolmostien Terveys will con- tinue until the original termination date of the agreements. The cost liabil-ity for demanding specialised care specified in the agreements ended on 1 January 2023. Jämsä Terveys’s agreement with the wellbeing services county of Central Finland will expire in August 2025. The cost liability for de- manding specialised care specified in the agreement ended on 1 July 2023. In August 2023, it was agreed with the wellbeing services county of Central Finland that the services will gradually be trans- ferred to the wellbeing services county in the first half of 2024. These changes will decrease Jämsä Terveys’s revenue approximately by 31 million euros from 2023 levels. The primary and specialised care services provided by Jokilaakson Terveys will continue at Jokilaakso Hospital in accordance with the subcontracting agreement until 2025. Jokilaakson Terveys has an ex- ception permit issued by the Ministry of Social Affairs and Health for round-the-clock emergency and on-call services in primary healthcare, as required for its operations. The permit is currently valid until the end of 2024, but the wellbeing services county of Cen- tral Finland has applied in January 2024 an extension of the permit until the end of 2025. On October 30, 2023, the regional council of the South Ostrobothnia wellbeing services county decided to terminate the outsourcing agreement with Kuusiolinna Terveys, which was originally valid until 2030, with the termination set for the end of 2025. The regional council's decision is not yet legally binding, and an appeal has been lodged with the Supreme Administrative Court. Pending legal processes Pihlajalinna is involved in certain pending legal proceedings concern- ing employment relationships, but they are not expected to have a significant financial impact on the Group. The company's subsidiary Jämsän Terveys Oy has taken legal action in the district court against the City of Jämsä, a former client, mainly concerning COVID-19-related costs which the City of Jämsä has not paid in breach of the service agreement. In addition, a difference of opinion has emerged between the company and the city during the 2022 financial year on the impact of the transfer of personnel on the annual fee under the service agreement. On 22 November 2023, the Vaasa Court of Appeal handed down its ruling on the dispute concerning the service agreement between Jä- msän Terveys Oy and the City of Jämsä. The Court of Appeal decided to uphold the decision of the District Court. Pihlajalinna has submit- ted an application for leave to appeal to the Supreme Court and an appeal concerning part of the judgment of the Vaasa Court of Appeal. REPORT BY THE BOARD OF DIRECTORS |AUDITED FINANCIAL STATEMENTS 13 Impairment testing of goodwill At the end of the financial year, goodwill on Pihlajalinna’s statement of financial position amounted to EUR 251.8 (251.0) million. Pihla- jalinna checks annually, and whenever necessary, that the carrying amount of goodwill does not exceed the fair value. The annual im- pairment testing was conducted on the situation on 30 November 2023. Pihlajalinna observed no indications of the carrying amount of goodwill being greater than its estimated recoverable amount. The cash-generating unit’s recoverable amount exceeded the carrying amount by approximately EUR 186 million. If permanent negative changes were to occur in the development of Pihlajalinna’s profit and growth, this could lead to an impairment of goodwill. Flagging notifications On 11 May 2023, Pihlajalinna Plc received a notification under Chap- ter 9, Section 5 of the Securities Market Act, according to which the holding of Fennia Mutual Insurance Company in Pihlajalinna Plc’s shares and votes had risen above 10 per cent on 11 May 2023. The holding of Fennia Mutual Insurance Company increased to 2,262,965 shares, or 10.004 per cent of the total of Pihlajalinna’s shares and votes. Share-based incentive schemes At its meeting on 23 March 2022, the Board of Directors approved the terms of a share-based incentive program (LTIP 2022) for the key persons of the company. In its entirety the incentive scheme is to form a six- year program and the share rewards based on the pro- gram are not allowed to be disposed of prior to year 2025. In addi- tion, to participate the program, a key person must invest in Pihla- jalinna shares. The performance and quality-based share programme comprises four separate performance periods of one year each (the calendar years 2022, 2023, 2024 and 2025). The potential share rewards will be paid out after the performance periods in the years 2023, 2024, 2025 and 2026. The Board of Directors annually decides on the participants, performance indicators, targets and earning opportunities. Two earn- ings periods have been launched under the programme: 2022 and 2023. For the earnings period 2023, a total of 48 key persons are enti- tled to participate to the share-based incentive programme. The pro- grammes are treated in their entirety as equity-settled share-based payments. The maximum number of shares (gross amount prior to deduction of applicable withholding tax) for each one-year performance period is defined in the allocation per participant. The applicable withholding tax will be deducted from the transferred shares, and the remaining net amount will be paid to the participants in shares. Shares paid out as share rewards are subject to a two-year transfer restriction. The earnings criteria for the performance and quality-based share pro- gramme are Pihlajalinna Group’s adjusted EBITA, as well as key oper- ational, quality-related and sustainability-related indicators. No performance and quality-based share rewards materialised for the performance period 2022 pursuant to the matching share plan, as the minimum targets set for the programme were not achieved. For the performance period 2023, the performance and quality-based share award did not materialize due to impairments recorded during the fi- nancial year. In case all the persons entitled to participate do participate to the program by meeting the condition of investment in full and if the per- formance targets set for the performance periods are fully achieved in the future, the maximum aggregate amount of share rewards that may be paid out based on the programme is approximately 618,000 shares (gross amount before the deduction of the applicable with- holding tax) and the total value of the share rewards payable is ap- proximately EUR 5.7 million. The above number of shares corre- sponds to approximately 2.7 per cent of the company’s total number of shares. Repurchase and transfer of own shares Pihlajalinna conveyed, in May, a total of 11,861 own shares as part of the remuneration of the Board of Directors. Pihlajalinna conveyed, in November, a total of 4 650 own shares in ac- cordance with the termination agreement to Joni Aaltonen who acted as CEO until 8 March 2023. The number of own shares held by Pihlajalinna was 53,980 at the end of the financial year, corresponding to approximately 0,26 per cent of the total number of shares and votes. The Board of Directors’ proposal for profit distri- bution and the Annual General Meeting 2024 The parent company’s total distributable funds amount to EUR 203,428,565.55, of which the result for the financial year 2023 is EUR -7,709,328.56. The Board of Directors proposes that a dividend of EUR 0.07 per share be paid for the financial year that ended on 31 December 2023. On the financial statements date, 31 January 2023, the total number of out-standing shares was 22,566,155. The corre- sponding total dividend according to the Board of Directors’ proposal would be at most EUR 1,579,630.85. No material changes have taken place in the company’s financial posi- tion after the end of the financial year. The company’s liquidity posi- tion is good and, in the view of the Board of Directors, the proposed distribution does not jeopardise the company’s ability to fulfil its obli- gations. Earnings per share for the financial year was EUR 0.19. The proposed dividend of EUR 0.07 is 37 per cent of earnings per share. According to the Pihlajalinna’s specified dividend policy, Pihlajalinna aims to dis- tribute dividend or capital repayment minimum of one-third of the earnings per share, taking into account the company’s financial posi- tion and strategy. Pihlajalinna Plc’s Annual General Meeting is planned to be held on 10 April 2024 in Tampere. The Board of Directors will decide on the no- tice of the General Meeting and the included proposals at a later date. The annual report for 2023, including the Board of Directors’ report and the financial statements, will be published on the company’s in- vestor website at investors.pihlajalinna.fi in week 12. REPORT BY THE BOARD OF DIRECTORS |AUDITED FINANCIAL STATEMENTS 14 Calculation of the parent company's distributable funds: EUR 31 Dec 2023 Reserve for invested unrestricted equity 183,190,483.50 Retained earnings 28,043,605.15 Result for the period -7,709,328.56 Capitalised development costs -96,194.54 Total 203,428,565.55 Pihlajalinna’s outlook for 2024 In 2024, Pihlajalinna will focus on organic growth and improving its profitability and financial position. ● The Group expects the consolidated revenue to increase from the previous year’s level (EUR 720.0 million in 2023). ● The Group expects the adjusted operating profit before the amorti- zation and impairment of intangible assets (EBITA) to improve from the previous year’s level (EUR 37.8 million in 2023). ● The Group continues measures to strengthen its financial position. Efficiency measures are expected to improve Pihlajalinna’s profita- bility. Slowed economic growth, weakened consumer confidence and changes in market interest rates may affect Pihlajalinna’s service de- mand and financial result more than expected. Price increases are ex- pected to compensate the effects of cost inflation. Corporate Governance Statement Pihlajalinna publishes its Corporate Governance Statement separately on the company’s investor website at investors.pihlajalinna.fi at the same time as the Board of Directors’ report during week 12. Up-to- date information about compliance with and deviations from the Cor- porate Governance Code is maintained on the investor site at inves- tors.pihlajalinna.fi. Statement of non-financial information Pihlajalinna reports non-financial information in accordance with the Finnish Accounting Act and the EU Taxonomy Regulation. The report- ing standards established by the Global Reporting Initiative (GRI) have been used as the framework for sustainability information in the annual report. This statement of non-financial information included in the Board of Directors’ report covers the operating principles, risks, results and in- dicators related to Pihlajalinna’s sustainability themes. Values, business and value creation Pihlajalinna is one of the leading private social and healthcare service providers in Finland. The Group offers comprehensive, high-quality and impactful private clinic and hospital services, as well as occupa- tional healthcare and insurance cooperation services. Pihlajalinna’s shares are listed on Nasdaq Helsinki Ltd. Pihlajalinna’s customers include private individuals, corporations, in- surance companies and wellbeing services counties, for whom the company provides a wide range of local and remote services. In the public sector, the company provides social and healthcare production models in which cooperation guarantees high-quality and impactful services. The company’s values are energy, ethics and open-mindedness. Pihla- jalinna offers its personnel meaningful work in safe working condi- tions. Each professional is important as a member of the work com- munity and as an enabler and developer of the customer experience, operational quality and impact. Pihlajalinna has an impact on, and generates value for, its various stakeholders ranging from societal operators to customers, the per- sonnel, shareholders and the environment. The more detailed value creation framework, including the basis of impact and the company’s impacts, is described in Pihlajalinna’s Annual Report. Pihlajalinna’s Annual Report will be published on the company’s investor website at investors.pihlajalinna.fi at the same time as the Board of Directors’ report in week 12. Material themes, key indicators and management of sustainability Pihlajalinna is committed to the UN Sustainable Development Goals and the Global Compact principles of responsible business, which guide the company’s business planning and sustainability efforts. Pihlajalinna’s sustainability efforts are based on the identification of materiality. In 2023, Pihlajalinna began to integrate the requirements of the EU’s Corporate Sustainability Reporting Directive (CSRD) in to the company’s reporting so that Pihlajalinna can report in compliance with the CSRD from 2024 onwards. A double materiality assessment (DMA) was carried out in 2023, which involved extensive stakeholder engagement and a comprehensive expert assessment and workshop analysis of impacts, risks and opportunities (IRO). Pihlajalinna continued to focus on three sustainability themes in 2023: responsibility for health and wellbeing, responsibility for per- sonnel, and sustainable business. The key indicators specified for the themes are access to surgical treatment within the target time, the share of preventive work in occupational healthcare, customer satis- faction, and employee satisfaction. The themes and results are de- scribed in more detail in the section Sustainability themes and key re- sults. Some of the indicators are also incorporated into the com- pany’s long-term loan agreement signed in 2022. Pihlajalinna moni- tors the GRI reporting framework indicators in its Annual Report, which is published in week 12, simultaneously with the Board of Di- rectors’ report on the company’s investor pages at investors.pihla- jalinna.fi. A more comprehensive overview of sustainability indicators is provided in the Annual Report. Pihlajalinna reports in accordance with the GRI standards. Each year, the company also completes Global Compact reporting and the EcoVadis sustainability assessment. Pihlajalinna’s sustainability actions have a clear administrative struc- ture, and they are carried out in accordance with guidelines and poli- cies drawn up on the basis of international principles. Pihlajalinna’s REPORT BY THE BOARD OF DIRECTORS |AUDITED FINANCIAL STATEMENTS 15 sustainability efforts are led by the Vice President for Communica- tions and Sustainability. She heads the corporate responsibility work- ing group, which consists of representatives of the Group’s busi- nesses as well as medical experts and specialists in Group functions such as finance, HR administration, properties and law. The working group prepares and ensures measures in line with the company’s sus- tainability targets and reports to the Management Team on the pro- gress of sustainability efforts four times per year. The Management Team approves and monitors the sustainability programme and re- lated actions, and ensures that the necessary resources are available. The highest decision-making body concerning the company’s sustain- ability is the Board of Directors, which monitors progress on the cho- sen themes at the annual level. The Board of Directors has appointed a committee to promote sustainability: the People and Sustainability Committee. The Audit Committee of the Board of Directors also has a significant role in promoting the renewal of sustainability reporting. The Board of Directors also decides on the company’s guidelines and policies. Theme Example of impacts Examples of risks and opportunities Responsibility for environment Greenhouse gas emissions Damages caused by extreme weather events, for example, to properties Responsibility for personnel Job satisfaction, continuous development opportuni- ties Job creation Attraction and retention as an employer, enhancing productivity Responsibility for health and wellbeing Population health and prevention Availability of services Patient safety, for example, cyber attacks on infrastruc- ture or equipment, leading to significant reputation da- mage and potential liability Sustainable business Shareholder value Creating economic value for society Availability of workforce Loss of company value Business opportunities Pihlajalinna respects internationally recognised human rights and non-discrimination. Pihlajalinna does not condone discrimination based on employees’ and practitioners’ origin, nationality, religious beliefs, ethnicity, gender, age or any other such factor. Pihlajalinna’s Code of Conduct describes the way the company operates, based on the principles of good governance and law, transparency, fairness and confidentiality. The Code of Conduct also includes the company’s commitment to the prevention of bribery and corruption, compliance with competition law and cooperation with stakeholders. Code of Conduct training is mandatory for all Pihlajalinna professionals. The new Code of Conduct training introduced in October was com- pleted by the end of the year by 1,935 people, representing approxi- mately 30 per cent of Pihlajalinna professionals. Pihlajalinna has a confidential whistleblowing channel that can be used for reporting misconduct and problems in the organisation. Pihlajalinna’s legal affairs unit is responsible for processing whistle- blower notifications, and the company’s Board of Directors monitors messages submitted via the whistleblowing channel and the actions taken in response to them. A total of 10 notifications were submitted via the whistleblowing channel in 2023 (4 in 2022). The investigation has been completed for nine of these cases. The whistleblower notifi- cations concerned incidents related to the equal treatment of em- ployees, bullying and the Code of Conduct. Two of the investigated in- cidents led to further action. Sustainability risks and opportunities Pihlajalinna completed a double materiality analysis in autumn 2023 to identify the company’s impacts on the environment and society, and the resulting financial business risks and opportunities. The as- sessment took into account the special characteristics of Pihla- jalinna’s business model and value chain. Pihlajalinna’s operations and business relationships give rise to a vari- ety of positive and negative impacts on the environment and society. A high-level assessment of the impacts and financial risks and oppor- tunities to Pihlajalinna’s operations arising from the impacts and the operating environment is provided in the table below. Sustainability themes and key results Pihlajalinna’s key sustainability themes are responsibility for health and wellbeing, responsibility for personnel, and sustainable business. Responsibility for health and wellbeing Clinical quality and impact are among the company’s highest priori- ties. The professional competence of the personnel is the foundation of patient safety. The qualifications of employees are verified during recruitment and they receive induction training in accordance with the applicable induction training programme. We actively develop the professional competence of our personnel. Pihlajalinna’s quality management is based on comprehensive self- monitoring, external quality assurance and comprehensive monitor- ing by the authorities. Pihlajalinna has an ISO 9001 quality manage- ment certificate. Self-monitoring makes it possible to quickly identify risks related to quality or safety. The business locations have a re- porting system for the personnel to report any deviations. Customers report any problems they observe either directly to the personnel or through Pihlajalinna’s feedback systems. Pihlajalinna is a significant operator in specialised care. The objective of surgical operations is to implement a quick and high-quality chain of care, enabling quick recovery and rehabilitation for patients. Ac- cess to surgical treatment within the target time has been highlighted as one of the company’s key sustainability indicators. With regard to access to surgical procedures for customers who are unable to work, Pihlajalinna aims to offer the first available surgical appointment within five weekdays. In 2023, the target for this was set at 67.5 per cent. The target was achieved, with the outcome being 81.1 per cent. In occupational health services, the prevention of illness is in every- one’s interest and helps reduce costs. The emphasis on preventive activities in occupational healthcare is monitored on a professional group-specific basis. In 2023, Pihlajalinna’s minimum target for the share of preventive work was 60 per cent for occupational health physicians and 75 per cent for occupational health nurses. In 2023, preventive work accounted for 65.8 (61.1) per cent of invoicing for occupational healthcare physicians and 81.4 (79.7) per cent of invoic- ing for occupational healthcare nurses. REPORT BY THE BOARD OF DIRECTORS |AUDITED FINANCIAL STATEMENTS 16 Pihlajalinna aims for an excellent customer experience in all of its ser- vices. The systematic collection and processing of feedback enables the company to develop services, processes and operating models ac- cording to the customers’ wishes. Pihlajalinna uses the Net Promoter Score (NPS) to measure the customer experience. The NPS for Pihla- jalinna’s appointments in 2023 was 79.1 (77.1) and the NPS for com- plete and partial outsourcing arrangements was 74.7 (72.3). The 2025 target for the Group’s combined NPS is 80. NPS can range from +100 to -100. Customer equality can be increased by improving the availability of services through the provision of remote services, even in areas where in-person services or the necessary expert may not be availa- ble. In 2023, a total of 40 (38) per cent of Pihlajalinna’s appointments were conducted remotely. Responsibility for personnel Pihlajalinna systematically promotes the wellbeing of personnel, and the company has a comprehensive equality and non-discrimination policy. Pihlajalinna wants to be the first choice among professionals in its industry. Pihlajalinna’s number of personnel remained stable in 2023, but the number of practitioners continued to grow as supply increased. At the end of the year, the company had 6,880 (7,016) employees and 2,208 (1,812) practitioners. Key personnel indicators are reported in more detail as part of the Annual Report. Employees are a key asset for the company: their expertise and com- petence are the basic conditions for an excellent customer experi- ence, the fulfilment of the strict quality requirements in the social and healthcare sector, and sustainability and impactfulness in busi- ness. Investments in the development and wellbeing of the personnel also help to ensure Pihlajalinna’s competitiveness in a rapidly chang- ing market. The development of work ability was one of the most im- portant themes in 2023. We continued the unique cooperation pro- ject to develop work ability management with pension insurance companies, which was launched in 2022. One of the main objectives of the project is to reduce sickness-related absences by means of an early intervention model, among other measures. Pihlajalinna’s sick- ness-related absence rate in 2023 was 5.7 (6.7) per cent. The company actively listens to the personnel to obtain information on the state of the work community. Employee satisfaction is meas- ured by the eNPS indicator, which is also one of Pihlajalinna’s key sus- tainability indicators. Pihlajalinna’s eNPS for 2023 improved from the previous year and was +4 (-1). The target set for 2023 was +8. The Group’s eNPS excluding complete and partial outsourcing arrange- ments in 2023 was +10 (+11) and the eNPS of the Group’s complete and partial outsourcing arrangements in 2023 was -4 (-17). The eNPS can range from +100 to -100. All Pihlajalinna employees are within the scope of annual develop- ment discussions. Pihlajalinna Academy is an online learning environ- ment for the company’s personnel that offers new content to support competence development. The total amount of training for the per- sonnel came to 77,104 hours in 2023, which corresponds to 11.2 hours per employee. At Pihlajalinna, the management of occupational safety is aimed at maintaining a healthy and safe working environment and the effec- tive prevention of accidents through training and the improvement of operating practices, for example. The most common causes of acci- dents were falling, slipping and unexpected behaviour by a customer. The number of serious accidents that resulted in an absence of more than 30 days remained fairly low in 2023: only 2 (6) serious accidents were reported in the Group as a whole during the year. The accident frequency decreased significantly from the previous year and was 26 (34), as measured by the number of accidents leading to an absence of at least one day per million hours worked. This was lower than the industry average of 35 by a clear margin. Sustainable business Pihlajalinna was founded more than 20 years ago to solve regional la- bour availability challenges in healthcare. Pihlajalinna’s has its roots, and strong expertise, in local cooperation to promote people’s well- being. The company still has extensive outsourcing operations in three wellbeing services counties: South Ostrobothnia, Central Fin- land and Pirkanmaa. Pihlajalinna also provides wellbeing services counties with a wide range of services under the service voucher sys- tem and other service cooperation to help reduce queues for treat- ment, which have escalated into a significant problem in society. Pihlajalinna’s operations generate economic added value in Finland, especially in the regions of Pirkanmaa, South Ostrobothnia and Cen- tral Finland. The most significant direct economic impacts arise from procurement, the remuneration of personnel and practitioners, and the payment of taxes and tax-like charges. As a rule, the services and goods procured by Pihlajalinna are purchased from domestic enter- prises or the EU. Pihlajalinna’s parent company and all of its subsidiaries are registered in Finland. Pihlajalinna is a public limited company and 98.6 (98.6) per cent of the company’s shares are owned by Finnish shareholders. Pihlajalinna complies with Finnish legislation in the collection, remit- tance and payment of taxes and tax-like charges. The Group pays all of its taxes to Finland. In 2023, Pihlajalinna’s operations generated a total of EUR 164.8 (155.7) million in payments to society. In addition, Pihlajalinna paid a total of EUR 129.8 (112.5) million in fees to practi- tioners, for which the practitioners themselves pay the taxes. Pihlajalinna’s procurement principles are documented in a Supplier Code of Conduct, which service providers, suppliers and partners are required to comply with. The document was incorporated into all new cooperation agreements and significant existing agreements in late 2022. Among Pihlajalinna’s large framework agreement partners, 30 out of 45 have signed the Supplier Code of Conduct. Pihlajalinna will further specify its principles of sustainable procurement in 2024, and the sustainability criteria for agreements will be more comprehen- sively incorporated into the procurement process. REPORT BY THE BOARD OF DIRECTORS |AUDITED FINANCIAL STATEMENTS 17 Tax footprint EUR million 2023 2022 Direct tax payable for the period Income tax (business income tax) 0.5 2.0 Employer’s pension contributions 45.5 42.0 Social security contributions 4.0 3.3 Employer’s unemployment insurance cont- ributions 4.6 4.3 Contribution to accident insurance and group life insurance 1.2 1.6 Employer contributions, total 55.3 51.2 Property taxes 0.1 0.2 Transfer taxes 0.0 0.9 Direct tax payable for the period, total 56.0 54.2 Value added tax of acquisitions payable by the company Value added taxes, estimate 20.5 20.1 Tax for the period Withholding taxes 62.4 57.8 Employee pension contributions 20.0 18.4 Employee unemployment insurance contri- butions 3.9 3.6 Payroll tax, total 86.3 79.8 Net value-added tax 2.1 1.5 Total tax for the period 88.3 81.3 Tax footprint 164.8 155.7 For Pihlajalinna, the management of data protection and information security is of vital importance, and its purpose is to ensure the secure processing of all of Pihlajalinna’s data – especially patient and per- sonal data – and the protection of the privacy of patients, customers and the company’s personnel. The management of information secu- rity aims to ensure the integrity, confidentiality and availability of in- formation. Pihlajalinna’s target for data protection is zero successful attempts to gain unauthorised access. This target was achieved in 2023. In 2023, Pihlajalinna not only increased its own level of infor- mation security but also conducted information security audits of partners and enhanced the operations of the external Security Opera- tions Centre (SOC). More information on information security is pro- vided in the Annual Report. In 2022, Pihlajalinna began developing measures to increase the well- being of the environment. The company’s environmental policy sets out the approach to environmental issues. The environmental im- pacts of Pihlajalinna’s operations arise mainly from energy consump- tion, carbon dioxide emissions and waste. Due to the nature of its op- erations, the company’s carbon intensity is low. The company has an ISO14001 environmental management system that was certified in 2023. The greenhouse gas emissions of Pihlajalinna’s operations and value chain are calculated in accordance with the internationally recognised GHG Protocol (Scope 1 and 2). The emission accounting model can be used to report the significant direct and indirect greenhouse gas emissions of the value chain. More details on the emission calculation are included in the Annual Report. The company will continue to de- velop emission calculation as part of its preparations for sustainability reporting obligations. The company will also set objectives concerning climate change mitigation and adaptation. Pihlajalinna switched to zero-emission electricity at the end of 2022. The purchasing of zero-emission electricity is an important part of managing Pihlajalinna’s climate impacts. EU taxonomy reporting The EU taxonomy is a classification system for environmentally sus- tainable economic activities. The Taxonomy Regulation sets six environmental objectives: climate change mitigation, climate change adaptation, sustainable use and protection of water and marine resources, transition to a circular economy, pollution prevention and control, and protection and resto- ration of biodiversity and ecosystems. An economic activity that pro- motes any of these objectives while doing no significant harm to the other objectives can be considered environmentally sustainable. En- vironmentally sustainable projects should also respect human rights and labour rights. At this stage, the scope of Pihlajalinna’s operations covered by the cli- mate regulations is limited to the economic activities that have the greatest need and potential to substantially contribute to climate change mitigation and adaptation. The company’s interpretation is that its business activities are not within the scope of the classifica- tion system, as the production of social and healthcare services is not among the industries with the highest emissions. Pihlajalinna has assessed the taxonomy eligibility of its economic ac- tivities and concluded that the taxonomy-eligible share of turnover (totalling EUR 720.0 million), capital expenditure (totalling EUR 66.5 million) and operating expenditure (totalling EUR 20.0 million) is 0% for all three. Accordingly, the non-eligible share of turnover, capital expenditure and operating expenditure is 100%. Pihlajalinna does not engage in economic activities relating to nuclear power or fossil gases. Information on taxonomy-aligned activities is presented in the tables below. REPORT BY THE BOARD OF DIRECTORS |AUDITED FINANCIAL STATEMENTS 18 Proportion of turnover from products or services associated with Taxonomy-aligned economic activities REPORT BY THE BOARD OF DIRECTORS |AUDITED FINANCIAL STATEMENTS 19 Proportion of CapEx from products or services associated with Taxonomy-aligned economic activities REPORT BY THE BOARD OF DIRECTORS |AUDITED FINANCIAL STATEMENTS 20 Proportion of OpEx from products or services associated with Taxonomy-aligned economic activities REPORT BY THE BOARD OF DIRECTORS |AUDITED FINANCIAL STATEMENTS 21 Template 1: Nuclear and fossil gas related activities Nuclear energy related activities 1. The undertaking carries out, funds or has exposures to research, development, demonstration and deployment of innovative electricity generation facilities that produce energy from nuclear processes with minimal waste from the fuel cycle. No 2. The undertaking carries out, funds or has exposures to construction and safe operation of new nuclear installations to produce electricity or process heat, including for the purposes of district heating or in- dustrial processes such as hydrogen production, as well as their safety upgrades, using best available technologies. No 3. The undertaking carries out, funds or has exposures to safe operation of existing nuclear installations that produce electricity or process heat, including for the purposes of district heating or industrial pro- cesses such as hydrogen production from nuclear energy, as well as their safety upgrades. No Fossil gas related activities 4. The undertaking carries out, funds or has exposures to construction or operation of electricity genera- tion facilities that produce electricity using fossil gaseous fuels. No 5. The undertaking carries out, funds or has exposures to construction, refurbishment, and operation of combined heat/cool and power generation facilities using fossil gaseous fuels. No 6. The undertaking carries out, funds or has exposures to construction, refurbishment and operation of heat generation facilities that produce heat/cool using fossil gaseous fuels. No REPORT BY THE BOARD OF DIRECTORS |AUDITED FINANCIAL STATEMENTS 22 Events after the financial period Kuusiolinna Terveys Oy, company part or Pihlajalinna Group, an- nounced 31 January 2024 it would commence change negotiations. The premature termination of the service agreement, as decided by the wellbeing services county, significantly impacts the company's op- erating conditions, necessitating the initiation of change negotiations. The change negotiations are still ongoing and involve the entire staff, excluding administrative support services. According to preliminary estimates, the outcome of the negotiations may result in a reduction of approximately 190 full-time equivalent positions within the com- pany. The negotiations are expected to last approximately six weeks in total. Pihlajalinna conveyed, in January 2024, a gross amount total of 20 000 own shares to CEO Tuomas Hyyryläinen. Compensation was pro- vided in the form of shares and cash. The applicable withholding tax was deducted from the transferred shares, and the remaining net amount was paid in shares. The compensation was related to the CEO's agreed right to acquire shares at the beginning of the share- based incentive program, during which the company releases shares in exchange for purchases. After conveying, the number of own shares held by Pihlajalinna was 43,980 at the end of the financial year, corresponding to approximately 0,19 per cent of the total num- ber of shares and votes. REPORT BY THE BOARD OF DIRECTORS |AUDITED FINANCIAL STATEMENTS 23 Key financial figures Scope of operations 2023 2022 2021 2020 2019 Revenue, EUR million 720.0 690.5 577.8 508.7 518.6 Change, % 4.3 19.5 13.6 -1.9 6.3 Organic revenue growth, EUR million 25.3 34.9 58.1 -11.3 13.4 Change, % 3.7 6.0 11.4 -2.2 2.8 Gross investments, EUR million 66.5 234.5 44.8 25.4 44.1 % of revenue 9.2 34.0 7.8 5.0 8.5 Capitalised development costs, EUR million 0.0 0.0 0.0 0.4 0.5 % of revenue 0.0 0.0 0.0 0.1 0.1 Employee benefit expenses, EUR million 322.8 296.6 255.2 214.2 222.0 Personnel at the end of the period (NOE) 6,880 7,016 6,297 5,550 5,815 Average number of personnel (FTE) 4,923 4,851 4,746 4,308 4,649 Profitability 2023 2022 2021 2020 2019 EBITDA, EUR million 72.5 54.4 62.6 52.2 47.8 EBITDA, % 10.1 7.9 10.8 10.3 9.2 Adjusted EBITDA, EUR million 80.6 64.2 65.3 54.8 55.7 Adjusted EBITDA, % 11.2 9.3 11.3 10.8 10.7 Operating profit (EBIT), EUR million 20.6 8.9 27.9 18.1 10.4 Operating profit, % 2.9 1.3 4.8 3.6 2.0 Adjusted operating profit (EBIT), EUR million 29.1 18.6 30.6 21.1 21.6 Adjusted operating profit, % 4.0 2.7 5.3 4.2 4.2 Adjusted operating profit before the amortisation and im- pairment of intangible assets (EBITA), EUR million 37.8 26.7 37.3 27.4 28.9 Adjusted EBITA, % 5.2 3.9 6.5 5.4 5.6 Net financial expenses, EUR million -12.4 -7.4 -3.7 -4.4 -3.9 % of revenue -1.7 -1.1 -0.6 -0.9 -0.8 Profit before tax, EUR million 8.2 1.5 24.2 13.7 6.4 % of revenue 1.1 0.2 4.2 2.7 1.2 Income tax, EUR million -3.6 6.1 -5.1 -4.8 -1.8 Profit for the period 4.6 7.7 19.1 8.9 4.6 Cash flow after investments, EUR million 60.5 -18.6 24.9 43.7 18.3 Return on equity (ROE), % 3.4 6.2 16.1 8.1 3.9 Return on capital employed (ROCE), % 4.0 2.3 8.8 5.7 3.1 Funding and financial position Interest-bearing net financial debt, EUR million 352.7 385.7 194.7 194.8 192.7 % of revenue 49.0 55.9 33.7 38.3 37.2 Equity ratio, % 22.0 18.6 27.0 25.9 24.1 Gearing, % 243.9 313.8 158.8 170.6 181.7 Net debt/adjusted EBITDA 4.4 6.0 3.0 3.6 3.5 Share related information 2023 2022 2021 2020 2019 Earnings per share (EPS) 0.19 0.42 0.89 0.38 0.16 Equity per share, EUR 6.56 5.50 5.27 4.82 4.44 Dividend per share, EUR (the Board of Directors’ proposal) 0.07 0.30 0.20 Dividend per share, % (the Board of Di- rectors’ proposal) 37.3 33.7 52.0 Effective dividend yield, % (the Board of Directors’ proposal) 0.99 2.37 2.13 Number of shares at year-end 22,566,155 22 549 644 22,594,235 22,617,841 22,620,135 Average number of shares 22,557,957 22 560 271 22,589,383 22,586,212 22,620,135 Market capitalisation, EUR million 159.3 192.1 285.6 212.2 345.6 Dividends paid, EUR million (the Board of Directors’ proposal) 1.6 6.8 4.5 P/E ratio 37.60 20.19 14.21 24.39 98.58 Highest quotation, EUR 9.90 13.18 12.98 15.66 15.88 Lowest quotation, EUR 6.82 8.48 9.26 8.72 8.70 Average quotation, EUR 8.20 11.06 11.18 12.09 12.77 Closing price at year-end, EUR 7.06 8.52 12.64 9.38 15.28 Trading volume of shares, 1,000 shares 2 801 3 770 6,929 6,620 4,062 Trading volume of shares, % 12.4 16.7 30.7 29.3 18.0 * Alternative performance measure REPORT BY THE BOARD OF DIRECTORS |AUDITED FINANCIAL STATEMENTS 24 Quarterly information EUR million Q4/23 Q3/23 Q2/23 Q1/23 Q4/22 Q3/22 Q2/22 Q1/22 INCOME STATEMENT Revenue 183.0 165.6 183.6 187.8 188.4 165.2 173.7 163.1 Other operating income -0.4 1.0 2.1 4.8 0.9 0.4 1.8 1.7 Materials and services -65.3 -56.6 -66.4 -66.9 -74.8 -61.8 -66.5 -64.2 Employee benefit expenses -84.4 -72.6 -82.8 -82.9 -80.4 -68.4 -74.6 -73.2 Other operating expenses -21.2 -17.3 -18.8 -19.8 -22.7 -17.4 -18.9 -18.2 EBITDA 11.6 20.1 17.7 23.0 11.5 18.1 15.6 9.3 EBITDA, % 6.4 12.1 9.7 12.3 6.1 10.9 9.0 5.7 Adjusted EBITDA 20.7 20.5 18.0 21.4 12.0 18.9 16.9 16.5 Adjusted EBITDA, % 11.3 12.4 9.8 11.4 6.4 11.4 9.7 10.1 IFRS3 expenses 0.0 0.0 -0.2 -0.5 -0.2 -0.1 -0.2 -0.8 Depreciation and amortisation -13.6 -13.0 -12.8 -12.5 -12.0 -11.5 -11.5 -10.5 Operating profit (EBIT) -1.9 7.1 4.9 10.5 -0.6 6.6 4.1 -1.2 Operating profit, % -1.1 4.3 2.7 5.6 -0.3 4.0 2.4 -0.7 Adjusted operating profit (EBIT) 7.6 7.3 4.8 8.2 -0.2 7.3 5.0 5.2 Adjusted operating profit (EBIT), % 4.1 4.4 2.6 4.4 -0.1 4.4 2.9 3.2 Adjusted operating profit before the amortisation and impairment of in- tangible assets (EBITA) 9.9 9.6 7.3 11.0 2.2 9.4 7.3 7.8 Adjusted EBITA, % 5.4 5.8 4.0 5.9 1.2 5.7 4.2 4.8 Financial income -0.1 0.2 0.2 0.1 0.4 0.1 0.1 0.1 Financial expenses -4.1 -2.8 -2.7 -3.1 -2.7 -2.1 -1.7 -1.6 Profit before taxes (EBT) -6.1 4.4 2.4 7.5 -2.8 4.5 2.5 -2.7 Income tax -0.3 -1.1 -0.6 -1.6 1.7 -0.5 -0.3 5.2 Profit for the period -6.4 3.3 1.8 5.9 -1.1 4.0 2.1 2.6 Share of the result for the period attributable to owners of the parent company -5.2 3.5 2.0 5.5 -0.7 3.3 1.7 5.3 Share of the result for the period attributable to non-controlling interests -1.2 -0.2 -0.2 0.4 -0.4 0.8 0.4 -2.7 EPS -0.2 0.2 0.1 0.2 0.0 0.1 0.1 0.2 Average number of personnel (FTE) 4,923 4,976 4,978 4,882 4,851 4,793 4,990 4,474 Change in personnel during the quarter -53 -1 95 31 58 -197 516 -272 REPORT BY THE BOARD OF DIRECTORS |AUDITED FINANCIAL STATEMENTS 25 Calculation of key financial figures and alternative performance measures Key figures Earnings per share (EPS) Profit for the financial period attributable to owners of the parent company - Hybrid bond interest expenses net of tax Average number of shares during the financial year Alternative performance measures Equity per share Equity attributable to owners of the parent company Number of shares at the end of the financial period Dividend per share Dividend distribution for the financial year (or proposal) Number of shares at the end of the financial period Dividend/result, % Dividend per share x 100 Earnings per share (EPS) Effective dividend yield, % Dividend per share x 100 Closing price for the financial year P/E ratio Closing price for the financial year Earnings per share (EPS) Share turnover, % Number of shares traded during the period x 100 Average number of shares Return on equity (ROE), % Profit for the period (rolling 12 months) x 100 Equity (average) Return on capital employed, % (ROCE) Profit before taxes (rolling 12 months) + financial expenses (rolling 12 months) x 100 Total statement of financial position – non-interest-bearing liabili- ties (average) Equity ratio, % Equity x 100 Total statement of financial position – prepayments received Gearing, % Interest-bearing net debt – cash and cash equivalents x 100 Equity EBITDA Operating profit + depreciation, amortisation and impairment EBITDA, % Operating profit + depreciation, amortisation and impairment x 100 Revenue Adjusted EBITDA¹⁾ Operating profit + depreciation, amortisation and impairment + adjustment items Adjusted EBITDA, % ¹⁾ Operating profit + depreciation, amortisation and impairment + adjustment items x 100 Revenue Adjusted operating profit before the amortisa- tion and impairment of intangible assets (EBITA)¹⁾ Operating profit + adjustment items + amortisation and impairment of intangible assets Adjusted EBITA, %¹⁾ Adjusted operating profit before the amortisation and impair- ment of intangible assets (EBITA) x 100 Revenue Net debt/Adjusted EBITDA¹⁾, Interest-bearing net debt - cash and cash equivalents rolling 12 months Adjusted EBITDA (rolling 12 months) Cash flow after investments Net cash flow from operating activities + net cash flow from in- vesting activities Adjusted operating profit (EBIT) ¹⁾ Operating profit + adjustment items Adjusted operating profit, % ¹⁾ Adjusted operating profit (EBIT) x 100 Revenue Profit before taxes Profit for the financial year + income tax Gross investments Increase in tangible and intangible assets and in right of-use as- sets Organic revenue growth, % Revenue for the period - revenue from M&A transactions for the period - revenue for the previous period x 100 Revenue for the previous period ¹⁾ Significant transactions that are not part of the normal course of business, are related to business acquisition costs (IFRS 3), are infrequently occurring events or valuation items that do not affect cash flow are treated as adjustment items affecting comparability between review periods. According to Pihlajalinna’s definition, such items include, for example, restructuring measures, impairment of assets and the remeasurement of previous assets held by subsidiaries, the costs of closing down businesses and business locations, gains and losses on the sale of businesses, costs arising from operational restructuring and the integration of acquired businesses, costs related to the termination of employment relationships, as well as fines and corresponding compensation payments. Pihlajalinna presents costs concerning cloud computing arrangements, and reversals of amortisation, as adjustment items. REPORT BY THE BOARD OF DIRECTORS |AUDITED FINANCIAL STATEMENTS 26 Reconciliations with alternative key figures and ratios Pihlajalinna publishes a wide range of alternative performance measures, i.e. key figures that are not based on financial reporting standards, because they are considered to be significant for investors, the manage- ment and the Board of Directors in assessing the group’s financial position and profitability. The alternative performance measures should not be considered to be replacements for the key figures defined in IFRS standards. The table below presents the reconciliation calculations for the alternative performance measures and the justifications for their presentation. Reading notes: /divide by the next number/numbers - deduct the next number/numbers + add the next number/numbers EUR million 2023 2022 Return on equity (ROE), % Profit for period (rolling 12 months)/ 4.6 7.7 Equity at beginning of period 122.9 122.6 Equity at end of period 144.6 122.9 Equity (average) x 100 133.7 122.7 Return on equity (ROE), % 3.4 6.2 Return on equity is one of the most important indicators of a company’s profitability used by shareholders and investors. The indicator illustrates the company’s ability to look after the capital invested by sharehol- ders in the company. The figure indicates how much return was accumulated on equity during the financial year. EUR million 2023 2022 Return on capital employed (ROCE), % Profit before taxes (rolling 12 months) + 8.2 1.5 Financial expenses (rolling 12 months) 12.7 8.1 / 20.9 9.6 Total statement of financial position at beginning of period - 661.6 457.1 non-interest-bearing liabilities at beginning of period 138.9 135.5 522.8 321.6 Total statement of financial position at end of period - 657.5 661.6 Non-interest-bearing liabilities at end of period 135.7 138.9 521.8 522.8 Average x 100 522.3 422.2 Return on capital employed (ROCE), % 4.0 2.3 Return on capital employed is one of the most important indicators produced by financial statements ana- lysis. It measures the company’s relative profitability, or the return on capital invested in the company that requires interest or other returns. EUR million 2023 2022 Equity ratio, % Equity/ 144.6 122.9 Total statement of financial position - 657.5 661.6 Advances received x 100 0.3 0.0 Equity ratio, % 22.0 18.6 The equity ratio measures the company’s solvency, the capacity to tolerate losses and the ability to ma- nage commitments in the long term. The indicator shows the percentage of the company’s assets that are financed by equity. EUR million 2023 2022 Gearing, % Interest-bearing financial liabilities – 377.2 398.8 Cash and cash equivalents/ 24.5 13.1 Equity x 100 144.6 122.9 Gearing, % 243.9 313.8 Gearing illustrates the company’s indebtedness. The figure reveals the ratio between the equity invested in the company by shareholders and the interest-bearing debt borrowed from lenders. EUR million 2023 2022 Net debt/adjusted EBITDA, rolling 12 months Interest-bearing financial liabilities - 377.2 398.8 Cash and cash equivalents 24.5 13.1 Net debt/ 352.7 385.7 Adjusted EBITDA (rolling 12 months) 80.6 64.2 Net debt/adjusted EBITDA, rolling 12 months 4.4 6.0 This figure illustrates how quickly, at the current profit rate, the company would have paid off its debts if the EBITDA were to be used in full to repay the debts, if the company does not, for example, invest or dis- tribute any dividend. REPORT BY THE BOARD OF DIRECTORS |AUDITED FINANCIAL STATEMENTS 27 EUR million 2023 2022 EBITDA and Adjusted EBITDA Profit for period 4.6 7.7 Income tax -3.6 6.1 Financial expenses -12.7 -8.1 Financial income 0.4 0.7 Depreciation, amortisation and impairment -51.9 -45.5 EBITDA 72.5 54.4 IFRS 3 costs – 0.7 1.3 Entries related to the IFRIC Agenda Decision concerning cloud computing arrangements 1.0 0.3 Other EBITDA adjustments 6.4 8.2 Total EBITDA adjustments 8.1 9.8 Adjusted EBITDA 80.6 64.2 EBITDA indicates how much is left of the company’s revenue after deducting operating expenses. Assess- ments of whether EBITDA is sufficiently high should take into account the company’s financial expenses, depreciation requirements and intended profit distribution. Adjusted EBITDA provides significant additi- onal information on profitability by eliminating items that do not necessarily reflect the profitability of the company’s operative business. Adjusted EBITDA improves comparability between periods and is frequently used by analysts, investors and other parties. The Group Management Team and operative management monitor and forecast adjusted EBITDA on a monthly basis. EUR million 2023 2022 EBITDA, % EBITDA/ 72.5 54.4 Revenue x 100 720.0 690.5 EBITDA, % 10.1 7.9 EUR million 2023 2022 Adjusted EBITDA, % Adjusted EBITDA/ 80.6 64.2 Revenue x 100 720.0 690.5 Adjusted EBITDA, % 11.2 9.3 EUR million 2023 2022 Operating profit (EBIT) and Adjusted operating profit (EBIT) Profit for the period 4.6 7.7 Income tax -3.6 6.1 Financial expenses -12.7 -8.1 Financial income 0.4 0.7 Operating profit (EBIT) 20.6 8.9 Entries related to the IFRIC Agenda Decision concerning cloud computing arrangements (reversal of amortisation ) - -0.5 -0.4 Other adjustments to amortisation and impairment 0.9 0.3 Total adjustments to depreciation, amortisation and impairment 0.5 0.4 Total EBITDA adjustments 8.1 9.8 Total operating profit (EBIT) adjustments 8.5 9.7 Adjusted operating profit (EBIT) 29.1 18.6 PPA amortisation 2.1 2.7 Amortisation and impairment of other intangible assets 6.6 5.4 Entries related to the IFRIC Agenda Decision concerning cloud computing arrangements (reversal of amortisation) 0.5 0.4 Adjusted operating profit before the amortisation and impairment of intangible assets (EBITA) 37.8 26.7 Operating profit indicates how much is left of the proceeds of actual business operations before financial items and taxes. With operating profit, the company must cover, among other things, financial expenses, taxes and the distribution of dividends. Adjusted operating profit provides significant additional informa- tion on profitability by eliminating items that do not necessarily reflect the profitability of the company’s operative business. Adjusted operating profit improves comparability between periods and is frequently used by analysts, investors and other parties. The Group Management Team and operative management monitor and forecast adjusted operating profit (EBIT) and adjusted operating profit before the amortisation and impairment of intangible assets (EBITA) on a monthly basis. EUR million 2023 2022 Operating profit (EBIT), % Operating profit/ 20.6 8.9 Revenue x 100 720.0 690.5 Operating profit (EBIT), % 2.9 1.3 REPORT BY THE BOARD OF DIRECTORS |AUDITED FINANCIAL STATEMENTS 28 EUR million 2023 2022 Adjusted operating profit (EBIT), % Adjusted operating profit/ 18.6 18.6 Revenue x 100 720.0 690.5 Adjusted operating profit (EBIT), % 4.0 2.7 EUR million 2023 2022 Adjusted operating profit before the amortisation and impairment of intangible assets (EBITA), % Adjusted operating profit before the amortisation and impairment of intangible assets (EBITA) / 37.8 26.7 Revenue x 100 720.0 690.5 Adjusted operating profit before the amortisation and impairment of intangible assets (EBITA), % 5.2 3.9 EUR million 2023 2022 Cash flow after investments Net cash flow from operating activities 79.0 64.9 Net cash flow from investing activities -18.5 -83.4 Cash flow after investments 60.5 -18.6 Cash flow after investments (free cash flow) indicates how much cash is left for the company after deduc- ting the cash tied up in operative business and investments. It indicates how much the company has left for its shareholders and creditors. Free cash flow indicates how sustainable the foundation of the com- pany’s profitability is, and it is used as the basis of the company’s valuation. EUR million 2023 2022 Profit before taxes Profit for period 4.6 7.7 Income tax -3.6 6.1 Profit before taxes 8.2 1.5 EUR million 2023 2022 Gross investments Property, plant and equipment at end of period 65.8 58.7 Right-of-use assets at end of period 203.9 197.7 Other intangible assets at end of period 21.1 22.8 Goodwill at end of period 251.8 251.0 Depreciation, amortisation and impairment for period are added 51.9 45.5 - Property, plant and equipment at beginning of period 58.7 45.0 Right-of-use assets at beginning of the period 197.7 95.6 Other intangible assets at beginning of period 22.8 14.9 Goodwill at beginning of period 251.0 188.9 Proceeds from the sale of property, plant and equipment during period -2.3 -3.0 Gross investments 66.5 234.5 Gross investments refers to the acquisition of long-term factors of production, including M&A transactions. Di- vestments and proceeds from the sale of property, plant and equipment are not deducted from investments. In- vestments are also presented on a cash flow basis in the cash flow statement. EUR million 2023 2022 Organic revenue growth, % Revenue for period - 720.0 690.5 Revenue from M&A transactions during period 16.2 77.8 Revenue from divestments during period -12.0 Revenue for previous period 690.5 577.8 Organic revenue growth / 25.3 34.9 Revenue for previous period x 100 690.5 577.8 Organic revenue growth, % 3.7 6.0 Revenue growth due to M&A transactions, % 2.3 13.5 Revenue growth 29.5 112.7 Revenue growth, % 4.3 19.5 Organic revenue growth is growth in existing business operations that has not come about as a result of M&A transactions. Organic growth can be achieved through increasing the service offering, new customer acquisition, growth in custom from existing customers, price increases and digitalisation. Social and healthcare outsourcing contracts won through public competitive bidding and new business locations established by the group itself are included in organic growth. Organic growth is calculated also excluding divestments. REPORT BY THE BOARD OF DIRECTORS |AUDITED FINANCIAL STATEMENTS 29 Shares and shareholders Distribution of shareholding by size range, 31 Dec 2023 1 ̶ 100 Shares per shareholder 101 ̶̶ 1 000 1 001 ̶̶ 10 000 10 001 ̶̶ 100 000 100 001 ̶̶ 500 000 500 001 ̶̶ Distribution of shareholding by size range, 31 Dec 2023 Shares per shareholder Number of shareholders % of shareholders Number of shares Percentage of shares, % 1 - 100 8,612 56.8 % 364,162 1.6 % 101 - 1 000 5,645 37.3 % 1,907,467 8.4 % 1 001 - 10 000 779 5.1 % 2,104,422 9.3 % 10 001 - 100 000 91 0.6 % 2,217,556 9.8 % 100 001 - 500 000 16 0.1 % 3,374,297 14.9 % 500 001 - 7 0.0 % 12,652,231 55.9 % Total 15,150 100.0 % 22,620,135 100.0 % of which nominee-registered shares 9 498,983 2.2 % Outstanding shares 22,620,135 100.0 % Major shareholders, 31 Dec 2023 1 LOCALTAPIOLA GENERAL MUTUAL INSURANCE COMPANY 3,481,641 15.4 % 2 MWW YHTIÖ LTD 2,309,010 10.2 % 3 FENNIA MUTUAL INSURANCE COMPANY 2,262,965 10.0 % 4 LOCALTAPIOLA MUTUAL LIFE INSURANCE COMPANY 1,895,156 8.4 % 5 ELO MUTUAL PENSION INSURANCE COMPANY 1,267,161 5.6 % 6 ILMARINEN MUTUAL PENSION INSURANCE COMPANY 728,431 3.2 % 7 NIEMISTÖ LEENA KATRIINA 707,867 3.1 % 8 FONDITA NORDIC MICRO CAP INVESTMENT FUND 430,000 1.9 % 9 NORDEA LIFE ASSURANCE FINLAND LTD 351,700 1.6 % 10 VIPUNEN CAPITAL OY 350,000 1.5 % 10 largest, total 13,783,931 60.9 % Other shareholders 8,836,204 39.1 % Total 22,620,135 100.0 % REPORT BY THE BOARD OF DIRECTORS |AUDITED FINANCIAL STATEMENTS 30 Distribution of shareholding by size range, 31 Dec 2023 Private companies Financial and insurance institutions Public entities Households Non-profit organisations Nominee registered Direct holding Indirect holdings Number of shares Percentage of shares and votes Number of shares Percentage of shares and votes Board of Directors Jukka Leinonen 12,636 0.1 % Leena Niemistö 707,867 3.1 % Mikko Wirén (MWW Yhtiö Oy) 2,309,010 10.2 % Mikko Wirén 5,000 0.0 % Heli Iisakka 2,267 0.0 % Hannu Juvonen 3,514 0.0 % Seija Turunen 4,392 0.0 % Kim Ignatius 1,318 0.0 % Tiina Kurki 1,318 0.0 % Management Team Tuomas Hyyryläinen 30,000 0.1 % Eetu Salunen 18,431 0.1 % Tarja Rantala 17,142 0.1 % Marko Savolainen 10,694 0.1 % Timo Harju 11,500 0.1 % Antti-Jussi Aro 4,001 0.0 % Riihijärvi Sari 4,004 0.0 % Shareholding of the management 31 Dec 2023 Distribution of shareholding by sector 31 Dec 2023 Number of shareholders % of shareholders Number of shares Percentage of shares, % Private companies 531 3.5 % 4,928,734 21.8 % Financial and insurance institutions 37 0.2 % 9,290,587 41.1 % Public entities 5 0.0 % 2,031,818 9.0 % Households 14,496 95.7 % 5,680,571 25.1 % Non-profit organisations 42 0.3 % 147,678 0.7 % Foreign shareholders 39 0.3 % 41,764 0.2 % Total 15,150 100.0 % 22,121,152 97.8 % Nominee registered 8 498,983 2.2 % Outstanding shares 22,620,135 100.0 % REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS 31 Financial statements 1 Jan–31 Dec 2023 CONTENTS Main statements included in the consolidated financial statements, IFRS ___ Consolidated statement of comprehensive income, IFRS 32 Consolidated statement of financial position, IFRS 33 Consolidated statement of cash flows, IFRS 34 Consolidated statement of changes in equity, IFRS 35 Notes to the consolidated financial statements, IFRS ___ Category No. Description Accounting policies 36 New and revised standards and interpretations applied in the past financial year 36 New and revised standards and interpretations to be applied in future financial years 37 Income statement 1 Revenue from contracts with customers and segment information 39 Income statement 2 Other operating income 43 Income statement 3 Materials and services 43 Income statement 4 Employee benefit expenses and the number of personnel 43 Income statement 5 Share-based payments 44 Income statement 6 Other operating expenses and audit fees 45 Income statement 7 Depreciation, amortisation and impairment 45 Income statement 8 Financial income 46 Income statement 9 Financial expenses 46 Income statement, taxes 10 Income taxes 46 EPS 11 Earnings per share 47 Statement of financial position 12 Property, plant and equipment 47 Statement of financial position 13 Intangible assets 49 Statement of financial position 14 Right-of-use assets 52 Statement of financial position 15 Other non-current receivables 53 Statement of financial position 16 Trade receivables and other receivables (current) 54 Statement of financial position 17 Provisions 55 Statement of financial position 18 Trade and other payables 55 Balance sheet, taxes 19 Deferred tax assets and liabilities 56 Equity 20 Financial assets and liabilities by measurement category 59 Equity 21 Notes on equity 61 Equity 22 Financial liabilities 63 Equity 23 Changes in financial liabilities with no impact on cash flow 63 Equity 24 Capital management 63 Risk management 25 Financial risk management 64 Group structure 26 Acquired business operations and divestments 67 Group structure 27 Subsidiaries and material non-controlling interests 70 Group structure 28 Interests in associates and joint arrangements 71 Other 29 Contingent assets and liabilities and commitment 71 Group structure 30 Group structure 73 Other 31 Related party transactions 74 Other 32 Events after the balance sheet date 75 Parent company financial statements, FAS ___ Parent company income statement FAS 76 Parent company balance sheet FAS 77 Parent company cash flow statement FAS 78 Parent company notes to financial statements, FAS ___ Parent company notes to financial statements, FAS 79 Date of and signatures to the report by the board of directors and the financial statements 85 ___ REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS 32 Consolidated statement of comprehensive income, IFRS EUR 1,000 Note 1–12/2023 1–12/2022 Revenue 1 719,984 690,481 Other operating income 2 7,532 4,896 Materials and services 3 -255,231 -267,224 Employee benefit expenses 4 -322,760 -296,572 Other operating expenses 6 -76,559 -77,164 Share of profit in associated companies and joint ventures 28 -478 -15 EBITDA 72,487 54,401 Depreciation, amortisation and impairment 7 -51,906 -45,498 Operating profit (EBIT) 20,581 8,903 Financial income 8 355 721 Financial expenses 9 -12,749 -8,074 Financial income and expenses -12,394 -7,353 Profit before taxes 8,187 1,550 Income tax 10 -3,587 6,110 Profit for the period 4,600 7,659 Attributable to: To the owners of the parent company 5,729 9,519 To non-controlling interests -1,129 -1,859 Earnings per share calculated on the basis of the result for the period attributable to the owners of the parent company (EUR) Basic 11 0.19 0.42 Diluted 0.19 0.42 Consolidated statement of comprehensive income EUR 1,000 Note 1–12/2023 1–12/2022 Profit for the period 4,600 7,659 Other comprehensive income that will be reclassified subse- quently to profit or loss Cash flow hedge 25 -1,768 5,113 Recorded in equity -1,020 5,113 Transferred to income statement -748 0 Income tax on other comprehensive income 354 -1,023 Other comprehensive income for the reporting period -1,415 4,090 Total comprehensive income for the reporting period 3,185 11,750 Attributable to: To the owners of the parent company 4,314 13,609 To non-controlling interests -1,129 -1,859 REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS 33 Consolidated statement of financial position, IFRS EUR 1,000 Note 31 Dec 2023 31 Dec 2022 ASSETS Non-current assets Property, plant and equipment 12 65,807 58,738 Goodwill 13 251,773 251,032 Other intangible assets 13 21,071 22,803 Right-of-use assets 14 203,932 197,746 Interests in associates 28 1,591 2,069 Other investments 168 1,167 Other receivables 15 6,088 9,160 Deferred tax assets 19 14,595 17,324 Total non-current assets 565,025 560,039 Current assets Inventories 3 4,460 4,309 Trade and other receivables 16 61,498 76,806 Current tax assets 1,998 2,103 Cash and cash equivalents 24,517 13,128 Current assets held for sale 26 5,255 Total current assets 92,473 101,601 Total assets 657,498 661,639 EUR 1,000 Note 31 Dec 2023 31 Dec 2022 EQUITY AND LIABILITIES Equity attributable to owners of the parent Share capital 80 80 Fair value reserve 2,676 4,090 Reserve for invested unrestricted equity 116,520 116,520 Hybrid loan 20,000 Retained earnings 3,032 -6,229 Profit for the financial year 5,729 9,519 148,036 123,981 Non-controlling interests -3,445 -1,092 Total equity 21 144,591 122,888 Deferred tax liabilities 19 8,452 8,512 Provisions 17 123 89 Lease liabilities 22 199,834 201,235 Financial liabilities 20 144,546 168,031 Other non-current liabilities 666 816 Total non-current liabilities 353,620 378,684 Trade and other payables 18 125,333 127,529 Current tax liabilities 119 30 Provisions 17 84 Lease liabilities 22 30,754 28,338 Financial liabilities 20 2,996 3,090 Current liabilities held for sale 26 1,081 Total current liabilities 159,287 160,067 Total liabilities 512,907 538,750 Total equity and liabilities 657,498 661,639 REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS 34 Consolidated statement of cash flows, IFRS EUR 1,000 Note 1–12/2023 1–12/2022 Cash flow from operating activities Profit for the period 4,600 7,659 Taxes 3,587 -6,110 Depreciation, amortisation and impairment 51,906 45,498 Financial income and expenses 12,394 7,371 Other 6,450 -121 Net cash generated from operating activities before change in working capital 78,937 54,299 Change in working capital 25 16,761 Interest received 409 714 Taxes paid -370 -6,892 Net cash flow from operating activities 79,002 64,882 Cash flow from investing activities Investments in tangible and intangible assets -22,859 -29,033 Proceeds from disposal of property, plant and equipment and intangible assets and prepayments 311 408 Changes in other receivables and investments -34 -1,775 Sale of subsidiaries with time-of-sale liquid assets deducted 26 7,657 0 Granted loans -2,078 -738 Dividends received 3 7 Acquisition of subsidiaries less cash and cash equivalents at date of acquisition 26 -1,460 -52,308 Net cash flow from investing activities -18,460 -83,439 Cash flow from financing activities Changes in non-controlling interests -262 -408 Acquisition of own shares 0 -1,475 Proceeds from long-term borrowings 23 5,000 204,000 Repayment of long-term borrowings 23 -33,975 -128,779 Repayment of lease liabilities 23 -31,825 -29,014 Interest and other financial expenses -6,178 -8,307 Dividends paid and other profit distribution -1,480 -8,589 Proceeds from hybrid bond 21 20,000 0 Hybrid bond expenses 21 -432 0 Net cash flow from financing activities -49,153 27,429 Changes in cash and cash equivalents 11,389 8,871 Cash at beginning of period 13,128 4,257 Cash at end of period 24,517 13,128 REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS 35 Consolidated statement of changes in equity, IFRS Equity attributable to owners of the parent company EUR 1,000 Note Share capital Reserve for invested unrestricted equity Fair value reserve Hybrid bond Retained earnings Non-controlling interests Equity Total Total equity, 1 Jan 2022 80 116,520 2,501 3,510 122,611 Profit for the period 9,519 -1,859 7,659 Comprehensive income for the period 25 4,090 4,090 Total comprehensive income for the period 4,090 9,519 -1,859 11,750 Dividends paid -6,767 -2,987 -9,754 Acquisition of own shares -1,475 -1,475 Share-based benefits 5 -49 -49 Investments in group subsidiaries 41 41 Total transactions with owners -8,290 -2,945 -11,236 Changes in NCI without a change in control 26 -610 202 -408 Other changes 172 172 Total changes in subsidiary shareholdings -439 202 -236 Total equity, 31 Dec 2022 80 116,520 4,090 3,290 -1,092 122,888 Equity attributable to owners of the parent company EUR 1,000 Note Share capital Reserve for invested unrestricted equity Fair value reserve Hybrid bond Retained earnings Non-controlling interests Equity Total Total equity, 1 Jan 2023 80 116,520 4,090 3,290 -1,092 122,888 Profit for the period 5,729 -1,129 4,600 Comprehensive income for the period 25 -1,415 -1,415 Total comprehensive income for the period -1,415 5,729 -1,129 3,185 Dividends paid -730 -730 Share-based benefits 5 299 299 Total transactions with owners 299 -730 -431 Changes in NCI without a change in control 26 -202 -347 -550 Other changes 77 -146 -70 Total changes in subsidiary shareholdings -126 -494 -619 Proceeds from hybrid bond 21 20,000 20,000 Hybrid bond interests and expenses 21 -432 -432 Total equity, 31 Dec 2023 80 116,520 2,676 20,000 8,760 -3,445 144,591 REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS 36 Accounting policies Company profile Pihlajalinna is one of the leading private social and healthcare service providers in Finland. The Group serves private persons, companies, insurance companies and public sector entities. Pihlajalinna provides a broad range of social and healthcare services as well as wellbeing services. The service selection includes general practitioner and medi- cal specialist services, occupational healthcare, social and healthcare outsourcing, fitness centre services, responsible doctor and remote consultation services as well as residential services and staffing ser- vices. At the end of the financial year, the total number of Pihlajalinna’s private clinics, hospitals, dental clinics, fitness centres and service housing units with 24-hour assistance was approximately 160. In ad- dition, Pihlajalinna has four major complete social and healthcare outsourcing agreements that collectively cover some 40 locations (in- cluding health centres, maternity and child health clinics, service housing units with 24-hour assistance and daytime activity centres). The Group’s parent company, Pihlajalinna Plc , is a Finnish public limited company established under the laws of Finland, whose Business ID is 2617455-1. The company is domiciled in Tampere, and its registered address is Kehräsaari B, FI-33200 Tampere, Finland . Pihlajalinna Plc ’s shares are listed on the NASDAQ OMX Helsinki main market. A copy of the consolidated financial statements is available on the internet at investors.pihlajalinna.fi or can be obtained at the head office of the Group’s parent company, address Kehräsaari B, 33200 Tampere, Finland . The Board of Directors of Pihlajalinna Plc approved these financial statements in its meeting on 13 February 2024. In accordance with the Finnish Limited Liability Companies Act, the shareholders may adopt or reject the financial statements at the Annual General Meet- ing held after their publication. The Annual General Meeting can also decide on modifications to be made to the financial statements. Basis of preparation The consolidated financial statements have been prepared in accord- ance with the International Financial Reporting Standards (IFRS), and their preparation complies with the IAS and IFRS as well as SIC and IFRIC interpretations effective on 31 December 2023. International Fi- nancial Reporting Standards, as intended in the Finnish Accounting Act and the regulations issued pursuant to the Act, refer to the stand- ards that have been approved for application within the EU in accord- ance with Regulation (EC) No. 1606/2002 and interpretations thereof. The notes to the consolidated financial statements also comply with the Finnish accounting and company legislation that complements the IFRS regulations. Accounting policies that influence a particular note to the consoli- dated financial statements are indicated with the heading Accounting policies in the note in question. The consolidated financial statements are presented in euros and all figures are rounded to the nearest thousand, unless otherwise specified. New and amended standards applied in the past financial year From the beginning of 2023, the Group has applied the following standards, which are already in effect, for the first time in its IFRS re- porting: Changes to IAS 1 Presentation of Financial Statements and to IFRS Practice Statement 2 Making Materiality Judgements The amendments clarify the application of materiality to disclosure of accounting policies. Changes to IAS 8 Accounting Principles, Changes in Accounting Esti- mates and Errors The amendments clarify how companies should distinguish changes in accounting policies from changes in accounting estimates, with a primary focus on the definition of and clarifications on accounting es- timates. Amendments to IAS 12 Income Taxes The amendments narrow the initial recognition exemption (IRE) and clarify that the exemption does not apply to transactions such as leases and decommissioning obligations which give rise to equal and offsetting temporary differences. From 2023 onwards, a deferred tax liability and assets from leases has been presented separately in the notes. The figures for comparison period 2022 have been adjusted correspondingly. Other new or amended standards that entered effect on 1 January 2023 did not have effect on Pihlajalinna’s consolidated financial state- ments. Consolidation principles Subsidiaries Subsidiaries are entities in which the Group exercises control. The Group has control of an entity when it is exposed, or has rights, to variable returns from its involvement with the entity and has the abil- ity to affect those returns through its power over the entity. Intragroup shareholdings are eliminated using the acquisition method. The consideration transferred and the acquired entity’s identifiable assets and assumed liabilities are measured at fair value at the date of acquisition. Acquisition-related costs are expensed. Any contingent consideration is measured at fair value at the date of ac- quisition and classified as a liability. If the initial accounting for a busi- ness combination is incomplete by the end of the reporting period in which the combination occurs, the Group reports in its financial state- ments provisional amounts for the items for which the accounting is incomplete. During the measurement period, the Group retrospec- tively adjusts the provisional amounts recognised at the acquisition date to reflect any new information. The measurement period may not exceed one year from the acquisition date. A contingent consider- ation classified as a liability is measured at fair value at the end of each reporting period, and any resulting gain or loss is recognised in profit or loss after the end of the measurement period. Non-controlling interests in the acquiree are recognised either at fair value or an amount that corresponds to their pro rata share of the acquiree’s net assets. The amount by which the consideration transferred, non-controlling interests in the acquiree and previously owned holding combined exceed the fair value of the acquired net as- sets is recognised as goodwill in the consolidated statement of finan- cial position. If the combined value of the consideration, non-control- ling interests and previously owned holding is lower than the fair REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS 37 value of the acquiree’s net assets, the difference is recognised in the statement of comprehensive income. Acquired subsidiaries are consolidated from the date when the Group obtained control, and disposed subsidiaries are consolidated until the date when the Group lost control. All intragroup transac- tions, receivables, liabilities, unrealised profits and internal profit dis- tribution are eliminated in the preparation of the consolidated finan- cial statements. Unrealised losses will not be eliminated in case of im- pairment losses. Profit or loss for the financial year attributable to the owners of the parent company and to the non-controlling interests is presented in the consolidated statement of comprehensive income. Comprehensive income is attributed to the owners of the parent company and to the non-controlling interests, even if this would lead to a situation where the portion attributable to the non-controlling interests is negative. The portion of equity attributable to the non- controlling interests is presented as a separate item under equity in the consolidated statement of financial position. Such changes in the parent company’s ownership interest in a subsidiary that do not lead to loss of control are treated as equity transactions. In connection with step-by-step acquisitions, the former ownership interest is measured at fair value, and the resulting gain or loss is rec- ognised in profit or loss. When the Group loses control of a subsidi- ary, any remaining interest is measured at fair value at the date of loss of control, and the resulting difference is recognised in profit or loss. Associates and joint arrangements Associates are companies over which the Group has significant influ- ence. As a rule, significant influence is established when the Group holds more than 20% of a company’s voting power or otherwise has significant influence but no control. A joint arrangement is an arrangement of which two or more par- ties have joint control. Joint control involves contractually agreed sharing of control of an arrangement, which exists only when deci- sions about relevant activities require the unanimous consent of the parties sharing control. A joint arrangement is either a joint operation or a joint venture. A joint venture is an arrangement whereby the Group has rights to the net assets of the arrangement, whereas in a joint operation the Group has rights to the assets, and obligations for the liabilities, relating to the arrangement. Associates are consolidated using the equity method. If the Group’s share of the loss of an associate exceeds the carrying amount of the investment, then the investment is carried at zero value, and the losses exceeding the carrying amount are not consolidated, un- less the Group is committed to fulfilling the obligations of the associ- ate. An investment in an associate includes the goodwill generated through the acquisition. Unrealised profits between the Group and an associate are eliminated in proportion to the Group’s ownership in- terest. The Group’s pro rata share of an associate’s profit for the fi- nancial year is included in operating profit. The Group owns 31% in Kiinteistö Oy Levin Pihlaja, which is consoli- dated as a joint operation according to the pro rata share, using the proportionate consolidation method. Foreign currency translation The consolidated financial statements are presented in euros, which is the functional currency and presentation currency of the Group’s parent company and of the subsidiaries engaged in business activi- ties. In their own accounting, Group companies translate day-to-day transactions denominated in foreign currency into their functional currency applying the exchange rates of the transaction date. Foreign exchange gains and losses related to the business are included in the corresponding expense items. Segment reporting Pihlajalinna’s CEO is the Group’s chief operating decision maker. The CEO monitors the Group’s result and makes significant operating de- cisions at the Group level. The Group operates only in Finland and its management system is based on a regional organisation structure. Under Pihlajalinna’s operating structure, the Group’s CEO, with the help of the Chief Operating Officers and the other members of the Management Team, is responsible for the Group’s business opera- tions and service offering to both the private and public sectors. The Chief Operating Officers prepare budgets for the Group’s businesses with the help of regional directors and the managing directors of the municipal companies. The Group CEO is responsible for the resources, investments and profitability of the Group’s businesses. Pihlajalinna’s group of cash-generating units corresponds to the reporting segment, i.e. the Group level. Group-level figures are reported as segment in- formation. The Group CEO uses the key figures from the IFRS financial state- ments in reporting on the Group’s result. The Group CEO assesses the result and profitability on the basis of the adjusted EBIT and adjusted EBITDA, and the reporting of the result complies with the accounting principles applied in the consolidated financial statements. The ad- justment items for the adjusted EBIT and adjusted EBITDA are speci- fied in Note 24 Capital management . Adjustments to EBITDA amounted to EUR 8.1 (9.8) million for the financial year, while adjust- ments to EBIT totalled EUR 8.5 (9.7) million. Key accounting estimates and uncertainties re- lated to estimates In the course of preparing the financial statements, it is necessary to make estimates and assumptions about the future. However, such es- timates and assumptions may later prove inaccurate compared with actual outcomes. The Group regularly monitors the realisation of the estimates and assumptions and changes in the underlying factors together with the business units by using several, both internal and external, sources of information. Any changes in estimates and assumptions are recog- nised in the financial year during which the estimate or assumption is corrected and in all subsequent financial years. The key accounting estimates and assumptions used in the prepa- ration of the consolidated financial statements that have the greatest effect on the figures presented in the consolidated financial state- ments are described in more detail in the following sections: Note Assumptions used concerning revenue recognition and the profitability of the Group’s fixed-term complete so- cial and healthcare services outsourcing agreements 1 Assumptions used in impairment testing 13 Assumptions used in the recognition of deferred tax as- sets 19 Accounting policies requiring management judge- ment The Group’s management makes judgement-based decisions regard- ing the choice of accounting policies and their application in the fi- nancial statements. The management has exercised judgement in the application of accounting policies in the financial statements with re- gard to the measurement of lease assets and liabilities in the state- ment of financial position (note 14). The management has also exer- cised judgement in determining the number of reporting segments (note Accounting policies, Segment reporting). New and revised standards and interpretations to be applied in future financial years The International Accounting Standards Board has published the fol- lowing new or amended standards and interpretations which the Group has not yet applied, but which are expected to have an effect on the consolidated financial statements. The Group will adopt them as from the effective date of each standard and interpretation, or if REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS 38 the effective date is some date other than the first day of the finan- cial year, as from the beginning of the financial year that first follows the effective date. * = The regulation in question was not approved for application in the EU by 31 December 2023. Amendments to IFRS 16 Leases (Effective for annual periods beginning on or after 1 January 2024, early application is permitted) The amendments introduce a new accounting model for variable pay- ments and will require seller-lessees to reassess and potentially re- state sale-and-leaseback transactions entered into since the imple- mentation of IFRS 16 in 2019. Amendments to IAS 1 Presentation of Financial Statements * (Effective for annual periods beginning on or after 1 January 2024, early application is permitted) The amendments are to promote consistency in application and clar- ify the requirements for determining if a liability is current or non-cur- rent. The amendments specify that covenants to be complied with af- ter the reporting date do not affect the classification of debt as cur- rent or non-current at the reporting date. The amendments require to disclose information about these covenants in the notes to the fi- nancial statements. The amendments also clarify transfer of a com- pany’s own equity instruments is regarded as settlement of a liability. Liability with any conversion options might affect classification as cur- rent or non-current unless these conversion options are recognized as equity under IAS 32. Amendments to IFRS 10 Consolidated Financial Statements and IAS 28 Investments in Associates and Joint Ventures * (Available for optional application, effective date deferred indef- initely) The amendments address the conflict between the existing guidance on consolidation and equity accounting and require the full gain to be recognised when the assets transferred meet the definition of a busi- ness under IFRS 3 Business Combinations . The new or amended standards listed above, or other new or amended standards, are not expected to have a significant effect on Pihlajalinna’s consolidated financial statements. REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS 39 Notes to the consolidated financial statements, IFRS 1. Revenue from contracts with customers Accounting policies The Group’s revenue consists of payments related to the sale of healthcare services, social services and wellbeing services measured at fair value, adjusted by any variable consideration. The healthcare services provided by the Group consist of occupational health services, services provided at private clinics and hospi- tals, responsible doctor services, diagnostics services and rehabilitation services. The social services pro- vided by the Group consist of services for the elderly and the disabled, mental health services and sub- stance abuse group services. A significant part of the consolidated revenue consists complete social and healthcare outsourcing, which also includes the provider’s liability for the costs of specialised care. The Group produces recruitment services related to healthcare professionals. The Group’s Forever fitness cen- tres offer diverse wellbeing services for adults who exercise. Fitness centre services complement Pihla- jalinna’s preventive occupational healthcare services and rehabilitation services carried out after specialised care procedures. Pihlajalinna’s services are also extensively available via digital channels. The Group recognises revenue from services produced by employees and independent practitioners on a gross basis, i.e. based on total customer invoicing, and the fees charged to the Group by independent practitioners are recognised in the income statement item External services, practitioners. As Pihlajalinna has primary responsibility for the provision of services to its customers, and the Group is exposed to signifi- cant risks and benefits related to the sale of services, the Group acts as a principal with regard to practition- ers with whom it has a contractual relationship. IFRS 15 Revenue from Contracts with Customers includes a five-step model that defines when, and at what amount, revenue from contracts with customers is recognised. Revenue can be recognised over time or at a point in time, and the transfer of control is the key criterion. The primary performance obligations for Pihlajalinna’s various revenue streams are as follows: Social and healthcare outsourcing ● statutory social and healthcare services for a municipality’s residents, separately described in contracts with customers, including possible public specialised care ● individual social and healthcare service visits by residents of other municipalities Private clinics ● individual customer visits to healthcare services at operating locations or digitally, including related sup- port services Surgical operations ● individual visits and related support services (e.g. private individuals who pay for their services them- selves or through insurance companies) Occupational healthcare ● individual occupational healthcare customer visits (e.g. appointments with occupational healthcare nurses and doctors, laboratory tests) at operating locations or digitally ● preventive and health-promoting separately agreed services (e.g. occupational health check-ups, work- place-specific occupational health surveys) ● other additional services agreed upon with the customer (e.g. first aid course) Fitness centre services ● obligations related to monthly and annual fees for fitness centre services ● individual separately charged additional services Recruitment services ● customer-specific monthly fees for recruitment services ● individual separately charged recruitment services Responsible doctor services ● location-specific daily charges described in the customer agreement Staffing service ● selling a healthcare professional’s labour event-specifically or based on time ● customer-specific monthly fees for emergency and on-call services REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS 40 Residential services ● elderly care home services on each day covered by the agreement ● individual separately charged additional services or health centre visits Digital services ● Remote doctor services ● Remote nurse services ● Other digital services related to appointment booking and assessing the need for care, other digital ser- vices ordered by the customer The services promised in a contract are treated as a single series of distinct services comprised performance obligation when the services provided are repeated in the same manner with respect to their substantial aspects and whose transfer to the customer takes place over time. The performance obligation in the Group’s social and healthcare outsourcing arrangements is the municipality’s statutory social and healthcare service operations described in the customer agreement. The Group’s customer contracts for the outsourc- ing of social and healthcare services are considered to consist of a single performance obligation in which the services provided by the Group are combined into a bundle of services. Transaction prices mainly comprises individual services according to the price list or annual, monthly, daily or hourly rates based on customer contracts. The outsourcing agreements are, as a rule, based on a fixed annual price. In most cases, the price concerns an individual performance obligation. In some cases, the price includes a variable component of consideration (e.g. discount, penalty charge, bonus, additional price, additional service), which is allocated to one or more performance obligations in proportion to their separate selling prices. The Group assesses the effect of the variable components on the amount of revenue recognised using historical data, for example, and recognises them at the most likely amount. The recogni- tion of revenue from the Group’s complete social and healthcare services outsourcing agreements may be- come more accurate with a delay and may also include variable consideration. The Group may not always be aware of the actual costs of the agreements, which may also affect revenue recognition. The performance obligations are fulfilled either over time (e.g. outsourcing, residential services, fitness centre services, recruitment services, responsible doctor services, fixed-price occupational health services) or at a point in time (e.g. occupational healthcare services, individual customer visits, additional services). In the services, the customer simultaneously receives and consumes the benefit from Pihlajalinna’s perfor- mance. Revenue is recognised on the reporting date at the amount that Pihlajalinna considers itself to be enti- tled to in exchange for the services delivered. Sales revenue from individual services is recognised at a point in time according to the time of the appointment or the use of the service. Revenue from outsourcing agree- ments for social and healthcare services under fixed annual prices is recognised over time. In outsourcing arrangements, the customer simultaneously receives and consumes the benefit from the service, which means that the conditions for recognising revenue over time are met. The payment terms and periods included in the contracts vary, but the payment periods are typically less than one year. The contracts do not include significant financing components or additional expenditure aris- ing from contractual receivables. In connection with outsourcing agreements, the client may provide Pihlajalinna, without financial consid- eration, with use of publicly owned infrastructure, or part there of, which Pihlajalinna operates in service production under the outsourcing agreement. Infrastructure may include for example premises, machinery and equipment. The IFRIC 12 Service Concession Arrangements interpretation is applied to the recognition of outsourcing agreements if the outsourcing party decides on the scope and pricing of the services pro- vided by Pihlajalinna and Pihlajalinna returns the infrastructure, free of charge, at the conclusion of the out- sourcing agreement. In such cases, Pihlajalinna is not considered to have control over assets received with- out consideration from a public-sector entity. Timing of the satisfaction of performance obligations EUR 1,000 2023 2022 At a point in time 315,864 318,950 Over time 404,119 371,531 Total 719,984 690,481 REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS 41 Key accounting estimates and decisions based on management judgement The recognition of revenue from complete outsourcing agreements for social and healthcare services may become more accurate with a delay, and it may include variable compensation. During the financial year, the management has used particular judgement with regard to the measurement and recognition of variable compensation and legal claims related to complete outsourcing agreements for social and healthcare services. In previous years, Pihlajalinna recognised revenue related to contractual variable compensation from its former complete outsourcing partners, namely the municipalities of Jämsä, Parkano and Mänttä-Vilppula. The client has not paid the amounts in question in breach of the service agreement. As a result of the establishment of the wellbeing services counties, Pihlajalinna aimed in 2023 to finalise the negotiations related to open receivables from previous years. The negotiations did not lead to the desired outcome. The company has commenced legal actions for debt recovery with regard to some of the receivables, and is considering legal actions to recover the other receivables. Consequently, the items in question no longer met the definition of contract assets at the end of the financial year, and Pihlajalinna has booked these items as expenses in the income statement. The items are classified as contingent off-balance sheet assets in accordance with IAS 37. Contingent assets are not recognised in the financial statements. The change in classification had the following effects on EBITDA: a decrease of EUR 1.4 million for Jämsän Terveys Oy, a decrease of EUR 4.8 million for Mäntänvuoren Terveys Oy, a decrease of EUR 1.3 million for Kolmostien Terveys Oy, and a decrease of EUR 0.4 million for Pihlajalinna Terveys Oy. The items, which may have a delayed effect on the profitability of complete outsourcing agreements according to the management’s estimate, reduced EBITDA by a total of EUR 7.8 million and are presented as EBITDA ad- justments. The entries also had a negative effect of EUR 0.4 million on financial items. The financial year profit before taxes the entries reduced total of EUR 8.2 million and earnings per share by EUR 0.26. The exact actual costs of the Group’s fixed-term complete outsourcing agreements for social and healthcare services are not always known to the Group on the reporting date, as the cost accumulation of public specialised care involves random fluctuation. In addition, individual cases falling within the scope of the wellbeing services counties’ pooling system for high-cost care may influence the cost liability of specialised care considerably during the financial year, and between financial periods, in Pihlajalinna’s municipal companies. Consequently, the management exercises judgement in determining the profitability of the agreements. On the financial statements date, Pihlajalinna’s only remaining cost liability for specialised care was under the complete outsourcing agreement with the wellbeing services county of South Ostrobothnia. For other complete outsourcing agreements, liability for the costs of specialised care ended during the financial year 2023. The ending of the cost liability under the agreements has improved the predictability of the profitability of the company’s agreements. Contractual assets and liabilities There may be differences in timing between revenue recognition and invoicing. The Group recognises a con- tractual asset when revenue is recognised before invoicing and, correspondingly, a contractual liability when revenue is recognised after invoicing. Summary of contractual items EUR 1,000 2023 2022 Trade receivables 52,469 47 168 Contract assets Current 3,619 13 452 Contract liabilities Current 1,347 3,237 Pihlajalinna has adjusted the figures for the comparison period and transferred EUR 7.4 million receiva- bles from trade receivables to contract assets. The amount of revenue recognized during the financial year that was included in contract liabilities at the beginning of the period: The amount of revenue recognized during the financial year that was included in contract liabilities at the beginning of the period: EUR 1,000 2023 2022 Revenue recognized from amounts included in contract liabilities 3,237 920 Revenue by region Pihlajalinna reports its sales revenue divided into the following geographical regions: ● Southern Finland includes Pihlajalinna’s business operations in the regions of Uusimaa, South West Fin- land, Päijät-Häme, Kymenlaakso and South Karelia. ● Mid-Finland includes Pihlajalinna’s business operations in the regions of Pirkanmaa, Satakunta, Kanta- Häme, Central Finland, South Savo, North Karelia and North Savo. ● Ostrobothnia includes Pihlajalinna’s business operations in the regions of Southern Ostrobothnia, Ostro- bothnia and Central Ostrobothnia. ● Northern Finland includes Pihlajalinna’s business operations in the regions of North Ostrobothnia, Kainuu and Lapland. ● Other operations include remote services, moving services and other administrative functions. EUR 1,000 2023 % 2022 % Southern Finland 179,008 25% 164,073 24% Mid-Finland 368,317 51% 369,542 54% Ostrobothnia 134,577 19% 132,465 19% Northern Finland 48,968 7% 43,440 6% Other operations 65,211 10% 54,466 8% Intra-Group sales -76,098 -73,505 Consolidated revenue 719,984 100% 690,481 100% REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS 42 Sales revenue by customer group Pihlajalinna’s customer groups are corporate customers, private customers and public sector customers. ● The Group corporate customers consist of Pihlajalinna occupational healthcare customers, insurance company customers and other corporate customers. The number of people within the scope of the Group’s occupational healthcare services is over 200,000 in the corporate customers group. ● The Group private customers are private individuals who pay for services themselves and may subse- quently seek compensation from their insurance company. ● The Group public sector customers consist of public sector organisations in Finland, such as municipali- ties, congregations, wellbeing services counties and the public administration when purchasing either so- cial and healthcare outsourcing services or residential, occupational healthcare and staffing services. The number of people within the scope of the Group’s occupational healthcare services is approximately 80,000 in the public sector customers group. EUR 1,000 2023 % 2022 % Corporate customers 268,050 37 225,270 33 of which insurance company customers 135,780 19 98,447 14 Private customers 102,060 14 103,243 15 Public sector 425,970 59 435,476 63 of which complete outsourcing 283,240 39 303,902 44 of which staffing 29,260 4 24,797 4 of which occupational healthcare and other services 113,470 16 106,777 15 Intra-Group sales -76,100 -73,508 Consolidated revenue 719,980 100 690,481 100 Information on key customers The Group’s sales revenue from the four largest customers totalled approximately EUR 313.4 (281.4) mil- lion, representing approximately 44% (41%) of the consolidated revenue. Estimate of unsatisfied performance obligations related to Group’s social and healthcare out- sourcing arrangements, EUR million: 31 Dec 2023 31 Dec 2022 31 Dec 2023 31 Dec 2022 2023 245 2032 7 7 2024 209 249 2033 7 7 2025 193 226 2034 7 7 2026 75 177 2035 6 7 2027 76 179 2028 77 182 2029 78 184 2030 47 156 2031 47 30 829 1,656 Service provider – client First year of service production under the current con- tract Duration of the original contract (years) Jämsän Terveys Oy 2015 10 Kuusiolinna Terveys Oy 2016 15 Mäntänvuoren Terveys Oy 2016 15 Kolmostien Terveys Oy 2015 15 Bottenhavets Hälsa Ab - Selkämeren Terveys Oy 2021 15 - 20 years On 30 October 2023, the county council of the wellbeing services county of South Ostrobothnia decided to terminate the outsourc-ing agreement with effect at the end of 2025, in accordance with the Act on the Implementation of the Reform of Health, Social and Rescue Services and on the Entry into Force of Related Legislation. The council’s decision is not yet legally binding, and an appeal has been lodged with the Su- preme Administrative Court. REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS 43 2. Other operating income Accounting policies Government grants received as compensation for expenses already incurred are recognised in profit or loss for the period in which they become receivable. These grants are presented under other operating income. Government grants related to capitalised development projects are recognised as deductions from the car- rying amounts of intangible assets, when there is reasonable assurance that such grants will be received and that the Group will comply with the conditions for receiving them. The grants will be recognised as income over the useful life of an asset by way of reduced depreciation. The Group has subleased certain premises that are not used for business operations. These leases are classified as operating leases and income from these leases is presented under other operating income. Sale and leaseback With regard to sale and leaseback agreements completed prior to the adoption of IFRS 16, the Group will continue the allocation of capital gains as before in accordance with the transition provision of IFRS 16. If a finance lease is created as a result of a sale and leaseback agreement, the difference between the car- rying amount and the sales price will be recognised in the consolidated statement of financial position and recognised as income over the lease term under other operating income. The unrecognised portion of the difference between the carrying amount and the sales price is presented as Other liabilities in the statement of financial position. Effects of COVID-19 In 2022, Pihlajalinna recognised a total of EUR 488 thousand in financial support intended to cover the fixed costs of the Group’s fitness centres in other operating income under government grants. No corresponding financial support was received in 2023. Compensation for the costs of pandemic-related services under the Group’s complete outsourcing agree- ments is presented in other operating income under other income items. Sale of dental care services Pihlajalinna announced in late 2022 that it will sell its dental care services to Hammas Hohde Oy. The Group recognised a gain of EUR 3.6 million from the divestment in other operating income during the financial year. More detailed information on the divestment of dental care services is provided in note 26 Acquisi- tions and divestments . EUR 1,000 2023 2022 Capital gains on property, plant and equipment 228 275 Rental income 2,265 503 Government grants 532 1,339 Other income items 907 2,779 Profit from sale of dental care services 3,600 0 Total 7,532 4,896 3. Materials and services Accounting policies Inventories are measured at acquisition cost or lower probable net realisable value. EUR 1,000 2023 2022 Materials -31,197 -30,975 Change in inventories 162 648 External services, practitioners -129,849 -112,527 External services, other -94,348 -124,370 Total -255,231 -267,224 4. Employee benefit expenses Accounting policies Pension plans are classified as defined benefit plans and defined contribution plans. The Group only has de- fined contribution plans. In defined contribution plans, the Group makes fixed payments to a separate unit. The Group has no legal or constructive obligation to make additional payments if the recipient of the pay- ments is incapable of paying out said retirement benefits. Payments made into the defined contribution plans are recognised in profit or loss for the financial year for which they are charged. The long-term share-based incentive scheme is recognised as an expense over its accrual period. The incentive scheme and other share-based payments are described in more detail in note 5 Share-based payments . Information on related party employee benefits and loans are presented in Note 31 Related party transactions. REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS 44 EUR 1,000 2023 2022 Wages and salaries -267,089 -245,289 Share-based incentive schemes - implemented as shares -269 -97 Pension costs - defined contribution plans -45,477 -42,010 Other social security expenses -9,926 -9,176 Total -322,760 -296,572 Number of personnel 2023 2022 Personnel on average (FTE) 4,923 4,851 Personnel at the end of the period (NOE) 6,880 7,016 5. Share-based payments Share-based incentive scheme for key personnel On 23 March 2022, Pihlajalinna’s Board of Directors approved the establishment of share-based incentive programme (LTIP 2022) for selected key employees. In its entirety the incentive scheme is to form a six- year program and the share rewards based on the program are not allowed to be disposed of prior to year 2026. In addition, in order to participate to the program, a key person must invest into Pihlajalinna shares. Performance and quality-based share program shall comprise of four separate performance periods of one year each (calendar years 2022, 2023, 2024 and 2025). Potential share rewards shall be paid out after the performance periods in years 2023, 2024, 2025 and 2026. The Board of Directors annually decides on the participants, performance indicators, targets and earning opportunities. Two earnings periods have been launched under the programme: 2022 and 2023. The programmes are treated in their entirety as eq- uity-settled share-based payments. The maximum number of shares (gross amount prior to deduction of applicable withholding tax) for each one-year performance period is defined in the allocation per participant. The applicable withholding tax will be deducted from the transferred shares, and the remaining net amount will be paid to the participants in shares. Shares paid out as share rewards are subject to a two-year transfer restriction. The earnings criteria for the performance and quality-based share programme are Pihlajalinna Group’s adjusted EBITA, as well as key operational, quality-related and sustainability-related indicators. No performance- and quality-based share rewards materialised for the performance period 2022 pursu- ant to the share plan, as the minimum objectives set for the programme were not achieved. Share rewards also did not materialise for the performance period 2023 due to impairments recognised during the finan- cial year. Performance-based long-term incentive programme (LTIP 2022) 2023 2022 Grant date 21 Jun 2023 23 Mar 2022 Share price at grant date, EUR 9.19 11.90 The year in which the shares are transferred 2024 2023 Amount of share-based rewards granted, maximum amount, number of shares 227,000 188,000 Actual share-based rewards, number of shares 0 0 Number of people within the scope of the programme at the end of the period 48 42 End of the vesting period 31 Dec 2023 31 Dec 2022 Form of payment In shares and cash In shares and cash CEO Tuomas Hyyryläinen is entitled to participate in the share-based incentive programme starting from the earnings period that begins on 1 January 2024. At the beginning of the share-based incentive scheme, the CEO has the right to purchase a maximum of 30,000 shares, so that for the first 10,000 shares, the company will give one share for each share purchased by the CEO, and for the next 20,000 shares, one share for each two shares purchased. If the CEO purchases the full quota of 30,000 shares, the company will give the CEO a total of 20,000 shares. Shares purchased by and given to the CEO are subject to the transfer restrictions of the LTIP programme. The effect of the remuneration on the result for the financial year was approximately EUR -0.2 million. Short-term incentive scheme (STI) The short-term incentive scheme (STI) is designed for the CEO. Starting from 2024, the CEO is entitled to a potential annual performance-based bonus (STI) that corresponds to 60% of the CEO’s annual salary at a maximum. The target level is 30% of the annual salary. The company’s Board of Directors confirms the amount, targets and criteria for the short-term incentive scheme annually. Other share-based payments On 13 October 2023, Pihlajalinna’s Board of Directors decided on share-based remuneration for Joni Aalto- nen under the terms of the termination agreement. Aaltonen served as the CEO until 8 March 2023. The remuneration was linked to performance- and quality-based earnings criteria. In connection with this, a gross amount of 10,000 shares was transferred to Joni Aaltonen on 13 November 2023. The remuneration was implemented in shares and cash. The applicable withholding tax was deducted from the transferred shares, and the remaining net amount was paid in shares. The effect of the remuneration on the result for the financial year was approximately EUR -0.1 million. REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS 45 6. Other operating expenses EUR 1,000 2023 2022 Voluntary indirect employee costs -8,263 -7,896 Facility expenses -13,586 -14,309 Vehicle operating costs -904 -913 Information management expenses -26,311 -26,170 Machinery and equipment expenses -6,810 -7,061 Travel expenses -3,264 -2,867 Sales and marketing expenses -6,823 -6,441 Other expenses -10,598 -11,508 Total -76,559 -77,164 Facility expenses Auditing, KPMG Oy Ab -328 -343 Statements, KPMG Oy Ab -11 -20 Non-audit services, KPMG Oy Ab -57 -51 Total -396 -414 7. Depreciation and amortization Accounting policies Property, plant and equipment will be depreciated using the straight-line method over their estimated eco- nomic useful lives. The estimated economic useful lives are as follows: Buildings 10–25 years Renovation expenses on real estate 5–10 years Machinery and equipment 3–10 years Other tangible assets 3–5 years For the magnetic imaging equipment at Turku, Oulu and Seinäjoki private clinics, the Group adopted a units- of-production based depreciation method effective from 1 January 2018. The amount of depreciation is based on the units of production derived from the equipment. The units-of-production based depreciation method is also applied to the imaging equipment in Helsinki, Tampere, Turku, Oulu and Kuopio that was transferred to Pihlajalinna as part of the acquisition of Pohjola Hospital (now Pihlajalinna Lääkärikeskukset Oy). The units-of-production method provides a more accurate reflection of the actual economic use of the magnetic imaging equipment in question. For the Group’s other machinery and equipment, the Group still uses straight-line depreciation. For intangible assets with finite economic useful lives, the amortisation periods are as follows: Trademarks 10 years Development costs 3–10 years Customer agreements 4 years Patient database 4 years Non-competition agreements 2–5 years Other intangible assets 3–7 years Property, plant and equipment is depreciated on a straight-line basis over the shorter of economic useful life or lease term. The planned depreciation periods of property, plant and equipment are as follows: Right-of-use plots 25 years Right-of-use buildings and business premises 1–15 years Right-of-use equipment 3–10 years Impairment is recognised pursuant to IAS 36 for onerous right-of-use buildings and business premises. Impairments for the financial year 2023 Pihlajalinna has performed an impairment test review regarding its other investments. Based on the review, Pihlajalinna has recorded an impairment of approximately EUR 0.6 million in its other investments. Refer to note 13 Impairment testing for more details. REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS 46 Depreciation, amortisation and impairment by asset type 2023 2022 Intangible assets Trademarks -564 -1,040 Capitalised development costs -1,088 -930 Customer relationship value -985 -1,233 Non-competition agreements -116 -60 Patient database -473 -378 Other intangible assets -4,963 -4,036 -8,189 -7,677 Property, plant and equipment Buildings -109 -104 Renovation expenses on real estate -2,507 -2,217 Machinery and equipment -9,375 -8,327 Other tangible assets -1 -1 -11,993 -10,649 Right-of-use assets Right-of-use plots -101 -97 Right-of-use buildings and business premises -30,088 -26,178 Right-of-use equipment -901 -898 -31,090 -27,173 Impairments -634 Total depreciation, amortisation and impairment -51,906 -45,498 8. Financial income EUR 1,000 2023 2022 Dividend income from financial assets measured at fair value through profit or loss 3 7 Interest income from loans and receivables 275 533 Interest income from financial lease receivables 67 135 Other financial income 9 46 Total 355 721 9. Financial expenses EUR 1,000 2023 2022 Interest expenses from financial liabilities carried at amortised cost -7,168 -3,392 Interest expenses on lease liabilities -3,724 -3,439 Other financial expenses -1,857 -1,243 Total -12,749 -8,074 The increased interest rates during 2023 have increased the interest expenses for the financial year. The other financial expenses line contains write-downs of loan receivables granted to associated compa- nies and other parties totaling approximately EUR 1.2 million, which were made based on the impairment testing. Refer to note 13 Impairment testing for more details. In the comparison period, the financing rear- rangement and the waiver costs paid at the end of the year due to the increase in the temporary covenant levels caused a total of EUR 0.7 million in one-time financing costs. Pihlajalinna’s financing arrangements and interest rate risk management have been explained in more detail in connection with notes 22 Financial liabilities and 25 Financial risk management . 10. Income taxes Accounting policies The income taxes on the consolidated income statement consist of current tax, adjustments to taxes for previous periods, and deferred taxes. Taxes are recognised in profit or loss, except when they are directly attributable to items recognised under equity or other comprehensive income. In such cases, also the tax is recognised under the item in question. Current tax is calculated on taxable profit, based on the enacted tax rate. Tax is adjusted with any taxes associated with prior financial years. Any penal interests related to said taxes are recognised under financial expenses. The share of associates’ profit is presented in the statement of comprehensive income as calculated from net profit and thus including the income tax charge. EUR 1,000 2023 2022 Current taxes -502 -1,931 Taxes for the previous financial years -39 -37 Deferred taxes -3,047 8,078 Total -3,587 6,110 Deferred taxes are described in more detail in note 19 Deferred tax assets and liabilities. REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS 47 Reconciliation of effective tax rate EUR 1,000 2023 2022 Profit before taxes 8,187 1,550 Taxes calculated on the basis of the Finnish tax rate (20%) -1,637 -310 Income not subject to tax 4 2 Non-deductible expenses -1,422 -309 Unrecorded deferred tax assets from tax losses -921 -70 Recorded deferred tax assets from tax losses 187 6,381 Utilised prior losses with unrecognised tax benefits 0 333 Share of associated company’s profit 28 -3 Share-based remuneration 40 -13 Other items 173 137 Taxes for prior financial years -39 -37 Taxes in the income statement -3,587 6,110 Effective tax rate -43.8 % - 11. Earnings per share Accounting policies Earnings per share is calculated by dividing the profit for the financial year attributable to owners of the par- ent by the weighted average number of shares outstanding during the financial year. When calculating earnings per share, the interest of the hybrid bond, net of tax, has been considered as a profit-reducing item. Earnings per share for the financial year attributable to owners of the parent are calculated by dividing the profit for the financial year attributable to owners of the parent by the weighted average number of shares outstanding during the financial year. When calculating diluted earnings per share, the average number of shares is adjusted by the dilution ef- fect of the share-based incentive scheme. EUR 1,000 2023 2022 Profit for the financial year attributable to owners of the parent, EUR 5,728,844.05 9,518,830.97 Hybrid bond interest -1,866,666.67 Tax effect 373,333.33 Adjusted profit for the financial year 4,235,510.72 9,518,830.97 Number of shares outstanding, weighted average 22,557,957 22,560,271 Basic earnings per share (EPS), EUR/share 0.19 0.42 Diluted earnings per share, EUR/share 0.19 0.42 12. Property, plant and equipment Accounting policies Property, plant and equipment are measured at cost less accumulated depreciation and impairment losses. Cost includes expenditures incurred directly from the acquisition of an item of property, plant and equip- ment. Costs incurred subsequently are included in the carrying amount of an asset only if it is deemed prob- able that any future economic benefits related to the asset will flow to the Group and that the cost of the asset can be reliably determined. Other repair and maintenance costs will be expensed at the time they are incurred. The residual value, the useful life of an asset and the depreciation method applied are reviewed at least at the end of each financial year and adjusted as necessary to reflect the changes in the expectations con- cerning the economic benefits attached to the asset. Capital gains generated from decommissioning and disposing of property, plant and equipment are included under other operating income, and capital losses are included under other operating expenses. Assets are depreciated from the time when they are ready for use; i.e. when their location and condition allow them to be applied as intended by the management. For the magnetic imaging equipment at Turku, Oulu and Seinäjoki private clinics, the Group adopted a units-of-production based depreciation method effective from 1 January 2018. The amount of depreciation is based on the units of production derived from the equipment. The units-of-production based depreciation method is also applied to the imaging equipment in Helsinki, Tampere, Turku, Oulu and Kuopio that was transferred to Pihlajalinna as part of the acquisition of Pohjola Hospital (now Pihlajalinna Lääkärikeskukset Oy). The units-of-production method provides a more accurate reflection of the actual economic use of the magnetic imaging equipment in question. For the Group’s other machinery and equipment, the Group still uses straight-line depreciation. REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS 48 Property, plant and equipment EUR 1,000 Land areas Buildings Renovation expenses on real estate Shares in real estate companies Machinery and equipment Other tangible assets Construction in progress Total Cost at 1 January 2023 36 3,029 34,263 5,472 75,341 167 5,246 123,553 Additions 0 90 832 0 13,320 4 5,135 19,380 Transfers between items 0 0 7,358 0 -352 -2 -7,669 -665 Disposals 0 -3 304 -186 -430 0 -1 -315 Cost at 31 December 2023 36 3,116 42,757 5,287 87,879 168 2,711 141,952 Accumulated depreciation at 1 January 2023 0 -511 -20,552 0 -43,743 -11 0 -64,817 Depreciation and amortisation 0 -109 -2,507 0 -9,375 -1 0 -11,993 Transfers between items 0 0 191 0 1,129 0 4 1,323 Reclassifications 0 0 0 0 0 0 0 0 Disposals 0 0 -188 0 -470 1 -1 -659 Accumulated depreciation at 31 December 2023 0 -620 -23,056 0 -52,460 -11 2 -76,145 Carrying amount at 1 January 2023 36 2,518 13,711 5,472 31,598 155 5,246 58,737 Carrying amount at 31 December 2023 36 2,496 19,700 5,287 35,419 157 2,713 65,807 EUR 1,000 Land areas Buildings Renovation expenses on real estate Shares in real estate companies Machinery and equipment Other tangible assets Construction in progress Total Cost at 1 January 2022 36 3,026 30,549 5,572 63,496 172 1,344 104,194 Additions 0 3 482 0 15,972 2 8,316 24,774 Business combinations 0 0 131 0 1,272 0 0 1,403 Transfers between items 0 0 4,384 0 157 0 -4,414 127 Reclassifications to assets held for sale 0 0 -1,282 -100 -5,072 -7 0 -6,461 Disposals 0 0 0 0 -484 0 0 -484 Cost at 31 December 2022 36 3,029 34,263 5,472 75,341 167 5,246 123,553 Accumulated depreciation at 1 January 2022 0 -505 -19,131 0 -39,560 -10 0 -59,206 Depreciation and amortisation 0 -104 -2,217 0 -8,327 -1 0 -10,649 Transfers between items 0 98 -10 0 -124 0 0 -37 Reclassifications 0 0 807 0 4,070 0 0 4,877 Disposals 0 0 0 0 197 0 0 197 Accumulated depreciation at 31 December 2022 0 -511 -20,552 0 -43,743 -11 0 -64,817 Carrying amount at 1 January 2022 36 2,521 11,417 5,572 23,936 162 1,344 44,987 Carrying amount at 31 December 2022 36 2,518 13,711 5,472 31,598 155 5,246 58,737 REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS 49 13. Intangible assets and goodwill Accounting policies Goodwill Goodwill generated through business combinations is measured at the amount by which the consideration transferred, non-controlling interests in the acquiree and previously owned holding combined exceed the fair value of the identifiable acquired net assets. Goodwill typically reflects the value of acquired market share, business expertise and synergies. Goodwill is not amortised, but it is tested for impairment annually and whenever there is an indication that the asset may be impaired. Goodwill is allocated to cash-generating units (CGUs). Goodwill is measured at original cost less accumulated impairment. Cloud computing arrangement Accounting treatment of cloud service arrangements depends on whether the cloud-based software is clas- sified as an intangible asset or a service contract. The arrangements in which the the Group has no authority on the software are accounted as service agreements which entitle the Group to utilize the cloud service provider's application software during the contract period. Application software license fees and related configuration or customization costs are recognized (for example, in other operating expenses) when the services are received. Prepayments to the cloud service provider for software customization that are not separable are recognized as an expense during the contract period. Capitalised development costs Assets are amortised from the time when they are ready for use. Assets that are not yet available for use are tested annually for impairment. Subsequent to their initial recognition, capitalised development costs are measured at cost less accumulated amortisation and impairment. The amortisation period for development costs is 3 to 10 years, during which capitalised development costs are amortised using the straight-line method. The Group’s capitalised development costs that have not been amortised are associated with the following projects: ● New operating model for fixed-price occupational healthcare agreements and a related occupational healthcare portal ● Renewal of primary care service models, involving remote service models for municipal residents and mobile solutions (social and healthcare service centre concept) ● Pihlajalinna mobile application and website development with the aim of making AI-assisted digital services available to all customers. ● The three-year SYKKI project, funded with Tekes subsidies, aimed at creating an effective and cost- efficient model for public social and healthcare services REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS 50 Intangible assets and goodwill 1000 € Goodwill Trademarks Development costs Customer relationship value Non- competition agreements Patient dadabase Other intangible assets Other long-term expenditures Pre-pay- ments Total Cost at 1 January 2023 251,032 10,910 6,386 12,612 7,788 7,836 7,494 21,153 482 325,694 Additions 891 0 38 0 0 0 219 5,752 481 7,381 Transfers between items 0 0 0 0 0 0 -21 837 -823 -8 Disposals -150 0 0 0 0 0 -2 0 -57 -208 Cost at 31 December 2023 251,773 10,910 6,424 12,612 7,788 7,837 7,690 27,742 84 332,859 Accumulated depreciation at 1 January 2023 0 -7,295 -4,949 -9,748 -7,557 -6,020 -6,637 -9,654 0 -51,860 Depreciation and amortisation 0 -564 -1,088 -985 -116 -473 -368 -4,595 0 -8,189 Transfers between items 0 0 0 0 0 0 24 14 0 38 Disposals 0 0 0 0 0 0 0 -4 0 -4 Accumulated depreciation at 31 December 2023 0 -7,859 -6,036 -10,733 -7,673 -6,494 -6,982 -14,239 0 -60,015 Carrying amount at 1 January 2023 251,032 3,615 1,436 2,864 231 1,816 857 11,500 482 273,834 Carrying amount at 31 December 2023 251,773 3,051 388 1,879 115 1,343 708 13,503 84 272,845 1000 € Goodwill Trademarks Development costs Customer relationship value Non- competition agreements Patient dadabase Other intangible assets Other long-term expenditures Pre-pay- ments Total Cost at 1 January 2022 188,909 7,762 6,368 10,572 7,507 5,677 6,894 13,543 715 247,948 Additions 0 0 18 0 0 0 547 6,224 663 7,451 Business combinations 65,127 3,148 0 2,040 281 2,159 59 496 0 73,310 Reclassifications to assets held for sale -3,004 0 0 0 0 0 -13 -6 0 -3,023 Transfers between items 0 0 0 0 0 0 7 897 -896 8 Cost at 31 December 2022 251,032 10,910 6,386 12,612 7,788 7,836 7,494 21,153 482 325,695 Accumulated depreciation at 1 January 2022 0 -6,255 -4,019 -8,515 -7,497 -5,642 -6,096 -6,149 0 -44,173 Depreciation and amortisation 0 -1,040 -930 -1,233 -60 -378 -533 -3,503 0 -7,677 Transfers between items 0 0 0 0 0 0 -8 -1 0 -9 Accumulated depreciation at 31 December 2022 0 -7,295 -4,949 -9,748 -7,557 -6,020 -6,637 -9,654 0 -51,860 Carrying amount at 1 January 2022 188,909 1,508 2,349 2,057 10 35 798 7,394 715 203,775 Carrying amount at 31 December 2022 251,032 3,615 1,436 2,864 231 1,816 857 11,500 482 273,834 REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS 51 Impairment testing of goodwill Accounting policies The carrying amounts of goodwill, other intangible assets, property, plant and equipment, right-of-use as- sets and non-financial investments are reviewed regularly for potential indications of impairment. If there are any indications of impairment, the value of the asset item must be tested. Impairment loss is recognised through profit or loss to the extent that the carrying amount of an asset exceeds its recoverable amount. In addition, goodwill and intangible assets with an unlimited economic useful life and which are not depreciated are tested annually for impairment. The impairment testing is carried out even if there are no indications of impairment. Goodwill generated in M&A transactions is allocated to cash-generating units (CGU). Under Pihlajalinna’s operating structure, the Group’s CEO, with the help of the Chief Operating Officers and the other members of the Management Team, is responsible for the Group’s business operations and service offering to both the private and public sectors. The Chief Operating Officers prepare budgets for the Group’s businesses with the help of regional directors and the managing directors of the municipal companies. The Group CEO is re- sponsible for the resources, investments and profitability of the Group’s businesses. Pihlajalinna’s cash-gen- erating unit corresponds to the reporting segment, i.e. the Group. The recoverable amount is determined by value-in-use calculations. Cash flow-based value-in-use is de- termined by calculating the discounted present value of expected cash flows. The discount rate used in the calculations is determined using the weighted average cost of capital (WACC), which describes the total cost of equity and liabilities, taking into account the time value of money and the specific risks associated with Pihlajalinna’s business. The discount rate is a pre-tax rate. The risk-free interest rate, risk multiplier (beta) and the additional risk premium and market risk premium parameters used in determining the discount rate are based on information obtained from the market. Cash flow estimates have been validated by comparing them to Pihlajalinna’s market capitalisation. Potential impairment loss on goodwill is recognised immediately in the income statement. Previously rec- ognised impairment losses on goodwill are not reversed. The Group carried out its annual impairment testing of goodwill based on the situation on 30 November 2023 (30 November 2022) using the carrying amounts on the date in question and calculations of future amounts. The result of the testing was that no impairment losses were recognised for the Group’s cash-gen- erating unit, i.e. the Group as a whole, for the financial year that ended on 31 December 2023. The Group’s recoverable amount exceeded the carrying amount by approximately EUR 186 (223) million. Goodwill: EUR 1,000 2023 2022 Tested goodwill in total, Group 251,773 254,264 Goodwill related to current assets held for sale -3,004 Changes that have occurred after testing in the preliminary purchase price allocations for the acquired businesses -228 Goodwill as per the statement of financial position at the end of the fi- nancial year 251,773 251,032 Assumptions used in the calculation of utility value for each testing period: Impairment testing of goodwill 2023 2022 Turnover growth, first three years, approximately -4.70% 5.30% EBIT margin, first three years, approximately 7.00% 6.90% Discount rate (pre tax WACC) 9.50% 8.70% Discount rate (after tax WACC) 8.00% 7.25% Forecast period (years) 9 10 Terminal growth rate after the forecast period (5 years) 2.00% 2.00% The terminal period’s share of the amount of expected cash flows 54% 46% REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS 52 Key accounting estimates and decisions based on management judgement In impairment testing, the recoverable amounts are determined on the basis of value-in-use. The cash flow forecasts used in the value-in-use calculations in impairment testing are based on cash flow forecasts pre- pared by the management and approved by the Board of Directors. For the impairment testing carried out in 2023, the cash flow forecasts cover a 9-year period and the ter- minal period. The management’s view is that using a 9-year forecast period is justified because the Group has significant long-term and fixed-term complete social and healthcare outsourcing agreements. These agreements will expire during the 9-year forecast period, which is why management’s view is that extending the forecast period provides a more accurate picture of the company’s future cash flows by making it possi- ble to include the expiration of the agreements in the modelling of cash flows. The terminal growth rate ap- plied after the forecast period is two per cent, which corresponds to the long-term inflation forecast for the Finnish economy. For the period 2024–2025, the management forecasts that revenue, operating profit and cash flows will increase in line with the Group’s long-term strategy. Thereafter, in the forecasts for 2026–2032, the Group has taken into account the impacts of the expiration of the complete outsourcing agreements in accordance with the agreement period of each agreement. More details on the duration of the agreements and unsatis- fied performance obligations are pro-vided in note 1 Revenue from contracts with customers . The assumptions of the development of prices and costs used in the cash flow estimates are based on the management’s estimates of the development of demand and the markets, which are compared with exter- nal information sources. The productivity and efficiency assumptions used in the calculations are based on internal targets, with previous actual development taken into account in their estimation. Key assumptions defined by the management and used in the calculation in 2023: Assumption Description Projected revenue Determined on the basis of a forecast prepared by the manage- ment and approved by the Board of Directors, and the agreement periods of the complete outsourcing agreements. Projected operating profit Determined on the basis of a forecast prepared by the manage- ment and approved by the Board of Directors, and the agreement periods of the complete outsourcing agreements. Duration of the forecast period For testing carried out in 2023, the forecast period is 9 years plus the terminal period. Terminal growth rate assump- tion The terminal growth rate assumption is 2%. Discount rate Determined using the weighted average cost of capital (WACC), which describes the total cost of equity and liabilities, taking into account the time value of money and the specific risks associated with Pihlajalinna’s business. Uncertainty in forecasting has been taken into account in determining the additional risk premium. Sensitivity analyses in impairment testing Based on the testing calculations, there is no need to recognise impairment. The cash-generating unit’s re- coverable amount exceeded the carrying amount by approximately EUR 186 (223) million. The management has conducted sensitivity analyses of the key factors. The table below shows the required change in as- sumptions that would lead to the recoverable amount being equal to the carrying amount, provided that the assumptions change one at a time. Sensitivity analyses 2023 2022 Decline in EBIT margin more than 2 percentage units more than 2 percentage units Decline in volume more than 14 percentage units more than 15 percentage units Increase in discount rate more than 2,5 percentage units more than 3 percentage units Decline in the terminal growth rate more than 2 percentage units more than 2 percentage units The management has conducted a sensitivity analysis for 2023 also with a five-year forecast period plus the terminal period. Also based on testing under a five-year period, the cash-generating unit's recovera- ble amount exceeded the carrying amount. 14. Right-of-use assets Accounting policies Most of the Pihlajalinna rental arrangements in line with the IFRS 16 are leases for business premises. The other lease arrangements in line with the standard concern land areas, machinery and equipment (exercise equipment, clinical equipment, cars and other equipment). Pihlajalinna applies the IFRS 16 exemption that allows lessees to elect not to recognise a right-of-use asset and corresponding lease liability for assets with a lease term of 12 months or less as well as assets of low value. Assets of low value include, for example, IT equipment and office furniture. Furthermore, to make the accounting of leases easier, Pihlajalinna elects not to separate service components from leases, instead treating the entire agreement as a lease in its con- solidated financial statements. For lease arrangements valid until further notice, with a short notice period, Pihlajalinna will estimate the probable lease term. Right-of-use assets are measured at cost, which includes the following items: ● original amount of the lease liability ● direct expenses of the initial phase and ● expenses due to restoring to original condition REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS 53 Right-of-use assets are presented under property, plant and equipment and lease liabilities are presented under financial liabilities. The right-of-use asset is initially measured at cost and depreciated over the economic life of the asset. The right-of-use asset is also subject to IAS 36 Impairment of Assets. The lease liability is initially measured at the present value of future lease payments. In later periods, the lease liability is measured using the effective interest rate method, according to which the lease liability is measured at amortised cost and the interest expense is amortised over the lease term. The standard allows the lessee to also include non-lease elements of an agreement (typically services) in the lease liability. Key accounting estimates and decisions based on management judgement When recognising leases on the balance sheet, estimates must be made concerning the lease term, the ex- ercising of extension options and the discount rate applied. When assessing the lease term of a new lease, extension options are not taken into account until a commitment has been made to exercise the extension option. Right-of-use assets EUR 1,000 Right-of- use plots Right-of-use build- ings and business premises Right-of-use equipment Total Cost at 1 January 2023 1,215 312,525 6,206 319,947 Additions -1 38,764 871 39,634 Transfers between items 0 18,413 -15 18,398 Disposals 0 -6,391 -560 -6,951 Cost at 31 December 2023 1,214 363,311 6,503 371,028 Accumulated depreciation at 1 January 2023 -580 -116,684 -4,936 -122,201 Depreciation and amortisation -101 -30,088 -901 -31,090 Transfers between items 0 -18,413 32 -18,381 Disposals 0 4,194 382 4,576 Accumulated depreciation at 31 Decem- ber 2023 -682 -160,992 -5,423 -167,097 Carrying amount at 1 January 2023 635 195,841 1,270 197,747 Carrying amount at 31 Dec 2023 533 202,319 1,080 203,932 Right-of-use assets EUR 1,000 Right-of- use plots Right-of-use build- ings and business premises Right-of-use equipment Total Cost at 1 January 2022 840 185,897 5,587 192,325 Additions 375 25,090 1,025 26,490 Business combinations 0 105,458 4 105,463 Transfers between items 0 138 -41 97 Disposals 0 -4,059 -368 -4,427 Cost at 31 December 2022 1,215 312,525 6,206 319,947 Accumulated depreciation at 1 January 2022 -484 -91,941 -4,314 -96,738 Depreciation and amortisation -97 -26,178 -898 -27,173 Transfers between items 20 20 Disposals 1,435 255 1,690 Accumulated depreciation at 31 Decem- ber 2022 -580 -116,684 -4,937 -122,201 Carrying amount at 1 January 2022 357 93,956 1,273 95,586 Carrying amount at 31 Dec 2022 635 195,841 1,270 197,746 Short-term leases recognised in the income statement, totalling EUR 227 (140) thousand, and minor leases recognised in the income statement, totalling EUR 1,379 (1,172) thousand, are practical exemptions pro- vided by IFRS 16 applied by the Group. Lease liabilities relating to right-of-use items are specified in Note 22 Financial liabilities . 15. Other non-current receivables Accounting policies Right-of-use assets that have been transferred to a lessee under a sublease and classified as financial leases have been derecognised from fixed assets and presented on the balance sheet as net investments in a sublease. REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS 54 EUR 1,000 2023 2022 Lease deposits paid 234 561 Non-current subleases 3,655 7,750 Non-current receivables 2,108 759 Other receivables 90 90 Total 6,088 9,160 Pihlajalinna subleased two care homes that it sold and leased back in May 2020 which form a significant part of sublease receivables. The table below presents the contractual maturity analysis of subleases. The figures are undiscounted and they include both future interest payments and repayments of the net investment. Maturity distribution of sublease receivables less than 1 year 1–2 years 2–3 years 3–4 years over 4 years Carrying amount at 31 Dec 2023 4,087 431 341 346 351 2,618 16. Trade and other receivables Accounting policies At the end of each reporting period, the Group assesses whether or not there is objective evidence of im- pairment regarding any individual financial asset. Objective evidence of impairment of loans and other re- ceivables includes significant financial distress of the debtor and payments being delinquent or substantially delayed. Impairment of loans is recognised in financial expenses in the income statement and impairment of other receivables is recognised in other operating expenses for the period in which the impairment was identified. The expected credit loss model is based on the amount of historical credit losses. The lifetime expected credit losses are calculated by multiplying the gross carrying amount of unpaid trade receivables by the ex- pected loss. EUR 1,000 2023 2022 Trade receivables 52,469 47 168 Prepayments and accrued income 4,739 14,051 Current subleases 431 947 Other receivables 241 1,189 Contract assets 3,619 13 452 Total 61,498 76,806 Pihlajalinna has adjusted the figures for the comparison year and transferred EUR 7.4 million from re- ceivables included in trade receivables in 2022 to contract assets The carrying amount of trade receivables and other receivables corresponds to the maximum credit risk in- volved at the end of the reporting period. Pihlajalinna regularly reviews the credit risk of its receivables and the procedures used to estimate the credit risk. No significant changes have been observed in customers’ payment behaviour during the financial year. The management of credit risks related to trade receivables, see note 25 Financial risk management. The Group recognised impairment losses of EUR 0.9 (0.5) million on trade receivables during the financial year. At the end of the financial year, the Group classified receivables amounting to EUR 8.2 million as contin- gent off-balance sheet assets in accordance with IAS 37. The items were recognised as expenses during the financial year 2023. In the comparison figures shown in the table above, the receivables in question are pre- sented as contract assets. The change in the classification is described in more detail in note 1 Revenue from contracts with customers . Pihlajalinna has also reviewed its loan receivables and recognised an impairment of EUR 1.2 million on the loan receivables. The write-downs of loan receivables are described in more detail in note 9 Financial expenses. Age distribution of trade receivables EUR 1,000 2023 Impairment losses Share of expected impairment losses Net 2023 Not due 34,321 -5 0.0 % 34,316 Less than 30 days 12,924 -7 0.1 % 12,917 30–60 days 1,058 -47 4.4 % 1,012 61–90 days 617 -91 14.7 % 526 More than 90 days 4,013 -316 7.9 % 3,697 Total 52,934 -465 52,469 EUR 1,000 2022 Impairment losses Share of expected impairment losses Net 2022 Not due 33,342 -25 0.1 % 33,317 Less than 30 days 8,469 -10 0.1 % 8,459 30–60 days 1,515 -72 4.7 % 1,443 61–90 days 918 -152 16.6 % 766 More than 90 days 3,706 -522 14.1 % 3,184 Total 47,949 -781 47,168 The Group’s expected credit loss model is based on the amount of historical credit losses. The share of ex- pected impairment losses varies between financial years because the Group’s expected credit losses based on historical information vary between different customer groups. Consequently, a particular customer REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS 55 group representing a higher or lower share of trade receivables can have a significant effect on the amount of expected credit losses. The Group’s trade receivables due more than 90 days mainly relate to open receivables from insurance company customers. The expected credit losses from contractual assets amount to EUR 0.0 (0.0) million, and the assets in question have not been taken into account in the table above. EUR 1,000 2023 2022 Credit loss provision at 1 January 781 698 Credit losses recorded -920 -504 Change in credit loss provision 605 587 Credit loss provision at 31 December 465 781 Material items incl. in prepayments and accrued income EUR 1,000 2023 2022 Personnel expenses 1,837 1,843 Expenses paid in advance 2,656 6,528 Hedging, interest rate swap 173 5,113 Other 73 566 Total 4,739 14,051 The carrying amounts of the receivables correspond materially to their fair values. 17. Provisions Accounting policies A provision is recognised when the Group has a legal or constructive obligation resulting from a past event, when it is probable that the payment obligation will materialise and when the amount of the obligation can be reliably estimated. The amount recognised as a provision equals the best estimate of the costs required to fulfil the present obligation on the date of the financial statements. A restructuring provision is recognised when the Group has in place a detailed plan for such restructuring and its implementation has commenced or the interested parties have been informed of the main points of such a plan. The Group recognises a provision for onerous contracts when the expected benefits to be derived from a contract are less than the unavoidable expenses of meeting the obligations under the contract. EUR 1,000 2023 2022 Current provisions 84 0 Non-current provisions 123 89 Total 207 89 - Onerous contracts Restructuring provision Total EUR 1,000 1.1.2022 137 68 205 Increases in provisions Provisions used -48 -68 -116 Reversals of unused provisions 31.12.2022 89 0 89 Increases in provisions 306 1,139 1,445 Provisions used -189 -1,139 -1,327 Reversals of unused provisions 31.12.2023 207 0 207 18. Trade and other payables EUR 1,000 2023 2022 Trade payables 27,051 41,673 Accrued liabilities 90,466 78,267 Pre-payments 311 33 Other liabilities 7,503 7,556 Total 125,333 127,529 Material items included under Accrued liabilities: Wages and salaries and social security payments 53,823 43,846 Doctor’s fee liability 17,055 15,376 Allocation of purchase invoices 11,481 10,261 Current liabilities held for sale 1,347 3,237 Unpaid interest expenses 2,147 212 Other accrued liabilities 4,614 5,334 Total 90,466 78,267 REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS 56 19. Deferred tax assets and liabilities Accounting policies Deferred taxes are calculated on temporary differences between the carrying amount and the tax base. However, a deferred tax liability shall not be recognised on the initial recognition of goodwill, or on the ini- tial recognition of an asset or liability in a transaction which is a business combination and, at the time of the transaction, affects neither accounting profit nor taxable profit and, at the time of the transaction, does not give rise to equal taxable and deductible temporary differences. In the Group, the most significant temporary differences result from depreciation and amortisation of property, plant and equipment and intangible assets, fair value-based adjustments made in connection with business combinations, and unused tax losses. Deferred taxes are calculated by applying tax rates enacted or substantively enacted by the end of the reporting period. A deferred tax asset is only recognised to the extent that it is probable that taxable profit will be available against which the temporary difference can be utilised. However, a deferred tax asset is not recognised if it arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither accounting profit nor taxable profit and, at the time of the transaction, does not give rise to equal taxable and deductible temporary differences. Whether or not deferred tax assets can be recognised in this respect is always estimated at the end of each reporting pe- riod. The Group shall offset deferred tax assets and liabilities where these relate to the same taxation authority and the same taxable entity. Deferred tax assets and tax liabilities for leases are presented separately in the notes to the financial statements. Key accounting estimates and decisions based on management’s judgement The management uses judgement when determining the deferred assets to be recorded in respect of tax losses confirmed in the Group. The most significant deferred tax assets from confirmed unused losses have been for Pihlajalinna Lääkärikeskukset Oy (approximately EUR 4.3 million) and Pihlajalinna Oyj (approxi- mately EUR 2.5 million). Deferred tax assets have been recorded up to the amount that, according to the management’s assess- ment, it is probable that taxable income will be generated in the future, against which the unused tax losses can be utilized. Estimates are based on forecasts made by management and how profitability develops in different companies. Actual results may differ materially from the estimates made at the time of preparing the financial statements. REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS 57 Changes in deferred taxes during 2023: Deferred tax assets (EUR 1,000) 1 January 2023 Recognised in profit and loss Recognised in the statement of comprehensive income Business combinations Reclassification to assets held for sale 31 December 2023 Tax losses carried forward confirmed by tax authorities 11,860 -3,394 8,467 Sales proceeds from sale and leaseback arrangements 193 -30 163 Provisions 227 -41 186 Share-based incentive scheme 5 48 53 Reclassification to assets held for sale -63 63 0 Leases - lease liabilities 45,915 203 46,118 Cloud computing arrangements 228 102 330 Other items 3,583 -98 3,485 Net effect of deferred tax liabilities and assets -44,623 417 -44,206 Deferred tax liabilities on the statement of financial position 17,324 -2,729 14,595 Deferred tax liabilities Property, plant and equipment and intangible assets 5,344 244 5,588 Recognition of property, plant and equipment and intangible assets at fair value in business combinations 1,705 -428 1,278 Fair value hedging 1,023 -354 669 Leases - right-of-use assets 41,289 228 41,517 Other items 99 383 481 Net effect of deferred tax liabilities and assets -40,948 -133 -41,081 Deferred tax liabilities on the statement of financial position 8,512 294 -354 8,452 REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS 58 Changes in deferred taxes during 2022: Deferred tax assets (EUR 1,000) 1 January 2022 Recognised in profit and loss Recognised in the statement of comprehensive income Business combinations Reclassification to assets held for sale 31 December 2022 Tax losses carried forward confirmed by tax authorities 2,547 9,314 11,860 Sales proceeds from sale and leaseback arrangements 223 -30 193 Provisions 293 -65 227 Share-based incentive scheme 60 -55 5 Reclassification to assets held for sale -63 -63 IAS 37, contingent assets 749 -749 0 Leases - lease liabilities 21,250 24,665 45,915 Cloud computing arrangements 255 -27 228 Other items 584 -767 3,766 3,583 Net effect of deferred tax liabilities and assets -20,476 -24,147 -44,623 Deferred tax liabilities on the statement of financial position 5,484 8,138 3,766 -63 17,324 Deferred tax liabilities Property, plant and equipment and intangible assets 4,803 520 22 5,344 Recognition of property, plant and equipment and intangible assets at fair value in business combinations 722 -542 1,526 1,705 Fair value hedging 1,023 1,023 Leases - right-of-use assets 20,155 21,134 41,289 Other items 22 77 99 Net effect of deferred tax liabilities and assets -19,818 -21,130 -40,948 Deferred tax liabilities on the statement of financial position 5,884 58 1,023 1,547 8,512 REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS 59 - Available tax losses Deferred tax assets recorded Deferred tax assets not recorded Maturing within five years 2023 2022 2023 2022 2023 2022 Maturing within five years 1,757 9,178 324 1,843 32 16 Maturing later than within five years 55,702 59,071 8,143 10,017 2,993 1,773 Total 57,460 68,249 8,467 11,860 3,025 1,790 Taxes calculated on the basis of the Finnish tax rate (20%) 11,492 13,650 0 20. Financial assets and liabilities by measurement category Accounting policies When a financial asset or liability is recognised on the transaction date, the Group measures it at its acquisi- tion cost, which is equal to the fair value of the consideration give or received. Derivative contracts are rec- ognised in the balance sheet at fair value on the trade day and subsequently remeasured at their fair value on the balance sheet date. Financial assets For the purpose of measurement after initial recognition, the Group’s financial assets are classified as finan- cial assets measured at amortised cost and financial assets measured at fair value through profit or loss. Fi- nancial assets are derecognised when the Group has lost its contractual right for the financial assets in ques- tion or has transferred substantially all risks and rewards outside the Group. The Group’s trade receivables, lease deposits and cash and cash equivalents have been classified as finan- cial assets measured at amortised cost using the effective interest method, taking any impairment into ac- count. Financial assets measured at fair value through profit or loss consist of quoted and unquoted shares and loan receivables. The Group has no holdings of shares quoted in public markets. Derivative contracts are recognised in the balance sheet at fair value on the trade date and subsequently remeasured at their fair value on the balance sheet date. Derivatives that do not meet the conditions of hedge accounting are recorded in the income statement. The change in fair value is recorded in equity in fair value reserve if the derivative contract meets the conditions of cash flow hedging. If hedge accounting is not applied derivatives are revalued to fair value at the end of the reporting period and the profit or loss dif- ference arising from the valuation is recorded in the income statement. Cash and cash equivalents Cash and cash equivalents consist of cash at hand and demand deposits. The account with credit limit in use is included in current financial liabilities. Financial liabilities The Group classifies loans from financial institutions, accounts with credit limits, lease liabilities, trade paya- bles and other liabilities as financial liabilities measured at amortised cost using the effective interest method. Transaction costs are included in the initial carrying amount. Arrangement fees for loan commit- ments are treated as transaction costs. The Group classifies contingent considerations arising from M&A transactions as financial liabilities measured at fair value through profit or loss. No interest is paid on liabili- ties arising from contingent considerations. Any contingent consideration is measured at fair value at the date of acquisition and classified as a liability. A contingent consideration classified as a liability is measured at fair value at the end of each reporting period, and any resulting gain or loss is recognised in profit or loss after the end of the measurement period. The valuation principles of derivatives are discussed above in the section Financial assets . Financial liabilities are classified as current liabilities, unless the Group has an unconditional right to postpone their repayment to a date that is at least 12 months subsequent to the end of the reporting period. REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS 60 EUR 1,000 Note Fair value hierarchy Fair value through profit or loss Fair value - hedging instrument Amortised cost Total carrying amounts Fair values total 31 Dec 2023 Carrying amounts of financial assets Non-current financial assets Other shares and participations level 3 168 168 168 Lease deposits 15 level 2 234 234 234 Other receivables 15 level 2 90 90 90 Loan receivables level 3 2,108 2,108 2,108 Current financial assets Trade receivables 16 52,469 52,469 52,469 Other receivables 16 level 2 241 241 241 Interest derivatives 25 level 2 173 173 173 Cash and cash equivalents 24,517 24,517 24,517 Total 2,276 173 77,550 79,999 79,999 Carrying amounts of financial liabilities Non-current financial liabilities Loans from financial institutions 22 level 2 143,800 143,800 143,800 Lease liabilities 22 level 2 199,834 199,834 199,834 Other liabilities 22 level 2 536 536 536 Contingent considerations level 3 210 210 210 Current financial liabilities Loans from financial institutions 22 level 2 2,296 2,296 2,296 Cheque account with credit limit 22 Contingent considerations level 3 700 700 700 Lease liabilities 22 level 2 30,754 30,754 30,754 Trade and other payables 18 27,051 27,051 27,051 Total 910 404,271 405,181 405,181 EUR 1,000 Note Fair value hierarchy Fair value through profit or loss Fair value - hedging instrument Amortised cost Total carrying amounts Fair values total 31 Dec 2022 Carrying amounts of financial assets Non-current financial assets Other shares and participations level 3 1,167 1,167 1,167 Lease deposits 15 level 2 561 561 561 Other receivables 15 level 2 90 90 90 Current financial assets Trade receivables 16 47,168 47,168 47,168 Other receivables 16 level 2 1,189 1,189 1,189 Interest derivatives 25 level 2 5,113 5,113 5,113 Cash and cash equivalents 13,128 13,128 13,128 Total 1,167 5,113 62,136 68,416 68,416 Carrying amounts of financial liabilities Non-current fin. liabilities Loans from financial institutions 22 level 2 167,255 167,255 167,255 Lease liabilities 22 level 2 201,235 201,235 201,235 Other liabilities 22 level 2 573 573 573 Contingent considerations level 3 203 203 203 Current financial liabilities Loans from financial institutions 22 level 2 1,386 1,386 1,386 Cheque account with credit limit 22 Contingent considerations level 3 1,704 1,704 1,704 Lease liabilities 22 level 2 28,338 28,338 28,338 Trade and other payables 18 41,673 41,673 41,673 Total 1,907 440,459 442,367 442,367 REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS 61 Fair value assessment Financial assets and liabilities recognised at fair value on the consolidated statement of financial position are classified according to their valuation-based hierarchy levels and measurement methods as follows: Fair value hierarchy levels Level 1: Fair values are based on quoted prices in active markets for identical assets and liabilities. The Group has no financial assets or liabilities measured according to level 1 of the hierarchy. Level 2: The fair value is determined using valuation methods. The financial assets and liabilities are not sub- ject to trading in active and liquid markets. The fair values can be determined based on quoted market prices and deduced valuation. The carrying amount of the trade receivables and financial assets essentially corresponds to their fair value, as the effect of discounting is not significant taking the maturity of the re- ceivables into consideration. The fair values of lease liabilities are based on discounted cash flows. The fair values of loans essentially correspond to their carrying amount since they have a floating interest rate and the Group’s risk premium has not materially changed. The carrying amount of other financial liabilities es- sentially corresponds to their fair value, as the effect of discounting is not significant taking the maturity of the receivables into consideration. Derivative financial instruments are initially recognized at fair value on the trade date and are subsequently remeasured at their fair value on the balance sheet date. Level 3: The fair value is not based on verifiable market information, and information on other circum- stances affecting the value of the financial asset or liability is not available or verifiable. The Group’s other shares and participations consist solely of shares in unlisted companies. 21. Notes on equity Accounting policies The Group classifies all instruments it issues either as an equity instrument or a financial liability, depending on their nature. Equity instruments are any contracts evidencing a residual interest in the assets of the com- pany after deducting all of its liabilities. Costs relating to the issue or purchase of equity instruments are presented as a deduction from equity. Pihlajalinna’s equity consists of the share capital, fair value reserve, reserve for invested unrestricted equity, hybrid bond, retained earnings and treasury shares held by the parent company. Reconciliation of the number of shares EUR 1,000 Number of outstanding shares, 1,000 pcs Number of treasury shares, 1,000 pcs Number of shares Share capital Reserve for invested unrestricted equity Treasury shares Total Shares, total, 1 January 2022 22,594 25.9 22,620 80 116,520 256 116,856 Acquisition of treasure shares -120 120 1475 1,475 Treasury shares held by the parent com- pany on 31 December 2022 75 -75 -909 -909 Outstanding shares on 31 December 2022 22,550 70 22,620 80 116,520 822 117,422 Shares, total, 1 January 2023 22,550 70 22,620 80 116,520 822 117,422 Treasury shares held by the parent com- pany on 31 Decem- ber 2023 17 -17 -192 -192 Outstanding shares on 31 December 2023 22,566 54 22,620 80 116,520 629 117,229 REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS 62 Treasury shares The total number of Pihlajalinna shares is 22,620,135. On the financial statements date, there were 22,566,155 outstanding shares and the company held 53,980 treasury shares. In May, Pihlajalinna conveyed a total of 11,861 shares held by the company as part of the remuneration of the Board of Directors. In No- vember, Pihlajalinna transferred 4,650 treasury shares to Joni Aaltonen under the terms of the CEO’s termi- nation agreement. Aaltonen served as the CEO until 8 March 2023. Share capital Pihlajalinna has one share series, with each share entitling its holder to one vote at a General Meeting of shareholders. The company’s shares have no nominal value. All shares bestow their holders with equal rights to dividends and other distribution of the company’s assets. The shares belong to the book-entry sys- tem. Fair value reserve The fair value reserve includes the effective portion of the change in the fair value of derivatives for which cash flow hedge accounting is applied The fair value reserve also includes the remaining value on the report- ing date of the derivative contract sold on 2 February 2023. The gain on the sale is presented in the fair value reserve less taxes and transferred to be recognised through profit and loss in the same periods as the hedged expected future cash flows will affect the result, meaning the years 2023–2027. On the reporting date, the sold derivative contracts’s share of the fair value reserve was approximately EUR 2.5 (4.1) million. Reserve for invested unrestricted equity The reserve for invested unrestricted equity contains other equity-like investments and the share subscrip- tion price to the extent that this is not entered in share capital under a specific decision. Hybrid Bond Pihlajalinna issued EUR 20 million hybrid bond on 27 March 2023. The hybrid bond bears a fixed interest rate of 12.00 percent per annum until 27 March 2026 (“Reset Date”), and from the Reset Date, a floating interest rate as defined in the terms and conditions of the capital securities. Starting from the reset date, the interest rate is variable at 14.00 percent plus 3-month Euribor according to the terms of the hybrid bond. The hybrid bond does not have a specified maturity date. Pihlajalinna is entitled to redeem the hybrid bond on the Reset Date and thereafter on each interest payment date. The hybrid bond is instrument that is subordinated to the company’s other debt obligations. The hybrid bond is treated as equity according to its nature and its accumulated interest and the transaction costs re- lating to the issuance of a hybrid bond, net of possible tax, are presented in equity as well. The hybrid bond does not confer to the holders the rights of a shareholder and do not dilute the holdings of the current shareholders. Expenses from the issuance of the hybrid bond EUR 0.4 million has been recognised as reduction of re- tained earnings. At the end of the financial year, the unpaid interest from the hybrid bond was EUR 1.9 mil- lion. Distributable funds The parent company’s total distributable funds amount to EUR 203,428,565.55, of which the result for the financial year accounts for EUR -7,709,328.56. Dividends The Board of Directors proposes that, in accordance with the dividend policy, a dividend of EUR 0.07 per share be paid for the financial year that ended on 31 December 2023. On the financial statements date, 31 December 2023, the total number of outstanding shares was 22,566,155. The corresponding total dividend according to the Board of Directors’ proposal would be EUR 1,579,630.85 . No material changes have taken place in the company’s financial position after the end of the financial year. The company’s liquidity position is good and, in the view of the Board of Directors, the proposed distri- bution does not jeopardise the company’s ability to fulfil its obligations. Earnings per share for the financial year was EUR 0.19. The proposed dividend of EUR 0.07 is 37 per cent of earnings per share. In accordance with Pihlajalinna’s specified dividend policy, Pihlajalinna aims to distribute dividend or capi- tal repayment minimum of one-third of the earnings per share, taking into account the company’s strategy and financial position. REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS 63 22. Financial liabilities EUR 1,000 2023 2022 Non-current interest-bearing liabilities Loans from financial institutions 143,800 167,255 Other liabilities 536 573 Lease liabilities 199,834 201,235 344,169 369,063 Current interest-bearing liabilities Loans from financial institutions 2,296 1,386 Lease liabilities 30,754 28,338 Yhteensä 33,051 29,723 Interest-bearing financial liabilities total 377,220 398,786 Pihlajalinna’s financing arrangement is described in more detail in note 22 Financial liabilities and note 25 Financial risk management. The loan instalments drawn under the Group’s revolving credit facility are de facto long-term items in spite of their maturity being 1, 3 or 6 months, because Pihlajalinna has an unequivocal right to postpone repayment by a minimum of 12 months from the reporting date. Lease liabilities EUR 1,000 2023 2022 Non-current lease liabilities Right-of-use plots 443 546 Right-of-use buildings and business premises 198,890 200,092 Right-of-use equipment 500 597 199,834 201,235 Current lease liabilities Right-of-use plots 100 99 Right-of-use buildings and business premises 30,076 27,569 Right-of-use equipment 578 670 30,754 28,338 23. Changes in interest-bearing liabilities with no impact on cash flow EUR 1,000 2022 Cash flow New instalments and lease liabilities Effective in- terest rate 2023 Non-current interest-bearing liabilities 167,327 -28,975 5,968 16 144,336 Current interest-bearing liabilities 1,887 0 410 0 2,296 Lease liabilities 229,573 -31,825 32,840 0 230,588 Total 398,786 -60,800 39,218 16 377,220 24. Capital management The goal of the Group’s capital management is to ensure that the normal requirements of business opera- tions are met, enable investments in line with the Group’s strategy and increase long-term shareholder value. The Group influences its capital structure mainly through the distribution of dividend and share is- sues. The key indicators concerning capital management are the equity ratio, the ratio of net debt to adjusted EBITDA and gearing. Loan covenants related to financing arrangement are described in more detail in the note 25 Financial risk management. EUR 1,000 Note 2023 2022 Equity 144,591 122,888 Total statement of fin. position – deferred revenue 657,187 661,606 Equity ratio 1) 22.0 % 18.6 % Interest-bearing financial liabilities 22 377,220 398,786 Cash and cash equivalents -24,517 -13,128 Interest-bearing net debt 352,703 385,659 Gearing 2) 243.9 % 313.8 % EBITDA 72,487 54,401 Adjustment items** 8,133 9,828 Adjusted EBITDA 80,621 64,229 Net debt/adjusted EBITDA 4.4 6.0 REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS 64 * Significant transactions that are not part of the normal course of business, are related to business acquisition costs (IFRS 3), are infrequently occurring events or valuation items that do not affect cash flow are treated as adjustment items af- fecting comparability between review periods. According to Pihlajalinna’s definition, such items include, for example, re- structuring measures, impairment of assets and the remeasurement of previous assets held by subsidiaries, the costs of closing down businesses and business locations, gains and losses on the sale of businesses, costs arising from operational restructuring and the integration of acquired businesses, costs related to the termination of employment relationships, as well as fines and corresponding compensation payments. Pihlajalinna also presents costs according to the IFRS Interpreta- tions Committee’s new Agenda Decision concerning cloud computing arrangements as adjustment items. EBITDA adjust- ments amounted to EUR 8.1 (9.8) million for the financial year that ended on 31 December 2023. ¹⁾ The formula for calculating the equity ratio is 100 x Equity / (Total statement of financial position – de- ferred revenue) ²⁾ The formula for calculating gearing is 100 x Interest-bearing net debt / Equity. 25. Financial risk management The Group’s main financial risks consist of credit and counterparty risk as well as interest rate and liquidity risks. The Group operates in Finland and is therefore not exposed to material foreign exchange risks in its operations. The Group’s general risk management policies are approved by the Board of Directors. The Group’s Chief Financial Officer, together with the operative management, is responsible for identifying fi- nancial risks and for practical risk management. The goal of the Group’s risk management is to ensure suffi- cient liquidity, minimise financing costs and regularly inform the management about the Group’s financial position and risks. Group’s financial administration actively monitors compliance with the financial covenants and assesses financial leeway in relation to the covenant maximums as part of the Group’s business planning. Liquidity risk The Group monitors the amount of financing required by business operations by analysing cash flow fore- casts in order to make sure the Group has a sufficient amount of liquid assets for financing operations and repaying maturing loans. The Group aims to ensure the availability and flexibility of financing with adequate credit limits, a balanced maturity profile and sufficiently long maturities for borrowings, as well as by ob- taining financing through several financial instruments. Monitoring and forecasting financial covenants in- cluded in the Company’s financing agreements is continuous. Pihlajalinna’s financing arrangement comprises a long-term loan of EUR 130 million and a revolving credit facility of EUR 70 million for general financing needs and acquisitions. It also includes an opportunity to later increase the total amount by EUR 100 million (to EUR 300 million), subject to separate decisions on a sup- plementary loan from the funding providers. Under the original agreement, Pihlajalinna’s financing arrangement was set to have a term of three years and a maturity date in March 2025. In December 2023, Pihlajalinna and the creditor banks agreed on re- structuring the financing arrangement. According to the new agreement, the financing arrangement will ma- ture in March 2026, and the loan margin will change effective from 1 July 2024. Pihlajalinna has an interest rate swap agreement with a nominal value of EUR 65 million, which is used to convert the interest on a floating rate financing arrangement to a fixed rate. Cash flow hedge accounting is applied to the interest rate swap agreement, which means that the effective portion of the change in fair value is recognised in other comprehensive income. The interest rate swap entered into effect in March 2023 and will remain in effect until 25 March 2027. Its fair value was EUR 0.2 (5.1) million at the end of the financial year. On 27 March 2023, Pihlajalinna issued a hybrid bond with an annual coupon of 12%. The hybrid bond does not have a specified maturity date. Pihlajalinna is entitled to redeem the hybrid bond on the Reset Date, 27 March 2026, and thereafter on each interest payment date. The hybrid bond is treated as an equity item in Pihlajalinna’s IFRS consolidated financial statements and it is described in more detail in note 21 Notes on equity . On the financial statements date, the Group’s cash and cash equivalents amounted to EUR 24.5 (13.1) million, in addition to which the Group had EUR 70.0 (43,0) million in unused committed credit limits availa- ble. Unused credit limits consist of EUR 10 million credit limit agreement and EUR 60 million unwithdrawn revolving credit facility. In addition, EUR 100.0 (100.0) million of an additional credit limit, which is subject to a separate credit decision, was unused on the financial statements date. The Group’s equity ratio at the end of the financial year was 22.0 (18.6) per cent. Financial liabilities repayment schedule The table below presents the contractual maturity of financial liabilities. The figures are undiscounted, and they include both future interest payments and repayments of principal. In the table below, the loan in- stalments drawn under the Group’s revolving credit facility are presented as long-term items in spite of their maturity being 1, 3 or 6 months, because Pihlajalinna has an unequivocal right to postpone the re- payment of the loan instalments by a minimum of 12 months from the reporting date. Interest payments related to the loan instalments drawn are presented in the table below according to the actual timing of their payment. EUR 1,000 Carrying amount at 31 Dec 2022 less than 1 year 1–2 years 2–3 years 3–4 years over 4 years Loans from financial insti- tutions 136,096 -9,355 -8,607 -132,628 -1,239 -424 Revolving credit facility 10,000 -543 -541 -10,223 Lease liabilities 230,588 -34,452 -31,357 -26,340 -23,702 -134,500 Other interest-bearing lia- bilities 536 -57 -57 -57 -57 -589 Contingent considerations 910 -706 -216 Trade payables 27,051 -27,051 Total 405,181 -72,165 -40,779 -169,249 -24,998 -135,513 REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS 65 EUR 1,000 Carrying amount at 31 Dec 2021 less than 1 year 1–2 years 2–3 years 3–4 years over 4 years Loans from financial insti- tutions 131,641 -6,128 -4,404 -130,110 -4 Revolving credit facility 37,000 -1,402 -1,406 -37,343 Lease liabilities 229,573 -31,699 -29,751 -26,129 -21,944 -132,924 Other interest-bearing lia- bilities 573 -59 -57 -57 -57 -644 Contingent considerations 1,907 -1,710 -6 -6 -206 Trade payables 41,673 -41,673 Total 442,367 -82,671 -35,624 -193,645 -22,210 -133,568 Loan covenants The Group’s key loan covenants are reported to the financiers on a quarterly basis. If the Group breaches the loan covenant terms, the creditors may accelerate the repayment of the loans. The management moni- tors the fulfilment of loan covenant terms and reports on them to the Board of Directors on a regular basis. The financing arrangement includes the customary financial covenants concerning leverage (ratio of net debt to pro forma EBITDA) and gearing. IFRS 16 lease liabilities are not taken into account in the calculation of the covenants (Frozen GAAP). The loan margin of the financing is additionally linked to Pihlajalinna’s an- nual sustainability objectives related to patient satisfaction (NPS), employee engagement (eNPS) and access to surgical treatment within the target time. Sustainability targets have a minor effect on the loan margin, depending on how many of the agreed-upon sustainability targets are achieved. At the end of the financial year, the sustainability targets linked to the financing arrangement caused no changes in the loan margins. In late 2022, Pihlajalinna and the creditor banks agreed on a temporary increase to the covenants of the financing arrangement and increasing the highest margin by one percentage point from the beginning of 2023 until the third quarter of the year. The creditor banks waived off the in-crease to the highest margin and the other waiver terms in late April 2023 when the company demonstrated it would remain under the original covenants for the next 12 months. The original gearing covenant of the financing arrangement is 115 per cent and the leverage covenant is was 3.75 at the end of the financial year 2023. At the end of the financial year 2022, the covenants agreed on a temporary basis were gearing of 140 per cent and leverage of 5.5. At the end of the financial year, gearing in accordance with the financing arrangement was 93.6 (139.95) per cent and leverage was 3.09 (5.23). At the end of the reporting period, 31 December 2023, the withdrawn loan amount to which the cove- nants apply was EUR 140.0 million (EUR 167.0 million). Interest rate risk The Group is exposed to interest rate risk through its external financing arrangement. In accordance with the Group’s risk management principles, the Board of Directors decides on the need for, and extent of, in- terest rate hedging for the Group’s loan portfolio. During the financial year 2022, the Group entered into an interest rate swap agreement with a nominal value of EUR 65 million to hedge its floating rate financing arrangement. The Group sold the interest rate swap agreement in question on 2 February 2023. The fair value of the interest rate swap agreement at the time of concluding the agreement was approximately EUR 3.9 million. The gain on the sale is presented in the fair value reserve less taxes and transferred to be recognised through profit or loss in the same periods as the hedged expected future cash flows will affect the result, meaning the years 2023–2027. On 2 Febru- ary 2023, the Group signed a new interest rate swap agreement with a nominal value of EUR 65 million. The interest rate swap is subject to cash flow hedge accounting. The interest rate swap entered into effect in March 2023 and will remain in effect until 25 March 2027. On the financial statements date, 63% (58%) of the interest-bearing liabilities were subject to fixed inter- est rates. During the financial year, the average annual interest rate on the Group’s interest-bearing liabili- ties and derivatives was approximately 3.20 per cent (2.5). The duration, i.e. the fixed interest rate period, of the financing portfolio was 3.6 (3.7) years. The table below presents the Group’s interest rate position at the end of the reporting period. EUR 1,000 2023 2022 Fixed rate financial liabilities 236,786 230,143 Variable rate financial liabilities 141,822 169,136 Financial liabilities subject to hedge accounting -65,000 -65,000 Total variable rate position 76,822 104,136 The table below presents the effects on consolidated profit before tax should market interest rates rise or fall, all other things being equal. The sensitivity analysis is based on the interest rate position at the closing date of the reporting period, including the hedging effect of derivatives. Since the Group has no material interest-bearing assets, its income and operating cash flows are not materially exposed to changes in mar- ket interest rates. EUR 1,000 2023 2023 2022 2022 Change 1.0 percentage units higher 1.0 percentage units lower 1.0 percentage units higher 1.0 percentage units lower Effect on profit before tax -768 1,418 -1,700 1,700 REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS 66 Derivative financial instruments and hedge accounting Accounting policy The Group applies hedge accounting to reduce the future cash flow variation in profit due to the variation in interest rates. Derivative financial instruments are initially recognized at fair value on the trade date and are subsequently remeasured at their fair value on the balance sheet date. Derivative contracts are included in current assets or liabilities, except derivatives maturities greater than 12 months after the balance sheet date, which are classified as non-current assets or liabilities. The effective portion of the changes in the fair value of derivative financial instruments that are designated and qualified as cash flow hedges are recog- nized in the fair value reserve of equity. In cash flow hedges the critical terms in hedged item and hedging instruments are the same and hedge ratio is 1:1. When a hedging arrangement is entered into, the relationship between the hedged item and the hedging instrument, as well as the objectives of the Group's risk management are documented. The effec- tiveness of the hedge relationship is tested regularly and the effective portion is recognised, according to the nature of the hedged item, against the change in the fair value of the hedged item in the fair value re- serve of equity. The ineffective portion is recognized in the income statement either in operating profit or financial income and expenses. Hedge accounting is discontinued when the hedging instrument expires or is sold, or when the contract is terminated or exercised. Any cumulative gain or loss existing in equity at that time remains in equity until the forecast transaction has occurred. Deriatives used for hedging During the financial year 2022, the Group entered into an interest rate swap agreement with a nominal value of EUR 65 million to hedge its floating rate financing arrangement. The Group sold the interest rate swap agreement in question on 2 February 2023. The fair value of the interest rate swap agreement at the time of concluding the agreement was approximately EUR 3.9 million. The gain on the sale is presented in the fair value reserve less taxes and transferred to be recognised through profit or loss in the same periods as the hedged expected future cash flows will affect the result, meaning the years 2023–2027. On 2 February 2023, the Group signed a new interest rate swap agreement with a nominal value of EUR 65 million. The interest rate swap is subject to cash flow hedge accounting. The interest rate swap entered into effect in March 2023 and will remain in effect until 25 March 2027. Its fair value was EUR 0.2 (5.1) mil- lion at the end of the financial year. Under the contract, the Group pays a fixed interest of 2.8 per cent and receives the floating six-month Euribor interest beginning from the start date. The table below shows the annual cash flows of the derivative calculated at market interest rates. In addi- tion, a sensitivity analysis of the derivative is presented below, illustrating the change in the market value of the derivative when the yield curve rises or falls and other factors remain unchanged. Interest rate swap agreement cash flows EUR 1,000 2024 2025 2026 2027 Total Interest rate swap agreement cash flow 31 Dec 2023 Interest rate swap agreement 632 -314 -536 -235 -453 EUR 1,000 2024 2025 2026 2027 Total Interest rate swap agreement cash flow 31 Dec 2022 Interest rate swap agreement 1,584 1,312 1,229 621 4,746 Interest rate swap agreement sensitivity analysis EUR 1,000 2023 2023 Change in the yield curve 1.0 percentage units lower 1.0 percentage units higher Change in market value of the interest rate swap agreement -1,928 1,868 EUR 1,000 2022 2022 Change in the yield curve 1.0 percentage units lower 1.0 percentage units higher Change in market value of the interest rate swap agreement -2,383 2,261 Credit risk The Group’s credit risk mostly consists of credit risks involved in customer receivables related to business operations. The Group’s largest customers are municipalities, joint municipal authorities or large and sol- vent listed companies. The Group’s key credit risks are presented in Note 16 Trade and other receivables. The payment information of corporate and private customers is checked at every appointment. For the collection of payments, the Group uses an external collections agency. The Group offers private customers financing via SveaRahoitus. This arrangement includes a check of the customer’s creditworthiness. The age distribution of trade receivables is presented in Note 16 Trade and other receivables. The amount of credit losses recorded in profit or loss during the financial year was not significant. The maximum amount of the Group’s credit risk equals to the carrying amount of financial assets at the end of the financial year (see Note 20 Financial assets and liabilities by measurement category ). Currency risk The Group operates mainly in Finland and is not therefore exposed to material foreign exchange risks in its operations. The Group’s annual procurements in foreign currencies are insignificant. REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS 67 26. Acquired business operations and divestments Accounting policies When the Group acquires assets either through business arrangements or through other arrangements, the management evaluates the actual nature of the asset and the business when determining whether it is a business combination. When an asset or a group of assets does not form a business operation, the acquisition is not treated as a business combination and in that case the Group records the acquisition of individual assets and liabilities. The acquisition cost is allocated to individual assets and liabilities in proportion to their current values at the time of acquisition, and no goodwill is generated. Acquisitions defined as business operations are treated as business combinations. The Group records business combinations using the acquisition method. The transferred consideration, including the contin- gent consideration and the identifiable assets and liabilities of the acquired company, are valued at fair value at the time of acquisition. Acquisition related expenses are recorded as expenses in the period in which they have incurred. The acquired business operations are consolidated to the financial statements from the moment the Group obtains control over the acquired business. The share of non-controlling inter- ests is recorded for each acquisition either at fair value or at an amount that corresponds to the relative share of the non-controlling interests in the net assets of the target of acquisition. If the initial accounting for a business combination is incomplete by the end of the reporting period in which the combination occurs, the Group presents these acquisitions as preliminary in its financial state- ments. Preliminary items are adjusted, and new assets and liabilities are recorded retrospectively, if new information is received that concerns the facts and circumstances that existed at the time of acquisition and which, if it had been known, would have affected the amounts recorded at that time. The measurement pe- riod may not exceed one year from the acquisition date. 26.1. Acquired business operations Acquired business operations 2023 Pihlajalinna had no business acquisitions in the financial year 2023. Acquired business operations 2022 Pohjola Hospital Ltd Pihlajalinna acquired the entire share capital of Pohjola Hospital Ltd from Pohjola Insurance Ltd. The ac- quisition was completed on 1 February 2022. The purchase price allocation fair value adjustments were mainly made to right-of-use assets EUR -9.8 million, other provisions EUR -4.3 million, financial lease lia- bilities EUR -6.0 million and goodwill EUR 0.5 million. EUR 1,000 2022 Consideration transferred Cash 35,193 Total acquisition cost 35,193 The values of the assets and liabilities acquired for consideration at the time of acquisition were as fol- lows: EUR 1,000 Note 2022 Property, plant and equipment 12 430 Intangible assets 13 5,989 Right-of-use assets 14 103,048 Deferred tax assets 19 3,705 Trade and other receivables 13,196 Cash and cash equivalents 1,809 Total assets 128,176 Deferred tax liabilities 1,100 Restructuring provision 413 Lease liabilities 22 125,771 Other liabilities 8,458 Total liabilities 135,742 Acquired net assets -7,566 Goodwill generated in the acquisition: EUR 1,000 Note 2,022 Consideration transferred 35,193 Net identifiable assets of acquirees 7,566 Goodwill 13 42,759 Transaction price paid in cash 35,193 Cash and cash equivalents of acquirees -1,809 Effect on cash flow 33,384 REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS 68 In the determination of fair values, intangible assets based on customer relationships, trademarks and patient databases were identified. The fair value of these was defined as EUR 5.5 million. The fair value was determined using an income-based approach, which requires a forecast of cash flows. In connection with the above, EUR 1.1 million were identified as a deferred tax liability. The merger of the businesses resulted in goodwill of EUR 42.8 million, which is based on the expected synergy benefits and skilled labour. Synergy benefits are based, for example, on an increase in the utiliza- tion rate of surgery, reception visits and diagnostic services and premises and administrative synergies. The generated goodwill is not tax deductible. The combined fair value of trade receivables and other receivables was EUR 13.2 million, which essen- tially corresponds to their book value, and there is no significant impairment risk associated with the re- ceivables. As a result of the merger of business operations described above, the turnover recorded in the finan- cial year 2022 was EUR 76 million, and the impact on the result of the financial year has been EUR 12.5 million. Costs related to acquisitions EUR 0.6 million have been recorded in other business expenses (IFRS 3 expenses). Acquired business operations 2022 Others Pihlajalinna completed the acquisitions of Etelä-Savon Työterveys Oy, Lääkärikeskus Ikioma Oy and Punk- kibussi® unit on 1 April 2022. Pihlajalinna completed the acquisition of Mediellen Oy on 1 September 2022 and the acquisitions of Seppälääkärit Oy and Seppämagneetti Oy on 1 October 2022. Information on the acquisitions is presented combined below because the acquisitions are not individually material: EUR 1,000 2022 Consideration transferred Cash 22,352 Contingent consideration 1,101 Total acquisition cost 23,454 The values of the assets and liabilities acquired for consideration at the time of acquisition were as fol- lows: EUR 1,000 Note 2022 Property, plant and equipment 12 961 Intangible assets 13 2,194 Right-of-use assets 14 3,591 Available-for-sale financial assets 1 Deferred tax assets 19 61 Inventories 223 Trade and other receivables 2,291 Cash and cash equivalents 1,969 Total assets 11,290 Deferred tax liabilities 19 447 Provisions 153 Financial liabilities 22 466 Lease liabilities 3,778 Other liabilities 6,014 Total liabilities 10,858 Acquired net assets 432 Goodwill generated in the acquisition: EUR 1,000 Note 2022 Consideration transferred 23,454 Share of the acquisition allocated to non-controlling interest 41 Net identifiable assets of acquirees -432 Goodwill 13 23,063 Transaction price paid in cash 22,352 Cash and cash equivalents of acquirees -1,969 Effect on cash flow 20,384 REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS 69 In the determination of fair values, intangible assets based on customer relationships, trademarks, pa- tient databases and non-compete agreements were identified. The fair value of these was defined as EUR 2.2 million. Fair value has been determined using an income-based approach, which requires a forecast of expected cash flows. In connection with the above, a calculated deferred tax liability of EUR 0.4 million was identified. The merger of the businesses resulted in a goodwill of EUR 23.1 million, which is based on the expected synergy benefits and skilled labour. About EUR 8 million of the generated goodwill is tax deductible. The combined fair value of trade receivables and other receivables was EUR 2.3 million, which essen- tially corresponds to their book value, and there is no significant impairment risk associated with the re- ceivables. As a result of the merger of business operations described above, the turnover recorded in the finan- cial year 2022 was EUR 16.5 million, and the impact on the result of the financial year has been EUR 1.5 million. Expenses related to the acquisition presented above, amounting to EUR 0.5 million, have been recog- nised in other operating expenses (IFRS 3 costs). Acquisitions and capital expenditure Acquired entity Month of acquisition Industry Domicile Pohjola Hospital Oy 2/2022 Private clinic operations Helsinki Etelä-Savon Työterveys Oy 4/2022 Occupational healthcare services Mikkeli Lääkärikeskus Ikioma Oy 4/2022 Private clinic operations, Dental care Mikkeli Punkkibussi®-business 4/2022 Private clinic operations Several Mediellen Oy 9/2022 Private clinic operations Sotkamo Seppälääkärit Oy 10/2022 Private clinic operations Jyväskylä Seppämagneetti Oy 10/2022 Private clinic operations Jyväskylä 26.2. Acquistions of non-controlling interest Acquisitions 2023 Company Acquisition date Acquired share, % New ownership interest, % Suomen Yksityiset Hammaslääkärit Oy 7 Jul 2023 and 16 Oct 2023 32% 95% Pihlajalinna Ikioma Oy 1 Jan 2023 6% 100% Eur 1,000 Acquisition price Change in minority share Impact in Group earnings Suomen Yksityiset Hammaslääkärit Oy Tampere -278 15 Pihlajalinna Ikioma Oy 287 -70 -218 Acquisitions 2022 Company Acquisition date Acquired share, % New ownership interest, % Suomen Yksityiset Hammaslääkärit Oy Tampere 8% 100% Laihian Hyvinvointi Oy 12/20/2022 19% 100% Eur 1,000 Acquisition price Change in minority share Impact in Group earnings Suomen Yksityiset Hammaslääkärit Oy Tampere 246 -618 Laihian Hyvinvointi Oy 36 -43 7 Accounting principles Transactions with non-controlling interests that do not lead to a loss of control are treated as transactions with owners. Changes in the share of ownership lead to adjustments of the carrying amounts of the Group’s share and the share of non-controlling interests. The difference between the adjustment made to non-con- trolling interests’ share and the paid or received consideration is recognised in earnings. 26.3. Divestments Sale of dental care services Pihlajalinna announced in late 2022 that it will sell its dental care services to Hammas Hohde Oy. Pihla- jalinna classified its dental health services as assets held for sale effective from 31 December 2022. The di- vestment was completed on 31 March, 2023. As a result of the divestment, net assets totalling approxi- mately EUR 5.1 million were removed from the consolidated statement of financial position. The Group rec- ognized a gain of EUR 3.6 million on the sale in other operating income for the financial year. As part of the transaction, the Group sold the entire share capital of Wiisuri Oy and Pihlajalinna Hammasklinikat Oy, along with the dental care business operations of certain Group companies . REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS 70 27. Subsidiaries and material non-controlling interests The Group’s structure The Group had 28 (34) subsidiaries in 2023. Of these subsidiaries, 17 (20) are wholly-owned and 11 (14) are partially owned. A list of all of the Group’s subsidiaries is presented in Note 30 Related party transactions . In 2023, the Group had 3 (3) associated companies and 1 (1) joint operation. Breakdown of material non-controlling interests in the Group Main busines loca- tion Non-controlling interests’ share of the votes Non-controlling interests’ share of profit or loss Non-controlling interests’ share of equity EUR 1,000 2023 2022 2023 2022 2023 2022 Jämsän Terveys Oy Jämsä 49% 49% -1288 -2462 -5173 -3885 Pihlajalinna Erityisasumispalvelut Oy Hämeenlinna 30% 30% 129 79 -1 -130 Dextra Lapsettomuusklinikka Oy Helsinki 49% 49% 166 227 584 418 Pihlajalinna Liikuntakeskukset Group several 30% 30% -417 -401 1036 1453 Total -1,410 -2,558 -3,554 -2,144 Summary of financial information on subsidiaries with a material non-controlling interest Jämsän Terveys Oy Pihlajalinna Erityisasumispalvelut Oy Dextra Lapsettomuusklinikka Oy Pihlajalinna Liikuntakeskukset Group 2023 2022 2023 2022 2023 2022 2023 2022 Current assets 3,725 5,381 1,136 767 1,439 1,026 1,430 1,742 Non-current assets 876 1,233 4,126 4,306 3,651 3,720 37,916 37,168 Current liabilities 15,059 14,144 1,254 1,464 936 860 18,136 17,278 Non-current liabilities 80 324 3,996 4,016 2,321 2,342 18,632 17,603 Revenue 69,204 75,231 6,848 6,370 5,100 5,201 14,489 12,653 Operating profit -2,663 -4,522 595 407 364 584 -127 -922 Profit/loss -2,628 -5,025 430 262 338 463 -1,401 -1,348 Share of profit/loss attributable to owners of the parent -1,340 -2,563 301 183 172 236 -984 -947 Non-controlling interests’ share of profit/loss -1,288 -2,462 129 79 166 227 -417 -401 Net cash flow from operating activities 1,925 -1,783 826 852 1,085 1,157 4,808 4,070 Net cash flow from investing activities -85 -83 -184 -18 -669 546 -599 -453 Net cash flow from financing activities -2,403 2,221 -642 -834 -418 -1,699 -4,496 -3,419 of which dividends paid to non-controlling interests -660 REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS 71 28. Interests in associates and joint arrangements Accounting policies Associates are companies over which the Group has significant influence. As a rule, significant influence is established when the Group holds more than 20% of a company’s voting power or otherwise has significant influence but no control. A joint arrangement is an arrangement of which two or more parties have joint control. Joint control in- volves contractually agreed sharing of control of an arrangement, which exists only when decisions about relevant activities require the unanimous consent of the parties sharing control. A joint arrangement is ei- ther a joint operation or a joint venture. A joint venture is an arrangement whereby the Group has rights to the net assets of the arrangement, whereas in a joint operation the Group has rights to the assets, and obli- gations for the liabilities, relating to the arrangement. Associates and joint ventures are consolidated using the equity method. If the Group’s share of the loss of an associate or a joint venture exceeds the carrying amount of the investment, then the investment is car- ried at zero value, and the losses exceeding the carrying amount are not consolidated, unless the Group is committed to fulfilling the obligations of the associate or joint venture. An investment in an associate or a joint venture includes the goodwill generated through the acquisition. Unrealised profits between the Group and an associate or a joint venture are eliminated in proportion to the Group’s ownership interest. The Group’s pro rata share of an associate’s or a joint venture’s profit for the financial year is included in operating profit. Changes in interests during the financial year The share of profit in associated companies and joint ventures for 2023 includes approximately EUR 0.5 million in impairment recognised during the financial year on Pihlajalinna’s holdings in Digital Health Solutions Oy and a share of approximately EUR -0.1 million of the company’s result. The impairment was recognised on the basis of impairment testing. More information is provided in note 13 Impairment testing . EUR 1,000 2023 2022 Interests in associates Ullanlinnan Silmälääkärit Oy 34 31 Digital Health Solutions Oy 0 609 Kuura Digilääkärit Oy 1,557 1,428 Interests in joint operations Koy Levin Pihlaja Oy 40 40 Total carrying amount 1,631 2,109 Interests in associates Name Holding, % Name 2023 2022 Ullanlinnan Silmälääkärit Oy Helsinki Healthcare services 37% 37% Digital Health Solutions Oy Sotkamo All legal business 41% 41% Kuura Digilääkärit Oy Helsinki Healthcare services 45% 45% Interests in joint operations The Group owns 31% in Kiinteistö Oy Levin Pihlaja, which is consolidated as a joint operation according to the pro rata share. 29. Contingent assets and liabilities and commitments Collateral given on own behalf 2023 2022 Sureties 5,300 4,158 Mortgage on company assets 0 200 Properties’ VAT refund liability 7 33 Lease commitments for off-balance sheet leases 1,606 1,312 Lease deposits 234 561 Hybrid bond interests Pihlajalinna issued EUR 20 million hybrid bond on 27 March 2023. At the end of the financial year, the un- paid interest was EUR 1.9 million. Lawsuits and official proceedings The City of Jämsä has taken legal action against Jämsän Terveys Oy regarding a matter concerning the price adjustment provision in the service agreement. The difference in views regarding whether the fixed annual price for social and healthcare services can decrease due to price. Jämsän Terveys filed an additional coun- terclaim against the City of Jämsä. The additional counterclaim concerns the effect of changes in the ser- vices under the service agreement on price and the service provider’s liability for financing investments by the Pirkanmaa Hospital District insofar as such investments serve operations after the term of the service agreement. The service provider is entitled to price adjustments corresponding to increases in costs and the contractual parties are under an obligation to negotiate and try to reach an agreement. On 4 April 2022, the District Court of Central Finland handed down its ruling on the dispute concerning the service agreement between Jämsän Terveys Oy and the City of Jämsä. The District Court did not deny the validity of the grounds for the variable charges in Jämsän Terveys’ service agreement, but the District Court found that the evidence presented regarding the realisation of the costs was insufficient. Pihlajalinna has submitted an application for leave to appeal to the Supreme Court and an appeal concerning part of the judgement of the Vaasa Court of Appeal. REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS 72 On 22 November 2023, the Vaasa Court of Appeal handed down its ruling on the dispute. The Court of Appeal decided to uphold the decision of the District Court. Pihlajalinna has submitted an application for leave to appeal to the Supreme Court and an appeal concerning part of the judgement of the Vaasa Court of Appeal. Jämsän Terveys Oy has taken legal action in the District Court against the The City of Jämsä, a former client, mainly concerning COVID-19-related costs which the City of Jämsä has not paid in breach of the service agreement. In addition, a difference of opinion has emerged between the company and the city during the 2022 financial year on the impact of the transfer of personnel on the annual fee under the service agree- ment. On 30 October 2023, the county council of the wellbeing services county of South Ostrobothnia decided to terminate the outsourcing agreement with Kuusiolinna Terveys Oy with effect at the end of 2025, in accord- ance with the transition period stipulated by the Act on the Implementation of the Reform of Health, Social and Rescue Services and on the Entry into Force of Related Legislation. The decision of the county council is not yet legally valid, and an appeal has been lodged with the Supreme Administrative Court. Pihlajalinna is involved in certain pending legal proceedings concerning employment relationships, but they are not expected to have a significant financial impact on the Group. Contingent assets At the end of the financial year 2023, Pihlajalinna had EUR 8.2 million in contingent receivables in accord- ance with IAS 37. The items in question have not been recognised in the financial statements as receivables because the realisation of the income involves uncertainty due to the potential collection of the receivables through legal action. Nevertheless, the inflow of economic benefits to the company is still considered prob- able. The matter is described in more detail in note 1 Revenue from contracts with customers. REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS 73 30. Group Companies The Group’s parent company and subsidiary relationships 31.12.2023 The Group’s parent company is Pihlajalinna Plc, which owns all of Pihlajalinna Terveys Oy’s Series A shares. Company Domicile Holding % of votes Pihlajalinna Terveys Oy Parkano 100% 100% Ikipihlaja Johanna Oy Jämsä 100% 100% Jokilaakson Terveys Oy Jämsä 90% 90% Mäntänvuoren Terveys Oy Mänttä-Vilppula 91% 91% Ikipihlaja Kuusama Oy Kokemäki 100% 100% Ikipihlaja Sofianhovi Oy Mänttä-Vilppula 100% 100% Ikipihlaja Matinkartano Oy Lieto 100% 100% Ikipihlaja Setälänpiha Oy Lieto 100% 100% Ikipihlaja Oiva Oy Raisio 100% 100% Kolmostien Terveys Oy Parkano 96% 96% Jämsän Terveys Oy Jämsä 51% 51% Kuusiolinna Terveys Oy Alavus 97% 97% Lääkäriasema DokTori Oy Lappeenranta 100% 100% Kompassi Lääkärikeskus Oy Seinäjoki 100% 100% Mediapu Oy Oulu 100% 100% Pihlajalinna Erityisasumispalvelut Oy Hämeenlinna 70% 70% Dextra Lapsettomuusklinikka Oy Helsinki 51% 51% Bottenhavets Hälsa Ab - Selkämeren Terveys Oy Kristiinankaupunki 75% 75% Linnan Klinikka Oy Hämeenlinna 100% 100% Pihlajalinna Liikuntakeskukset Oy Tampere 70% 70% Forever Helsinki Oy Helsinki 70% 70% Suomen Yksityiset Hammaslääkärit Oy Tampere 95% 95% Laihian Hyvinvointi Oy Laihia 100% 100% Pihlajalinna Lääkärikeskukset Oy Helsinki 100% 100% Pihlajalinna Ikioma Oy Mikkeli 100% 100% Pihlajalinna Kainuu Oy Sotkamo 100% 100% Pihlajalinna Seppälääkärit Oy Jyväskylä 100% 100% Information on the associates is presented in Note 28 Interests in associates and joint arrangements. Changes in Group Structure The following changes in Group Structure were implemented during the financial year: Merged Company Target Company Month of Acquisition Pihlajalinna Lääkärikeskukset Oy Pihlajalinna Lääkärikeskukset Oy (former Pihlajalinna Omasairaala Oy 1.2. – 31.12.2022) 1.1.2023 Pihlajalinna Turku Oy Pihlajalinna Lääkärikeskukset Oy (former Pihlajalinna Omasairaala Oy 1.2. – 31.12.2022) 1.1.2023 Etelä-Savon Työterveys Oy Pihlajalinna Lääkärikeskukset Oy (former Pihlajalinna Omasairaala Oy 1.2. – 31.12.2022) 1.1.2023 Pihlajalinna Oulu Oy Pihlajalinna Lääkärikeskukset Oy (former Pihlajalinna Omasairaala Oy 1.2. – 31.12.2022) 1.4.2023 Pihlajalinna Seppämagneetti Oy Pihlajalinna Lääkärikeskukset Oy (former Pihlajalinna Omasairaala Oy 1.2. – 31.12.2022) 1.5.2023 Mergers were not implemented during the 2022 financial year. Acquired and sold business operations are described in more detail in note 26 Acquired business operations and divestments. REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS 74 31. Related party transactions The Group’s related parties consist of the subsidiaries, associates and joint ventures. Key management per- sonnel considered related parties consist of the members of the Board of Directors and the Management Team, including the CEO and their family members. Employee benefits of management EUR 1,000 2023 2022 Monetary salaries, Management Team 1,768 1,030 Share-based rewards, Management Team 0 65 Fringe benefits, Management Team 36 10 Post-employment benefits, Management Team 277 182 Salaries and other short-term employee benefits, Management Team, total 2,081 1,288 Salaries and remuneration Joni Aaltonen acted as CEO of Pihlajalinna until 8 March 2023. Mikko Wirén acted as interim CEO from 9 March to 31 August 2023. Tuomas Hyyryläinen started as CEO of Pihlajalinna on 1 September 2023. EUR 1,000 2023 2022 Joni Aaltonen Monetary salaries 140 287 Share-based rewards 0 32 Fringe benefits 9 20 Post-employment benefits 203 Total 353 339 Mikko Wirén Monetary salaries 160 0 Share-based rewards 0 0 Fringe benefits 14 0 Total 174 0 Tuomas Hyyryläinen Monetary salaries 120 0 Share-based rewards 0 0 Fringe benefits 0 0 Total 120 0 EUR 1,000 2023 2022 Board of Directors Chair of the Board Jukka Leinonen 68 0 Vice-Chair of the Board Leena Niemistö 54 53 Board member Mikko Wirén 44 261 Board member Heli Iisakka 43 34 Chair of the People and Sustainability Committee Hannu Juvonen 54 41 Chair of the Audit Committee Seija Turunen 53 50 Board member Kim Ignatius 38 0 Board member Tiina Kurki 37 0 Board member (until 3 April 2023) Mika Manninen 6 37 Board member (until 12 June 2022) Kati Sulin 0 17 Total 397 491 Of the annual remuneration paid in shares, a total of 2,636 (0) shares held by the company were transferred to the Chair of the Board of Directors, 1,757 (1,423) shares transferred to the Vice Chair and the Chair of the People and Sustainability Committee and Audit Committee each, and 1,318 (949) shares to each member of the Board of Directors. According to the CEO’s contract, the notice period for dismissal is 6 months. The company is liable to pay the CEO one-time compensation for termination amounting to eight months’ total salary. The CEO’s pension benefits are according to the statutory pension scheme. The CEO Tuomas Hyyryläinen is not a member of the Board of Directors. Related party transactions and related party receivables and liabilities: 2023 2022 Key management personnel Rents paid 1,014 919 Services procured 1,277 1,064 Prepayments -99 -96 Trade payables 179 105 The Group has leased its business premises in Karkku, Tampere and Kangasala from Mikko Wirén's control- ling company. Mikko Wirén acted as the interim CEO from 9 March to 31 August 2023 and is a member of REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS 75 the Board of Directors. The Group also has an agreement with Mikko Wirén's controlling company MWW Oy, under which the Group buys healthcare professionals’ services and consulting. 32. Events after the balance sheet date Pihlajalinna Group company Kuusiolinna Terveys Oy commenced change negotiations on 31 January 2024. The premature termination of the service agreement by a decision of the wellbeing services county will have a significant impact on the company’s operating conditions, which is why the company had to com- mence change negotiations. The change negotiations were still incomplete at the time of signing the finan- cial statements and they concern the entire personnel of Kuusiolinna Terveys Oy except administrative sup- port services. According to a preliminary estimate, the negotiations may result in a reduction of approxi- mately 190 person-years in the company. The duration of the negotiations is expected to be six weeks. Pihlajalinna conveyed in 2 January 2024 a gross amount of 20,000 shares to CEO Tuomas Hyyryläinen. The remuneration was implemented in shares and cash. The applicable withholding tax deducted from the transferred shares, and the remaining net amount was paid in shares. The remuneration was related to the agreed-upon right for the CEO to acquire shares at the beginning of the share-based incentive scheme, with Pihlajalinna transferring matching shares corresponding to the purchased shares. The arrangement is de- scribed in more detail in note 5 Share-based payments. After the transfer of shares, Pihlajalinna held 43,980 treasury shares, corresponding to approximately 0.19 per cent of the total number of shares and votes in the company. REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS 76 PARENT COMPANY FINANCIAL STATEMENTS, FAS Parent company income statement, FAS EUR Note 2023 2022 Revenue 1.1. 9,077,280.9 6,756,645.1 Other operating income 1.2. 395,721.1 444,262.1 Personnel expenses 1.3. -1,397,212.7 -1,228,082.9 Depreciation, amortisation and impairment 1.4. -2,672,301.2 -2,215,305.4 Other operating expenses 1.5 -8,876,588.6 -6,283,335.7 Operating profit (loss) -3,473,100.5 -2,525,816.7 Financial income and expenses 1.6 -5,353,946.6 -3,206,505.2 Profit (loss) before appropriations and taxes -8,827,047.1 -5,732,322.0 Appropriations 1.7 Change in depreciation difference -783,600.4 104,453.1 Group contribution 537,000.0 0.0 Income taxes 1.8. 1,364,319.0 1,123,722.5 Profit (loss) for the financial year -7,709,328.6 -4,504,146.4 REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS 77 Parent company balance sheet, FAS EUR Note 2023 2022 Assets Non-current assets Intangible assets 2.1 3,377,107.4 3,731,227.9 Property, plant and equipment 2.2 6,397,913.2 1,742,356.4 Investments 2.3 384,535,076.0 384,535,076.0 Total non-current assets 394,310,096.5 390,008,660.2 Current assets Non-current receivables 2.4 2,488,041.5 1,160,236.5 Current receivables 2.5 50,925,791.8 59,571,221.5 Cash and cash equivalents 24,278,892.0 4,222,590.0 Total current assets 77,692,725.2 64,954,048.0 Total assets 472,002,821.7 454,962,708.2 Equity and liabilities Equity 2.6 Share capital 80,000.0 80,000.0 Reserve for invested unrestricted equity 183,190,483.5 183,190,483.5 Retained earnings 28,043,605.2 32,547,508.8 Profit/loss for the financial year -7,709,328.6 -4,503,903.6 Total Equity 203,604,760.1 211,314,088.7 Accumulated appropriations 2.7 1,697,485.8 913,885.4 Liabilities 2.9 Non-current liabilities 163,649,827.4 167,003,079.1 Current liabilities 103,050,748.4 75,731,655.0 Total liabilities 266,700,575.8 242,734,734.2 Total equity and liabilities 472,002,821.7 454,962,708.2 REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS 78 Parent company cash flow statement, FAS EUR 2023 2022 Cash flow from operating activities Profit for the period -7,709,328.6 -4,503,903.6 Depreciation, amortisation and impairment 2,672,301.2 2,215,305.4 Financial income and expenses 5,353,946.6 3,206,505.2 Other adjustments (appropriations and taxes) -1,157,402.1 -1,228,175.5 Cash flow before change in working capital -840,482.8 -310,268.6 Change in net working capital -1,039,744.8 667,238.7 Cash flows from operating activities before financial items and taxes -1,880,227.6 356,970.2 Interest received 3,308,330.4 4,507,029.1 Direct taxes paid 1,489,667.8 -4,258,649.6 Cash flow from operating activities 2,917,770.5 605,349.7 Cash flow from investing activities Investments in tangible and intangible assets -1,502,075.3 -1,485,750.2 Proceeds from sale of intangible and tangible assets 52,000.0 0.0 Other investments 0.0 300,000.0 Investments in subsidiaries 0.0 -100,000,000.0 Cash flow from investing activities -1,450,075.3 -101,185,750.2 Cash flow from financing activities Proceeds from short-term borrowings from group companies 29,052,037.8 9,543,151.0 Loans granted to group companies 5,349,810.6 9,649,797.8 Proceeds from long-term borrowings 5,000,000.0 209,000,000.0 Repayment of long-term borrowings -33,063,486.7 -132,774,286.9 Group contributions received 0.0 20,350,000.0 Hybrid bond 20,000,000.0 0.0 Hybrid bond interests and expenses -431,860.2 0.0 Interest paid -7,317,895.0 -4,902,504.2 Dividends paid 0.0 -6,767,176.5 Acquisition of own shares 0.0 -1,474,755.6 Cash flow from financing activities 18,588,606.5 102,624,225.5 Change in cash and cash equivalents 20,056,301.7 2,043,825.1 Cash at the beginning of the financial year 4,222,590.0 2,178,764.9 Cash at the end of the financial year 24,278,892.0 4,222,590.0 REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS 79 Notes to the financial statements 31 December 2023 Accounting policies Pihlajalinna Plc (2617455-1), domiciled in Tampere, is the parent company of Pihlajalinna Group. The com- pany was established on 15 April 2014. Valuation of non-current assets Intangible assets and tangible assets have been recognised in the balance sheet at cost. Depreciation and amortisation according to plan is calculated using the straight-line method over the economic useful lives of the assets. The planned depreciation periods are as follows: Development costs 5–7 years Other intellectual property rights 5–7 years Other long-term expenditures 5–7 years Machinery and equipment 3–10 years Acquisition costs of assets included in non-current assets with a probable economic useful life of less than 3 years, and small-scale acquisitions (value under EUR 850) have been expensed in the financial year during which they were acquired in full. Financial assets are measured at the lower of cost or fair market, if the im- pairment is considered to be permanent. Recognition of deferred taxes Deferred tax liabilities or assets have been calculated on the temporary differences between taxation and the financial statements, using the prevailing tax base at balance sheet date. The balance sheet includes de- ferred tax liabilities in their entirety and deferred tax assets in the amount of the estimated probable receiv- ables. Revenue recognition The sale of products and services is recognised in connection with their delivery. Capitalised development costs (Accounting Ordinance 2:4, 3-4) The company’s capitalised product development expenditure relating to the Pihlajalinna mobile application and the company website will be amortised over their economic useful lives. Unamortised development ex- penditure included in intangible assets, which restricts profit distribution, amounted to EUR 96 (258) thou- sand at the end of the financial year. Recognition of pension schemes The personnel’s statutory pension security is handled by an external pension insurance company. Pension costs are recognised as expenses during the year of their accrual. Derivative financial instruments The company has an interest swap agreement that is used to hedge floating rate financing arrangement. The company present the interest swap agreement according to prudent basis (Accounting Board 2016/1963). The negative value of the interest swap agreement is recorded based on the lowest value as an expense and a liability. The positive unrealized value is presented as an off balance sheet item and income statement item and presented only in the Notes. Additional information on the derivative is presented in the parent company’s Other notes . The company has sold its valid interest rate swap agreement during the beginning of 2023. The fair value of the interest rate swap agreement at the time of closing the agreement was approximately EUR 3.9 million. Sales profit is presented as reducing the financial expenses of the financial year in the income statement of the parent company. Hybrid Bond On March 27, 2023, Pihlajalinna Oyj issued a hybrid bond of EUR 20 million. The hybrid bond is presented in liabilities in the balance sheet and the interest is presented in financial expenses in the income statement. 1.1. Revenue EUR 1,000 2023 2022 Revenues by sector Sale of services 3 0 Sale of services, intracompany 9,074 6,757 9,077 6,757 1.2. Other operating income EUR 1,000 2023 2022 Rental income 116 116 Lease income from equipment 240 328 Capital gains on property, plant and equipment 40 0 396 444 1.3. Personnel expenses EUR 1,000 2023 2022 Wages and salaries -1,245 -1,096 Pension costs -133 -115 Other social security expenses -19 -16 -1,397 -1,228 REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS 80 Average number of employees during the financial year 3 3 The remuneration of the Board of Directors of Pihlajalinna Plc is included in the company’s personnel ex- penses. The Annual General Meeting of 4 April 2023 decided that remuneration shall be paid to the mem- bers of the Board of Directors as follows: to the full-time Chairman of the Board of Directors EUR 60,000 per year; to the Vice-Chairman of the Board and the Chairman of the Audit Committee EUR 40,000 per year, and to members EUR 30,000 per year. The annual remuneration shall be paid in company shares and in cash, with approximately 40 per cent of the remuneration used to acquire shares in the name and on behalf of the members of the Board of Direc- tors, and the remainder paid in cash. The remuneration can be paid either entirely or partially in cash if the member of the Board of Directors has, on the day of the General Meeting, 4 April 2023, been in possession of over EUR 1,000,000 worth of company shares. The company is responsible for the expenses and transfer tax arising from the acquisition of the shares. The remuneration to be paid in company's own shares was completed by handing over to the members of the Board a total of 11,861 own shares in May. Rest of the annual remuneration was paid at the same time in cash. If the term of a Board member ends before the An- nual General Meeting of 2023, the Board is entitled to decide on the possible recovery of the remuneration in a manner it deems appropriate. In addition, the Annual General Meeting decided that each Board member shall be paid a meeting fee of EUR 600 for each Board and Committee meeting. furthermore, reasonable travel expenses of the members of the Board of Directors are reimbursed in accordance with the Company's travel policy. 1.4. Depreciation and impairment EUR 1,000 2023 2022 Depreciation according to plan Intangible assets -1,849 -1,802 Property, plant and equipment -823 -413 Total depreciation according to plan -2,672 -2,215 1.5. Other operating expenses EUR 1,000 2023 2022 Voluntary social security expenses -13 32 Facility expenses -173 -130 Vehicle expenses -15 -17 ICT expenses -7,359 -4,983 Machinery and equipment expenses Sales, marketing and travel expenses -67 -48 Administrative expenses -1,250 -1,136 Other operating expenses, total -8,877 -6,283 Auditor’s fees Audit fees 75 126 Auxiliary services 35 Total 110 126 1.6. Financial income and expenses EUR 1,000 2023 2022 Interest income from non-current investments From Group companies 3,174 1,841 From others 359 2 Interest income from non-current investments, total 3,533 1,842 Interest expenses and other financial expenses To Group companies -2,553 -428 To others -6,335 -4,621 Interest expenses and other financial expenses, total -8,887 -5,049 Financial income and expenses, total -5,354 -3,207 1.7. Appropriations EUR 1,000 2023 2022 Difference between depreciation according to plan and dep- reciation in taxation -784 104 Group contributions received 537 Total -247 104 1.8. Income taxes EUR 1,000 2023 2022 Change in deferred tax assets 1,364 1,124 Income taxes on actual operations during the financial year Income taxes total 1,364 1,124 REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS 81 Notes to the balance sheet 2.1. Intangible assets EUR 1,000 2023 2022 Development costs Acquisition cost at the start of the financial year 1,607 1,607 Acquisition cost at the end of the period 1,607 1607 Accumulated depreciation at beginning of period -1,348 -1118 Depreciation and amortisation for the period -162 -230 Carrying amount at the end of period 96 258 Other intellectual property rights Acquisition cost at the start of the financial year 1,658 1,658 Acquisition cost at the end of the period 1,658 1,658 Accumulated depreciation at beginning of period -1,464 -1,249 Depreciation and amortisation for the period -154 -215 Carrying amount at the end of period 39 194 Other long-term expenditures Acquisition cost at the start of the financial year 7,449 6,051 Additions 1,251 1,331 Transfers between items 273 67 Acquisition cost at the end of the period 8,973 7,449 Accumulated depreciation at beginning of period -4,335 -2,979 Depreciation and amortisation for the period -1,533 -1,356 Carrying amount at the end of period 3,105 3,114 Prepayments for intangible assets Acquisition cost at the start of the financial year 166 79 Additions 244 153 Transfers between items -273 -67 Carrying amount at the end of period 137 166 Intangible assets, total Acquisition cost at the start of the financial year 10,879 9,394 Additions 1,495 1,485 Acquisition cost at the end of the period 12,374 10,879 Accumulated depreciation at beginning of period -7,148 -5,346 Depreciation and amortisation for the period -1,849 -1,802 Carrying amount at the end of period 3,377 3,731 2.2. Property, plant and equipment EUR 1,000 2023 2022 Machinery and equipment Acquisition cost at the start of the financial year 3,585 3,584 Additions 5,491 1 Disposals -111 0 Acquisition cost at the end of the period 8,965 3,585 Accumulated depreciation at beginning of period -1,843 -1,430 Depreciation and amortisation for the period 99 0 Accumulated depreciation on disposals -823 -413 Carrying amount at the end of the period 6,398 1,742 Other intellectual property rights Acquisition cost at the start of the financial year 3,585 3,584 Additions 5,491 1 Disposals -111 0 Acquisition cost at the end of the period 8,965 3,585 Accumulated depreciation at beginning of period -1,843 -1,430 Depreciation and amortisation for the period 99 0 Accumulated depreciation on disposals -823 -413 Carrying amount at the end of the period 6,398 1,742 2.3. Investments EUR 1,000 2023 2022 Other shares and participations Acquisition cost at the start of the financial year 50 350 Disposals 0 -300 Acquisition cost at the end of the period 50 50 Shares in subsidiaries Acquisition cost at the start of the financial year 384,485 284,485 Additions 0 100,000 Acquisition cost at the end of the period 384,485 384,485 Total investments 384,535 384,535 A full list of the Group’s subsidiaries is presented in Note 30 Group Companies in the the consolidated financial statements. REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS 82 2.4. Non-current receivables EUR 1,000 2023 2022 Receivables from others Lease deposits given 0 37 Deferred tax assets 2,488 1,124 Total non-current receivables 2,488 1,160 2.5. Current receivables EUR 1,000 2023 2022 Receivables from others Trade receivables 12 12 Other receivables 43 865 Prepayments and accrued income 1,566 5,553 Total 1,621 6,431 Receivables from Group companies Trade receivables 1,808 771 Loan receivables 45,533 50,882 Prepayments and accrued income 1,964 1,487 Total 49,305 53,140 Material items included under Prepayments and accrued in- come Group contribution 537 0 Accrued direct taxes 0 1,490 Allocation of sales 0 672 Accrued social security expenses 64 112 Accrued trade payables 2,462 3,952 Other 467 815 Total 3,530 7,040 Total current receivables 50,926 59,571 2.6. Equity EUR 1,000 2023 2022 Restricted equity Share capital at the beginning 80 80 Share capital at the end 80 80 Total restricted equity 80 80 Unrestricted equity Reserve for invested unrestricted equity at the beginning 183,190 183,190 Reserve for invested unrestricted equity at the end 183,190 183,190 Retained earnings at the beginning 28,044 40,136 Dividends paid 0 -6,767 Acquisition of own shares 0 -822 Retained earnings 28,044 32,548 Profit for the period -7,709 -4,504 Total unrestricted equity 203,525 211,234 Total equity 203,605 211,314 Retained earnings 28,044 32,548 Result for the period -7,709 -4,504 Reserve for invested unrestricted equity 183,190 183,190 Capitalised development costs -96 -258 Distributable unrestricted equity 203,429 210,976 Shares in subsidiaries 22,620,135 22,620,135 of which treasury shares 53,980 70,491 Number of outstanding shares 22,566,155 22,549,644 2.7. Accumulated appropriations EUR 1,000 2023 2022 Accumulated depreciation difference 1,697 914 REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS 83 2.8. Mandatory provisions EUR 1,000 2023 2022 Onerous contracts 0 0 2.9. Liabilities EUR 1,000 2023 2022 2.9.1 Non-current liabilities Liabilities to others Loans from financial institutions 140,000 167,000 Hybrid Bond 20,000 0 Other non-current liabilities 3,650 3 Non-current liabilities, total 163,650 167,003 2.9.2 Current liabilities Liabilities to others Trade payables 1,373 5,430 Other liabilities 1,213 365 Accrued liabilities 4,643 651 7,229 6,447 Liabilities to Group companies Trade payables 85 4 Accrued liabilities 107 2,703 Other liabilities 95,630 66,578 95,821 69,285 Material items included under Accrued liabilities Personnel expense allocations 173 171 Interest allocations 4,014 2,876 Other items 563 307 4,750 3,354 Current liabilities, total 103,051 75,732 REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS 84 Other notes EUR 1,000 2023 2022 Collaterals and contingent liabilities Other sureties 157 121 Pihlajalinna’s financing arrangements Pihlajalinna’s financing arrangement comprises a long-term loan of EUR 130 million and a revolving credit facility of EUR 70 million for general financing needs and acquisitions. It also includes an opportunity to later increase the total amount by EUR 100 million (to EUR 300 million), subject to separate decisions on a sup- plementary loan from the funding providers. Under the original agreement, Pihlajalinna’s financing arrangement was set to have a term of three years and a maturity date in March 2025. In December 2023, Pihlajalinna and the creditor banks agreed on re- structuring the financing arrangement. According to the new agreement, the financing arrangement will ma- ture in March 2026, and the loan margin will change effective from 1 July 2024. The financing arrangement includes the customary financial covenants concerning leverage (ratio of net debt to pro forma EBITDA) and gearing. IFRS 16 lease liabilities are not taken into account in the calculation of the covenants (Frozen GAAP). The loan margin of the financing is additionally linked to Pihlajalinna’s an- nual sustainability objectives related to patient satisfaction (NPS), employee engagement (eNPS) and access to surgical treatment within the target time. Sustainability targets have a minor effect on the loan margin, depending on how many of the agreed-upon sustainability targets are achieved. At the end of the financial year, the sustainability targets linked to the financing arrangement caused no changes in the loan margins. In late 2022, Pihlajalinna and the creditor banks agreed on a temporary increase to the covenants of the financing arrangement and increasing the highest margin by one percentage point from the beginning of 2023 until the third quarter of the year. The creditor banks waived off the in-crease to the highest margin and the other waiver terms in late April 2023 when the company demonstrated it would remain under the original covenants for the next 12 months. The original gearing covenant of the financing arrangement is 115 per cent and the leverage covenant is was 3.75 at the end of the financial year 2023. At the end of the financial year 2022, the covenants agreed on a temporary basis were gearing of 140 per cent and leverage of 5.5. At the end of the financial year, gearing in accordance with the financing arrangement was 93.6 (139.95) per cent and leverage was 3.09 (5.23). At the end of the reporting period, 31 December 2023, the withdrawn loan amount to which the cove- nants apply was EUR 140.0 million (EUR 167.0 million) . During the financial year 2022, the Pihlajalinna entered into an interest rate swap agreement with a nom- inal value of EUR 65 million to hedge its floating rate financing arrangement. The Group sold the interest rate swap agreement in question on 2 February 2023. The fair value of the interest rate swap agreement at the time of concluding the agreement was approximately EUR 3.9 million. The gain on the sale is presented reducing financial expenses in the parent company’s income statement. On 2 February 2023, the Pihlajalinna signed a new interest rate swap agreement with a nominal value of EUR 65 million. The interest rate swap is subject to cash flow hedge accounting. The interest rate swap en- tered into effect in March 2023 and will remain in effect until 25 March 2027. Its fair value was EUR 0.2 (5.1) million at the end of the financial year. Derivative contract is presented in the parent company’s financial statements based on the principle of prudence, and the positive unrealized difference between the value at the time of execution and the value on the balance sheet date has not been recorded as income in the fi- nancial statements. On 27 March 2023, Pihlajalinna issued a hybrid bond with an annual coupon of 12%. The hybrid bond does not have a specified maturity date. Pihlajalinna is entitled to redeem the hybrid bond on the Reset Date, 27 March 2026, and thereafter on each interest payment date. The hybrid bond is presented in the parent company’s financial statements in liabilities in the balance sheet and the interest is presented in fi- nancial expenses in the income statement. Pihlajalinna had EUR 70.0 (43,0) million in unused committed credit limits available. Unused credit limits consist of EUR 10 million credit limit agreement and EUR 60 million unwithdrawn revolving credit facility. In addition, EUR 100.0 (100.0) million of an additional credit limit, which is subject to a separate credit deci- sion, was unused on the financial statements date . EUR 1,000 2023 2022 Lease commitments Within one year 158 146 Between one and five years 396 230 REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS 85 Dates and signatures to the report by the Board of Directors and the financial statements Tampere, 13 February 2024 Jukka Leinonen Kim Ignatius Heli Iisakka Hannu Juvonen Chairman Tiina Kurki Leena Niemistö Seija Turunen Mikko Wirén Tuomas Hyyryläinen CEO Auditor’s Note A report on the performed audit has been issued today. On the date of the electronic signature KPMG Oy Ab Assi Lintula Authorised Public Accountant REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS 86 Auditor’s Report To the Annual General Meeting of Pihlajalinna Plc Report on the Audit of the Financial Statements Opinion We have audited the financial statements of Pihlajalinna Plc (business identity code 2617455-1) for the year ended 31 December 2023. The financial statements comprise the consolidated statement of financial posi- tion, statement of comprehensive income, statement of changes in equity, statement of cash flows and notes, including a summary of significant accounting policies, as well as the parent company’s balance sheet, income statement, cash flow statement and notes. In our opinion ● the consolidated financial statements give a true and fair view of the group’s financial position, financial performance and cash flows in accordance with International Financial Reporting Standards (IFRS) as adopted by the EU ● the financial statements give a true and fair view of the parent company’s financial performance and fi- nancial position in accordance with the laws and regulations governing the preparation of financial state- ments in Finland and comply with statutory requirements. Our opinion is consistent with the additional report submitted to the Audit Committee. Basis for Opinion We conducted our audit in accordance with good auditing practice in Finland. Our responsibilities under good auditing practice are further described in the Auditor’s Responsibilities for the Audit of the Financial Statements section of our report. We are independent of the parent company and of the group companies in accordance with the ethical requirements that are applicable in Finland and are relevant to our audit, and we have fulfilled our other ethical responsibilities in accordance with these requirements. In our best knowledge and understanding, the non-audit services that we have provided to the parent company and group companies are in compliance with laws and regulations applicable in Finland regarding these services, and we have not provided any prohibited non-audit services referred to in Article 5(1) of reg- ulation (EU) 537/2014. The non-audit services that we have provided have been disclosed in note 6 to the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Materiality The scope of our audit was influenced by our application of materiality. The materiality is determined based on our professional judgement and is used to determine the nature, timing and extent of our audit proce- dures and to evaluate the effect of identified misstatements on the financial statements as a whole. The level of materiality we set is based on our assessment of the magnitude of misstatements that, individually or in aggregate, could reasonably be expected to have influence on the economic decisions of the users of the financial statements. We have also taken into account misstatements and/or possible misstatements that in our opinion are material for qualitative reasons for the users of the financial statements. Key Audit Matters Key audit matters are those matters that, in our professional judgment, were of most significance in our au- dit of the financial statements of the current period. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. The significant risks of material misstatement referred to in the EU Reg- ulation No 537/2014 point (c) of Article 10(2) are included in the description of key audit matters below. We have also addressed the risk of management override of internal controls. This includes consideration of whether there was evidence of management bias that represented a risk of material misstatement due to fraud. REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS 87 The key audit matter How the matter was addressed in the audit Items containing management’s estimates related to social and healthcare outsourcing agreements (refer to notes 1 Revenue from contracts with customers, 16 Trade and other receivables and 29 Contingent assets and liabilities and commitments in the consolidated financial statements) ● A significant proportion of the Group’s revenue is based on long-term complete and partial social and healthcare outsourcing agree- ments. A high level of management judgement, which can have a significant impact on the consolidated result and statement of fi- nancial position, is involved in the accounting for outsourcing contracts due to the extent of the contracts, definitions of contractual obligations and amendment clauses for changed situations. ● The client of the Group’s social and healthcare outsourcing agreements changed from the municipalities to the wellbeing services counties as of 1.1.2023. The wellbeing services counties had the right to terminate the agreements by 31.10.2023, and one material agreement has been terminated to expire in accordance with the transition period of the enforcement law at the end of year 2025. ● In some outsourcing agreements, the responsibility for the costs of demanding specialised care has during the financial year based on negotiations been transferred to the wellbeing services county. The change reduces risks related to costs and income. ● Note 1, section Key accounting estimates and decisions based on management judgement of the consolidated financial statements, explains the challenges related to the collection of receivables related to complete social and healthcare outsourcing agreements with the previous clients. The company has commenced legal actions for debt recovery with regard to some of the receivables and is considering legal actions to recover other receivables. These items in question do no longer meet the definition of contract assets at the end of the financial year, and Pihlajalinna is presenting these items as contingent off-balance sheet assets in accordance with IAS 37. ● The write-downs of these items reduced the EBITDA by a total of 7.8 million euros during the financial year, and in addition also had a negative effect of 0.4 million euros on the financial items. The write-downs have a significant impact on the Group's result for the financial year. ● Due to the amount of changes related to the outsourcing agreements, the amount of items containing management’s estimates at the beginning of the year, as well as the material impact on the result for the period of the write-downs of receivables, items contain- ing management’s estimates related to social and healthcare outsourcing agreements are considered a key audit matter. ● We assessed the items containing management’s estimates related to social and healthcare outsourcing agreements recorded in the consolidated financial statements through discussions with management, analytically and by per- forming substantive testing. We obtained agreements, calculations and ad- ministrative documents related to the items. ● We have discussed matters related to the change of the client with the man- agement. In addition, we have reviewed the renewed service agreements, contract amendments and decisions related to contract terminations in the wellbeing services counties, as well as the impact of these changes on the Group's revenue and costs. ● We have obtained legal representation letter about pending legal disputes. In addition, we have reviewed the legal opinions of the law firms used by the Group regarding the Court of Appeal’s ruling in the dispute between Jämsän Terveys Oy and the City of Jämsä and its effects on outstanding receivables from the previous municipalities clients. ● We have reviewed the write-downs of receivables and the basis for them. ● We assessed the recognition principles applied to income and expense items containing management’s estimates compared to IFRS principles and consid- ered the appropriateness of the Group’s disclosures in respect of items con- taining management’s estimates. ● We reported in more detail about the contents and the changes of these items containing management’s estimates to the Audit Committee and the Board of Directors. Goodwill impairment assessment (refer to note 13 Intangible assets and goodwill in the consolidated financial statements) ● The Group has expanded its activities through acquisition of companies. As a result, the consolidated statement of financial position 31 December 2023 includes goodwill totalling 251.8 million euros. ● Goodwill is not amortized but is tested at least annually for impairment. Determining the cash flow forecasts underlying the impair- ment tests requires management make judgments over certain key inputs, for example revenue growth rate, discount rate, long- term growth rate and inflation rates. ● Due to the high level of judgement related to the forecasts used, and the significant carrying amounts involved, goodwill impairment assessment is considered a key audit matter. ● Our audit procedures included, among others, assessing key inputs in the im- pairment calculations such as revenue growth rate, profitability and discount rate, by reference to the parent company’s Board approved budgets, data ex- ternal to the Group and our own views. ● We assessed the historical accuracy of forecasts prepared by management by comparing the actual results for the year with the original forecasts. ● We involved KPMG valuation specialists that assessed the technical accuracy of the calculations and compared the assumptions used to market and indus- try information. ● Furthermore, we considered the appropriateness of the Group’s disclosures in respect of goodwill and impairment testing. REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS 88 Responsibilities of the Board of Directors and the Managing Director for the Financial State- ments The Board of Directors and the Managing Director are responsible for the preparation of consolidated finan- cial statements that give a true and fair view in accordance with IFRS Accounting Standards as adopted by the EU, and of financial statements that give a true and fair view in accordance with the laws and regula- tions governing the preparation of financial statements in Finland and comply with statutory requirements. The Board of Directors and the Managing Director are also responsible for such internal control as they de- termine is necessary to enable the preparation of financial statements that are free from material misstate- ment, whether due to fraud or error. In preparing the financial statements, the Board of Directors and the Managing Director are responsible for assessing the parent company’s and the group’s ability to continue as a going concern, disclosing, as ap- plicable, matters relating to going concern and using the going concern basis of accounting. The financial statements are prepared using the going concern basis of accounting unless there is an intention to liqui- date the parent company or the group or cease operations, or there is no realistic alternative but to do so. Auditor’s Responsibilities for the Audit of the Financial Statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that in- cludes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with good auditing practice will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the ag- gregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements. As part of an audit in accordance with good auditing practice, we exercise professional judgment and maintain professional scepticism throughout the audit. We also: ● Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstate- ment resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, for- gery, intentional omissions, misrepresentations, or the override of internal control. ● Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effective- ness of the parent company’s or the group’s internal control. ● Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. ● Conclude on the appropriateness of the Board of Directors’ and the Managing Director’s use of the going concern basis of accounting and based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the parent company’s or the group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evi- dence obtained up to the date of our auditor’s report. However, future events or conditions may cause the parent company or the group to cease to continue as a going concern. ● Evaluate the overall presentation, structure and content of the financial statements, including the disclo- sures, and whether the financial statements represent the underlying transactions and events so that the financial statements give a true and fair view. ● Obtain sufficient appropriate audit evidence regarding the financial information of the entities or busi- ness activities within the group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsi- ble for our audit opinion. We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and communicate with them all relationships and other mat- ters that may reasonably be thought to bear on our independence, and where applicable, related safe- guards. From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes pub- lic disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS 89 Other Reporting Requirements Information on our audit engagement We were first appointed as auditors by the Annual General Meeting when Pihlajalinna Plc was established on 15 April 2014 and our appointment represents a total period of uninterrupted engagement of ten years. In Pihlajalinna Terveys Oy we were first appointed as auditors for the financial year ended 31 December 2010. Pihlajalinna Plc became a public interest entity on 8 June 2015. We have been the company’s auditors since it became a public interest entity. Other Information The Board of Directors and the Managing Director are responsible for the other information. The other in- formation comprises the report of the Board of Directors and the information included in the Annual Re- port, but does not include the financial statements and our auditor’s report thereon. We have obtained the report of the Board of Directors prior to the date of this auditor’s report, and the Annual Report is expected to be made available to us after that date. Our opinion on the financial statements does not cover the other information. In connection with our audit of the financial statements, our responsibility is to read the other infor- mation identified above and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. With respect to the report of the Board of Directors, our responsibility also includes considering whether the report of the Board of Directors has been prepared in accordance with the applicable laws and regulations. In our opinion, the information in the report of the Board of Directors is consistent with the information in the financial statements and the report of the Board of Directors has been prepared in accordance with the applicable laws and regulations. If, based on the work we have performed on the other information that we obtained prior to the date of this auditor’s report, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. Tampere 16 February 2024 KPMG OY AB Assi Lintula Authorised Public Accountant, KHT Independent Auditor’s Reasonable Assurance Report on Pihlajalinna Plc’s ESEF Financial Statements To the Board of Directors of Pihlajalinna Plc We have undertaken a reasonable assurance engagement in respect of whether the consolidated financial statements for the year ended 31 December, 2023 included in the digital financial statements 74370058MTRLEDOCHV67-2023-12-31-en.zip of Pihlajalinna Plc (Business ID 2617455-1) have been marked up with iXBRL markups in accordance with the requirements of Article 4 of EU Delegated Regulation 2018/815 (ESEF RTS). The Responsibility of the Board of Directors and Managing Director The Board of Directors and Managing Director are responsible for preparing the report of the Board of Direc- tors and financial statements (ESEF financial statements) that comply with the requirements of ESEF RTS. This responsibility includes: ● preparation of ESEF financial statements in XHTML format in accordance with Article 3 of the ESEF RTS ● marking up the primary statements and the notes to the consolidated financial statements, and the company identification data included in the ESEF financial statements with iXBRL tags in ac- cordance with Article 4 of the ESEF RTS; and ● ensuring consistency between ESEF financial statements and audited financial statements. The Board of Directors and the Managing Director are also responsible for such internal control as they deem necessary to prepare the ESEF financial statements in accordance with the requirements of the ESEF RTS. Auditor’s Independence and Quality Management We are independent of the company in accordance with the ethical requirements applicable in Finland, which apply to the engagement we have performed, and we have fulfilled our other ethical responsibilities in ac- cordance with these requirements. The auditor applies International Standard on Quality Management ISQM 1, which requires the firm to design, implement and operate a system of quality management including policies or procedures regarding compli- ance with ethical requirements, professional standards and applicable legal and regulations requirements. Auditor’s Responsibility In accordance with the Engagement Letter our responsibility is to express an opinion on whether the marking up of the consolidated financial statements included in the ESEF financial statements comply in all material respects with the Article 4 of the ESEF RTS. We conducted our reasonable assurance engagement in accord- ance with International Standard on Assurance Engagements 3000 . The engagement involves procedures to obtain evidence whether; REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS 90 ● the primary statements of the consolidated financial statements included in the ESEF financial statements are, in all material respects, marked up with iXBRL tags in accordance with Article 4 of the ESEF RTS, and; ● whether the notes to the consolidated financial statements and the company identification data included in the ESEF financial statements data, have been marked up, in all material respects, with iXBRL tags in accordance with Article 4 of the ESEF RTS; and ● whether the ESEF financial statements and the audited financial statements are consistent with each other. The nature, timing and the extent of procedures selected depend on practitioner’s judgement. This includes the assessment of the risks of material departures from the requirements set out in the ESEF RTS, whether due to fraud or error. We believe that the evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Opinion In our opinion, the primary statements of the consolidated financial statements, the notes to the consolidated financial statements and the company identification data included in the ESEF financial statements of Pihla- jalinna Plc identified as 74370058MTRLEDOCHV67-2023-12-31-en.zip for the year ended 31 December, 2023 are, in all material respects, marked up in compliance with the ESEF Regulatory Technical Standard. Our audit opinion on the audit of the consolidated financial statements of Pihlajalinna Plc for the year ended 31 December, 2023 is set out in our Auditor’s Report dated 16 February, 2024. In this report, we do not ex- press any audit opinion or other assurance conclusion on the consolidated financial statements. Tampere 14 March, 2024 KPMG OY AB Assi Lintula Authorised Public Accountant, KHT

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