Annual Report (ESEF) • Mar 21, 2022
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Download Source FileUntitled 2021 ANNUAL REPORT 2021 NET DEBT/ADJUSTED EBITDA 3.0 (2020: 3.6) target below 3 ADJUSTED EBITDA EUR 65.3 million (2020: 54.8) REVENUE: EUR 577.8 million (2020: 508.7) +13.6% ADJUSTED OPERATING PROFIT (EBIT) EUR 30.3 million/5.3% (2020: EUR 20.9 million, 4.1%) target over 7% Key figures • The Group pays all of its taxes to Finland • Headquartered in Kehräsaari, Tampere • Extensive range of on-site, remote and digital services for both private and public sector customers • Strong geographical presence in Pirkanmaa, South and North Ostrobothnia, Central Finland, North Savo and the Helsinki Metropolitan Area • Values: energy, ethics, open-mindedness • Listed on the main list of Nasdaq Helsinki in 2015 (HEL: PIHLIS) EARNINGS PER SHARE EUR 0.89 (2020: 0,38) NUMBER OF PERSONNEL 6,297 (2020: 5,550) Pihlajalinna Pihlajalinna is one of the leading providers of social, healthcare and wellbeing services in Finland. The Group´s customers include private individuals, companies, insurance companies and public sector entities, such as municipalities and joint municipal authorities. This is voluntary published pdf report, so it does not fulfill the disclosure obligation pursuant to Section 7:5§ of the Securities Markets Act. ANNUAL REPORT 2021 Contents Pihlajalinna 2021 ................................................... 2 CEO’s Review ........................................................4 Business and strategy ................................. 5 Operating environment ......................................6 Trends and megatrends ....................................8 Diverse remote services ....................................10 Mental Care health service ...............................12 Exercise referral ....................................................13 Customer groups ................................................. 14 Insurance company accounts .........................15 A year of development in 2021 ......................16 Sustainability ............................................... 18 Personnel, the most important resource ....20 Data protection and information security . 21 Tax liability and footprint ..................................22 A trusted partner for municipalities .............23 Impact maps ..........................................................24 Board of Directors ............................................... 28 Management Team ..............................................29 Action report by the Board of Directors .. 31 Audited financial statements ..................... 54 Auditor’s report ....................................................96 Information for shareholders ..........................100 2 BUSINESS AND STRATEGY | SUSTAINABILITY | REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS Timeline 2021 1 JAN Bottenhavets Hälsa − Selkämeren Terveys starts operations 25 JAN Pihlajalinna and Sasky, a municipal education and training consortium expand their training cooperation 17 MAR Pihlajalinna starts cooperation with NONNA Group Selkämeren Terveys, a joint venture between Pihlajalinna, Kristiinankaupunki and the Hospital District of Vaasa produces healthcare services for approximately 6,600 residents of Kristiinan - kaupunki. The joint venture is responsible for physician and nurse appointments, dental care, rehabilitation services, the maternity and child health clinic and physical therapy. The term of the outsourcing agreement will be from the mini - mum of 15 years to maximum of 20 years. “Partnership with the 2022 IIHF Ice Hockey World Championship works us perfectly. We have a strong track record in supporting sports, and it was easy to find shared goals and values with the event. The Finnish team will play all of its games at the newly built arena in Tampere, so I am eagerly looking forward to the tournament myself,” says CEO Joni Aaltonen. In response to the ageing of the popula - tion, Pihlajalinna invests in NONNA Group, a developer and provider of modern housing solutions. The cooperation provides us with the opportunity to be involved in developing services for safe living at home and a new concept of home delivery services. The acquisition is an important element of Pihlajalin- na´s growth strategy, and it strengthens the Group’s service portfolio in all healthcare specialties. The business combination also enables the geographical expansion of the service network, especially in the Helsinki Metropolitan Area and other growth centers. Growth potential is further increased by the new five- year service agreement signed with Pohjola Insurance in connection with the deal. “We want to oer the best possible service to families with children. Through the Pihlajalinna Health App (Terveyssovellus) health appli- cation, parents can quickly get professional help with their child’s ailment, and the service can be used from anywhere, even from the summer cabin or while on a holiday trip,” says Nina-Maria Tigerstedt, Business Director, Pihlajalinna Remote Clinic. 29 MAR Pihlajalinna lauches new remote service for patients with diabetes 30 MAR Pihlajalinna organizes Capital Markets Day 1 MAY Työterveys Virta Oy becomes a part of Pihla- jalinna Group 19 MAY Pihlajalinna is selected as an ocial partner of the 2022 IIHF Ice Hockey World Championship 20 MAY Pihlajalinna´s 24 hour customer service is launched 21 MAY Pihlajalinna Mental Care (Mielen huoli) mental health help line is launced 1 JUN Pihlajalinna becomes the healthcare service provider of Hailuoto municipality 11 JUN The District Court of Kanta-Häme issues a decision on the dispute between Pihlajalinna and the munici- pality of Hattula 21 JUN Pihlajalinna acquires Digital Health Solutions Oy 1 JUL Pihlajalinna signs an extension contract as UPM´s occupational healthcare service provider 2 JUL Pihlajalinna announces its intention to acquire Poh- jola Hospital 9 JUL Pihlajalinna´s remote consultation service Health App (Terveyssovellus) becomes available around the clock 17 AUG Pihlajalinna signs an extension contract as Stora Enso´s occupational healthcare service provider 19 AUG Pihlajalinna announces opening of a private clinic in Lahti 23 AUG Pihlajalinna launches Pediatrician chat service 3 SEP Pihlajalinna becomes as an ocial main partner of the Finnish Ski Association 8 SEP Uniikki, a special housing unit opens in Lohja 8 OCT Pihlajalinna wins a public bidding competition for Piispanportti health centre in Espoo 1 NOV Finla´s occupational health care unit in Mänttä becomes part of Pihlajalinna Group 9 NOV Pihlajalinna´s weight management clinic starts operations 3 BUSINESS AND STRATEGY | SUSTAINABILITY | REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS How would you describe 2021? The year 2021 was characterised by the healthcare challenges brought with the prolonged COVID-19 epidemic. These chal - lenges also had an impact on Pihlajalin- na. We adapted our services in response to the new needs created by the epidemic; for example, by performing COVID-19 testing throughout the year and participating in the vaccination eort. We kept a close eye on the development of the situation. Our employees did very well in adapting to the changing circumstances. During the epidemic, we have shown to be a significant and flexible part of the Finnish healthcare. We launched our updated strategy at our Capital Markets Day in March. We focus on the renewal of private customer services, strengthening cooperation in social and healthcare services and our relationships with the upcoming wellbeing services counties, and promote the development of digital services. Our strategic choices and our eciency improvement program have been reflected in our operations. Our revenue increased strongly in 2021 and our profitability improved clearly. What were the highlights of 2021? At the beginning of July, we announced that we will acquire the entire share capital of Pohjola Hospital Ltd. The transaction was approved by the Finnish Competition and From the CEO Consumer Authority at the beginning of 2022 and completed on 1 February 2022. In connection with the acquisition, we signed a new five-year service agreement with Pohjola Insurance. Our goal is to expand our network of operating locations and our range of specialised care services regionally, especially in the Helsinki Metropolitan Area and other growth centers. The integration of Työterveys Virta, which was acquired by Pihlajalinna in 2021, progressed according to plan. The acquisi - tion strengthened our position in Northern Ostrobothnia and Oulu region. We are also very satisfied with the development of our occupational healthcare services. Our customer base has grown and, within the year, we signed extensions to our contracts with Stora Enso and UPM, for example. The number of people currently within the scope of Pihlajalinna’s occupational healthcare services is approximately 250,000. We invested in digitalization in 2021, which significantly improves our competi - tiveness. This development is also reflected in our day-to-day operations: approximately 40 per cent of our customers in catego - ries other than municipal outsourcing use our services digitally. We have developed entirely new types of services where remote services are an essential part of the care path. One concrete example is the re - mote service model for diabetes, which is described in more detail on page 10 of this Annual Report. Mental health problems and related dis - ability have increased alarmingly over the past few years. This trend has intensified during the COVID-19 epidemic. An anonymic analysis of Pihlajalinna occupational health care visits was used to evaluate the exten - tion of the problem in Finland in terms of mental health issues. The rate of sickness-re - lated absences caused by reasons related to mental health per 1,000 employees have increased by 24 per cent compared to last year. Correlation to the pre-epidemic period in 2019, the increase is as high as 36 per cent. In 2021, we developed low-threshold mental health services, such as the Mental Care (Mielen huoli) help line, which is de - scribed in more detail on page 12 of this An- nual Report. Our goal is eective prevention and early intervention to avoid extended disability and human suering. The COVID-19 epidemic has burdened the healthcare system in many ways, and the care backlog has increased for many illness - es. Our new service concepts enable us to produce healthcare services more ecient - ly and make them available to a growing number of private customers, also through remote channels. How do you see Pihlajalinna’s future? Our strategic choices, the acquisition of Pohjola Hospital and our five-year agree - ment with Pohjola Insurance are welltimed. In addition to the care backlog created by COVID-19, the entire Finnish social and healthcare service system is in the midst of historic reforms. In June 2021, the Finnish Par - liament approved the new legislation govern- ing the organization of social and healthcare services. Consequently, from the beginning of 2023, the responsibility for organizing social, healthcare and rescue services will be trans - ferred to 21 wellbeing services counties. Clinical quality has always been at the core of Pihlajalinna’s operations. In 2022, we will update our strategy concerning quality and impact and will also define and publish new performance measures for our operations. We are seeking revenue growth of EUR 250 million by the end of 2025, using 2021 as the baseline. One third of the growth is expected to arise from the public sector and the rest two thirds from corporate and private cus - tomers. We expect to further accelerate our growth in 2022. At the same time, the demand for our services is increasing due to the needs of the ageing population and the growing health trend among consumers. The use of data in health monitoring will create new expecta - tions for healthcare providers, and digitali- zation will increasingly be a driver of service development. Our goal for the future is to continue to be a significant part of Finn - ish healthcare and to be at the forefront of developing and producing new impact-based services. JONI AALTONEN Toimitusjohtaja 4 BUSINESS AND STRATEGY | SUSTAINABILITY | REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS Pihlajalinna’s strategy 2021–2025 BUSINESS AND STRATEGY Strategic priorities 1. The renewal of services for private customers Pihlajalinna will strengthen its multichannel services and consumer business through new service concepts and digital innovation. 2. Cooperation in social and healthcare services Pihlajalinna will engage in close cooperation with the future wellbeing services counties and build a strong market position in public healthcare. 3. Enhancing digitalisation Pihlajalinna has a strong focus on digitalisation in the development of personnel, the customer experience and operational performance. Mission We help Finns to live a better life Vision We bring wellbeing to everyone Values Ethics, energy, open-mindedness Objectives for the strategy period • Pihlajalinna oers the most attractive and diverse range of services. • Pihlajalinna is the number one choice of con- sumers and professionals. • Pihlajalinna services are easy to access and available without delay. • Revenue growth of EUR 250 million by the end of 2025, using 2021 as the baseline. One third of the growth is expected to arise from the public sector and the rest two thirds from corporate and private customers. • Adjusted operating profit before the amor- tisation and impairment of intangible assets (EBITA) over 9 per cent of revenue in the long term. • Long term target for net debt is less than 3x adjusted EBITDA. In the beginning of strategy period due to Pohjola Hospital acquisition the net debt will decline close to to 5. • Distributing at least one-third of the profit for each financial year to shareholders as divi- dends or capital repayment. Performance indicators The achievement of goals is measured by, for example, financial indicators, an increase in the number of appointment times and pro- cedures available to customers, and in the Net Promoter Score (NPS), which measures the customer and employee experience. 5 BUSINESS AND STRATEGY | SUSTAINABILITY | REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS BUSINESS AND STRATEGY T he Finnish social and healthcare sector is undergoing a historic transformation. In June 2021, the Finnish Parliament approved a new pack- age of legislation on social and healthcare services. As a result, the responsibility for organising social, healthcare and rescue services will be transferred from munici- palities and joint municipal authorities to 21 wellbeing services counties, the City of Helsinki and partially to the joint county authority for the Hospital District of Hel- sinki eective from the beginning of 2023. The COVID-19 epidemic continued throughout 2021, creating waves of in- fection early in the year, after the sum- mer and late in the year. The seven-day averages for new cases and the number of hospitalized patients peaked in Finland in January 2022. Pandemic-related restric- tions were in place throughout 2021, and extensive restrictions were imposed at the turn of the year due to the Omicron vari- ant. While infection numbers are still high nationally, the number of cases requiring intensive care has decreased substantially. In negotiations held on 2 February 2022, The operating environment the Finnish Government determined that the extensive restrictions can be gradually relinquished while taking the epidemio- logical situation into consideration. The extensive restrictions have included, for example, the complete closure of indoor facilities used for individual sports and physical exercise by adults. The sec- ond-dose vaccination coverage in Finland stood at 74.5 per cent of the entire population at the beginning of February 2022. Due to the COVID-19 restrictions and the burden placed on the healthcare system by the epidemic, the treatment backlog for oth- er illnesses continues to grow. According to the Finnish Institute for Health and Welfare statistics, queues for treatment in public healthcare have increased in gen- eral due to COVID-19. At the end of November, a total of 150,392 patients were waiting for access to care at hospitals operated by the hospital districts. This repre- sented a year-on-year increase BUSINESS AND STRATEGY | SUSTAINABILITY | REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS Pihlajalinna business locations 2021 Private clinic surgical operation dental clinic Social and healthcare outsourcing Residential service Fitness centre Responsible doctor service of nearly 9,000 patients. Of these, 9,499 patients (6.3 per cent) had waited for access to non-urgent specialised care for more than six months, which is an increase of nearly 1,900 patients compared to the beginning of 2021. Care queues have grown especially in surgery and psychia- try. In primary care, non-urgent outpatient appointments with physicians were avail- able within one week of the assessment of the need for treatment in approximately 60 per cent of cases in October 2021 in all of the Regional State Administrative Agency regions. The increased use of re- mote consultations has expedited access to care at health centers. In October 2021, the number of non-urgent visits to dental care was still lower than in 2019. The number of voluntary medical expenses insurance policies increased significantly between 2009 and 2020. According to Finance Finland, over 1.26 million Finns had private medical expenses insurance at the end of June 2021. Growth has been seen in insurance policies taken out by adult private individuals, children’s insurance policies as well as medical expenses insurance policies taken out by companies for their employees. The new social and healthcare service system will significantly reshape health care structures and needs as the responsibility for organising services is transferred from municipalities to larger wellbeing services counties. 7 BUSINESS AND STRATEGY | SUSTAINABILITY | REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS BUSINESS AND STRATEGY T he trends, megatrends and drivers of change in our society are reflected in the operations and development needs of social services and healthcare. We keep a close eye on their development and impacts and we anticipate the future. This is crucial for our ability to respond to the future challenges of the social and healthcare services sector and help peo- ple in Finland to live a better life. Trends and megatrends have a very concrete impact on Pihlajalinna’s devel- opment. This is reflected in our business operations in various ways, including the continuous development of extensive remote services, comprehensive occupa- tional healthcare services, eective social and healthcare service solutions devel- oped in cooperation with the public sector and the creation of other care paths that support wellbeing. These are discussed in more detail in this Annual Report. The rapid and unpredictable changes in society caused by the COVID-19 pandem- ic challenge the prevailing trends. For example, the COVID-19 crisis is consid- ered to have aected the megatrend of urbanization at least temporarily, with migration in Finland being increasingly Trends and megatrends influencing our industry The rapid and unpredictable changes in society caused by the COVID-19 pandemic challenge the prevailing trends. directed towards more rural municipalities and municipalities surrounding growth centers. However, the actual impact on megatrends of the changes caused by the epidemic can be assessed only after a longer period of time. In a short term, the significant care backlog caused by the COVID-19 epidemic presents a challenge to the Finnish healthcare system. Sustainability (social and ecological sustainability) In addition to the ecological sustain- ability crisis, we need to respond to questions concerning the future of social sustainability. In addition to par- ticipation, a sense of community and accessibility, social sustainability is a matter of the fair distribution of benefits and disadvan- tages. Social sustainability is reflected in, for example, the wellbeing of com- panies’ employees and maintaining the vitality of dierent regions. BUSINESS AND STRATEGY Growth and concentration of wealth The growth of total wealth contributes to the growth of consumption. However, there is a clear concentration of wealth among the older generations, who also have an increased need for healthcare services. Indeed, their wealth is reflected in invest- ments in their own health. More and more people have the ability to take out voluntary medical expenses insurance, for example. According to Finance Finland, over 1.26 million Finns had a private medical expenses insurance at the end of June 2021. Lifestyle diseases are increasing The most common causes of death among work- ing-age people in Finland are tumors, cardio- vascular diseases, dementia and causes related to alcohol consumption. However, standardized mortality in the working-age population, relative to the age structure and size of the entire popu- lation, is declining. Although recreational exercise that promotes wellbeing has increased, the level of fitness especially among young age groups has declined and overweight is an increasingly com- mon issue. The period of the COVID-19 epidemic has also had a negative impact on the physical fitness of people in Finland. Increasing inequality The health of Finns has improved on the whole, but the dierences between socio- economic groups are among the largest in the Western world. For example, the life expectancy of a Finnish man with a higher education is approximately six years longer than that of a man with only a basic edu- cation completed. The dierences between socioeconomic groups are related to, for example, the use of health services and life- style choices that are relevant to health. Health remains a strong trend Interest in personal health and well- being is increasing, especially among younger people. The self-monitoring of health has become increasingly common as technology has devel- oped. The health trend is also re- flected in statistics: people in Finland smoke less, eat healthier food, exer- cise more and are more active users of health and wellbeing services. The population is ageing The ageing of the population continues, and the biggest changes in the age struc- ture are still to come. They will have a sig- nificant impact on the dependency ratio in Finland and the increasing prevalence of age-related illnesses. According to population forecasts, there will be seven non-working-age persons per 10 work- ing-age persons in Finland by 2050. The ageing of the large generations will pose unprecedented challenges to the econom- ics of our society. Urbanization continues The population concentrates in growth centers. According to forecasts, jobs will be concentrated mainly in cities, which also oer the best study opportunities. In munic- ipalities with a negative net migra- tion rate, the population is ageing and the challenges related to the availability of healthcare services are becoming deeper. . Healthcare reform Finnish social and healthcare services are in the midst of historic reforms. The new social and healthcare service system will significantly reshape healthcare structures and needs as the responsibil- ity for organizing services is transferred from municipalities to larger wellbeing services counties. The reforms will have significant impacts on municipalities’ resources and economic situation, as social and healthcare services have previously accounted for a majority of municipalities’ expenses. The digital transformation continues The rapid development of technological solutions continues, and the COVID-19 epidemic has only increased the demand for virtual operating environments and services. Health technology is becoming part of daily life, remote consultations are becoming common and people are mea- suring their health in various ways. The use of artificial intelligence in predicting and diagnosing illnesses is increasingly becoming a part of the care chain. 9 BUSINESS AND STRATEGY | SUSTAINABILITY | REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS A lthough the general wellbeing of Finns has improved, statistics show that half a million Finns have diabetes, more than half of the population is overweight, and mental health problems have become the most common cause of disability pensions, with the number of pensions having risen by as much as 10–20 per cent. The ageing of the popula- tion also brings other health issues, such as tumors, Alzheimer’s disease and cardio- vascular diseases. The focus of healthcare should be shifted increasingly towards prevention. Allocating resources based on the impact of care makes care chains more eective in terms of both wellbeing and costs. Pihlajalinna has done long-term work around development in areas such as remote services, digital solu- tions and comprehensive occu- pational healthcare services. The COVID-19 epidemic has accelerated digitalization and further increased the number of remote consul- tations. Pihlajalinna has also launched new data-driven services based on remote consultations, such as the Pih- lajalinna Diabetes Clinic and the Pihlajalinna Weight Management Clinic. They help patients achieve better balance by integrating monitoring and measure- ment into care paths Pihlajalinna strength- ened its position as pediatric service provider by launching a new pediatrician chat service in the Pihlajalinna Health App application in August. Pediatrician chat service is available without an appoint- ment. Many acute ailments not requiring physical examination, can be treated through the application. A pediatrician can also prescribe medication, renew prescription or issue a referral for further examinations. Pihlajalinna will further develop its network of operating locations and its range of specialized care services as well as continue to expand its service network geographically, especially in the Helsin- ki Metropolitan Area and other growth centers. Monitoring the impact of services is an important aspect of service development. Pihlajalinna has initiated a strategy eort to assess performance indicators that measure service quality and impact. The need for healthcare services is growing, and it is important to find solutions for both prevention and treatment with the most impact. BUSINESS AND STRATEGY Diverse remote services The pediatrician chat service is available without an appointment. 55 % Growth of Pihlajalinna remote appointments service volume in percen- tage in 2021. 39 % Percentage of remote consultations in 2021. BUSINESS AND STRATEGY Remote services and new treatment models P ihlajalinna improves the availability and accessibility of its services by introducing new service innovations and by developing digital services in par- ticular. In recent years, Pihlajalinna has sig- nificantly expanded the range of remote services. Remote services help equalise regional dierences in service provision and have enabled the flexible and safe use of services during the COVID-19 epidemic. 163 SPECIALISTS Number of specialists who provided appointments via the Pihlajalinna health application in 2021. 10 SECONDS The median waiting time of customers using the Pihla- jalinna health application in 2021. 15 500 RESPONSIBLE DOCTOR SERVICE CUSTOMERS Number of customers treated via Pihlajalin- na’s responsible doctor service in 2021. In Pihlajalinna’s responsible doctor model, a physician who is familiar with the patient’s overall situation is responsible for their day- to-day care in cooperation with nursing sta. The model is part of our range of services oered to municipal customers. 72 MUNICIPALITIES Pihlajalinna’s responsible doctor service is used by 72 municipalities across Finland. The customers include municipalities as well as joint municipal authorities. 98% Growth of Pihlajalinna Health App service volume in percentage in 2021. 11 BUSINESS AND STRATEGY | SUSTAINABILITY | REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS BUSINESS AND STRATEGY The growing demand for mental health services and the challenges related to access to care make frequent headlines. Pihlajalinna responded to the challenge by developing Mental Care (Mielen huoli), a mental health helpline that oers quick and convenient access to professional help. The need for mental health services is growing in Finland. Statistics show that the number of Finns receiving sickness allowance paid on the basis of mental health increased throughout the 2010s (Finnish Institute for Health and Welfare), and mental health and behavioral prob- lems have become the most important basis for disability pension (Finnish Asso- ciation for Mental Health, Finnish Centre for Pensions). According to the OECD, the costs of mental health treatment in Finland amount to roughly EUR 11 billion per year, including the labor market costs, healthcare service costs and social securi- ty (Finnish Association for Mental Health). “Mental health services are often congested and access to care can be slow. The prolonged COVID-19 epidemic and isolation from other people has only aggravated the situation for people who struggle with their mental health. This Low-threshold help for mental health concerns – without queuing means there is a great demand for the Mental Care helpline that was launched in May 2021,” says Marika Pöyri-Pirkola, Team Leader for the Mental Care helpline at Pihlajalinna. Help for small and large concerns The Metal Care helpline oers help with a wide range of mental health issues, such as anxiety, depression, fatigue, insomnia, problems with coping at work and sud- den stressful life changes. The customer is initially connected to a nurse with completed training on short-term therapy. Together with the customer, the nurse plans the appropriate treatment path. The customer can get acute discussion help from the Mental Care nurse, pro- ceed to short-term therapy or proceed to longer-term treatment. If necessary, the customer is oered a consultation with a specialist in psychiatry. “The customer benefits from close collaboration between the nurse and the specialist in psychiatry. At the same time, the cost of care remains moderate because the specialist’s services are used only as necessary. The Mental Care help- line has been well received. The number of customers is growing and the feedback from our customers has been very posi- tive. We will also continue to develop the service further,” Pöyri-Pirkola adds. Secure healthcare services remotely from the comfort of your living room The Mental Care helpline is implemented entirely through initial remote consulta- tions. Customers can get assistance from the comfort of their living room, anywhere in Finland. The remote service model also makes ecient use of the resources of mental health professionals. “The Mental Care helpline, like all Pih- lajalinna´s digital services, is based on an uncompromised information security. The Visiba Care reception platform we use has been developed specifically for patient use. It uses communication methods which ensure the information sent between the customer and Pihlajalinna´s servers remains confidential and encrypted using the TLS encryption protocol. The Swedish Medical Products Agency has awarded the CE mark to Visiba Care in recognition as a first-class product in terms of its medical and technical security. All patient data is processed in accordance with the General Data Protection Regulation (GDPR) and the Act on the Electronic Processing of Client Data in Healthcare and Social Welfare,” Pöyri-Pirkola concludes. The need for mental health services is growing in Finland. 12 BUSINESS AND STRATEGY | SUSTAINABILITY | REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS Pihlajalinna mission is to help its cus- tomers to live a better life. As a concrete example of this, Pihlajalinna launched the exercise referral concept in the summer of 2021. This completely new operating model in Finland supports comprehensive customer care. The service is based on comprehensive scientific evidence regarding the benefits of physical activity in the treatment of illnesses. Exercise can play a crucial role in the success of treatment and it can be used either alone or to support medical treatment. At Pihlajalinna, the exercise referral is seen particularly useful in the areas of healthcare where physical exer- cise has thus far been a less-used form of treatment. “Exercise can be recommended in various situations as part of a treatment. It has been shown to be useful in the treat- ment of high blood pressure, diabetes, depression, musculoskeletal disorders and many other conditions. When a customer makes exercise part of their lifestyle, the impact can be tremendously positive. For example, type 2 diabetes can be prevent- ed or controlled with appropriate exercise and diet, so that the patient’s medication can be even discontinued altogether,” says Regional Director, specialist in geriatrics Arvo Haapanen from Pihlajalinna. Pihlajalinna`s Exercise Referral (Liikun- talähete) concept and its seamless func- tionality of the service is guaranteed by cooperation between Pihlajalinna´s private clinics and Forever fitness centers also being part of the Group. When deemed necessary, the exercise referral is sent to Forever with the customer’s consent, and Forever then contacts the customer to make an appointment with a physiothera- pist. At the initial meeting, the customer’s starting level is assessed and goals are set, considering any physical or psychological barriers to exercise allowing the physio- therapist to recommend a customized and safe exercise plan for the customer. “To support the customer, we gather a multidiciplinary team that may include not only the treating physician and phys- iotherapist but also a personal trainer, motivation trainer, Fustra trainer, nutrition- ist and massage therapist. The physio- therapist closely supports the customer in putting the exercise plan into action and refers the customer to a follow-up with the physician at appropriate intervals. The aim is for the customer to succeed – to get help for their health problems and adopt a physically active lifestyle,” says Mikko Mustala, Managing Director of For- ever fitness centres. The annual cost of physical inactiv- ity adds up to several billion euros As many as 80% of Finns are not physi- cally active enough with regard to their health, which leads to costs to society that amount to at least EUR 3 billion annually (UKK Institute). The costs are expected to only increase due to the ageing of the population and increasing morbidity. One in two members of the working-age pop- ulation in Finland have a lifestyle illness or an elevated risk of one. For example, over two million people in Finland are overweight, and half a million Finns have been diagnosed with type 2 diabetes. “There is only one cure to physical inactivity: you need to get moving! Our exercise referral concept is a highly refined, per- sonalised, safe and easy way to make exercise part of your life,” Arvo Haapanen concludes. Exercise Referral - a personalized and safe solution to promote physical activity BUSINESS AND STRATEGY As many as 80% of Finns are not physically active enough with regard to their health. Customer groups BUSINESS AND STRATEGY (included in corporate customers) (included in public sector) SHARE OF CONSOLIDATED REVENUE 13% (14%) SHARE OF CONSOLIDATED REVENUE 5% (5 %) SHARE OF CONSOLIDATED REVENUE 46% (50%) REVENUE M€ 85.3 (81.1) +5.1% REVENUE M€ 34.8 (31.4) + 10.9% REVENUE M€ 300.8 (287.9) +4.5% REVENUE M€ 137.8 (120.7) +14.1% Private customers Insurance company customers Complete and partial outsourcings Corporate customers Pihlajalinna’s customer groups are corporate customers, private customers and public sector customers. The Group’s corporate customer group consists of Pihlajalin- na’s occupational healthcare customers, insurance company customers and other corporate contract customers. The Group has approximately 250 000 occupational health care customers. The Group’s private customers are private individuals who pay for services themselves and may subsequently seek compensation from their insurance company. The Group’s public sector customer group consists of public sector organizations in Finland, such as municipalities, joint municipal authorities, parishes, hospital districts and public administration when purchasing social and health- care outsourcing services, residential services, occupational healthcare services and stang services. SHARE OF CONSOLIDATED REVENUE 21% (21 %) REVENUE M€ 427.7 (372.4) +14.8% Public sector SHARE OF CONSOLIDATED REVENUE 66% (65%) 14 BUSINESS AND STRATEGY | SUSTAINABILITY | REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS Pihlajalinna is a partner to all insurance companies and treats a significant por- tion of the illnesses and accidents of their customers. Pihlajalinna’s cooperation with insurance companies has been intensifying year by year. Pihlajalinna has developed a unique care chain model that ensures the high quality and cost-eectiveness of custom- er care. The model is based on Pihlajalin- na’s extensive experience of public sector partnerships. The care chain model has been further developed in cooperation with insurance companies. The purpose of the model is to ensure quick access to treatment for employees and private customers. This allows the customer to get an appoint- ment with a specialist on the day of the accident and is referred to further examinations if needed, which typically are X-ray and MRI imaging. If the accident is severe and requires surgical treatment, the procedure enables to proceed without Deeper cooperation with insurance companies a delay from the initial appointment. The aim is to get the customer back to work and normal life as soon as possible, which is beneficial to the customer, their employ- er and whole society. Pihlajalinna measures the impact of treatment by reporting to insurance companies on service promise times and the time spent on providing care through a specific scheme. Systematic action and monitoring aim to ensure the start and im- plementation of treatment to be prompt and cost-eective, also from the employ- er’s point of view. The measurement of the impact of the care chain is planned to be further developed. In the cooperation Pihlajalinna places a key emphasis on delivering a good cus- tomer experience to the user of the ser- vices. At the heart of the process is high quality treatment and functioning care chain following all agreed steps, from start to finish. It is also important for employees to get their sickness absence certificates recorded and delivered to their insurance company in a timely manner to avoid any delay in compensation for lost earnings. Pihlajalinna has taken significant steps in cooperation, with the latest being the acquisition of Pohjo- la Hospital sealed in January 2022 to be part of the Group. The acquisi- tion improves service availability and the service oering and expands the provi- sion of orthopedic services in particular. Pohjola Hospital is known especially for its high-quality expertise in orthopedics and hand surgery. Pihlajalinna expects to significantly grow its business operations with the customer flow through insurance compa- nies. Also the national reform of social and healthcare services as well as the grow- ing popularity of medical insurances are expected to accelerate the growth. The customer gets an appointment with a specialist on the day of the accident and are referred to further examinations if needed. BUSINESS AND STRATEGY 15 BUSINESS AND STRATEGY | SUSTAINABILITY | REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS BUSINESS AND STRATEGY 2021, a year of development With the service renewal, Pihlajalinna enables 24 hour access to remote consultation for private customers whenever they need it. The remote consultations are available through Pihlajalinna Health App (Terveyssovel- lus) health application. At night (between 11 p.m. and 7 a.m.) a nurse assesses the need and urgency of a treatment through a remote consultation. This ensures that the customer can be directed to the appropriate care path immediately. The nurse may also consult a physician and the physician will contact the customer if necessary. During the day time, various acute conditions not requiring a physical exam- ination can be treated through remote consultations, as well as prescribe medication, issue referrals for further examinations and issue short sickness absences. Remote consultations around the clock Pihlajalinna’s three-year partnership agreement with the Finnish Ski Association (FSA) covers wo- men’s, men’s, girls’ and boys’ national teams in all of the FSA’s sports, namely cross-country skiing, ski jumping and the Nordic combined. As a leading expert in medicine and health, Pihlajalinna wants to work together with the FSA to support the success of top sports and the potential of Nordic winter sports to inspire people to exercise. The partnership agreement includes extensive health cooperation, with Pihlajalinna ensuring the national teams having access to physicians and physiother- apists at their training camps and on competition trips. Pihlajalinna also provides the COVID-19 testing services required by the FSA. As the COVID-19 epidemic prolonged, Pihlajalinna continued to actively develop and conceptualize services related to the epidemic management, such as COVID-19 testing. Pihlajalinna helped to ensure a safe organization of the Ruka Nordic ski event in November through systematic testing. A total of 385 athletes and 821 team members joined the event in Ruka. Pihlajalinna’s well-honed testing process and experienced testing team ensu- red smooth and quick service for athletes and their support teams. Obesity is a long-term condition causing significant physical, psychological, social and financial conse- quences. Pihlajalinna´s Weight Management Clinic pro- vides its customers with comprehensive, specialist-led treatment to support weight management. The Clinic operates nationally as a remote service, but customers can also visit the clinic in person in Munkkivuori, Helsinki. The care path starts with an assessment consultation. The potential need for medical or surgical intervention is evaluated by an experienced specialist. Dieticians, physiotherapists from Forever fitness centers together with the therapy and sleep coaching services support the customer’s success. Diverse services related to the epidemic Main partner of the Finnish Ski Association Comprehen- sive support for weight management 16 BUSINESS AND STRATEGY | SUSTAINABILITY | REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS BUSINESS AND STRATEGY 2021, a year of development Pihlajalinna acquired a part of Digital Health Soluti- ons Ltd and agreed on the future acquisition of the company’s entire share capital from its current owners. The company’s main product is the Digiterveys digital health service concept, which includes a digital service platform. The service concept has been developed to support the wellbeing of the personnel of organizations in vari- ous ways. It helps organizations to look after individuals in times of change. The concept is unique, as it is not focused only on physiological health and nutrition, but also on work performance, stress tolerance and recovery. A new Uniikki spot, a special housing unit with capacity for 14 residents opened in Lohja in September. Pihla- jalinna Uniikki is a concept for service housing with 24- hour assistance for people with developmental disabili- ties and those on the autism spectrum. Uniikki’s goal is to develop new customer-oriented service models, and the focus of operations is on the equal encounter with customers. “Uniikki’s operations are focused on individual functional daily life and support- ing the residents’ right to self-determination. At Uniikki, service housing with 24-hour assistance is based on the engagement of the residents and the idea of everyone having the right to live a life of dignity that suits their individual circumstances,” says Miina Laru, Managing Director of Pihlajalinna Special Housing Services. Pihlajalinna Diabetes Clinic aims to oer high-quality treatment and the monitoring of diabetes regardless of the customer’s habitation. The clinic’s new remote service is aimed particularly at patients with type 2 diabetes. The service is used via the Pihlajalinna Health App (Terveys- sovellus) health application. The customer is initially connected to a diabetes nurse and subsequently to a remote consultation with a specialist in internal medicine. The customer is always served by diabetes specialists, and the treatment plans are made on the basis of the latest international treatment recommendations in addition to the national Current Care Guidelines used in Finland. Treatment of type 2 diabetes is currently being revolutionized by new and eective medications that can significantly reduce the risk of dia- betes comorbidities and support the patient’s weight management. Digital health Expansion of special housing services Remote service for patients with diabetes In July 2021, Pihlajalinna Terveys Oy announced its intent to ac- quire the entire share capital of Pohjola Hospital. The transaction was completed on 1 February 2022 after the Finnish Competition and Consumer Authority approved the acquisition. The business combination strengthens Pihlajalinna´s service portfolio and enables the geographical expansion of the service network, especially in the Helsinki Metropolitan Area and other growth centers. The acquisition also further improves Pihlajalinna’s opportunities for the development, digitalization and conceptual- ization of services. The acquisition not only improves the availabil- ity of our services and our service portfolio, but also expands the provision especially in the orthopedic services. Pohjola Hospital is known for its high-quality expertise in orthopedics and hand surgery. Growth potential is further increased by the new five-year service agreement signed with Pohjola Insurance in connection with the deal. Top-tier hospital 17 BUSINESS AND STRATEGY | SUSTAINABILITY | REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS P Pihlajalinna publishes its GRI sustainability re- port Pihlajalinnabegan an eort to develop its sustainability strategy in autumn 2021. As a part of the process, Pihlajalin- na made a materiality as- sessment of its impacts on society as well as defined the key sustainability themes, risks and stakeholders. The results are presented in the Sustainability Report published in 2022, which marks the first time the report applies the international GRI Standards (Global Reporting Initiative) framework. Pihlajalinna will continue to develop its sustainability reporting further and pre- pare for the revised reporting obligations arising from a Regulation issued by the European Commission, for example. The three main themes of sustain- ability were identified on the ba- sis of a materiality assessment As part of the adoption of the GRI Stan- Sustainability in Pihlajalinna dards reporting framework, a working group comprised of representatives of Pihlajalinna’s management carried out Pihlajalinna’s first GRI-compliant ma- teriality assessment in December 2021. The assessment is based on interviews conducted in autumn 2021 to identify key sustainability impacts in Pihlajalinna busi- ness operations. The assessment also took into account stakeholder feedback and the stakeholder survey conducted in late 2019. The materiality assessment serves as the foundation for Pihlajalinna’s future sustainability eorts, including the process of defining the company’s sustainability strategy. In the materiality assessment, a total of 15 topics were identified as being signifi- cant with regard to the company’s impact and stakeholder views. These topics were grouped under three main themes: responsibility for health and wellbeing, sustainable business and responsibility for personnel. Responsibility for health and wellbeing Patient safety and the prevention of illness are at the core of Pihlajalinna’s sustainabil- ity. The impact and quality of services, as well as their availability and accessibility, were also identified as key sustainability topics. Pihlajalinna also emphasizes the importance of processing patient and personal data securely and ensuring the uninterrupted operation of information systems. Sustainable business For Pihlajalinna, sustainable business means striving for good corporate citizen- ship. Operating ethically and sustainably is key to achieving the Group’s strategic ob- jectives. Pihlajalinna also creates economic value for society by producing ecient social and healthcare services, purchasing services and goods from local suppliers and paying all of its taxes to Finland. Responsibility for personnel Pihlajalinna wants to be the first choice among professionals in its industry. The company aims to deliver an excellent employee experience, where the key sustainability-related elements include oc- cupational safety, looking after employee wellbeing, and competence development. SUSTAINABILITY Patient safety and the prevention of illness are at the core of Pihlajalinna’s sustainability. 18 BUSINESS AND STRATEGY | SUSTAINABILITY | REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS SUSTAINABILITY Pihlajalinna aims to ensure regulatory compliance, high quality, safety and impactful treatment every day. Patient safety and the secure processing of patient and personal data are basic preconditions for the compa- ny’s operations. The professional competence of employees consti- tutes the foundation of quality and patient safety. The professional qualifications of employees are verified during recruitment, and new employees are trained for their duties in accordance with an induction training programme. Pihlajalinna actively develops employee competence. Over the years, Pihlajalinna’s service network has grown in scale and now covers entire Finland. With over 150 operating locations, the significance of the Group’s environmental responsibility has increased. Pihlajalinna’s operations create environmental impacts in the form of energy consumption, CO2 emissions and waste. Pihlajalinna will start to develop its environmental management systems in 2022 with the aim of seeking ISO 14001 certification for selected businesses. Development of environmental management sys- tems to commence in 2022 Employee competence is the foundation for quality and patient safety Medical key figures 2021 16,34 COMPLAINTS 0,08 % PATIENT INJURY NOTIFICATIONS FILED IN 2021 0,39 OFFICIAL COMPLAINTS 0 SURGICAL INFECTIONS DEEP INFECTIONS 1 267 010 TOTAL NUMBER OF VISITS +75 PRIVATE CLINICS +91 HOSPITALS +85 DENTAL CLINICS +67 TELEPHONE SERVICES The number of appointments, complaints, ocial complaints and patient injury notifications include Pihlajalinna’s private healthcare services (private clinics, private hospitals, occupational health centres and dental clinics) and cases that occurred in those ser- vices and which the Group was informed of. The Group does not necessarily receive information about complaints, o- cial complaints or patient injury notifications related to the operations of practitioners working at Pihlajalinna’s clinics. * The number of complaints, ocial complaints and patient injury notifications is expressed per 100,000 appointments. Since January 2021, it has also been possible to submit complaints via Pihlajalinna’s website. The figure for patient injuries reflects the number of compensable injuries according to decisions issued by the Patient Insurance Centre in 2021. The total amount of feedback received in 2021 was 121,818 (81,582). Net Promoter Score (NPS) is expressed in a range of -100 to +100. NPS INDEX +70 MUNICIPAL JOINT VENTURES +73 PIHLAJALINNA HEALHT APP 19 BUSINESS AND STRATEGY | SUSTAINABILITY | REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS Personnel, the most important resource SUSTAINABILITY Key sustainability themes in 2021 • Clear targets • Implementation of team development discussions • Development of leadership and supervisory work • Enhancing collaboration in statutory employ- er-employee cooperation and the management of occupational wellbeing at various levels • Occupational safety and health especially with regard to the COVID-19 pandemic and the threat of violence Channels of engagement • Personal interaction • Personnel briefings • Development discussions • Training and coaching • Intranet • Pihlis Pulse personnel survey • statutory employer-employee coopera- tion and occupational safety meetings • Pihlajalinna Academy Pihlajalinna wants to be the first choice among professionals in its industry. In 2021, Pihlajalinna had 6,297 (5,550) employees and 1,070 (1,056) practitioners. The departure turnover of employees was 16.2% (11.1%). Pihlajalinna uses the international eNPS (Em- ployee Net Promoter Score) index to measure the employee experience. The eNPS index is expressed in a range of +100 to -100. COMPLETE AND PARTIAL OUTSOURCINGS eNPS 2021 -14 (-7) GROUP EXCLUDING COMPLETE AND PAR - TIAL OUTSOURCINGS eNPS 2021 +15 (-1) 20 BUSINESS AND STRATEGY | SUSTAINABILITY | REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS Training The personnel receive regular training on data protection and information security. All Pihlajalinna professionals are required to complete general training on data protection, including a test. Those who process patient data also need to take an additional test on patient data. The personnel have access to up to date guidelines. Risk assessment Data protection and information security risks are assessed and analysed on a regular basis as well as always in the specification phase of a new system and when ever signifi- cant changes are made. Access management In all systems, user rights and access management are centralised. System administrators determine the principles for granting user rights. Control and monitoring The status of data protection and information security is reported as part of internal and external audits. IT security technology solutions are constantly assessed and separate IT security inspections are made to the most critical envi- ronments. Data protection related work in supervised by a steering group and operational action is led by the data protection and IT security team. Service provider monitoring Suppliers and external service providers must comply with information security requirements defined by the Group and suppliers are subject to regular audits. Inconnection with external services change, information security require- ments are reviewed. Processing of IT security deviations Pihlajalinna Group has defined procedures and tools for detecting information security deviations. Additionaly, action plans are in place for exceptional situations. Each information security deviation is recorded and processed for further action. Connecting to the network Connection to the Group network and associated ser- vices can be allowed using only devices and applications approved by the Group IT management. In order to ensure IT security, applications and file formats are monitored and when nesessary, limited. The most crucial systems can be accessed only from the internal network. When accessing from an external network, multi-factor authentication is required. Information security practices Data protection and information security SUSTAINABILITY Pihlajalinna’s information security indicators Target Number of intrusion attempts Number of detected viruses and malware programs Devices are clean from viruses and malware programs automatically removed viruses automatically removed malware programs automatically removed viruses automatically removed malware programs Volume of junk mail Less than of junk mail gets through Target achieved Target achieved IT security updates are completed All IT security updates are installed within hours from the release of updates are installed within one week from the release of updates are installed within one week from the release A t Pihlajalinna, the purpose of data protection and the management of information security is to ensure the secure processing of patient and personal data as well as the protection of the privacy of patients, customers and the company’s personnel. A further goal of information security management is the prevention of disruptions in the functioning of critical information systems endan- gering service functionality or availability. Pihlajalinna takes into account the continuously increasing information security requirements in its operations as the provision of digital services grows. The Group develops and improves informa- tion security by means of up-to-date and secure methods, such as strong authentication practices, external monitoring and continuous testing. Data protection and information security are an import- ant part of Pihlajalinna’s ISO 9001 certified quality management system. All Pihlajalinna professionals are required to complete general training on data protection, including a test. Employees who process patient data are also required to pass a test on patient data and its processing. The Group administration ensures that the guidelines pertaining to data protection and information security are up-to-date and provides training and support to supervisors on matters related to data protection and informa- tion security as well as their implementation at the unit level. Compliance with the operating guide- lines concerning data protection and information security is monitored in internal audits. 21 BUSINESS AND STRATEGY | SUSTAINABILITY | REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS R eporting our tax footprint in connection with the annual report is already an established practice since 2016. The Group pays all its taxes to Finland. The Group has also a significant local impact in various ar- eas of the country, especially on those, where Pihlajalinna is responsible of the total outsourcing of public social and healthcare services. Pihlajalinna’s tax footprint describes the tax and other tax related income the society accrues through the Group’s business operations. The vast majority of taxes consist of withholding taxes and employer liabilities. Ad- ditionally Pihlajalinna paid EUR 73,0 (71,9) million in total to professional practitioners, out of which they further ac- counted their own individual taxes. Corporate tax portion of Pihlajalinna’s tax foorprint is EUR 5,3 (4,2) million. Tax liability and footprint SUSTAINABILITY On 2021 the society gained EUR 131,9 (110,4) million from Pihlajalinna. T he Group public sector customers consist of public sector organisa- tions in Finland, such as municipal- ities, joint municipal authorities, congre- gations, hospital districts and the public administration when purchasing either social and healthcare outsourcing services or residential, occupational healthcare and stang services. Pihlajalinna can oer an impactful chain of care not only for individuals but also for the wellbeing services counties that are responsible for organising service provi- sion. The company has a long track record of extensive and pioneering cooperation with municipalities and there is strong evidence of its eectiveness. In 2021, Pihlajalinna had cooperation agreements of varying scope with nearly a hundred Finnish municipalities. Social and healthcare services provided via outsourcing have helped municipalities and joint municipal authorities improve the quality and availability of services, keep the growth of costs under control and expedite access to care. The overall economic impacts of the cooperation are also reflected in the positive development of the annual margins of the partner mu- SUSTAINABILITY A trusted partner for municipalities nicipalities. The annual margin represents the cash generated from operations that remains after operating costs are paid, and is available for purposes such as the municipality’s investments and loan repayments. In addition to cost eciency and ser- vice availability, Pihlajalinna focuses on the continuous development of customer satisfaction, which is reflected in the cus- tomer satisfaction surveys of the partner municipalities. Customer satisfaction has remained at an excellent level in all of Pihlajalinna’s joint ventures. Pihlajalinna has success- fully strengthened the local services of its partner municipalities while also making modern remote con- sultation services available to the residents. Data from 1 Jan - 31 Dec 2021 Jämsän Terveys (JT) is a joint venture established between Pihlajalinna and the municipality of Jämsä. It has produced social and healthcare services for Jämsä starting from 1 September 2015 under an outsourcing agreement signed in spring 2015. The agreement period is 10 years. The company is responsible for providing primary and special- ised care to approximately 20,000 inhabitants in Jämsä. Jokilaakso Hospital is a hospital that provides public specialised care. The hospital is part of the Pihlajalinna Group. The hospital’s services are produced by Jokilaakson Terveys (JLT), estab- lished in 2010, a joint venture between Pihlajalin- na and the Central Finland Hospital District. PERSONNEL ECONOMICAL IMPACT OWNERSHIP SPECIALISED CARE AND SERVICES APPOINTMENTS WITH PHYSICIANS JÄMSÄN TERVEYS Pihlajalinna 51 % Jämsä municipality49 % BOARD OF DIRECTORS Pihlajalinna representatives 50 % (3) Jämsä municipality representatives 50 % (3) OWNERSHIP, JOKILAAKSON TERVEYS Pihlajalinna 90 % Keski-Suomen sairaanhoitopiiri 10 % COMPLAINTS AND OFFICIAL COMPLAINTS 11 Jämsän Terveys • Jokilaakson Terveys LOCAL SUBCONTRACTORS 109 51 VALUE OF COOPERATION 758 392 € 113 278,27 € Jämsän Terveys • Jokilaakson Terveys CORPORATE TAXES TO THE MUNICIPALITY 0 € 805 920 € WITHHOLDING TAXES TO THE MUNICIPALITY 3 278 732 € 1 709 607 € DIVIDENS TO THE CENTRAL FINLAND HOSPITAL DISTRICT 0 € 200 000 € PIHLAJALINNA GROUP’S WITHHOLDING TAXES TO THE REGIONAL GOVERNMENT: CENTRAL FINLAND PIHLAJALINNA’S JOINT VENTURE DIVIDENDS, EQUITY REPAYMENT AND PURCHASE PRICES FOR SHARES TO PARTNER MUNICIPALITY AND HEALTH CARE DISTRICT DURING THE PERIOD 2014-2021 6 076 945 € 6 814 000 € Jämsän Terveys • Jokilaakson Terveys NUMBER OF EMPLOYEES 489 270 FIXED-TERM 17% 15% PERMANENT 83% 85% AVERAGE AGE OF PERSONNEL 45.9 44.4 LARGEST AGE GOUP 56–60 56–60 THE WORK ABILITY INDEX average total score 7.8 7.8 SPECIALITIES NEARLY 2,000 SURGICAL OPERATIONS ANNUALL MOST SIGNIFICANT SPECIALITIES: 22 • OPAEDICS AND SURGERY • INTERNAL MEDICINE • NEUROLOGY • CARDIOLOGY DAYS OF CARE 78 568 Jämsän Terveys and Jokilaakso Hospital 63 939 EMERGENCY AND ON-CALL SERVICES 9 743 SPECIALISED CARE 18 178 DENTAL CARE 14 935 ADULT PSYCHIATRY 1 958 ADOLESCENT PSYCHIATRY 311 CHILD PSYCHIATRY 176 SUBSTANCE ABUSE CLINIC 141 FAMILY SERVICE CENTRE 2 444 PRIMARY CARE (Jämsä, Koskenpää Länkipohja, Kuorevesi) 16 053 TOTAL 24 BUSINESS AND STRATEGY | SUSTAINABILITY | REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS Data from 1 Jan - 31 Dec 2021 Mäntänvuoren Terveys Oy is a joint venture established in 2013 between the municipality and Pihlajalinna. The cur- rent agreement between the municipal- ity and Pihlajalinna is valid until 2026, followed by a five-year option period. Mäntänvuoren Terveys is responsible for providing social and healthcare services to 11,700 customers in Mänttä-Vilppula and Juupajoki. PERSONNEL ECONOMICAL IMPACT OWNERSHIP SPECIALISED CARE AND SERVICES APPOINTMENTS WITH PHYSICIANS COMPLAINTS AND OFFICIAL COMPLAINTS 13 LOCAL SUBCONTRACTORS 81 VALUE OF COOPERATION 2 392 946 € CORPORATE TAXES TO THE MUNICIPALITY 716 838 € WITHHOLDING TAXES TO THE MUNICIPALITY PIHLAJALINNA GROUP’S WITHHOLDING TAXES TO THE REGIONAL GOVERNMENT: PIRKANMAA PIHLAJALINNA’S JOINT VENTURE DIVIDENDS,EQUITY REPAYMENT AND PURCHASE PRICE FOR SHARES TO PARTNER MUNICIPALITY DURING THE PERIOD 2016-2020 2 729 413 € DIVIDENDS TO THE MUNICIPALITY 0 € 14 814 584 € 10 892 810 € NUMBER OF EMPLOYEES 366 FIXED-TERM 11 % PERMANENT 89 % AVERAGE AGE OF PERSONNEL 44,5 LARGEST AGE GOUP 56–60 THE WORK ABILITY INDEX average total score 7,4 MOST SIGNIFICANT SPECIALITIES: • GERIATRICS • SURGERY • PLASTIC SURGERY • PSYCHIATRY • INTERNAL MEDICINE CARDIOLOGY • LUNG DISEASES • DIALYSIS UNI Mäntänvuoren Terveys MÄNTÄNVUOREN TERVEYS Pihlajalinna 91 % Mänttä-Vilppula municipality 9 % BOARD OF DIRECTORS Pihlajalinna representatives 60 % (3) Mänttä-Vilppula municipality representatives 40 % (2) DAYS OF CARE 76 908 27 158 DENTIST APPOINTMENTS 7 517 APPOINTMENTS WITH PHYSICIANS 19 641 TOTAL 25 BUSINESS AND STRATEGY | SUSTAINABILITY | REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS Data from 1 Jan – 31 Dec 2021 Kuusiolinna Terveys Oy is a joint ven- ture established by Pihlajalinna and the municipalities of Alavus, Ähtäri, Kuor- tane and Soini. The agreement period is 10 years and the agreement includes a five-year option. It has produced social and healthcare services for Alavus, Kuortane and Ähtäri since 1 January 2016, and for Soini since 1 January 2017. The company is responsible for provid- ing primary care to 22,400 inhabitants in total. PERSONNEL ECONOMICAL IMPACT OWNERSHIP SPECIALISED CARE AND SERVICES APPOINTMENTS WITH PHYSICIANS COMPLAINTS AND OFFICIAL COMPLAINTS 12 LOCAL SUBCONTRACTORS 251 VALUE OF COOPERATION 2 394 283 € CORPORATE TAXES TO THE MUNICIPALITY 924 € WITHHOLDING TAXES TO THE MUNICIPALITY PIHLAJALINNA GROUP’S WITHHOLDING TAXES TO THE REGIONAL GOVERNMENT: SOUTH OSTROBOTHNIA PIHLAJALINNA’S JOINT VENTURE DIVIDENDS ANS PURCHASE PRICES FOR SHARES TO PARTNER MUNICIPALITIES (MUNICIPALITIES, TOTAL) 7 463 285 € DIVIDENDS TO THE MUNICIPALITY 539 000 € 8 217 661€ 26 697 874 € NUMBER OF EMPLOYEES 1 106 FIXED-TERM 11 % PERMANENT 89 % AVERAGE AGE OF PERSONNEL 44,0 LARGEST AGE GOUP 56–60 THE WORK ABILITY INDEX average total score 8,0 SPECIALITIES MOST SIGNIFICANT SPECIALITIES: 14 • INTERNAL MEDICINE • GERIATRICS • CARDIOLOGY • ORTHOPAEDICS AND SURGERY • UROLOGY • ENT DAYS OF CARE 180 525 Kuusiolinna KUUSIOLINNA TERVEYS Pihlajalinna 97 % Alavus, Kuortane, Ähtäri ja Soini total 3 % BOARD OF DIRECTORS Pihlajalinna representatives 50 % (4) The municipality representatives 50 % (4) TOTAL Primary care, emergency and on-call services 34 131 SPECIALISED CARE 4 716 DENTAL CARE 17 829 PSYCHIATRIC POLYCLINIC 1 660 FAMILY SERVICES 3 637 26 BUSINESS AND STRATEGY | SUSTAINABILITY | REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS Data from 1 Jan – 31 Dec 2021 Kolmostien Terveys is a joint venture established between Pihlajalinna and the municipality of Parkano. It has produced social and healthcare services for Parkano and Kihniö starting from 1 September 2015. The agreement period is 10 years and the agreement includes a five-year option. The company is re- sponsible for providing primary care to 8,300 inhabitants in Parkano and Kihniö. PERSONNEL ECONOMICAL IMPACT OWNERSHIP SPECIALISED CARE AND SERVICES APPOINTMENTS WITH PHYSICIANS TOTAL 23 113 COMPLAINTS AND OFFICIAL COMPLAINTS 11 LOCAL SUBCONTRACTORS 73 VALUE OF COOPERATION 461 864 € CORPORATE TAXES TO THE MUNICIPALITY 0 € WITHHOLDING TAXES TO THE MUNICIPALITY PIHLAJALINNA GROUP’S WITHHOLDING TAXES TO THE REGIONAL GOVERNMENT: PIRKANMAA PIHLAJALINNA’S JOINT VENTURE DIVIDENDS TO PARTNER MUNICIPALITIES (MUNICIPALITIES, TOTAL) 2016-2020 2 688 074 € DIVIDENDS TO THE MUNICIPALITY 0 € 14 814 584 € 5 090 000 € NUMBER OF EMPLOYEES 455 PERMANENT 13 % FIXED-TERM 87 % AVERAGE AGE OF PERSONNEL 43,3 LARGEST AGE GOUP 56–60 THE WORK ABILITY INDEX average total score 7,9 MOST SIGNIFICANT SPECIALITIES: • GERIATRICS • GYNECOLOGY • PSYCHIATRY • YOUTH PSYCHIATRY • NEUROLOGY • INTERNAL MEDICINE • RADIOLOGY AND GENERAL MEDICIN DAYS OF CARE 66 462 Kolmostien Terveys KOLMOSTIEN TERVEYS Pihlajalinna 96 % Parkano municipality 4 % BOARD OF DIRECTORS Pihlajalinna reprentatives 50 % (3) Parkano municipality representatives 50 % (3) APPOINTMENTS WITH PHYSICIANS DENTIST APPOINTMENTS 17 176 5 936 27 BUSINESS AND STRATEGY | SUSTAINABILITY | REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS Board of Directors Mikko Wirén Chairman of the Board of Directors b. 1972, Lic.Med., Member of the Board of Directors since 2016 Mika Manninen b. 1975, M.Sc. (Econ.), Member of the Board of Directors since 2019 Group CFO, Fennia Group Independent of the Company Kati Sulin b. 1974, Master of Arts, Member of the Board of Directors since 2018 Managing Director, Ifolor Oy Independent of the Company Seija Turunen b. 1953, M.Sc. (Econ.), Member of the Board of Directors since 2016 Board Professional Independent of the Company and its major shareholders Leena Niemistö Vice Chairman of the Board of Directors b. b. 1963, D.Med.Sc., Specialist in Physiatrics, Member of the Board of Directors since 2014 Board Professional Independent of the Company and its major shareholders Hannu Juvonen b. 1955, Lic.Med., Specialist, MBA, Member of the Board of Directors since 2019 Practitioner, management consultant Independent of the Company and its major shareholders For more information on the members of Pihlajalinna Plc´s Board of Directors and Management Team, please refer to Corporate Governance in the Investors section at: http://investors. pihlajalinna.fi/corporate- governance 28 BUSINESS AND STRATEGY | SUSTAINABILITY | REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS Sanna Määttänen was a member of Pihlajalinna´s Management Team, in the role of Chief Business Development Ocer and Chief Information Ocer, until March 2021. Sari Nevanlinna was appointed Pihlajalinna´s Chief Commercial Ocer (CCO) in December 2021. Nevanlinna took up her post and joined the Management Team in March 2022. Management Team Joni Aaltonen Group CEO b. 1970, BBA Employed by the Company since 2008 Antti-Jussi Aro Chief Information Ocer b. 1983, M.Sc. in Technology Employed by the Company since 2021 (from 3 May 2021) Marko Savolainen Chief Legal Ocer b. 1967, LL.M with court training Employed by the Company since 2017 Juha-Pekka Halttunen Sales Director b. 1969, Vocational Qualification in Business Employed by the Company since 2005 Teija Kulmala Group COO, CEO of Jämsän Terveys Oy and Jokilaakson Terveys Oy b. 1969, D.Med.Sc., Specialist in obstetrics and gynaecology, eMBA Employed by the Company since 2016 Tarja Rantala Chief Finance Ocer b. 1972, M.Sc. (Econ.) Employed by the company since 2014 Sari Riihijärvi Chief Medical Ocer b. 1977, D.Med.Sc., oncologist Employed by the Company since 2021 (from 2 July 2021) Elina Heliö Chief People and Culture Ocer b. 1972, LL.M with court training Employed by the Company since 2019 29 BUSINESS AND STRATEGY | SUSTAINABILITY | REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS 2021 REPORT BY THE BOARD OF DIRECTORS AND FINANCIAL STATEMENTS 2021 Report by the Board of Directors for the financial year 1 Jan - 31 Dec 2021 Pihlajalinna’s CEO Joni Aaltonen ................................................................................................32 Pihlajalinna’s strategy 2021–2025 ...............................................................................................33 Revenue by customer group ........................................................................................................33 Seasonal variation .............................................................................................................................35 Consolidated revenue and result ................................................................................................35 The operating environment ......................................................................................................... 36 Consolidated statement of financial position and cash flow ...........................................37 Financing arrangements ................................................................................................................37 Acquisitions and capital expenditure ...................................................................................... 38 Complete and partial outsourcing agreements ................................................................... 38 Research and development ........................................................................................................ 39 Personnel............................................................................................................................................. 39 Changes in Group structure ......................................................................................................... 39 Management Team .......................................................................................................................... 39 Board of Directors ........................................................................................................................... 39 Shareholders’ Nomination Board ............................................................................................... 39 Committees nominated by the Board ..................................................................................... 39 Remuneration of the members of the Board of Directors ...............................................40 Board authorisations ......................................................................................................................40 Auditors and auditing ....................................................................................................................40 Shares and shareholders ............................................................................................................... 40 Risk management ................................................................................................................................... 41 Risks and uncertainties in business operations ..........................................................................41 Flagging notifications ..........................................................................................................................43 Tax liability and footprint ....................................................................................................................43 Share-based incentive schemes .......................................................................................................43 Repurchase of own shares .................................................................................................................44 The Board of Directors’ proposal for profit distribution and the Annual General Meeting 2022 ..........................................................................................................44 Pihlajalinna’s outlook for 2022..........................................................................................................44 Corporate Governance Statement ..................................................................................................44 Statement of non-financial information ........................................................................................44 Events after the financial period ......................................................................................................44 Key financial figures ..............................................................................................................................45 Share-related information, tables ....................................................................................................46 Quarterly information ...........................................................................................................................47 Calculation of key financial figures and alternative performance measures .................. 48 Reconciliations of alternative performance measures ............................................................49 Shares and shareholders ..................................................................................................................... 52 Shareholding of the management .................................................................................................. 53 Signatures to the Report by the Board of Directors and the Financial Statements ...96 CONTENTS 31 BUSINESS AND STRATEGY | SUSTAINABILITY | REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS Joni Aaltonen, CEO of Pihlajalinna Growth in the fourth quarter was strong. Revenue increased by 12.8 per cent to EUR 154.7 (137.2) million. Profitability was weighed down in the final quarter by the higher costs of to- tal outsourcing arrangements, which led to adjusted EBITA declining by 12.5 per cent to EUR 7.8 (9.0) million. Negotiations concerning compensation of the increased expenses with municipal clients have not led into the desired outcomes by the end of the financial year. Negoti- ations are still ongoing with Parkano and Mänttä-Vilppula. The district court hearing with the City of Jämsä concerning the price adjustment provision in the service agreement, increased expenses due to authority requirements and the financing of the investements of the hospital districts has begun. Negotiations with the Kuusiokunnat joint municipal social and health authority concerning adjustments to the annual price reached a settlement in June 2021. Nationwide COVID-19 testing reached another peak late in the year, and COVID-19 services accounted for a significant share of revenue during the fourth quarter. The customer volumes of Pihlajalinna private clinics increased by 17 per cent year-on-year and were 9 per cent higher compared to 2019 level. Some 39 per cent of all customer appointments, excluding municipal outsourcing and COVID-19 testing, took place via remote services. The volume of surgical services grew by 34 per cent. The sales of occupational healthcare services contin- ued to see strong growth, and Pihlajalinna has also been successful in terms of customer retention. The key drivers of growth are digital services, competitive pricing and successful acquisitions. The number of people within the scope of Pihlajalinna occupational healthcare services was approximately 240,000 at the end of the financial year. Due Report by the Board of Directors for the financial year 1 Jan–31 Dec 2021 to new contracts starting 2022 we expect this number to increase to 250,000. The proportion of preventive activ- ities in occupational healthcare services grew in line with targets, increasing by over 6 per cent year-on-year. Disability is a significant problem in society. Disability is most commonly caused by mental health and muscu- loskeletal disorders. An anonymic analysis of Pihlajalinna occupational health care visits was used to evaluate the extention of the problem in Finland in terms of men- tal health issues. The rate of sickness-related absences caused by reasons related to mental health per 1,000 employees have increased by 24 per cent compared to last year. Correlation to the pre-pandemic period in 2019, the increase is as high as 36 per cent. Due to the serious- ness of the situation, we launched the Pihlajalinna Mental Care (Mielen Huoli), a remote mental care helpline service in early 2021 to provide with assistance and treatment for mental health issues at an early stage. Our goal is eec- tive prevention and early intervention to avoid extended disability and human suering. In the early summer, we launched the Pihlajalinna Exercise Referral (Liikuntalähete) as part of our new service selection. The exercise referral is a comprehensive service that improves the customer’s quality of life and is produced in partnership with our fitness centers. The foundation for this service concept lies in the scientific evidence on the benefits of physical activity on wellbeing and health. Timely intervention in musculoskeletal disor- ders through physiotherapy, occupational physiotherapy, and – where necessary – surgical treatment, also reduces sickness-related absences and costs. According to the Finnish Institute for Health and Wel- fare statistics, at the end of November 2021, a total of 150,392 people (31 December 2020: 141,469) were waiting for access to care at hospitals operated by the hospital districts. Of these, 9,539 (7,617) people, or 6.3 (5.4) per cent, had waited for access to non-urgent specialised care for more than six months. In specialised care, con- gestion is highest in surgery and psychiatry. Our job at Pihlajalinna is to provide people with a channel through which they can access the service they need without a delay. The most eective solution for working through the waiting lists for treatment is increased purchasing from private-sector service providers. In the coming years, Finnish healthcare will face sig- nificant reforms. Concrete progress will be seen in the national reform of healthcare and social services when the councils in charge of the wellbeing services counties become operational on 1 March 2022. Private sector has developed new service models and care paths to ensure high quality care and quick access to treatment in all circumstances. Pihlajalinna is a pioneer on this transition with a proved track record. We expect the development of digital services to continue to significantly improve Pihlajalinna’s competitiveness. Where necessary, we have the agility and capacity to adapt to quick changes. Pih- lajalinna will engage in close cooperation with the future wellbeing services counties. At the beginning of July, we announced our intention to acquire the entire share capital of Pohjola Hospital Ltd. The transaction was approved by the Finnish Competi- tion and Consumer Authority at the beginning of 2022 and completed on 1 February 2022. In connection with the acquisition, we also signed a new five-year service agreement with Pohjola Insurance. The acquisition not only improves the availability of our services and our ser- 32 BUSINESS AND STRATEGY | SUSTAINABILITY | REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS Mission We help Finns to live a better life Vision We bring wellbeing to everyone Values Ethics, energy, open-mindedness vice portfolio, but also expands the provision especially in the orthopedic services. Pohjola Hospital is known for its high-quality expertise in orthopedics and hand surgery. Following the acquisition of Pohjola Hospital, we have further refined our strategy and long-term targets. We expect the customer flow through insurance companies to significantly grow Pihlajalinna business operations. Growth will also be accelerated by the national reform of social and healthcare services as well as the growing popularity of medical insurance. Our goal is to expand our network of operating loca- tions and our range of specialized care services, espe- cially in the Helsinki Metropolitan Area and other growth centers. Pihlajalinna will strengthen its network of private clinics by opening new clinics in Lahti, Espoo and Vantaa in early 2022. We are seeking revenue growth of EUR 250 million by the end of 2025, using 2021 as the baseline. One third of the growth is expected to arise from the public sector and the rest two thirds from corporate and private cus- tomers. The long-term target for adjusted operating prof- it before the amortisation and impairment of intangible assets (EBITA) is over 9 per cent of revenue. The long- term target for net debt is less than 3x adjusted EBITDA. In the beginning of the strategy period due to Pohjola Hospital acquisition the net debt will decline close to 5. Pihlajalinna aims to distribute each financial year at least one-third of its profits to shareholders as dividends or capital repayment. Pihlajalinna is publishing its first sustainability report according to GRI-standard (Global Reporting Initiative), with topics being the economical value of the company to the society among others. Open and transparent com- munication is critical for Pihlajalinna, when it comes to tax responsibility. Reporting our tax footprint in connection with the annual report is already an established practice since 2016. The Group pays all its taxes to Finland. The Group has also a significant local impact in various areas of the country, especially on those, where Pihlajalinna is responsible of the total outsourcing of public social and healthcare services. Pihlajalinna’s strategy 2021–2025 Strategic priorities 1. The renewal of services for private customers Pihlajalinna will strengthen its multichannel ser- vices and consumer business through new ser- vice concepts and digital innovation. 2. Cooperation in social and healthcare services Pihlajalinna will engage in close cooperation with the future wellbeing services counties and build a strong market position in public healthcare. 3. Enhancing digitalisation Pihlajalinna has a strong focus on digitalisation in the development of personnel, the custom- er experience and operational performance. Objectives for the strategy period • Pihlajalinna oers the most attractive and diverse range of services. • Pihlajalinna is the number one choice of consumers and professionals. • Pihlajalinna services are easy to access and available without delay. • Revenue growth of EUR 250 million by the end of 2025, using 2021 as the baseline. One third of the growth is expected to arise from the public sector and the rest two thirds from corporate 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. • Long term target for net debt is less than 3x adjusted EBITDA. In the beginning of the strategy period due to Pohjola Hospital acquisition the net debt will decline close to 5. • Distributing at least one-third of the profit for each financial year to shareholders as dividends or capital repayment. Performance indicators The achievement of goals is measured by, for example, financial indicators, an increase in the number of appoint- ment times and procedures available to customers, and in the Net Promoter Score (NPS), which measures the customer and employee experience. Revenue by customer group Pihlajalinna customer groups are corporate customers, private customers and public sector customers. • The Group corporate customers consist of Pihlajalinna occupational healthcare customers, insurance compa- ny customers and other corporate customers. • The Group private customers are private individuals who pay for services themselves and may subsequent- ly seek compensation from their insurance company. • The Group public sector customers consist of public sector organisations in Finland, such as municipalities, joint municipal authorities, congregations, hospital districts and the public administration when purchas- ing either social and healthcare outsourcing services or residential, occupational healthcare and stang services. Pihlajalinna’s tax footprint describes the tax and other tax related income the society accrues through the Group’s business operations. On 2021 the society gained EUR 131,9 (110,4) million from Pihlajalinna. 33 BUSINESS AND STRATEGY | SUSTAINABILITY | REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS October–December 2021 EUR million 10-12/2021 10-12/2020 change change % Corporate customers 38.8 35.7 3.1 8.6 % of which insurance company customers 9.8 9.0 0.7 8.2 % Private customers 23.3 22.4 0.9 3.9 % Public sector 111.3 97.5 13.8 14.2 % of which complete outsourcing 76.8 73.6 3.2 4.3 % of which stang 6.4 5.9 0.5 7.7 % of which occupational heal- thcare and other services 28.1 17.9 10.2 56.8 % Intra-Group sales -18.7 -18.4 -0.3 1.4 % Total consolidated revenue 154.7 137.2 17.5 12.8 % January–December 2021 EUR million 1–12/2021 1–12/2020 change % change % Corporate customers 137.8 120.7 17.1 14.1 % of which insurance company cus- tomers 34.8 31.4 3.4 10.9 % Private customers 85.3 81.1 4.2 5.1 % Public sector 427.7 372.4 55.2 14.8 % of which complete and partial out- sourcing agreements 300.8 287.9 12.9 4.5 % of which stang 26.1 23.0 3.0 13.2 % of which occupational healthcare and other services 100.8 61.5 39.3 63.8 % Intra-Group sales -73.0 -65.6 -7.4 11.2 % Total consolidated revenue 577.8 508.7 69.1 13.6 % Q4 2021 Q4 2021 Revenue by custom- er group 2021, % 2020 2021 +50 % +13,6 % 509 578 +4 % +5 % +14 % 127 85 301 288 85 81 138 121 Q4/2020 Q4/2021 +45 % +12,8 % 155137 +4 % +4 % +9 % 24 35 74 77 22 23 36 39 Corporate customers Private customers Complete and partial outsourcings Other private sector services Revenue by customer group, 2021, M€ 44 % 20 % 14 % 22 % 46 % 20 % 13 % 21 % October–December 2021 Revenue from corporate customers amounted to EUR 38.8 (35.7) million, an increase of EUR 3.1 million, or 8.6 per cent. Sales to insurance company customers increased by EUR 0.7 million, or 8.2 per cent. Revenue from occupational healthcare services and remote services increased. In the corporate customer group, revenue from COVID-19 services amounted to EUR 2.3 (3.5) million, a decrease of EUR 1.2 million. The customer volumes of Pihlajalinna’s private clinics increased by 9 per cent year-on-year and were 3 per cent higher than in 2019. Revenue from private customers amounted to EUR 23.3 (22.4) million, an increase of EUR 0.9 million, or 3.9 per cent. In the private customer group, revenue from COVID-19 services amounted to EUR 0.8 (0.4) million, an increase of EUR 0.4 million. The customer volumes of Pihlajalinna’s private clinics increased by 5 per cent year-on-year and were 13 per cent lower than in 2019. Revenue from the public sector amounted to EUR 111.3 (97.5) million, an increase of EUR 13.8 million, or 14.2 per cent. Revenue from COVID-19 services amounted to EUR 7.0 (3.4) million, an increase of EUR 3.5 million. The partial outsourcing agreement with Kris- tiinankaupunki, index adjustments to complete outsourcing agreements and additional invoicing increased revenue by a total of EUR 3.2 million. The acquisition of Työterveys Virta increased revenue from the public sector by EUR 3.2 million. The customer volumes of Pihlajalinna’s private clinics increased by 64 per cent year-on-year and were 63 per cent higher than in 2019 due to Työterveys Virta acquisition. Without the acquisition of Työterveys Virta, customer volumes would have increased by 4 per cent year-on-year and by 4 per cent compared to 2019. January–December 2021 Revenue from corporate customers amounted to EUR 137.8 (120.7) million, an increase of EUR 17.1 million, or 14.1 per cent. Sales to insurance company customers increased by EUR 3.4 million, or 10.9 per cent. Revenue from occupational healthcare services 34 BUSINESS AND STRATEGY | SUSTAINABILITY | REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS increased by EUR 6.0 million. In the corporate customer group, revenue from COVID-19 services amounted to EUR 9.4 (5.9) million, an increase of EUR 3.5 million. Revenue from surgical services and remote services increased. The customer volumes of Pihlajalinna’s private clinics in- creased by 5 per cent year-on-year but were one per cent lower than in 2019. Revenue from private customers amounted to EUR 85.3 (81.1) million, an increase of EUR 4.2 million, or 5.1 per cent. Revenue from fitness centre services, fertility treatments and surgical services increased by a combined EUR 2.0 million. In the private customer group, revenue from COVID-19 services amounted to EUR 2.2 (1.0) mil- lion, an increase of EUR 1.2 million. The customer volumes of Pihlajalinna’s private clinics decreased by 2 per cent year-on-year and were 22 per cent lower than in 2019. This was due to the COVID-19 pandemic still. Revenue from the public sector amounted to EUR 427.7 (372.4) million, an increase of EUR 55.2 million, or 14.8 per cent. Revenue from COVID-19 services amounted to EUR 27.3 (4.6) million, an increase of EUR 22.7 million. The partial outsourcing agreement with Kristiinankaupunki, index adjustments to complete outsourcing agreements and additional invoicing increased revenue by a total of EUR 12.6 million. The acquisition of Työterveys Virta increased revenue from the public sector by EUR 9.9 million. The customer volumes of Pihlajalinna’s private clinics increased by 54 per cent year-on-year and were 55 per cent higher than in 2019. Without the acquisition of Työterveys Virta, customer volumes would have increased by 7 per cent year-on-year and by 8 per cent compared to 2019. Seasonal variation Pihlajalinna’s business operations are to a certain extent influenced by seasonal fluctuations. Pihlajalinna’s com- plete outsourcing for social and healthcare services and other fixed-price invoicing is accompanied by a steady period of recognition of revenue as income. During the summer holidays, especially in July, sta 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 custom- ers is lower and profitability is weaker during holiday seasons, especially in July–August and December. At the quarterly level, seasonal fluctuations have historically had a positive eect on profitability for the third quarter of the year. Consolidated revenue and result October–December 2021 Pihlajalinna’s revenue totalled EUR 154.7 (137.2) million, an increase of EUR 17.5 million, or 12.8 per cent. M&A trans- actions accounted for EUR 3.6 million, or 2.6 per cent, of the growth in revenue. Organic revenue growth was EUR 13.9 million, or 10.1 per cent. Revenue from complete and partial outsourcing agreements increased by EUR 3.2 million. Revenue from COVID-19 services amounted to EUR 10.1 (7.4) million, an increase of EUR 2.7 million. Other organic growth con- sisted mainly of growth in private clinic services of EUR 2.2 million, growth in occupational healthcare services of EUR 1.5 million and growth in remote services of EUR 1.2 million. The customer volumes of Pihlajalinna’s private clin- ics increased by 17 per cent year-on-year and were 9 per cent higher than in 2019. Without the acquisition of Työterveys Virta, customer volumes would have increased by 6 per cent year-on-year and they would have been 2 per cent lower than in 2019 due to the decrease in the volume of private customers. Some 39 (30) per cent of all customer appointments, excluding municipal outsourc- ing and COVID-19 testing, took place via remote services during the quarter. EBITDA was EUR 14.5 (15.1) million, a decrease of EUR -0.5 million, or -3.5 per cent. Adjusted EBITDA was EUR 14.9 (15.8) million. EBITDA adjustments amounted to EUR 0.3 (0.7) million. The profitability of private clinic services improved due to COVID-19 services. The profitability of fitness centre services improved as the operating condi- tions returned closer to normal in the final quarter of the year. Fitness centres also received retrospective financial support from the government in the amount of EUR 0.5 million in November. The profitability of occupational healthcare services remained good, although it was significantly lower than in the comparison period due to the decrease in COVID-19 services. Profitability was reduced by the increased costs of specialised care under complete outsourcing agree- ments and the Group’s increased general expenses. Depreciation, amortisation and impairment amounted to EUR 9.0 (8.3) million. Adjustments to depreciation, amortisation and impairment amounted to EUR 0.1 (-0.1) million. Depreciation of intangible assets amounted to EUR 1.7 (1.6) million, of which depreciation related to pur- chase price allocations amounted to EUR 0.7 (0.7) million. Depreciation, amortisation and impairment of property, plant and equipment amounted to EUR 2.4 (2.1) million, and depreciation and impairment of right-of-use assets totalled EUR 4.8 (4.6) million. Pihlajalinna’s operating profit (EBIT) was EUR 5.6 (6.8) million, a decrease of EUR -1.2 million. The EBIT-to-reve- nue ratio (EBIT margin) was 3.6 (4.9) per cent. Adjusted operating profit before the amortisation and impairment of intangible assets (EBITA) was EUR 7.8 (9.0) million. The adjusted EBITA margin was 4.9 (6.5) per cent. Ad- justments to EBIT amounted to EUR 0.4 (0.6) million. The Group’s net financial expenses amounted to EUR -1.0 (-1.0) million. Profit before taxes came to EUR 4.6 (5.7) million. Taxes in the income statement amounted to EUR -1.2 (-2.8) million. Profit came to EUR 3.3 (2.9) mil- lion. Earnings per share (EPS) was EUR 0.19 (0.15). January–December 2021 Pihlajalinna’s revenue totalled EUR 577.8 (508.7) million, an increase of EUR 69.1 million, or 13.6 per cent. M&A transactions accounted for EUR 11.0 million, or 2.2 per cent, of the growth in revenue. Organic revenue growth was EUR 58.1 million, or 11.4 per cent. Revenue from complete and partial outsourcing agreements increased by EUR 12.6 million. Revenue from COVID-19 services amounted to EUR 38.9 (11.4) million, an increase of EUR 27.5 million. Other organic growth con- sisted mainly of growth in private clinic services of EUR 5.9 million, growth in occupational healthcare services of EUR 5.5 million, growth in surgical services of EUR 3.2 million and growth in remote services of EUR 2.7 million. 35 BUSINESS AND STRATEGY | SUSTAINABILITY | REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS The customer volumes of Pihlajalinna’s private clinics increased by 11 per cent year-on-year and were on a par with 2019. Without the acquisition of Työterveys Virta, customer volumes would have increased by 3 per cent year-on-year and would have declined 7 per cent from 2019, mainly due to the decrease in the volume of private customers. The figures do not incorporate the number of customer appointments under municipal outsourc- ing agreements. Some 39 (28) per cent of all customer appointments, excluding municipal outsourcing and COVID-19 testing, took place via remote services during the period. The capacity utilisation rates of surgical oper- ations improved. The proportion of preventive activities in occupational healthcare services grew. The volume of surgical services at Jokilaakso hospital grew by 9 per cent. The number of freedom-of-choice patients in public healthcare at Jokilaakso hospital increased by 13 per cent. The demand for fitness centres and dental care services improved, but revenue from these areas was still signifi- cantly below the level of 2019. EBITDA was EUR 62.6 (52.2) million, an increase of EUR 10.5 million, or 20,1 per cent. Adjusted EBITDA was EUR 65.3 (54.8) million, an increase of EUR 10.6 million, or 19.3 per cent. EBITDA adjustments amounted to EUR 2.7 (2.6) million. The profitability of private clinic services improved due to COVID-19 services. The profitability of occupational healthcare services remained good and improved due to higher volumes. The profitability of fit- ness centres improved. The capacity utilisation rates and profitability of surgical operations improved. Profitability was significantly reduced by the increased costs of specialised care under total outsourcing agree- ments, social services, dental care services and services for the elderly. Depreciation, amortisation and impairment amounted to EUR 34.7 (34.0) million. Adjustments to depreciation, amortisation and impairment amounted to EUR -0.3 (0.1) million. Depreciation of intangible assets amounted to EUR 6.7 (6.3) million, of which depreciation related to purchase price allocations amounted to EUR 3.0 (3.1) million. Depreciation, amortisation and impairment of property, plant and equipment amounted to EUR 9.2 (8.8) million, and depreciation and impairment of right- of-use assets totalled EUR 18.8 (18.9) million. Pihlajalinna’s operating profit amounted to EUR 27.9 (18.1) million, an increase of EUR 9.8 million, or 54.0 per cent. The EBIT-to-revenue ratio (EBIT margin) was 4.8 (3.6) per cent. Adjusted operating profit before the amor- tisation and impairment of intangible assets (EBITA) was EUR 37.3 (27.4) million. The adjusted EBITA margin was 6.5 (5.4) per cent. Adjustments to EBIT amounted to EUR 2.4 (2.8) million. The Group’s net financial expenses amounted to EUR -3.7 (-4.4) million. In the comparison period, net financial expenses were increased on a non-recurring basis by a waiver expense associated with the financing arrange- ment. Profit before taxes came to EUR 24.2 (13.7) million. Taxes in the income statement amounted to EUR -5.1 (-4.8) million. Profit came to EUR 19.1 (8.9) million. Earn- ings per share (EPS) was EUR 0.89 (0.38). The operating environment The COVID-19 pandemic continued throughout 2021, cre- ating waves of infection early in the year, after the sum- mer and late in the year. The seven-day averages for new cases and the number of hospitalized patients peaked in Finland in January 2022. Pandemic-related restrictions were in place throughout 2021, and extensive restrictions were imposed at the turn of the year due to the Omicron variant. While infection numbers are still high nationally, the number of cases requiring intensive care has de- creased substantially. In negotiations held on 2 Febru- ary 2022, the Finnish Government determined that the extensive restrictions can be gradually relinquished while taking the epidemiological situation into consideration. The extensive restrictions have included, for example, the complete closure of indoor facilities used for individual sports and physical exercise by adults. The second-dose vaccination coverage in Finland stood at 74.5 per cent of the entire population at the beginning of February 2022. Due to the COVID-19 restrictions and the burden placed on the healthcare system by the pandemic, the treatment backlog for other illnesses continues to grow. According to the Finnish Institute for Health and Welfare statistics, queues for treatment in public healthcare have increased in general due to COVID-19. At the end of November, a total of 150,392 patients were waiting for access to care at hospitals operated by the hospital districts. This repre- sented a year-on-year increase of nearly 9,000 patients. Of these, 9,499 patients (6.3 per cent) had waited for access to non-urgent specialised care for more than six months, which is an increase of nearly 1,900 patients compared to the beginning of 2021. Care queues have grown especially in surgery and psychiatry. In primary care, non-urgent outpatient appointments with physicians were available within one week of the as- sessment of the need for treatment in approximately 60 per cent of cases in October 2021 in all of the Regional State Administrative Agency regions. The increased use of remote consultations has expedited access to care at health centers. In October 2021, the number of non-ur- gent visits to dental care was still lower than in 2019. The number of voluntary medical expenses insurance policies increased significantly between 2009 and 2020. According to Finance Finland, over 1.26 million Finns had private medical expenses insurance at the end of June 2021. Growth has been seen in insurance policies taken out by adult private individuals, children’s insurance poli- cies as well as medical expenses insurance policies taken out by companies for their employees. The reform of healthcare and social welfare services will see the responsibility for the organisation of health- care, social welfare and rescue services transferred from municipalities to 21 wellbeing services counties, the City of Helsinki and partially to the joint county authority for the Hospital District of Helsinki. The results of the regional elections were confirmed on 26 January 2022 and the councils will start their work on 1 March 2022. The new social and healthcare service system will significantly reshape health care structures and needs as the responsi- bility for organizing services is transferred from munici- palities to larger wellbeing services counties. The ageing of the population continues, and the big- gest changes in the age structure are still to come. They will have a significant impact on the dependency ratio 36 BUSINESS AND STRATEGY | SUSTAINABILITY | REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS in Finland and the increasing prevalence of age-related illnesses. According to population forecasts, there will be seven non-working-age persons per 10 working-age persons in Finland by 2050. The ageing of the large gen- erations will pose unprecedented challenges to finances in society. According to the Ministry of Finance latest economic report, the Finnish GDP was expected to have grown by 3.4 per cent in 2021. The deterioration of the COVID-19 pandemic in late 2021 increased uncertainty among economic decision-makers and temporarily slowed down economic growth around the turn of the year. In 2022, GDP growth is expected to be in 3.0 per cent and consumer demand is expected to remain at a good level. Economic growth is expected to subsequently slow down, with the growth forecast being 1.5 per cent in 2023 and 1.4 per cent in 2024. Consolidated statement of financial position and cash flow Pihlajalinna Group’s total statement of financial position amounted to EUR 457.1 (441.3) million. Consolidated cash and cash equivalents amounted to EUR 4.3 (13.3) million. Net cash flow from operating activities in the quarter amounted to EUR 24.8 (18.5) million. Taxes paid amount- ed to EUR 0.6 (-0.6) million. The change in net working capital was EUR 9.6 (4.0) million. Net cash flow from operating activities during the financial year amounted to EUR 56.9 (46.9) million. Taxes paid amounted to EUR -2.6 (-3.6) million. The change in net working capital was EUR -3.3 (-1.8) million. Working capital totalling EUR 14.7 (27.8) million was released from trade and other payables. Working capital amounting to EUR 16.8 (27.5) million was tied up in trade receivables and other receivables and EUR 0.3 (1.1) million in invento- ries. Changes in provisions tied up EUR 0.9 (1.0) million in working capital. Net cash flow from investing activities totalled EUR -5.8 (-1.9) million during the quarter. Investments in tangi- ble and intangible assets amounted to EUR -5.8 (-2.0) million, and the proceeds from the disposal of tangible assets amounted to EUR 0.2 (0.1) million. Pihlajalinna acquired the business operations of Finla Työterveys Oy’s Mänttä-Vilppula unit in November 2021. Net cash flow from investing activities totalled EUR -32.1 (-4.1) million for the financial year. Acquisitions of subsidiaries (mainly Työterveys Virta Oy on 1 April 2021) had an impact of EUR -16.4 (-1.4) million on net cash flow from investing activities. Investments in tangible and intangible assets amounted to EUR -14.8 (-9.6) million, and the proceeds from the disposal of tangible assets amounted to EUR 0.5 (6.8) million. Pihlajalinna sold and leased back two care properties in Laihia in May 2020. Investments in NONNA Group Oy and Digital Health Solu- tions Oy were EUR -1.3 million. The Group’s cash flow after investments (free cash flow) was EUR 19.0 (16.7) million for the quarter and EUR 24.9 (42.8) million for the financial year. Net cash flow from financing activities totalled EUR -21.5 (-9.5) million for the quarter. The change in financial liabilities, including changes in credit limits, amounted to EUR -15.4 (-3.2) million. Payments for financial lease liabilities amounted to EUR -5.1 (-5.4) million, and interest paid and other financial expenses amounted to EUR -1.1 (-0.9) million. Net cash flow from financing activities during the finan- cial year totalled EUR -33.9 (-56.5) million. The change in financial liabilities, including changes in credit limits, amounted to EUR -1.6 (-12.2) million. Payments for finan- cial lease liabilities amounted to EUR -19.8 (-20.6) million, and interest paid and other financial expenses amounted to EUR -4.0 (-4.5) million. The net eect of the change in non-controlling interests on cash flow was EUR -3.0 (-18.3) million. Pihlajalinna acquired 7.2 per cent of the share capital of Kuusiolinna Terveys from the municipality of Kuortane in August 2021. The transaction price, paid in cash, was EUR 3.0 million. In January 2020, Pihlajalinna paid EUR 16.3 million in total for shares in Kuusiolinna Ter- veys to the municipalities of Alavus, Ähtäri and Soini as well as EUR 2.0 million to the city of Mänttä-Vilppula for shares in Mäntänvuoren Terveys. A total of EUR 0.4 (0.2) million in dividends was paid to non-controlling interests. Pihlajalinna Plc distributed dividends of EUR 4.5 (0.0) million for the financial year 2020 in accordance with the decision of the Annual General Meeting. The Group has acquired its own shares for its incentive scheme and the remuneration of the Board of Directors in the amount of EUR 0.6 (0.7) million. The Group’s gearing was 158.8 (170.6) per cent. In- terest-bearing net debt amounted to EUR 194.7 (194.8) million. Return on capital employed was 8.8 (5.7) per cent and return on equity was 16.1 (8.1) per cent. Financing arrangements Pihlajalinna has a five-year EUR 120 million unsecured financing arrangement with Danske Bank and Nordea. The agreement is valid until 9 March 2023. Pihlajalinna has started refinancing negotiations that are intended to be completed before the end of March 2022. The current arrangement comprises a EUR 50 million revolving credit facility and a long-term bullet loan of EUR 70 million. It also includes an opportunity to increase the total amount by EUR 60 million (to EUR 180 million), subject to sepa- rate decisions on a supplementary loan from the funding providers. The financing arrangement includes the customary financial covenants concerning leverage (ratio of net debt to pro forma EBITDA) and gearing. The calculation of covenants will continue with the creditor banks in ac- cordance with the accounting principles confirmed in the original financing arrangement (frozen GAAP, i.e. exclud- ing the IFRS 16 impact and the IFRS Interpretations Com- mittee’s Agenda Decision concerning the configuration or customisation costs in cloud computing arrangements). The Group met the set covenants on 31 December 2021. Due to the changes in the operating environment caused by the COVID-19 panpidemic, Pihlajalinna and the funding providers agreed on a temporary adjustment to the covenants of the financing arrangement for the first two quarters of 2020 at the end of March 2020. The orig- inal covenants of the financing arrangement – leverage of 3.75 and gearing of 115 per cent – took eect again when the covenants were reviewed in the third quarter of 2020. In connection with this, a permanent new margin ceil- ing was added to the financing arrangement. The margin 37 BUSINESS AND STRATEGY | SUSTAINABILITY | REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS Complete and partial outsourcing agreements Company Pihlajalinna’s holding, 31 December 2020 Pihlajalinna’s holding, 31 December 2021 First year of service produc- tion under the current contract Duration of contract (years) Jokilaakson Terveys Oy 90% 90% internal service provision internal service provision Jämsän Terveys Oy 51% 51% 2015 10 Kuusiolinna Terveys Oy 90% 97% 2016 15 Mäntänvuoren Terveys Oy 91% 91% 2016 15 Kolmostien Terveys Oy 96% 96% 2015 15 Bottenhavets Hälsa Ab - Selkämeren Terveys Oy 83% 75% 2021 15–20 years Summary of the revenue and profitability of complete and partial outsourcing agreements (intra-Group sales eliminated). More informa- tion on the profitability of complete outsourcing agreements is presented in this report in the section Items that may, according to the management estimate, influence the profitability of complete outsourcing agreements with a delay. Complete and partial outsourcing agreements 10–12/2021 3 months 10–12/2020 3 months 2021 2020 2019 INCOME STATEMENT Revenue, EUR million 71.2 66.9 277.0 264.2 262.4 EBITDA, EUR million 0.2 1.4 6.6 11.0 15.3 EBITDA, % 0.3 2.0 2.4 4.2 5.8 Adjusted EBITDA, EUR million 0.2 1.4 6.7 11.0 17.5 Adjusted EBITDA, % 0.3 2.0 2.4 4.2 6.7 Operating profit (EBIT), EUR million -0.5 0.7 3.6 8.2 13.0 Operating profit (EBIT), % -0.8 1.0 1.3 3.1 4.9 Adjusted operating profit (EBIT), EUR million -0.5 0.7 3.7 8.2 15.1 Adjusted operating profit (EBIT), % -0.8 1.0 1.3 3.1 5.8 Adjusted operating profit before the amortisation and impairment of intangible assets (EBITA), EUR million -0.5 0.7 4.1 8.5 15.4 Adjusted operating profit before the amortisation and impairment of intangible assets (EBITA), % -0.6 1.1 1.5 3.2 5.9 Profit before tax (EBT), EUR million -0.6 0.6 3.6 8.1 12.8 ceiling will enter into eect if leverage exceeds 3.50. On 31 December 2021, leverage in accordance with the financing arrangement stood at 2.30 and gearing at 91 per cent. Due to the acquisition of Pohjola Hospital Ltd, Pihlaja- linna and the funding providers agreed, before the end of the year, on temporarily increasing the gearing cove- nant to 140 per cent for the first and second quarters of 2022. The Group has credit limit agreements valid until fur- ther notice, totalling EUR 10 million. The notice period of the credit limit agreements is one month. At the end of the financial period, Pihlajalinna had a total of EUR 45.0 million in unused committed credit limits. In addition, EUR 45.0 million of an additional credit limit, which is subject to separate credit decisions, was unused at the year end. Pihlajalinna and the funding providers agreed on the acquisition of Pohjola Hospital Ltd and the financing of the transaction in a timely manner, before the turn of the year. The transaction was financed from the additional credit limit in February 2022. Acquisitions and capital expenditure Gross investments, including acquisitions, amounted to EUR 44.8 (25.4) million. Gross investments in M&A trans- actions amounted to EUR 20.0 (0.0) million. The Group’s gross investments in property, plant and equipment and intangible assets, which consisted of development investments, additional investments and replacement investments required for growth, amounted to EUR 13.8 (10.4) million. Gross investments in connection with the opening of new units amounted to EUR 1.1 (0.4) million. Gross investments in right-of-use assets amounted to EUR 9.8 (14.6) million, including the opening of new units in Lohja (Uniikki special needs residential services) and, in the comparison period, in Helsinki (Pihlajalinna Tavastia private clinic) and Riihimäki (Uniikki special needs residential services). Investment commitments for the Group’s devel- opment, additional and replacement investments amounted to approximately EUR 2.0 (2.5) million. The investment commitments are related to additional and replacement investments in clinical equipment and infor- mation system projects. On 1 February 2022, Pihlajalinna acquired the entire share capital of Pohjola Hospital Ltd from Pohjola Insur- ance Ltd. The net debt-free purchase price, paid in cash, was EUR 31.8 million. 38 BUSINESS AND STRATEGY | SUSTAINABILITY | REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS Changes in Group structure The following changes in group structure were imple- mented during the financial year: Merged company Target company Month of acquisition Pihlajalinna Seinäjoki Oy Pihlajalinna Lääkärikeskukset Oy 9 April 2021 Terveyspalvelu Verso Oy Pihlajalinna Lääkärikeskukset Oy 1 May 2021 Työterveys Virta Oy Pihlajalinna Oulu Oy 1 September 2021 Research and development Increases to intangible assets totalled EUR 4.0 (3.6) mil- lion during the financial year. During the financial year 2021, the development of the digital appointment booking system progressed as planned in parallel with the improvements of the assess- ment of the need for treatment. A wider range of pre- ventive services was added into the remote clinic service selection. The service oering through the occupational health portal was further expanded and more analytics was de- ployed to even better serve our occupational healthcare customers. Care chain service for our insurance custom- ers was enhanced. A development of a new mobile appli- cation for professionals targeted to our own employees and professional medical practitionists was started. Other deployments were a new ERP system of our fitness cen- ters, a new invoice work flow system and a new imaging archive and communications system (PACS) in addition with the lauch of a new patient information system for dental care customers. During the financial year 2022 the Pihlajalinna website and Pihlajalinna Health App (Terveyssovellus) -mobile application will be in the main focus, when developing the private sector customer services like the digital ap- pointment booking system to enhance the service level. Remote appointment service will be aligned and service oering further expanded. New features will be added into our portal for the occupational healthcare care customers to benefit. To mention some of them, expanding possibilities of analyt- ics and reporting capabilities. A new mobile application for professionals will be launched for our employees and professional medical practitioners. Enhancements will be made also to our HR and document management sys- tems. A new ERP system will be deployed in our surgical business area. Personnel At the end of the financial year, the number of personnel was 6,297 (5,550), an increase of 747 persons, or 13 per cent. The Group personnel averaged 4,746 (4,308) per- sons as full-time equivalents, an increase of 438 persons, or 10 per cent. The Group employee benefit expenses totalled EUR 255.2 (214.2) million, an increase of EUR 40.9 million, or 19.1 per cent. The growth in the number of personnel was attributable to COVID-19 services, the acquisition of Työterveys Virta and the start of the partial outsourcing agreement with Kristiinankaupunki. The increase in employee expenses was also attributable to general increases, the elimination of the temporary reduction in TyEL insurance contributions and person- nel-related flexibility during the comparison period, i.e. the COVID-19 spring of 2020. Pihlajalinna fitness centers held cooperation negoti- ations due to the impacts of the COVID-19 epidemic in March. The outcome of the negotiations made it possible to temporarily lay o all employees for the maximum period of 90 days if necessary. The part-time or full-time temporary layos of some of the employees began in the second half of March and lasted through the COVID-19 closure in April. Management Team CEO Joni Aaltonen serves as the Chairman of the Man- agement Team. The Management Team also includes COO Teija Kulmala, CFO Tarja Rantala, Chief Legal Ocer Marko Savolainen, Chief People and Culture Ocer Elina Heliö and Sales Director Juha-Pekka Halttunen. Antti-Jus- si Aro, M.Sc. (Tech.), joined Pihlajalinna on 3 May 2021 as the new CIO and a member of the Group Management Team. Medical specialist Sari Riihijärvi, PhD, became Pihlajalinna’s Chief Medical Ocer (CMO) and a member of the Management Team on 2 July 2021. Sari Nevanlinna, M.Sc. (Econ.), M.Soc.Sc. was appointed as Pihlajalinna’s Chief Commercial Ocer (CCO). She will join the Group Management Team on 1 March 2022. Board of Directors The Annual General Meeting on 15 April 2021 resolved that the number of the members of the Board of Direc- tors shall be six instead of the previous seven. Hannu Juvonen, Mika Manninen, Leena Niemistö, Kati Sulin, Seija Turunen and Mikko Wirén were re-elected to the Board of Directors for a term of oce ending at the conclusion of the next Annual General Meeting. The Annual General Meeting elected Mikko Wirén as the Chairman of the Board and Leena Niemistö as the Vice-Chairman. Shareholders’ Nomination Board The Shareholders’ Nomination Board is comprised of the following representatives: • Juha Koponen, Group Director and Board member, LocalTapiola General Mutual Insurance Company and LocalTapiola Mutual Life Insurance Company • Mikko Wirén, Managing Director, MWW Yhtiö Oy • Antti Kuljukka, CEO, Fennia Mutual Insurance Company • Hanna Hiidenpalo, deputy CEO, Elo Mutual Pension Insurance Company Committees nominated by the Board Pihlajalinna Plc Board of Directors appointed the follow- ing members to its committees at its constitutive meeting on 15 April 2021: • Audit Committee: Seija Turunen (chairman), Mika Man- ninen and Hannu Juvonen • People Committee: Mikko Wirén (chairman), Leena Niemistö and Kati Sulin It was agreed that all members of the Board of Direc- tors may join any of the committee meetings. 39 BUSINESS AND STRATEGY | SUSTAINABILITY | REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS Share-related information, outstanding shares 10-12/2021 10-12/2020 2021 2020 No. of shares outstanding at the end of the period 22,594,235 22,617,841 22,594,235 22,617,841 Average no. of shares outstanding during the period 22,594,235 22,574,207 22,589,383 22,586,212 Highest price, EUR 12.92 10.45 12.98 15.66 Lowest price, EUR 11.54 8.72 9.26 8.72 Average price, EUR 12.23 9.31 11.18 12.09 Closing price, EUR 12.64 9.38 12.64 9.38 Share turnover, 1,000 shares 1,061 2,628 6,929 6,620 Share turnover, % 4.7 11.6 30.7 29.3 Market capitalisation at the end of the period, EUR million 285.6 212.2 285.6 212.2 * average rate weighted by trading level Remuneration of the members of the Board of Directors The Annual General Meeting of 15 April 2021 resolved that the remuneration of the members of the Board of Directors other than the Chairman of the Audit Commit- tee will remain unchanged, and that the following annual remuneration will be paid to the members of the Board of Directors elected for the term of oce ending at the 2022 Annual General Meeting: EUR 250,000 per year to the full-time Chairman of the Board of Directors, EUR 36,000 per year to the Vice-Chairman and to the Chair- man of the Audit Committee, and EUR 24,000 per year to the other members. The AGM resolved that 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 Directors, and the remainder paid in cash. The remunera- tion could be paid either entirely or partially in cash if the member of the Board of Directors was, on the day of the AGM, 15 April 2021, 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 acqui- sition of the shares. The share-based remuneration was paid by transferring treasury shares held by the company to the members of the Board of Directors in the total amount of 9,848 shares on 11 May 2021, immediately after the release of the interim report for 1 January–31 March 2021. The remainder of the annual remuneration was paid concurrently as a one-o cash payment. If the term of a Board member ends before the Annual General Meeting of 2022, the Board is entitled to decide on the possi- ble recovery of the remuneration in a manner it deems appropriate. Of the annual remuneration paid in shares, a total of 5,000 shares were transferred to the Chairman of the Board of Directors, with 1,212 shares transferred to the Vice Chairman and the Chairman of the Audit Committee each, and 808 shares to each member of the Board of Directors. The AGM decided that each Board member shall be paid a meeting fee of EUR 500 for each Board and Com- mittee 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 15 April 2021 authorised the Board of Directors to decide on the acquisition of a maximum of 2,061,314 shares, which is approximately 9 per cent of the Group’s current number of shares. Own shares may be repurchased on the basis of the authori- sation only by using unrestricted equity. Targeted share acquisition is possible. The authorisation is eective until the next Annual General Meeting, or until 30 June 2022 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 entitlement to shares under Chapter 10, Section 1 of the Limited Liability Companies Act. The number of shares to be issued cannot exceed 3,091,971 shares, which corresponds to approximately 14 per cent of all the shares in the Group. The authorisation concerns both the issuance of new shares and the sale or transfer of the Group’s own shares. The authorisation permits a targeted share issue. The authorisation is eective until the next Annual General Meeting, or until 30 June 2022 at the latest. Auditors and auditing At Pihlajalinna’s Annual General Meeting held on 15 April 2021, KPMG Oy Ab, a firm of authorised public accoun- tants, was elected as the company’s auditor for the finan- cial year 1 January–31 December 2021. Lotta Nurminen, APA, is the principal auditor. Shares and shareholders At the end of the financial period, Pihlajalinna Plc’s share capital entered in the Trade Register amounted to EUR 80,000 and the total number of shares was 22,620,135, of which 22,594,235 were outstanding and 25,900 were held by the company. The company has one share series, with each share entitling its holder to one vote at the Annual General Meeting. All of the outstanding shares bestow their holders with equal rights to dividends and other distribution of the company’s assets. At the end of the review period, the company had 15,126 (14,141) share- holders. A list of the largest shareholders is available on the company’s investor website at investors.pihlajalinna.fi. 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. 40 BUSINESS AND STRATEGY | SUSTAINABILITY | REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS Risk management PIn its risk management, Pihlajalinna’s aim is to oper- ate as systematically as possible and incorporate risk management in normal business processes. Further- more, the group invests in quality management systems and the management of occupational safety and health risks. Pihlajalinna’s Risk Management Policy defines and categorises the group’s risks and describes the goals of risk management. In addition, it defines risk management principles, operating methods and responsibilities. Pihlajalinna sharpened its management system in response to the COVID-19 pandemic. The Group Man- agement Team actively monitors the epidemiological situation and operational indicators and assesses what measures are necessary. The Medical Management Team meets weekly and issues instructions to the Group’s units in accordance with the guidelines and policies issued by the national and regional authorities. While the COVID-19 pandemic continues, the safety and health of the Group’s personnel and customers remain the first priority in Pihlajalinna’s management system. Regional manage- ment, personnel and practitioners are kept up to date on the situation through continuous communication on the intranet despite the fact that daily crisis management has been discontinued. Internal risk reporting is included in the regular busi- ness reporting as well as in business planning and deci- sion-making. The material risks and their management are reported to stakeholders regularly and, when necessary, on a case-by-case basis. In 2021, Pihlajalinna applied the previously developed and implemented Enterprise Risk Management process, which involves classifying risks as strategic, operational, financial and damage risks. Enterprise Risk Management processes will be developed further in 2022. Strategic risks refer to uncertainty related to the im- plementation of the Group’s short-term and long-term strategy. An example is structural changes in society. The role of the private sector as a provider of social and healthcare services as well as structural changes in the public sector have a material impact on the company’s business. Operational risks are risks that are caused by external factors, technology, actions of employees, the operations of the organisation or the functionality of processes. These risks are managed by, for instance, monitoring the competitive situation systematically and reacting to its changes. Financial risks refer to risks that are related to the Group’s financial position, such as profitability, the man- agement of financing risks (interest rate risk, liquidity risk, refinancing risk, counterparty risk and receivables risk) and taxation. For instance, changes in tax legislation may have an impact on the company’s business. Damage risks are related to accidents or other damage that may occur to the Group’s assets, personnel, cus- tomers, stakeholders or environment. The company has liability and patient insurance to cover potential malprac- tice caused by the company’s own personnel. A factor that links all risk categories together is the reputational risk that may aect the reputation of the Group’s brands or the entire Group. Breaches of informa- tion security and data protection may lead to financial losses, claims for compensation and loss of reputation. The goal of Pihlajalinna risk management is to promote the achievement the Group’s strategic and operation- al targets, shareholder value, the Group’s operational profitability and the realisation of responsible operating methods. Risk management seeks to ensure that the risks aecting the company’s business operations are known, assessed and monitored. This is followed by the planning and implementation of practical measures and continu- ous monitoring. The Group and operative management are responsible for risk management according to reporting responsibil- ities. In addition, risk management specialists guide and develop the group’s risk management. The Group Man- agement Team regularly discusses the key risks related to the Group’s business operations. Everyone working at Pihlajalinna must also know and manage risks related to their responsibilities. 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 The COVID-19 pandemic has a twofold impact on Pih- lajalinna’s business: on the one hand, the demand for COVID-19 services has led to the growth of Pihlajalinna’s business but, on the other hand, COVID-19 restrictions have at times led to weaker demand for services. The service provision and customer volumes of private clinics and dental care units have yet to recover to the pre-pan- demic levels of 2019. The fitness centre business has par- ticularly suered from the extensive restrictions that have included the complete closure of indoor facilities used for individual sports and physical exercise by adults. In addition to the impacts of the COVID-19 pandem- ic, the significant risks and uncertainties aecting the Group’s operations are connected to the complete out- sourcing agreements on social and healthcare services, material amendments to legislation, opening new loca- tions, the success of acquisitions, digital service devel- opment and information system projects as well as risks related to taxation and the commitment and recruitment of competent management. A tax audit of the Group’s main companies began in the spring 2017. The tax audit was completed in its entire- ty in February 2021. No additional taxes became payable as a result of the tax audit with regard to income taxation (the Act on the Taxation of Business Profits) and with- holding taxes (Tax Prepayment Act). No notable sanc- tions arose from the tax audit with regard to value added taxes (Value Added Tax Act). The reforms concerning the organisation of social, healthcare and rescue services, when implemented, may lead to changes in Pihlajalinna’s outsourcing agreements for social and healthcare services. Processes stipulated by the legislation concerning the reform of healthcare and social services will be carried out in cooperation with the wellbeing services counties to ensure the application of the service agreements as part of the organisation and production of services in the wellbeing services counties. This may aect the term of validity of Pihlaja- linna’s service agreements and the scope of the services provided. Pihlajalinna expects that its fixed-term service 41 BUSINESS AND STRATEGY | SUSTAINABILITY | REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS agreements will remain in eect, as agreed, with the wellbeing services counties until the end of the term for each agreement. Determining the annual profitability of the Group’s fixed-term complete social and healthcare services out- sourcing agreements may become accurate with a delay. The Group may not always be aware of the actual costs of the agreements at the time of preparing the financial statements, and the agreements may involve variable ele- ments of compensation. The cost accumulation of public specialised care involves random fluctuation. In addition, individual cases falling within the scope of the hospital districts’ pooling system for high-cost care may influence the cost liability of specialised care considerably during the financial year, and between financial periods, in Pihla- jalinna’s municipal companies. The fixed-term service agreements for all of the Group’s complete outsourcing arrangements are highly similar with regard to their principles and basic terms. Pihlajalinna has calculated and recognised the variable compensation components and cost compensation under the agreements using the same criteria and model for all clients. Demands for the compensation of cost increases due to changes in services corresponding to the actual costs and investment costs that serve operations after the end of the term of the contract being the client’s responsibility constitute the majority of costs and vari- able compensation components that are specified with a delay. For 2021, the assessment of investment costs and COVID-19 related costs included in invoicing by hospital districts can only be carried out with finality after the hospital districts have published their financial state- ments. Pihlajalinna has recognised only part of these legally justified claims in its income statement. The parties to the agreements are bound by an obligation to negotiate and negotiation is the primary procedure. If the obligation to negotiate does not lead to payment, the receivables are sought through legal action, which may further delay the collection of items presented in current receivables in the financial statements. Items that may, according to the management estimate, influence the profitability of complete outsourcing agreements with a delay: 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 dierence in views regarding whether the fixed annual price for social and healthcare services can decrease due to price adjustments amounted to approximately EUR 3.7 (2.6) million at the end of the financial year. Jämsän Terveys filed an additional counterclaim against the City of Jämsä. The additional counterclaim concerns the eect of changes in the services 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. In its counter- claim, Jämsän Terveys claims a total of approximately EUR 16 million from the City of Jämsä. The total amount of variable compensation under the counterclaim that Jämsän Terveys has recognised as revenue and recorded in its receivables amounts to EUR 3.9 (3.8) million. The total amount of contractually and legally justified variable compensation from the City of Mänttä-Vilppula that Mäntänvuoren Terveys Oy has recognised as revenue and recorded in its receivables amounts to EUR 4.1 (3.5) million. The variable compensation recognised as revenue in accordance with the agreement includes an estimate of compensation for specialised care costs to the service provider of the Pirkanmaa Hospital District’s investment costs allocated to the client. The receivables from vari- able compensation components are also related to cost increases caused by service changes and compensating such increases in accordance with the actual costs. The total amount of contractually and legally justified variable compensation from the City of Parkano that Kolmostien Terveys Oy has recognised as revenue and recorded in its receivables amounts to EUR 1.7 (0.6) million. The variable compensation recognised as revenue in accordance with the agreement includes an estimate of compensation for specialised care costs to the service provider of the Pirkanmaa Hospital District’s investment costs allocated to the client. The receivables from vari- able compensation components are also related to cost increases caused by service changes and compensating such increases in accordance with the actual costs. The client approved cost increases arising from changes to services for the elderly as part of the annual fee under the service agreement. As regards Kuusiolinna Terveys Oy, the disputes con- cerning the annual price and other separate charges were settled with all of the clients during the financial year. The decisions of the City Boards of Alavus and Ähtäri and the Municipal Boards of Soini and Kuortane pertaining to the agreed-upon matters became legally valid in August 2021. Pending legal processes: The City of Jämsä has taken legal action against Jämsän Terveys Oy regarding a matter concerning the price ad- justment provision in the service agreement as mentioned above under Items that may, according to the manage- ment estimate, influence the profitability of complete outsourcing agreements with a delay. The district court hearing was held in January 2022. The district court has announced to reach a decision in the beginning of March. The District Court of Kanta-Häme issued a decision on the dispute between Pihlajalinna and the municipality of Hattula on 11 June 2021. The District Court found that Hattula did not have the right to terminate the agree- ment. Nevertheless, Pihlajalinna was ordered to pay compensation totalling EUR 123,175, including interest, to Hattula as contractual penalties and damages for breach- es during the contract period. Pihlajalinna’s counterclaim was approved with regard to its basis but rejected with regard to its amount. Each party was responsible for its legal costs. On 31 August 2021, in arbitration proceedings brought against a subsidiary of Pihlajalinna Group regarding a breach of contract, an arbitration court found that the claimant had suered damages of EUR 295,800 due to 42 BUSINESS AND STRATEGY | SUSTAINABILITY | REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS the unfounded termination of an agreement. The court of arbitration ordered Pihlajalinna to pay compensation for damages and the claimant’s legal expenses, totalling EUR 82,943, and, under joint and several liability, pay for the costs of the arbitration proceedings, totalling EUR 98,694. Pihlajalinna has a few employment related cases with legal proceedings ongoing. No major financial impacts are expected onthe Group of these disputes. Impairment testing of goodwill At the end of the financial year, goodwill on Pihlajalinna statement of financial position amounted to EUR 188.9 (173.6) million. Pihlajalinna checks annually and, if neces- sary, quarterly, that the carrying amount of goodwill does not exceed the fair value. The annual impairment testing was conducted on the situation on 30 November 2021. Pi- hlajalinna observed no indications of the carrying amount of goodwill being greater than its estimated recoverable amount. If negative changes were to occur in the develop- ment of Pihlajalinna’s profit and growth, this could lead to an impairment of goodwill. This could have an unfavour- able impact on Pihlajalinna’s operating result and equity. Flagging notifications The company did not receive any flagging notifications under Chapter 9, Section 5 of the Securities Markets Act during the financial year. Tax liablility and footprint Pihlajalinna’s tax footprint describes the tax and other tax related income the society accrues through The Group business operations. On 2021 the society gained EUR 131,9 (110,4) million from Pihlajalinna. The vast majority of taxes consist of withholding taxes and employer liabili- ties. Additionally Pihlajalinna paid EUR 73,0 (71,9) million in total to professional practitioners, out of which they further accounted their own individual taxes. Corporate tax portion of Pihlajalinna’s tax foorprint is EUR 5,3 (4,2) million. Tax footprint EUR million 31 December 2021 31 December 2020 Direct tax payable for the period Income tax 5.3 4.2 Employer’s pension contributions 35.3 27.0 Social security contributions 3.2 2.5 Employer’s unemployment insu- rance contributions 3.5 2.5 Contribution to accident insurance and group life insurance 1.6 1.3 Employer contributions, total 43.7 33.3 Property taxes 0.1 0.1 Transfer taxes 0.4 0.4 Direct tax payable for the period, total 49.5 37.9 Value added tax of acquisitions pay- able by the company Value added taxes, estimate 14.3 11.3 Tax for the period Withholding taxes 48.0 43.3 Employee pension contributions 15.8 13.7 Employee unemployment insurance contributions 2.9 2.2 Payroll tax, total 66.7 59.2 Net value-added tax 1.4 1.9 Taxes collected for the period, total 68.1 61.1 Tax footprint 131.9 110.4 Share-based incentive schemes At its meeting on 14 February 2019, the Board of Di- rectors approved the terms of a share-based long-term incentive programme for Pihlajalinna Group’s senior management (LTIP 2019). The incentive programme is eective from 1 January 2019 onwards and it is aimed at the CEO, the Management Team and other key employ- ees selected for inclusion in the programme. LTIP 2019 constitutes a five-year plan period. None of the share rewards received by the key employees thereunder may be sold or transferred prior to 2022, and the share rewards are subject to a two-year transfer restriction for each performance period. In the event that a beneficiary’s employment ends during the transfer restriction period, shares that have already been received must be returned. The key employee is required to have made an invest- ment in Pihlajalinna shares as a precondition for partici- pation in the programme. At the end of the financial year, the incentive programme included 27 key employees. The fixed matching share programme (commitment shares) consisted of a commitment period from the be- ginning of 2019 to the payment of the fixed share reward at the end of 2020. In this scheme, the company matched each key employee’s share investments with additional shares at a fixed rate. A total of 97,000 matching shares were awarded. This figure is the gross reward, from which the applicable taxes were deducted, leaving a net amount of 45,105 shares that were transferred to the participants on 28 December 2020. The shares are subject to a trans- fer restriction, but they are not subject to the obligation to return the shares in the event of termination. The performance- and quality-based matching share plan included three one-year performance periods (the calendar years 2019–2021), during which the participants could earn performance-based additional shares, provid- ed that the company reached the performance objectives set by the Board of Directors. Based on each individual performance period, the participant can earn a maximum of two additional shares for three shares invested without consideration (gross before the deduction of the appli- cable payroll tax). The performance-based share rewards will be delivered after the respective performance periods according to the programme in the spring of 2020, 2021 and 2022. No performance- and quality-based share rewards ma- terialised for the first performance period 2019 pursuant to the matching share plan, as the minimum objectives set for the programme were not achieved. For the second performance period 2020, the gross reward for the Group’s management was 56,583 shares. The net amount of 26,546 shares were paid to the partic- ipants on 25 February 2021. These shares are subject to a transfer restriction, but they are not subject to the obliga- tion to return the shares in the event of termination. 43 BUSINESS AND STRATEGY | SUSTAINABILITY | REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS The performance targets for the performance period 2021 were related to the achievement of the consolidat- ed adjusted operating profit target for 2021, the devel- opment of the customer satisfaction index (NPS) and employee net promoter score (eNPS), the growth of the share of internal production in specialised care, the im- plementation of the eciency improvement programme for municipal companies and items that may, according to the management estimate, have a delayed impact on the profitability of complete outsourcing agreements. For the performance period 2021, the gross reward for the Group’s management is 18,816 shares. The shares are expected to be transferred to the participants in February 2022. The shares are subject to a transfer restriction. Repurchase of own shares During the period 15 January–21 January 2021, Pihlajalinna acquired a total of 60,000 of its own shares for an aver- age price of EUR 9.70 per share. Following the repurchase, Pihlajalinna held a total of 62,294 of its own shares, which was approximately 0.28 per cent of the total number of shares. On 25 February 2021, Pihlajalinna conveyed 26,546 shares held by the company to key employees in accordance with the incen- tive programme. On 11 May 2021, Pihlajalinna conveyed 9,848 shares held by the company as part of the fees of the Board of Directors in accordance with the decision of the Annual General Meeting. After the share transfers, the number of treasury shares held by the company was 25,900 shares at the end of the financial period. The treasury shares can be used for payments under the incentive scheme currently in eect. The Board of Directors’ proposal for profit distribution and the Annual General Meeting 2022 The Board of Directors proposes that a dividend of EUR 0.30 per share be paid for the financial year that ended on 31 December 2021. Calculation of the parent compa- ny’s distributable funds: EUR 31.12.2021 Reserve for invested unrestricted equity 183,190,483.50 Retained earnings 26,152,278.97 Profit for the period 13,893,203.86 Capitalised development costs -488,602.20 Total 222,747,364.13 On the balance sheet date, the number of shares entitling their holder to dividend was 22,594,235, and consequent- ly, the total dividend amount would be EUR 6,778,270.50. 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 distribution does not jeopardise the company’s ability to fulfil its obliga- tions. Earnings per share for the financial year was EUR 0.89. The proposed dividend of EUR 0.30 is 33.7 per cent of earnings per share. Pihlajalinna Plc’s Annual General Meeting will be held on 13 April 2022 in Tampere. The Board of Directors will decide on the notice of the General Meeting and the included proposals at a later date. The annual report for 2021, including the Board of Directors’ report and the financial statements, will be published on the company’s investor website at investors. pihlajalinna.fi in week 12. Pihlajalinna’s outlook for 2022 Pihlajalinna’s full year consolidated revenue is expected to increase substantially, and full year adjusted operating profit before the amortisation and impairment of intangi- ble assets (EBITA) is expected to be on a par with 2021. Due to Pohjola Hospital integration and potential ecien- cy improvement plans in municipal companies, the first half of the year will be below the bar of the previous year. The acquisition of Pohjola Hospital will increase consol- idated revenue by at least EUR 50 million in the financial year 2022. Revenue from COVID-19 services is expected to decline from the level of 2021. In 2022, Pihlajalinna will focus on the integration of Pohjola Hospital operations to be a seamless part of its Medical Center for All of Finland -concept. Maintaining profitability on a par with 2021 will require success in increasing supply, realization of the planned synergies of the acquisition, and successfull implementation of potential eciency improvements in municipal companies. Corporate Governance Statement Pihlajalinna publishes its Corporate Governance State- ment 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 Corpo- rate Governance Code is maintained on the investor site at investors.pihlajalinna.fi. Statement of non-financial information Pihlajalinna’s first sustainability report according to GRI-standard (Global Reporting Initiative) includes state- ment of non-financial information. Sustainability report is published on the company’s investor website at investors. pihlajalinna.fi at the same time as the Board of Directors’ report during week 12. Events after the financial period Pihlajalinna and Pohjola Hospital were combined The Finnish Competition and Consumer Authority (FCCA) unconditionally approved the combining of Pihlajalinna and Pohjola Hospital. The acquisition is an important el- ement of Pihlajalinna growth strategy, and it strengthens the combined entity’s service portfolio in all healthcare specialities. The business combination also enables the geographical expansion of the service network, espe- cially in the Helsinki Metropolitan Area and other growth centers. Growth potential is further strengthened by the new five-year service agreement signed with Pohjola In- surance in connection with the deal. The transaction was completed on 1 February 2022. As previously announced, the net debt-free purchase price, paid in cash, was EUR 31.8 million. Pohjola Hos- 44 BUSINESS AND STRATEGY | SUSTAINABILITY | REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS pital revenue was EUR 62.5 million in 2021 and EUR 59.4 million in 2020. Established in 2013, Pohjola Hospital is a hospital chain specialising in orthopedics, i.e. a treatment of musculoskeletal dis- orders and accidents. Pohjola Hospital operates in five university hospital cities: Helsinki, Tampere, Turku, Oulu and Kuopio. The company had an average of 295 employees and over 300 practitioners in 2021. The proposals of Pihlajalinna Plc’s Shareholders’ Nomina- tion Board to the Annual General Meeting 2022 The number of members and composition of the Board of Directors The Nomination Board proposes to the Annual General Meeting of Pihlajalinna Plc, scheduled to be held on 13 April 2022, that the number of the members of the Board be confirmed to be seven instead of the current six. The Nomination Board proposes that Hannu Juvonen, Mika Manninen, Leena Niemistö, Kati Sulin, Seija Turunen and Mikko Wirén, currently members of the Board of Directors, be re-elected as members of the Board of Directors. The Nomination Board proposes that Heli Iisakka be elected as a new member of the Board of Directors. Heli Iisakka, born 1968, M.Sc. (Econ.), is the CFO of Colliers Finland Oy. Iisakka is independent of the company and its major shareholders. With regard to the procedure for the election of the members of the Board of Directors, the Shareholders’ Nomination Board rec- ommends that the shareholders vote on the proposal as a whole at the Annual General Meeting. The Nomination Board proposes that the Annual General Meeting elect Mikko Wirén as the Chair- man of the Board and Leena Niemistö as the Vice-Chairman. The Shareholders’ Nomination Board proposes that, due to the ongoing significant changes in the social services and healthcare sector and the company’s significant ongoing strategic develop- ment, the role of the Chairman of the Board of Directors should still be a full-time role for the next term of oce. The Nomination Board’s shared will is that, after this term, the role of the Chairman of the Board of Directors will no longer be a full-time role. Remuneration of the members of the Board of Directors The Shareholders’ Nomination Board proposes that the remunera- tion of the Chairman of the Board of Directors be kept unchanged, and that the remuneration of the Vice-Chairman, the Chairman of the Audit Committee and the members of the Board of Direc- Scope of operations 2021 2020 restated ** 2019 2018 2017 without IFRS 16 Revenue, EUR million 577,8 508,7 518,6 487,8 424,0 Change, % 13,6 -1,9 6,3 15,0 6,2 * Organic revenue growth, EUR million 58,1 -11,3 13,4 -2,0 10,1 Change, % 11,4 -2,2 2,8 -0,5 2,5 * Gross investments, EUR million 44,8 25,4 44,1 160,0 30,4 % of revenue 7,8 5,0 8,5 32,8 7,2 * Capitalised development costs, EUR million 0,0 0,4 0,5 1,3 1,2 % of revenue 0,0 0,1 0,1 0,3 0,3 Employee benefit expenses, EUR million 255,2 214,2 222,0 208,4 175,4 Personnel at the end of the period (NOE) 6 297 5 550 5 815 5 850 4 753 Average number of personnel (FTE) 4 746 4 308 4 515 4 618 3 879 Profitability * EBITDA, EUR million 62,6 52,2 47,8 44,8 33,3 * EBITDA, % 10,8 10,3 9,2 9,2 7,9 * Adjusted EBITDA, EUR million 65,3 54,8 55,7 45,9 34,4 * Adjusted EBITDA, % 11,3 10,8 10,7 9,4 8,1 * Operating profit (EBIT), EUR million 27,9 18,1 10,2 13,2 19,1 * Operating profit, % 4,8 3,6 2,0 2,7 4,5 * Adjusted operating profit (EBIT), EUR million 30,3 20,9 21,4 14,4 16,9 * Adjusted operating profit, % 5,3 4,1 4,1 3,0 4,0 * Adjusted operating profit before the amor- tisation and impairment of intangible assets (EBITA), EUR million 37,3 27,4 28,9 19,6 23,8 * Adjusted EBITA, % 6,5 5,4 5,6 4,0 5,6 Net financial expenses, EUR million -3,7 -4,4 -3,9 -3,8 -1,7 % of revenue -0,6 -0,9 -0,8 -0,8 -0,4 * Profit before tax, EUR million 24,2 13,7 6,3 9,5 17,4 % of revenue 4,2 2,7 1,2 1,9 4,1 Income tax, EUR million -5,1 -4,8 -1,8 -2,7 -3,4 Profit for the period 19,1 8,9 4,5 6,8 14,1 Cash flow after investments, EUR million 24,9 42,8 17,4 -18,8 -25,1 * Return on equity (ROE), % 16,1 8,1 3,8 5,7 13,6 * Return on capital employed (ROCE), % 8,8 5,7 3,1 4,7 11,8 Key financial figures 45 BUSINESS AND STRATEGY | SUSTAINABILITY | REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS Share related information 2021 2020 restated ** 2019 2018 2017 Earnings per share (EPS) 0,89 0,38 0,15 0,16 0,46 * Equity per share, EUR 5,27 4,82 4,47 5,36 4,87 Dividend per share, EUR (the Board of Directors’ pro- posal) 0,30 0,20 0,10 0,16 * Dividend per share, % (the Board of Directors’ pro- posal) 33,72 51,80 64,0 34,7 * Eective dividend yield, % (the Board of Directors’ proposal) 2,37 2,13 1,2 1,2 Number of shares at year-end 22 594 235 22 617 841 22 620 135 22 620 135 20 613 146 Average number of shares 22 589 383 22 586 212 22 620 135 22 224 236 20 613 146 Market capitalisation, EUR million 285,6 212,2 345,6 195,0 274,0 Dividends paid, EUR million (the Board of Directors’ proposal) 6,8 4,5 2,3 3,3 * P/E ratio 14,21 24,39 102,71 55,1 28,9 Highest quotation, EUR 12,98 15,66 15,88 15,28 18,42 Lowest quotation, EUR 9,26 8,72 8,70 8,56 12,60 Average quotation, EUR 11,18 12,09 12,77 12,18 16,30 Closing price at year-end, EUR 12,64 9,38 15,28 8,62 13,34 * Trading volume of shares, 1,000 shares 6 929 6 620 4 062 6 182 5 189 * Trading volume of shares, % 30,7 29,3 18,0 27,8 25,2 * Alternative performance measure ** Pihlajalinna has changed its accounting policies and begun to retrospectively apply, eective from 1 January 2020, the IFRS Interpretations Committee’s Agenda Decision published in April 2021 regarding the recognition of configuration or customisation costs in a cloud computing arrangement (Software as a Service, SaaS). Funding and financial position 2021 2020 restated ** 2019 2018 2017 without IFRS 16 Interest-bearing net financial debt, EUR million 194,7 194,8 192,7 178,0 34,2 % of revenue 33,7 38,3 37,2 36,5 8,1 * Equity ratio, % 26,9 25,9 24,3 29,9 41,8 * Gearing, % 158,8 170,6 181,7 136,6 32,3 * Net debt/adjusted EBITDA 3,0 3,6 3,5 3,9 1,0 tors be increased, with the following annual remuneration to be paid to the members of the Board of Directors to be elected at the Annual General Meeting for the term of oce ending at the close of the Annual General Meeting 2023: to the Chairman of the Board of Directors EUR 250,000; to the Vice-Chairman EUR 39,000, and to members EUR 26,000. The proposal is that the annual remuneration to be paid in company shares and cash so that about 40 per cent of the remuneration is used to purchase the company’s shares on behalf of the members and the remaining share of the remuneration is 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, 13 April 2022, 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 shares can be paid by transferring company shares in possession of the company to the members of the Board of Directors or by purchasing shares directly on behalf of the Board members within three weeks after the interim report for the period of 1 January–31 March 2022 has been published. If this is not possible due to legal or other regulatory reasons, such as insider regulations, the shares will be transferred or purchased at the earliest possible time thereafter or, alternatively, the remuneration will be paid in cash. If the term of a Board member ends before the Annual General Meeting of 2023, the Board is entitled to decide on the possible recovery of the remuneration in a manner it deems appropriate. The Nomination Board proposes that each member of the Board of Directors be paid a cash attendance fee of EUR 500 per Board or Com- mittee meeting. Reasonable travel expenses will also be reimbursed to the members of the Board in accordance with the company’s travel policy. 46 BUSINESS AND STRATEGY | SUSTAINABILITY | REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS EUR 1,000 Q4/21 Q3/21 Q2/21 Q1/21 Q4/20 Q3/20 Q2/20 Q1/20 Income statement Revenue 154 721 140 622 142 545 139 887 137 194 123 855 114 659 132 974 Other operating income 1 644 698 241 1 121 472 634 937 336 Materials and services -56 325 -49 273 -50 719 -53 201 -53 539 -47 496 -44 202 -52 740 "Employee benefit expenses" -69 278 -60 536 -64 100 -61 250 -55 478 -50 093 -52 296 -56 368 Other operating expenses -16 221 -13 303 -12 941 -11 695 -13 580 -10 408 -10 605 -12 092 EBITDA 14 542 18 208 15 025 14 862 15 068 16 491 8 493 12 111 Adjusted EBITDA 14 889 19 339 15 884 15 223 15 780 17 240 9 060 12 693 Adjusted EBITDA, % 9,6 13,8 11,1 10,9 11,5 13,9 7,9 9,5 Depreciation, amortisation and impairment -8 961 -8 797 -8 478 -8 465 -8 314 -8 623 -8 336 -8 750 Operating profit (EBIT) 5 581 9 411 6 547 6 397 6 754 7 869 157 3 361 Adjusted operating profit (EBIT) 6 030 10 470 7 155 6 691 7 331 8 656 668 4 243 Adjusted operating profit (EBIT), % 3,9 7, 4 5,0 4,8 5,3 7,0 0,6 3,2 Adjusted operating profit before the amortisation and impairment of intangible assets (EBITA) 7 837 12 252 8 929 8 317 8 956 10 289 2 272 5 908 Adjusted EBITA, % 5,1 8,7 6,3 5,9 6,5 8,3 2,0 4,4 Financial income 58 64 62 58 50 73 64 46 Financial expenses -1 063 -935 -1 006 -952 -1 066 -1 100 -1 075 -1 396 Profit before taxes 4 576 8 539 5 603 5 502 5 738 6 842 -854 2 011 Income taxes -1 234 -1 702 -1 107 -1 088 -2 789 -1 511 53 -589 Profit for the period 3 342 6 838 4 496 4 415 2 949 5 331 -801 1 422 Share of the result for the financial year attribu- table to owners of the parent company 4 257 6 978 4 335 4 524 3 400 4 531 -531 1 287 Share of the result for the financial year attribu- table to non-controlling interests -915 -140 161 -110 -452 800 -269 136 EPS 0,19 0,31 0,19 0,20 0,15 0,20 -0,02 0,06 Personnel at the end of the period (NOE) 6 297 5 750 6 000 5 783 5 550 5 882 5 640 5 535 Change in personnel during the quarter 547 -250 217 233 -332 243 105 21 * Pihlajalinna has changed its accounting policies and begun to retrospectively apply, eective from 1 January 2020, the IFRS Interpretations Committee’s Agenda Decision published in April 2021 regarding the r ecognition of configuration or customisation costs in a cloud computing arrangement (Software as a Service, SaaS). Quarterly information 47 BUSINESS AND STRATEGY | SUSTAINABILITY | REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS Key figures Earnings per share (EPS) Profit for the financial period attributable to owners of the parent company 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) Eective 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 liabilities (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 EBITDA Operating profit + depreciation, amortisation and impairment + adjustment items Adjusted EBITDA, % Operating profit + depreciation, amortisation and impairment + adjustment items x 100 Revenue Adjusted operating profit before the amortisation and impairment of intangible assets (EBITA) Operating profit + adjustment items + amortisation and impairment of intangible assets Adjusted EBITA, % Adjusted operating profit before the amortisation and impairment of intangible assets (EBITA) x 100 Revenue Net debt/Adjusted EBITDA, rol- ling 12 months Interest-bearing net debt - cash and cash equivalents Adjusted EBITDA (rolling 12 months) Cash flow after investments Net cash flow from operating activities + net cash flow from investing activities Adjusted operating profit (EBIT) Operating profit + adjustment items Adjusted operating profit, % 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 assets Organic revenue growth, % Revenue for the period - revenue from M&A transac- tions for the period - revenue for the previous period x 100 Revenue for the previous period Calculation of key financial figures and alternative performance measures * 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 aect cash flow are treated as adjustment items aecting 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 also presents costs according to the IFRS Interpretations Committee’s new Agenda Decision concerning cloud computing arrangements, and reversals of amortisation, as adjustment items. Adjusted operating profit before the amortisation and impairment of intangible assets (EBITA) is presented as a new alternative performance measure. 48 BUSINESS AND STRATEGY | SUSTAINABILITY | REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS 2021 2020 Return on equity (ROE), % Profit for the period (rolling 12 months)/ 19 091 8 901 Equity at beginning of period 114 190 105 323 Equity at end of period 122 611 114 190 Equity (average) x 100 118 400 109 756 Return on equity (ROE), % 16,1 8,1 Return on equity is one of the most important indicators of a company’s profitability used by sha- reholders and investors. The indicator illustrates the company’s ability to look after the capital invested by shareholders in the company. The figure indicates how much return was accumulated on equity during the financial year. Return on capital employed (ROCE), % 2021 2020 Profit before taxes (rolling 12 months) + 24 222 13 737 Financial expenses (rolling 12 months) 3 956 4 637 / 28 178 18 373 Total statement of financial position at beginning of period - 441 337 437 685 non-interest-bearing liabilities at beginning of period 119 031 112 655 322 306 325 030 Total statement of financial position at end of period - 457 066 441 337 Non-interest-bearing liabilities at end of period 135 479 119 031 321 587 322 306 Average x 100 321 947 323 668 Return on capital employed (ROCE), % 8,8 5,7 Return on capital employed is one of the most important indicators produced by financial state- ments analysis. It measures the company’s relative profitability, or the return on capital invested in the company that requires interest or other returns. Equity ratio, % 2021 2020 Equity/ 122 611 114 190 Total statement of financial position – 457 066 441 337 Advances received x 100 938 1 158 Equity ratio, % 26,9 25,9 The equity ratio measures the company’s solvency, the capacity to tolerate losses and the ability to manage commitments in the long term. The indicator shows the percentage of the company’s assets that are financed by equity. Gearing, % 2021 2020 Interest-bearing financial liabilities – 198 977 208 117 Cash and cash equivalents/ 4 257 13 306 Equity x 100 122 611 114 190 Gearing, % 158,8 170,6 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. The second financial covenant of the Group’s financing arrangements is the gearing ratio. The maximum value of this key figure is 115% excluding the eect of IFRS 16 (frozen GAAP). On the financial state- ments date, gearing calculated according to the financing agreement was 91%. Net debt/adjusted EBITDA, rolling 12 months 2021 2020 Interest-bearing financial liabilities - 198 977 208 117 Cash and cash equivalents 4 257 13 306 Net debt/ 194 720 194 810 Adjusted EBITDA (rolling 12 months) 65 336 54 773 Net debt/adjusted EBITDA, rolling 12 months 3,0 3,6 This figure illustrates how quickly, at the current profit rate, the company would have paid o its debts if the EBITDA were to be used in full to repay the debts, if the company does not, for example, invest or distribute any dividend. The second financial covenant linked to the Group’s financing arrangement is based on the ratio of the Group’s net debt to pro forma EBITDA (leve- rage). The maximum value of the covenant linked to the financing arrangement is 3.75. The closer the value of the covenant is to the maximum value, the higher the loan margin. The Group’s mana- gement and Board of Directors monitor the fulfilment of the covenant on a monthly basis and the covenant is reported to the lenders on a quarterly basis. The covenant calculations are also updated with forecasts whenever the Group is about to carry out a significant acquisition. On the financial statements date, leverage calculated according to the financing agreement was 2.30. 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 management 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 mea- sures and the justifications for their presentation. Reading notes: /divide by the next number/numbers - deduct the next number/numbers + add the next number/numbers 49 BUSINESS AND STRATEGY | SUSTAINABILITY | REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS EBITDA and Adjusted EBITDA 2021 2020 Profit for the period 19 091 8 901 Income taxes -5 130 -4 835 Financial expenses -3 956 -4 637 Financial income 242 232 Depreciation, amortisation and impairment -34 701 -34 023 EBITDA 62 638 52 164 IFRS 3 costs 1 428 124 Entries related to the IFRIC Agenda Decision concerning cloud computing arrangements 563 282 Other EBITDA adjustments 707 2 204 Total EBITDA adjustments 2 698 2 609 Adjusted EBITDA 65 336 54 773 EBITDA indicates how much is left of the company’s revenue after deducting operating expenses. Assessments of whether EBITDA is suciently high should take into account the company’s finan- cial expenses, depreciation requirements and intended profit distribution. Adjusted EBITDA provides significant additional 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. EBITDA, % 2021 2020 EBITDA/ 62 638 52 164 Revenue x 100 577 774 508 682 EBITDA, % 10,8 10,3 Adjusted EBITDA, % 2021 2020 Adjusted EBITDA/ 65 336 54 773 Revenue x 100 577 774 508 682 Adjusted EBITDA, % 11,3 10,8 Operating profit (EBIT), adjusted EBIT and adjusted EBITA 2021 2020 Profit for the period 19 091 8 901 Income taxes -5 130 -4 835 Financial expenses -3 956 -4 637 Financial income 242 232 Operating profit (EBIT) 27 936 18 141 Entries related to the IFRIC Agenda Decision concerning cloud computing arrangements -290 -232 Other adjustments to amortisation and impairment, total 1 381 Total EBITDA adjustments 2 698 2 609 Total operating profit (EBIT) adjustments 2 410 2 758 Operating profit (EBIT), % 2021 2020 Operating profit/ 27 936 18 141 Revenue x 100 577 774 508 682 Operating profit (EBIT), % 4,8 3,6 Adjusted operating profit (EBIT), % 2021 2020 Adjusted operating profit/ 30 346 20 899 Revenue x 100 577 774 508 682 Adjusted operating profit (EBIT), % 5,3 4,1 Adjusted operating profit before the amortisation and impairment of intangible assets (EBITA), % 2021 2020 Adjusted operating profit before the amortisation and impairment of intangible assets (EBITA)/ 37 335 27 424 Revenue x 100 577 774 508 682 Adjusted EBITA, % 6,5 5,4 Cash flow after investments 2021 2020 Net cash flow from operating activities 56 936 46 904 Net cash flow from investing activities -32 064 -4 124 Cash flow after investments 24 873 42 780 Cash flow after investments (free cash flow) indicates how much cash is left for the company after deducting 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 company’s profitability is, and it is used as the basis of the company’s valuation. Adjusted operating profit (EBIT) 30 346 20 899 PPA amortisation 2 985 3 097 Amortisation and impairment of other intangible assets 3 714 3 197 Entries related to the IFRIC Agenda Decision concerning cloud computing arrangements 290 232 Adjusted operating profit before the amortisation and impair- ment of intangible assets (EBITA) 37 335 27 424 Operating profit indicates how much is left of the proceeds of actual business operations before finan- cial items and taxes. With operating profit, the company must cover, among other things, financial e xpenses, taxes and the distribution of dividends. Adjusted operating profit provides significant addi- tional information on profitability by eliminating items that do not necessarily reflect the profitabi- lity of the company’s operative business. Adjusted operating profit improves comparability between periods and is fr equently used by analysts, investors and other parties. The Group Management Team and operative management monitor and forecast adjusted opera - ting profit (EBIT) and adjusted operating profit before the amortisation and impairment of intangible as sets (EBITA) on a monthly basis. 50 BUSINESS AND STRATEGY | SUSTAINABILITY | REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS Organic revenue growth, % 2021 2020 Revenue for the period - 577 774 508 682 Revenue from M&A transactions during the period 11 008 1 424 Revenue for the previous period 508 682 518 596 Organic revenue growth/ 58 084 -11 338 Revenue for the previous period x 100 508 682 518 596 Organic revenue growth, % 11,4 -2,2 Revenue growth due to M&A transactions, % 2,2 0,3 Revenue growth 69 092 -9 914 Revenue growth, % 13,6 -1,9 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 oering, new customer acquisition, growth in custom from existing customers, price increases and digitalisa- tion. Social and healthcare outsourcing contracts won through public competitive bidding and new business locations established by the group itself are included in organic growth. The adjustment items are presented in the income statement items as follows: 2021 2020 Employee benefit expenses 414 1 457 Other operating expenses 2 285 1 152 EBITDA adjustment items total 2 698 2 609 Depreciation, amortisation and impairment -288 149 Operating profit adjustment items total 2 410 2 758 * Pihlajalinna has changed its accounting policies and begun to retrospectively apply, eective from 1 January 2020, the IFRS Interpretations Committee’s Agenda Decision published in April 2021 regar- ding the recognition of configuration or customisation costs in a cloud computing arrangement (Software as a Service, SaaS). * The definition of adjustment items has changed: in addition to the former definition, adjustment items include costs of business acquisitions, costs recognised in relation to the IFRS Interpreta- tions Committee’s new Agenda Decision regarding cloud services, and reversals of depreciation. 2021 2020 EBITDA 62 638 52 164 Adjustments to EBITDA Dismissal-related expenses 414 -60 Compensation under the share-based incentive scheme in relation to the expired tender oer 1 517 Onerous contracts -225 IFRS 3 costs 1 428 124 Entries related to the IFRIC Agenda Decision concerning cloud compu- ting arrangements 563 282 Other 518 747 Adjustments to EBITDA in total 2 698 2 609 Adjusted EBITDA 65 335 54 772 Depreciation, amortisation and impairment -34 701 -34 023 Adjustments to depreciation, amortisation and impairment Double depreciation arising from a merger with no cash flow eect 354 Entries related to the IFRIC Agenda Decision concerning cloud compu- ting arrangements -290 -232 Closure of operating locations 1 26 Adjustments to depreciation, amortisation and impairment in total -288 149 PPA amortisation 2 985 3 097 Amortisation and impairment of other intangible assets, excluding cloud services 4 004 3 428 Amortisation and impairment of intangible assets, total 6 988 6 525 Adjusted operating profit before the amortisation and impairment of intangible assets (EBITA) 37 335 27 424 Operating profit (EBIT) 27 936 18 141 Financial income 242 232 Financial expenses -3 956 -4 637 Income taxes -5 130 -4 835 Profit for the period 19 091 8 901 Profit before taxes 2021 2020 Profit for the period 19 091 8 901 Income tax -5 130 -4 835 Profit before taxes 24 222 13 737 Gross investments 2021 2020 Property, plant and equipment at the end of the period 44 989 43 996 Right-of-use assets at the end of the period 95 586 102 832 Other intangible assets at end of period 14 866 15 336 Goodwill at end of period 188 909 173 607 Depreciation, amortisation and impairment for the period are added 34 701 34 023 - Property, plant and equipment at the start of the period 43 996 53 237 Right-of-use assets at the start of the period 102 832 108 109 Other intangible assets at beginning of the period 15 336 18 133 Goodwill at beginning of the period 173 607 173 607 Proceeds from the sale of property, plant and equipment during the period -1 503 -8 700 Gross investments 44 784 25 409 Gross investments refers to the acquisition of long-term factors of production, including M&A transactions. Divestments and proceeds from the sale of property, plant and equipment are not deducted from investments. Investments are also presented on a cash flow basis in the cash flow statement. 51 BUSINESS AND STRATEGY | SUSTAINABILITY | REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS Shares and shareholders Major shareholders, 31 Dec. 2021 Number of shares Percentage of shares and votes 1 LOCALTAPIOLA GENERAL MUTUAL INSURANCE COMPANY 3 481 641 15,4 % 2 MWW YHTIÖ OY 2 309 010 10,2 % 3 FENNIA MUTUAL INSURANCE COMPANY 1 998 965 8,8 % 4 LOCALTAPIOLA MUTUAL LIFE INSURANCE COMPANY 1 893 985 8,4 % 5 ELO MUTUAL PENSION INSURANCE COMPANY 1 267 161 5,6 % 6 NIEMISTÖ LEENA KATRIINA 704 687 3,1 % 7 ILMARINEN MUTUAL PENSION INSURANCE COMPANY 628 431 2,8 % 8 SKANDINAVISKA ENSKILDA BANKEN AB (PUBL), HELSINKI BRANCH 497 093 2,2 % 9 FONDITA NORDIC MICRO CAP MUTUAL FUND 470 000 2,1 % 10 OP-FINLAND SMALL CAP FUND 383 175 1,7 % 10 largest, total 13 634 148 60,3 % Other shareholders 8 985 987 39,7 % Total 22 620 135 100,0 % Distribution of shareholding by size range, 31 Dec. 2021 Shares per shareholder Number of shareholders % of shareholders Number of shares Percentage of shares, % 1 - 100 8 307 54,9 % 370 257 1,6 % 101 - 1 000 5 938 39,3 % 2 057 759 9,1 % 1 001 - 10 000 771 5,1 % 2 133 191 9,4 % 10 001 - 100 000 90 0,6 % 2 617 582 11,6 % 100 001 - 500 000 13 0,1 % 3 157 466 14,0 % 500 001 - 7 0,0 % 12 283 880 54,3 % Total 100,0 % 22 620 135 100,0 % of which nominee-registered shares 867 727 3,8 % Outstanding shares 22 620 135 100,0 % 1–100 Shares per shareholder 1,6% 101–1000 9,1% 1001–10000 9,4% 10001–100000 11,6 % 100001–500000 14,0% 500001– 54,3% Distribution of shareholding by size range, 31 Dec. 2021 52 BUSINESS AND STRATEGY | SUSTAINABILITY | REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS Distribution of shareholding by sector, 31 Dec. 2021 Number of shareholders % of shareholders Number of sharesl Percentage of shares, % Private companies 534 3,5 % 4 360 877 20,0 % Financial and insurance institutions 46 0,3 % 9 391 463 43,2 % Public entities 6 0,0 % 2 047 965 9,4 % Households 14 469 95,7 % 5 792 445 26,6 % Non-profit organisations 39 0,3 % 133 408 0,6 % Foreign shareholders 32 0,2 % 26 250 0,1 % Total 15 126 100,0 % 21 752 408 96,2 % Nominee registered 867 727 3,8 % Outstanding shares 22 620 135 100,0 % Shareholding by the management Direct holding Indirect holdings Number of shares Percentage of shares and votes Number of shares Percentage of shares and votes Board of Directors Mikko Wirén (MWW Yhtiö Oy) 2 309 010 10,2 % Mikko Wirén 5 000 0,0% Leena Niemistö 704 687 3,1 % Hannu Juvonen 808 0,0 % Mika Manninen 808 0,0 % Kati Sulin 808 0,0 % Seija Turunen 1 212 0,0 % Management Team Joni Aaltonen 37 524 0,2 % Teija Kulmala 14 819 0,1 % Tarja Rantala 16 270 0,1 % Elina Heliö 1 743 0,0 % Marko Savolainen 9 815 0,0 % Juha-Pekka Halttunen 6 094 0,0 % Antti-Jussi Aro 500 0,0 % Riihijärvi Sari 0 0,0 % Private companies 20,0% Financial and insurance institutions 43,2% Public entities 9,4% Households 26,6% Non-profit organisations 0,6% Foreign shareholders 0,1% Distribution of shareholding by sector, 31 Dec. 2021 53 BUSINESS AND STRATEGY | SUSTAINABILITY | REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS Financial statements 1 Jan–31 Dec 2021 CONTENTS Main statements included in the consolidated financial statements, IFRS Consolidated statement of comprehensive income, IFRS 55 Consolidated statement of financial position, IFRS 55 Consolidated statement of cash flows, IFRS 56 Consolidated statement of changes in equity, IFRS 57 Notes to the consolidated financial statements, IFRS Category No. Description Accounting policies 58 New and revised standards and interpretations applied in the past financial year 58 New and revised standards and interpretations to be applied in future financial years 60 Income statement 1 Revenue from contracts with customers and segment information 62 Income statement 2 Other operating income 64 Income statement 3 Materials and services 65 Income statement 4 Employee benefit expenses and the number of person- nel 65 Income statement 5 Share-based incentive scheme for key personnel 66 Income statement 6 Other operating expenses and audit fees 66 Income statement 7 Depreciation, amortisation and impairment 67 Income statement 8 Financial income 68 Income statement 9 Financial expenses 68 Income statement, taxes 10 Income taxes 68 EPS 11 Earnings per share 69 Statement of financial position 12 Property, plant and equipment 69 Statement of financial position 13 Intangible assets 71 Statement of financial position 14 Right-of-use assets 74 Statement of financial position 15 Other non-current receivables 75 Statement of financial position 16 Trade receivables and other receivables (current) 75 Statement of financial position 17 Provisions 76 Statement of financial position 18 Trade and other payables 77 Balance sheet, taxes 19 Deferred tax assets and liabilities 77 Equity 20 Financial assets and liabilities by measurement cate- gory 79 Equity 21 Notes on equity 81 Equity 22 Financial liabilities 81 Equity 23 Changes in financial liabilities with no impact on cash flow 82 Equity 24 Capital management 82 Risk management 25 Financial risk management 82 Group structure 26 Business combinations 84 Group structure 27 Subsidiaries and material non-controlling interests 85 Group structure 28 Interests in associates and joint arrangements 86 Other 29 Contingent assets and liabilities and commitments 86 Other 30 Related party transactions 87 Other 31 Events after the balance sheet date 88 Parent company financial statements, FAS Parent company balance sheet FAS 90 Parent company income statement FAS 90 Parent company cash flow statement FAS 90 Parent company notes to financial statements, FAS Parent company notes to financial statements, FAS 91 Date of and signatures to the report by the board of directors and the financial statements 96 Auditor’s report 97 Information for shareholders 101 54 BUSINESS AND STRATEGY | SUSTAINABILITY | REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS Consolidated statement of comprehensive income, IFRS EUR 1,000 note 1.1.-31.12.2021 1.1.-31.12.2020 Restated Revenue 1 577 774 508 682 Other operating income 2 3 704 2 379 Materials and services 3 -209 516 -197 977 Employee benefit expenses 4 -255 164 -214 235 Other operating expenses 6 -54 151 -46 678 Share of profit in associated companies and joint ventures 28 -9 -7 EBITDA 62 638 52 164 Depreciation, amortisation and impairment 7 -34 701 -34 023 Operating profit (EBIT) 27 936 18 141 Financial income 8 242 232 Financial expenses 9 -3 956 -4 637 Financial income and expenses -3 715 -4 404 Profit before taxes 24 222 13 737 Income tax 10 -5 130 -4 835 Profit for the period 19 091 8 901 Total comprehensive income for the period 19 091 8 901 To the owners of the parent company 20 095 8 687 To non-controlling interests Earnings per share for profit attributable to owners of the parent company, EUR -1 004 214 Basic 11 0.89 0.38 Diluted 0.89 0.38 * Pihlajalinna has changed its accounting policies and begun to retrospectively apply, eective from 1 January 2020, the IFRS Interpretations Committee’s Agenda Decision published in April 2021 regarding the recognition of configuration or customisation costs in a cloud computing arrangement (Software as a Service, SaaS). Consolidated statement of financial position, IFRS EUR 1,000 note 31.12.2021 31.12.2020 Restated Property, plant and equipment 12 44 989 43 996 Goodwill 13 188 909 173 607 Other intangible assets 13 14 866 15 336 Right-of-use assets 14 95 586 102 832 Interests in associates 28 308 17 Other investments 1 176 126 Other receivables 15 5 211 5 503 Deferred tax assets 19 5 484 5 555 356 529 346 973 note 31.12.2021 31.12.2020 Inventories 3 705 3 400 Trade and other receivables 16 92 143 75 771 Current tax assets 433 1 886 Cash and cash equivalents 4 257 13 306 100 537 94 364 Total assets 457 066 441 337 Share capital 80 80 Reserve for invested unrestricted equity 116 520 116 520 Retained earnings 2 501 -7 633 119 101 108 967 Non-controlling interests 3 510 5 223 Total equity 122 611 114 190 Deferred tax liabilities 19 5 884 5 761 Provisions 17 134 114 Lease liabilities 22 87 857 95 475 Financial liabilities 20 91 445 92 523 Other non-current liabilities 1 002 1 152 186 321 195 024 Trade and other payables 18 125 107 109 352 Current tax liabilities 3 282 2 004 Provisions 17 71 648 Lease liabilities 22 18 392 18 705 Financial liabilities 20 1 283 1 415 148 135 132 124 Total liabilities 334 455 327 147 Total equity and liabilities 457 066 441 337 * Pihlajalinna has changed its accounting policies and begun to retrospectively apply, eective from 1 January 2020, the IFRS Int erpretations Committee’s Agenda Decision published in April 2021 regarding the recognition of configuration or customisation costs in a cloud computing arrangement (Software as a Service, SaaS). 55 BUSINESS AND STRATEGY | SUSTAINABILITY | REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS Consolidated statement of cash flows, IFRS EUR 1,000 note 1.1. - 31.12.2021 1.1. - 31.12.2020 Restated Profit for the period 19 091 8 901 Taxes 5 130 4 835 Depreciation, amortisation and impairment 34 701 34 023 Financial income and expenses 3 724 4 411 Other -45 -66 Net cash generated from operating activities before change in working capital 62 601 52 105 Change in working capital -3 336 -1 830 Interest received 235 223 Taxes paid -2 564 -3 594 Net cash flow from operating activities 56 936 46 904 Investments in property, plant and equipment and intangible assets -14 833 -9 597 Proceeds from disposal of property, plant and equipment and intangible assets 526 6 843 Changes in other investments -1 350 20 Dividends received 7 10 Acquisition of subsidiaries less cash and cash equivalents at date of acquisition 26 -16 414 -1 400 Net cash flow from investing activities -32 064 -4 124 Acquisitions of non-controlling interests -3 017 -18 282 Acquisition of own shares -582 -692 Repayment of short-term borrowings 23 0 -501 Proceeds from long-term borrowings 23 20 000 0 Repayment of long-term borrowings 23 -21 584 -11 675 Repayment of lease liabilities 23 -19 822 -20 604 Interest and other operational financial expenses -3 986 -4 512 Dividends paid and other profit distribution -4 932 -212 Net cash flow from financing activities -33 923 -56 477 Changes in cash and cash equivalents -9 050 -13 697 Cash at the beginning of the financial year 13 306 27 004 Cash at the end of the financial year 4 257 13 306 * Pihlajalinna has changed its accounting policies and begun to retrospectively apply, eective from 1 January 2020, the IFRS Interpretations Committee’s Agenda Decision published in April 2021 regarding the recognition of configuration or customisation costs in a cloud computing arrangement (Software as a Service, SaaS). 56 BUSINESS AND STRATEGY | SUSTAINABILITY | REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS Consolidated statement of changes in equity, IFRS Equity attributable to owners of the parent company Share capital Reserve for invested unrestricted equity Retained earnings Non-controlling interests Total equity Total equity, 1 Jan. 2020 80 116 520 -15 481 4 965 106 083 IFRIC Agenda Decision concerning the customisation and configuration costs of cloud computing arrangements -761 -761 Restated equity, 1 Jan. 2020 80 116 520 -16 242 4 965 105 323 Profit for the period, reported 8 687 214 8 901 Total comprehensive income for the period 8 687 214 8 901 Dividends paid -312 -312 Acquisition of own shares -692 -692 Share-based benefits 1 312 0 1 312 Total transactions with owners 620 -312 308 Changes in NCI without a change in control -698 356 -342 Total changes in subsidiary shareholdings -698 356 -342 Total equity, 31 Dec. 2020 80 116 520 -7 633 5 223 114 190 Equity attributable to owners of the parent company Share capital Reserve for invested unrestricted equity Retained earnings Non-controlling interests Total equity Total equity, 1 Jan. 2021 80 116 520 -7 633 5 223 114 190 Profit for the financial year 20 095 -1 004 19 091 Total comprehensive income for the period 20 095 -1 004 19 091 Dividends paid -4 517 -315 -4 832 Acquisition of own shares -582 -582 Share-based benefits 14 14 Total transactions with owners -5 085 -315 -5 400 Changes in NCI without a change in control -4 875 -395 -5 270 Total changes in subsidiary shareholdings -4 875 -395 -5 270 Total equity, 31 Dec. 2021 80 116 520 2 501 3 510 122 611 * Pihlajalinna has changed its accounting policies and begun to retrospectively apply, eective from 1 January 2020, the IFRS Interpretations Committee’s Agenda Deci-sion published in April 2021 regarding the recognition of configuration or customisation costs in a cloud computing arrangement (Software as a Service, SaaS). 57 BUSINESS AND STRATEGY | SUSTAINABILITY | REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS Accounting policies Company profile Pihlajalinna is one of the leading private social and health- care service providers in Finland. The Group serves pri- vate persons, companies, insurance companies and public sector entities, such as municipalities and hospital districts. Pihlajalinna provides a broad range of social and healthcare services as well as wellbeing services. The service selection includes general practitioner and medical specialist services, occupational healthcare, social and healthcare outsourcing, fitness centre services, responsible doctor and remote con- sultation services as well as residential services and stang services. 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 140. In addition, Pihlajalinna has four ma- jor complete social and healthcare outsourcing agreements that collectively cover some 60 locations (including 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 do- miciled 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 oce of the Group’s parent company, address Keh- räsaari B, 33200 Tampere, Finland. The Board of Directors of Pihlajalinna Plc approved these financial statements in its meeting on 17 February 2022. In accordance with the Finnish Limited Liability Companies Act, the shareholders may adopt or reject the financial statements at the Annual General Meeting 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 accordance with the International Financial Reporting Stan- dards (IFRS), and their preparation complies with the IAS and IFRS as well as SIC and IFRIC interpretations eective on 31 December 2021. International Financial Reporting Standards, as intended in the Finnish Accounting Act and the regulations issued pursuant to the Act, refer to the standards that have been approved for application within the EU in accordance with Regulation (EC) No. 1606/2002 and interpretations thereof. The notes to the consolidated financial statements also comply with the Finnish accounting and company legisla- tion that complements the IFRS regulations. Accounting policies that influence a particular note to the consolidated 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 accounting policies applied in the finan- cial year that ended on 31 december 2021 Configuration or customisation costs in a cloud computing arrangement – IAS 38 Intangible assets (eective immediately) The Agenda Decision issued by the IFRS Interpretations Com- mittee in April 2021 clarifies the accounting of the costs of configuring or customising a supplier’s application software in a Software as a Service (SaaS) arrangement. The Agenda Decision addresses whether the company that purchases the service can recognise an intangible asset in its balance sheet, and if not, how the configuration or customisation costs are to be treated in accounting. Agenda Decisions are intend- ed to be applied as soon as possible after their publication. Pihlajalinna has changed its accounting policies and begun to retrospectively apply, eective from 1 January 2020, this Agenda Decision regarding the recognition of configuration or customisation costs in a cloud computing arrangement. Retrospective eect on the 2020 financial statements of the IFRIC agenda decision 2020 reported figures Eect of the IFRIC Agenda Decision 2020 restated ASSETS Other intangible assets 16.3 -1.0 15.3 Deferred tax assets 5.4 0.2 5.6 Total non-current assets 347.8 -0.8 347.0 Total Assets 442.1 -0.8 441.3 EQUITY Retained earnings -15.6 -0.8 -16.3 Profit for the period 8.7 0.0 8.7 Total 109.8 -0.8 109.0 Non-controlling interests 5.2 0.0 5.2 Total Equity 115.0 -0.8 114.2 Total Equity and liabilities 442.1 -0.8 441.3 INCOME STATEMENT Other operating expenses -46.4 -0.3 -46.7 EBITDA 52.4 -0.3 52.2 Depreciation, amortisation and impairment -34.3 0.2 -34.0 Operating profit (EBIT) 18.2 0.0 18.1 Profit before taxes 13.8 0.0 13.7 Income tax -4.8 0.0 -4.8 Total comprehensive income for the period 8.9 0.0 8.9 Total comprehensive income for the period attributable: To the owners of the parent company 8,7 0,0 8,7 To non-controlling interests 0.2 0.0 0.2 Cash flow from operating activities decreased and cash 58 BUSINESS AND STRATEGY | SUSTAINABILITY | REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS flow from investing activities increased by EUR 0.6 million due to the application of the Agenda Decision. New and amended standards applied in the past financial year In 2021, the Group has adopted the following amended standards published by the IASB. They are not, however, estimated to have a material eect on Pihlajalinna’s finan- cial statements. COVID-19-related Rent Concessions after 30 June 2021 – Amendments to IFRS 16 Leases (eective from 1 April 2021 for financial years beginning on or after 1 January 2021) The amendment allows lessees to not recognise rent concessions as changes in leases, provided that the con- cessions are a direct consequence of COVID-19 and meet certain conditions. The expedient was not applied to the financial statements for 2021. Interest Rate Benchmark Reform – Phase 2 – Amend- ments to IFRS 9 Financial Instruments, IAS 39 Financial Instruments: Recognition and Measurement, IFRS 7 Financial Instruments: Disclosures, IFRS 4 Insurance Contracts and IFRS 16 Leases (eective for annual peri- ods beginning on or after 1 January 2021) The amendments address issues aecting financial statements when changes are made to contractual cash flows and hedging relationships as a result of interest rate benchmark reform. The amendments assist companies in providing useful information about the eects of interest rate benchmark reform on financial statements. Consolidation principles Subsidiaries Subsidiaries are entities in which the Group exercises control. The Group has control of an entity when it is ex- posed, or has rights, to variable returns from its involve- ment with the entity and has the ability to aect 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 ac- quisition. Acquisition-related costs are expensed. Any contingent consideration is measured at fair value at the date of acquisition and classified as a liability. If the initial accounting for a business combination is incomplete by the end of the reporting period in which the combina- tion occurs, the Group reports in its financial statements provisional amounts for the items for which the account- ing is incomplete. During the measurement period, the Group retrospectively 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 consid- eration 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 assets is recognised as goodwill in the consolidated statement of financial position. If the combined value of the consid- eration, non-controlling interests and previously owned holding is lower than the fair value of the acquiree’s net assets, the dierence is recognised in the statement of comprehensive income. Acquired subsidiaries are consolidated from the date when the Group obtained control, and disposed subsid- iaries are consolidated until the date when the Group lost control. All intragroup transactions, receivables, liabili- ties, unrealised profits and internal profit distribution are eliminated in the preparation of the consolidated financial statements. Unrealised losses will not be eliminated in case of impairment losses. Profit or loss for the financial year attributable to the owners of the parent compa- ny 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 for- mer ownership interest is measured at fair value, and the resulting gain or loss is recognised in profit or loss. When the Group loses control of a subsidiary, any remaining interest is measured at fair value at the date of loss of control, and the resulting dierence is recognised in profit or loss. Associates and joint arrangements 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 involves contractually agreed sharing of control of an arrange- ment, which exists only when decisions 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 arrange- ment 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 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 carried 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 59 BUSINESS AND STRATEGY | SUSTAINABILITY | REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS the goodwill generated through the acquisition. Unre- alised 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 as- sociate’s or a joint venture’s profit for the financial year is included in operating profit. The Group owns 31% in Kiinteistö Oy Levin Pihlaja, which is consolidated 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 presen- tation currency of the Group’s parent company and of the subsidiaries engaged in business activities. 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 makes significant operational decisions at the Group level. The Group operates only in Finland and its management system is based on a regional organ- isation structure. Under Pihlajalinna’s operating structure, the Group’s CEO, with the help of the Chief Operating Ocer (COO) and the other members of the Manage- ment Team, is responsible for the Group’s business operations and service oering to both the private and public sectors. The COO is responsible for preparing the Group businesses’ budgets with the help of the Regional Directors. The Group CEO is responsible for the resourc- es, investments and profitability of the Group’s business- es. Pihlajalinna’s cash-generating unit corresponds to the reporting segment, i.e. the Group. The senior operating decision-maker, Pihlajalinna’s CEO, monitors the Group’s result. Group-level figures are reported as segment infor- mation. Accounting policies requiring manage- ment judgement and major sources of estimation uncertainty In the course of preparing the financial statements, it is necessary to make estimates and assumptions about the future. However, such estimates and assumptions may lat- er 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 chang- es in estimates and assumptions are recognised in the financial year during which the estimate or assumption is corrected and in all subsequent financial years. Addition- ally, it is necessary to exercise judgement in the appli- cation of the accounting policies. The most significant estimates and assumptions are presented under the note in question under the heading Key accounting estimates and decisions based on management judgement. New and revised standards and interpre- tations to be applied in future financial years * = The regulation in question was not approved for appli- cation in the EU by 31 December 2021. Costs of Fulfilling a Contract – Amendments to IAS 37 Provisions, Contingent Liabilities and Contingent Assets (eective for annual periods beginning on or after 1 Jan- uary 2022) When an onerous contract is accounted for based on the costs of fulfilling the contract, the amendments clarify that these costs comprise both the incremental costs and an allocation of other direct costs. Annual Improvements to IFRS Standards 2018–2020 (eective for annual periods beginning on or after 1 Jan- uary 2022). The Annual Improvements process provides a mecha- nism for minor and non-urgent amendments to IFRSs to be grouped together and issued in one package annually. The amendments clarify the following standards: • IFRS 1 First-time Adoption of International Finan- cial Reporting Standards – Subsidiary as a first-time adopter: The amendment simplifies the application of IFRS 1 in a subsidiary that becomes a first-time adopter later than its parent. The subsidiary may elect to measure cumulative translation dierences at the amounts included in the consolidated financial statements of the parent. • IFRS 9 Financial Instruments – Fees in the ‘10 per cent’ test for derecognition of financial liabilities: This amendment clarifies that – for the purpose of performing the ‘10 per cent test’ for derecognition of financial liabilities – in determining those fees paid net of fees received, a borrower includes only fees paid or received between the borrower and the lender, including fees paid or received by either the borrower or lender on the other’s behalf. • IFRS 16 Leases – Lease incentives – example 13: The amendment removes the illustration of payments from the lessor relating to leasehold improvements. The example was not clear as to why such payments are not a lease incentive. • IAS 41 Agriculture – Taxation in fair value measure- ments: The amendment removes a requirement to exclude cash flows from taxation when measuring fair value, thereby aligning the fair value measurement requirements in IAS 41 with those of IFRS 13 Fair Val- ue Measurement. Assumptions concerning cash flows and discount rates should be consistent when using the present value method to measure fair value, i.e. both should be based on either a pre-tax or post-tax discount rate and pre-tax or post-tax cash flows. Property, Plant and Equipment — Proceeds before Intended Use – Amendments to IAS 16 Property, Plant and Equipment (eective for annual periods beginning on or after 1 January 2022) Under the amendments, proceeds from selling items before the related item of PPE is available for use should be recognised in profit or loss, together with the costs of producing those items. Reference to the Conceptual Framework – Amend- ments to IFRS 3 Business Combinations (eective for 60 BUSINESS AND STRATEGY | SUSTAINABILITY | REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS financial years beginning on or after 1 January 2022). The amendments update a reference in IFRS 3 and include further specifications related to updating the reference. IFRS 17 Insurance Contracts (eective for financial years beginning on or after 1 January 2023, early applica- tion permitted for companies that also apply IFRS 9 Fi- nancial Instruments and IFRS 15 Revenue from Contracts with Customers). The new standard for insurance contracts helps inves- tors and other parties better understand insurers’ risk ex- posure, profitability and financial position. This standard replaces the IFRS 4 standard. Classification of Liabilities as Current or Non-current – Amendments to IAS 1 Presentation of Financial State- ments * (eective for financial years beginning on or after 1 January 2023, early application is permitted). The amendments aim to promote consistency in application and clarify the requirements on determining whether a liability is current or non-current. Disclosure of Accounting Policies – Amendments to IAS 1 Presentation of Financial Statements and IFRS Practice Statement 2 Making Materiality Judgements * (eective for financial years beginning on or after 1 Janu- ary 2023, early application is permitted). The amendments clarify the application of the material- ity principle to disclosures of accounting policies. Definition of Accounting Estimates – Amendments to IAS 8 Accounting Policies, Changes in Accounting Esti- mates and Errors * (eective for financial years beginning on or after 1 January 2023, early application is permitted). 61 BUSINESS AND STRATEGY | SUSTAINABILITY | REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS 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 discounts and other adjustment items. 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, rehabilitation services and dental care services. The social services provided by the Group consist of services for the elderly and the disabled, mental health services and substance 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 pro- duces recruitment services related to healthcare profes- sionals. The Group’s Forever fitness centres oer diverse wellbeing services for adults who exercise. Fitness centre services complement Pihlajalinna’s preventive occupa- tional healthcare services and rehabilitation services carried out after specialised care procedures. Pihlaja- linna’s services are also extensively available via digital channels. The Group recognises the remuneration of employed healthcare professionals and contract-based practitioners in revenue on a gross basis, i.e. based on total customer invoicing. According to the management’s view, Pihlaja- linna has primary responsibility for the provision of ser- vices to its customers. Therefore, the Group is involved in a contractual relationship as a principal which is exposed to significant risks and benefits related to the sale of services. The Group records the remuneration of con- tract-based practitioners in the income statement under the item External services. IFRS 15 Revenue from Contracts with Customers includes a five-step model for recognising revenue from contracts with customers: when to recognise revenue, and at what amount. Revenue can be recognised over time or at a point in time, and the passing of control is a key criterion. Pihlajalinna has identified the following principal performance obligations: Social and healthcare outsourcing • statutory social and healthcare services for a munici- pality’s residents, separately described in contracts with customers, including possible public specialised care • individual social and healthcare service visits by resi- dents of other municipalities Private clinics and dental care • individual customer visits to healthcare services at op- erating locations or digitally, including related support services Surgical operations • individual visits and related support services (e.g. pri- vate individuals who pay for their services themselves 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 cus- tomer (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 ser- vices • individual separately charged recruitment services Responsible doctor services • location-specific daily charges described in the cus- tomer agreement Stang service • selling a healthcare professional’s labour event-specifi- cally or based on time • customer-specific monthly fees for emergency and on-call services 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 services ordered by the customer Notes to the consolidated financial statements, IFRS 62 BUSINESS AND STRATEGY | SUSTAINABILITY | REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS The transaction price primarily comprises individual services according to the price list or annual, monthly, daily or hourly rates based on customer agreements. In most cases, the price concerns an individual performance obligation. In some cases, the price includes a variable element of consideration (e.g. discount, penalty charge, bonus, additional price, additional service), which is allocated to one or more performance obligations. 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). The performance obligation in social and healthcare outsourcings is the municipality’s statutory social and healthcare service operations described in the custom- er agreement. Outsourcing arrangements are primarily based on a fixed annual price, and they are recognised as revenue based on the passage of time. The recognition of revenue from the Group’s complete social and healthcare services outsourcing agreements may become more ac- curate with a delay and may also include variable consid- eration. The Group may not always be aware of the actual costs of the agreements, which may also aect revenue recognition. Revenue from individual services is recognised on a treatment visit-specific or service--specific basis based on service use. Key accounting estimates and decisions based on management judgement Determining the annual profitability of the Group’s fixed- term complete social and healthcare services outsourc- ing agreements may become accurate with a delay. The Group may not always be aware of the actual costs of the agreements at the time of preparing the financial state- ments, and the agreements may involve variable elements of compensation. The cost accumulation of public special- ised care involves random fluctuation. In addition, individ- ual cases falling within the scope of the hospital districts’ pooling system for high-cost care may influence the cost liability of specialised care considerably during the finan- cial year, and between financial periods, in Pihlajalinna’s municipal companies.The fixed-term service agreements for all of the Group’s complete outsourcing arrangements are highly similar with regard to their principles and basic terms. Pihlajalinna has calculated and recognised the vari- able compensation components and cost compensation under the agreements using the same criteria and model for all clients. Demands for the compensation of cost increases due to changes in services corresponding to the actual costs and investment costs that serve operations after the end of the term of the contract being the client’s responsibility constitute the majority of costs and variable compensation components that are specified with a delay. For 2021, the assessment of investment costs and COVID-19 related costs included in invoicing by hospital districts can only be carried out after the hospital districts have published their financial statements. Pihlajalinna has recognised only part of these legally justified claims in its income statement. The parties to the agreements are bound by an obligation to negotiate and negotiation is the primary procedure. If the obligation to negotiate does not lead to payment, the receivables are sought through legal action, which may further delay the collection of items presented in current receivables in the financial statements. Items that may, according to the management’s estimate, influence the profitability of complete outsourcing agreements with a delay: 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 dierence in views regarding whether the fixed annual price for social and healthcare services can decrease due to price adjustments amounted to approximately EUR 3.7 (2.6) million at the end of the financial year. Jämsän Terveys filed an additional counterclaim against the City of Jämsä. The additional counterclaim concerns the eect of changes in the services 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 nego- tiate and try to reach an agreement. In its counterclaim, Jämsän Terveys claims a total of approximately EUR 16 million from the City of Jämsä. The total amount of vari- able compensation under the counterclaim that Jämsän Terveys has recognised as revenue and recorded in its receivables amounts to EUR 3.9 (3.8) million. As regards Kuusiolinna Terveys Oy, the disputes con- cerning the annual price and other separate charges were settled with all of the clients during the financial year. The decisions of the City Boards of Alavus and Ähtäri and the Municipal Boards of Soini and Kuortane pertaining to the agreed-upon matters became legally valid in August 2021. The total amount of contractually and legally justified variable compensation from the City of Mänttä-Vilppula that Mäntänvuoren Terveys Oy has recognised as revenue and recorded in its receivables amounts to EUR 4.1 (3.5) million. The variable compensation recognised as revenue in accordance with the agreement includes an estimate of compensation for specialised care costs to the service provider of the Pirkanmaa Hospital District’s investment costs allocated to the client. The receivables from variable compensation components are also related to cost inc- reases caused by service changes and compensating such increases in accordance with the actual costs. The total amount of contractually and legally justified variable compensation from the City of Parkano that Kolmostien Terveys Oy has recognised as revenue and recorded in its receivables amounts to EUR 1.7 (0.6) million. The variable compensation recognised as revenue in accordance with the agreement includes an estimate of compensation for specialised care costs to the service provider of the Pirkanmaa Hospital District’s investment costs allocated to the client. The receivables from variable compensation components are also related to cost inc- reases caused by service changes and compensating such increases in accordance with the actual costs. The client approved cost increases arising from changes to services for the elderly as part of the annual fee under the service agreement. 63 BUSINESS AND STRATEGY | SUSTAINABILITY | REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS 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 Uusi- maa, South West Finland, 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, Ostrobothnia and Central Ostrobothnia. • Northern Finland includes Pihlajalinna’s business operations in the regions of North Ostrobothnia, Kainuu and Lapland. EUR 1,000 2021 % 2020 % Southern Finland 148 291 23 114 749 20 Mid-Finland 330 820 51 316 810 56 Ostrobothnia 128 335 20 116 808 20 Northern Finland 29 934 5 16 176 3 Other operations 13 374 2 9 755 1 Intra-Group sales -72 980 -65 617 Consolidated revenue 577 774 100 508 682 100 Sales revenue by customer group Pihlajalinna’s customer groups are corporate customers, private customers and public sector customers. • The Group’s corporate customer group consists of Pihlajalinna’s occupational health customers, insurance company customers and other corporate contract customers. • The Group’s private customers are private individuals who pay for services themselves and may subsequently seek compensation from their insurance company. • The Group’s public sector customer group consists of public sector organisations in Finland, such as municipalities, joint municipal authorities, congregations, hospital dis- tricts and the public administration when purchasing social and healthcare outsourc- ing services, residential services, occupational health services and stang services. EUR 1,000 2021 % 2020 % Corporate customers 137 773 21 120 719 21 of which insurance company customers 34 798 5 31 378 5 Private customers 85 320 13 81 150 14 Public sector 427 661 66 372 430 65 of which complete outsourcing 300 813 46 287 897 50 of which stang 26 073 4 23 027 4 of which occupational healthcare and other services 100 775 15 61 507 11 Intra-Group sales -72 980 -65 617 Consolidated revenue 577 774 100 508 682 100 Information on key customers The Group’s sales revenue from the four largest municipal customers totalled approx- imately EUR 277.9 (272.5) million, representing 48% (54%) of the Group’s eliminated revenue. Estimate of unsatisfied performance obligations related to fixed-term service agreements on the provision of social and healthcare services, EUR million EUR 1,000 31.12.2021 31.12.2020 1000 € 31.12.2021 31.12.2021 2021 259 2030 167 158 2022 263 260 2031 37 36 2023 266 262 2032 6 6 2024 269 263 2033 6 6 2025 247 240 2034 6 6 2026 199 192 2035 6 6 2027 201 193 2028 204 194 2029 206 195 2 085 2 276 Summary of the Group’s complete outsourcing agreements and their agreement periods Service provider – client First year of service production under the current contract Duration of contract (years) Jämsän Terveys Oy – City of Jämsä 2015 10 Kuusiolinna Terveys Oy – KuusSote 2016 15 Mäntänvuoren Terveys Oy – City of Mänt- tä-Vilppula 2016 15 Kolmostien Terveys Oy – City of Parkano 2015 15 Bottenhavets Hälsa Ab (Selkämeren Ter- veys Oy) – Kristiinankaupunki 2021 15 – 20 years 2. Other operating income Accounting policies Government grants received as compensation for expenses already incurred are rec- ognised in profit or loss for the period in which they become receivable. These grants are presented under other operating income. 64 BUSINESS AND STRATEGY | SUSTAINABILITY | REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS Government grants related to capitalised development projects are recognised as deductions from the carrying amounts of intangible assets, when there is reasonable assurance that such grants will be received and that the Group will comply with the con- ditions 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. 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 dier- ence between the carrying amount and the sales price will be recognised in the con- solidated statement of financial position and recognised as income over the lease term under other operating income. The unrecognised portion of the dierence between the carrying amount and the sales price is presented as Other liabilities in the statement of financial position. EUR 1,000 2021 2020 Capital gains on property, plant and equipment 209 235 Rental income 528 550 Government grants 1 160 1 379 Other income items 1 807 215 Total 3 704 2 379 Eects of COVID-19 In June 2020, the Finnish Government decided on support for business costs for compa- nies that had suered a significant decrease in revenue due to the COVID-19 pandemic and that have had costs that are dicult to adjust. In 2021, the Finnish Government car- ried out the fourth round of cost support for companies. In the financial year 2021, Pihla- jalinna recognised a total of EUR 628 thousand in financial support intended to cover the fixed costs of the Group’s fitness centres in other operating income under government grants. In 2020, Pihlajalinna received EUR 800 thousand in cost support, which was the Group-specific maximum amount. Compensation for the costs of pandemic-related services under the Group’s complete outsourcing agreements is presented in other operating income under other income items. Agreement on the compensation principles was reached with the client munici- palities in 2021. Municipalities and joint municipal authorities are compensated for costs directly related to the COVID-19 pandemic by means of government grants. 3. Materials and services Accounting policies Inventories are measured at the lower of cost and probable net realisable value. EUR 1,000 2021 2020 Materials -20 452 -19 967 Change in inventories 153 1 092 External services, practitioners -73 042 -71 931 External services, other -116 176 -107 171 Total -209 516 -197 977 Eects of COVID-19 The Group’s purchases of personal protective equipment and other hygiene precau- tions taken in response to the COVID-19 pandemic increased the value of inventories in 2021. 4. Employee benefit expenses Accounting policies Pension plans are classified as defined benefit plans and defined contribution plans. The Group only has defined contribution plans. In defined contribution plans, the Group makes fixed payments to a separate unit. The Group has no legal or constructive obliga- tion to make additional payments if the recipient of the payments 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 gross amount of the incentive scheme includes the share component and the cash component. Approximately half of the gross remuneration, corresponding to withholding taxes, is paid in cash. EUR 1,000 2021 2020 Wages and salaries -211 095 -179 381 Share-based incentive schemes - implemented as shares -357 -1 517 Pension costs – defined contribution plans -35 344 -27 009 Other social security expenses -8 368 -6 327 Total -255 164 -214 235 The employer’s TyEL pension contributions were reduced by 2.6 percentage points for the period 1 May–31 December 2020. The pension insurance company will not pay customer compensation for the period during which the reduced rate was in eect. The 65 BUSINESS AND STRATEGY | SUSTAINABILITY | REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS eect of the temporary reduction in the employer’s TyEL pension contributions will be compensated in full during the period 2022–2025 through an increase in the employer’s TyEL pension contributions. 2021 2020 Personnel on average (FTE) 4 746 4 308 Personnel at the end of the period (NOE) 6 297 5 550 Information on the employee benefits and loans of members of management considered to be related parties is presented in Note 30 Related party transactions. 5. Share-based incentive scheme for key personnel At its meeting on 14 February 2019, the Board of Directors approved the terms of a share-based long-term incentive programme for Pihlajalinna Group’s senior manage- ment (LTIP 2019). The incentive programme is eective from 1 January 2019 onwards and it is aimed at the CEO, the Management Team and other key employees selected for inclusion in the programme. LTIP 2019 constitutes a five-year plan period. None of the share rewards received by the key employees thereunder may be sold or transferred prior to 2022, and the share rewards are subject to a two-year transfer restriction for each performance period. In the event that a beneficiary’s employment ends during the transfer restriction period, shares that have already been received must be returned. The key employee is required to have made an investment in Pihlajalinna shares as a precon- dition for participation in the programme. At the end of the financial year, the incentive programme included 27 key employees. The fixed matching share programme (commitment shares) consisted of a commit- ment period from the beginning of 2019 to the payment of the fixed share reward at the end of 2020. In this scheme, the company matched each key employee’s share invest- ments with additional shares at a fixed rate. A total of 97,000 matching shares were awarded. This figure is the gross reward, from which the applicable taxes were deducted, leaving a net amount of 45,105 shares that were transferred to the participants on 28 December 2020. The shares are subject to a transfer restriction, but they are not subject to the obligation to return the shares in the event of termination. The performance- and quality-based matching share plan included three one-year performance periods (the calendar years 2019–2021), during which the participants could earn performance-based additional shares, provided that the company reached the performance objectives set by the Board of Directors. Based on each individual per- formance period, the participant can earn a maximum of two additional shares for three shares invested without consideration (gross before the deduction of the applicable payroll tax). The performance-based share rewards will be delivered after the respective performance periods according to the programme in the spring of 2020, 2021 and 2022 No performance- and quality-based share rewards materialised for the first perfor- mance period 2019 pursuant to the matching share plan, as the minimum objectives set for the programme were not achieved. For the second performance period 2020, the gross reward for the Group’s manage- ment was 56,583 shares. The net amount of 26,546 shares were paid to the participants on 25 February 2021. These shares are subject to a transfer restriction, but they are not subject to the obligation to return the shares in the event of termination. The performance targets for the performance period 2021 were related to the achieve- ment of the consolidated adjusted operating profit target for 2021, the development of the customer satisfaction index (NPS) and employee net promoter score (eNPS), the growth of the share of internal production in specialised care, the implementation of the eciency improvement programme for municipal companies and items that, according to the management’s estimate, may have a delayed impact on the profitability of com- plete outsourcing agreements. For the performance period 2021, the gross reward for the Group’s management is 18,816 shares. The shares are expected to be transferred to the participants in February 2022. The shares are subject to the normal transfer restric- tion. 6. Other operating expenses EUR 1,000 2021 2020 restated Facility expenses -9 907 -9 600 Equipment and information management expenses -23 235 -20 707 Sales and marketing expenses -7 832 -6 065 Other expenses -13 177 -10 307 Total -54 151 -46 678 Auditor’s fees Auditing, BDO -122 Auditing, KPMG Oy Ab -288 -225 Statements, KPMG Oy Ab -10 -7 Non-audit services, KPMG Oy Ab -16 Total -298 -370 Pihlajalinna has changed its accounting policies and begun to retrospectively apply, eective from 1 January 2020, the IFRS Interpretations Committee’s Agenda Decision published in April 2021 regarding the recognition of configuration or customisation costs in a cloud computing arrangement (Software as a Service, SaaS). 66 BUSINESS AND STRATEGY | SUSTAINABILITY | REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS 7. Depreciation and impairment Accounting policies Property, plant and equipment will be depreciated using the straight-line method over their estimated economic 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 new private clinics, the Group adopted a units-of-production based depreciation method eective from 1 January 2018. The amount of depreciation is based on the units of production derived from the equipment. For the Group’s other machinery and equipment, the Group still uses straight-line depre- ciation. As the utilisation rate of imaging capacity is low during the first years of a new operating location, the units-of-production method provides a more accurate reflection of the actual economic use of the magnetic imaging equipment in question. For intangible assets with finite economic useful lives, the amortisation periods are as follows: Trademarks 10 years Development costs 3–10 years Other intangible assets Customer agreements 4 years Patient database 4 years Non-competition agreements 2–5 years Intellectual property rights 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 busi- ness premises. 67 BUSINESS AND STRATEGY | SUSTAINABILITY | REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS EUR 1,000 2021 2020 restated Depreciation, amortisation and impairment by asset type Intangible assets Trademarks -776 -776 Capitalised development costs -961 -924 Customer relationship value -1 622 -1 479 Non-competition agreements -355 -536 Patient database -232 -306 Other intangible assets -2 752 -2 272 -6 699 -6 293 Property, plant and equipment Buildings -96 -170 Renovation expenses on real estate -2 463 -2 620 Machinery and equipment -6 604 -6 012 Other tangible assets -1 -1 -9 163 -8 803 Right-of-use assets Right-of-use plots -91 -120 Right-of-use business premises and buildings -17 885 -17 578 Right-of-use business premises and buildings, impairment -26 Right-of-use equipment -863 -1 202 -18 840 -18 927 Total depreciation, amortisation and impairment -34 701 -34 023 * Pihlajalinna has changed its accounting policies and begun to retrospectively apply, eective from 1 January 2020, the IFRS Interpretations Committee’s Agenda Decision published in April 2021 regard- ing the recognition of configuration or customisation costs in a cloud computing arrangement (Soft- ware as a Service, SaaS). 8. Financial income EUR 1,000 2021 2020 Dividend income from financial assets measured at fair value through profit or loss 7 10 Interest income from loans and receivables 118 94 Interest income from financial lease receivables 83 94 Other financial income 35 34 Total 242 232 9. Financial expenses EUR 1,000 2021 2020 Interest expenses from financial liabilities carried at amortised cost -1 726 -2 128 Interest expenses on lease liabilities -1 706 -1 900 Other financial expenses -524 -609 Total -3 956 -4 637 Due to the changes in the operating environment caused by the COVID-19 epidemic, Pihlajalinna and the creditor banks agreed on a temporary adjustment to the covenants of the financing arrangement at the end of March 2020. As part of the agreement, a per- manent new margin ceiling was added to the financing arrangement. The margin ceiling will enter into eect if leverage exceeds 3.50. Financial expenses in 2020 were increased by a waiver expense associated with the financing arrangement and higher interest rate margins. . 10. Income taxes Accounting policies The income taxes on the consolidated income statement consist of current tax, adjust- ments 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 2021 2020 Current taxes -5 291 -4 159 Taxes for the previous financial years 2 -2 Deferred taxes: Origination and reversal of temporary dierences 159 -675 Total -5 130 -4 835 68 BUSINESS AND STRATEGY | SUSTAINABILITY | REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS Reconciliation of eective tax rate EUR 1,000 2021 2020 Profit before taxes 24 222 13 737 Taxes calculated on the basis of the Finnish tax rate (20%) -4 844 -2 747 Income not subject to tax 2 2 Non-deductible expenses -284 67 Unrecorded deferred tax assets from tax losses -635 -318 Utilised prior losses with unrecognised tax benefits 495 81 Share of associated company’s profit -2 -1 Share-based remuneration 24 -59 Payment of liability to B series shareholders (end of arrangement) -1 938 Other items 112 80 Taxes for prior financial years 2 -2 Taxes in the income statement -5 130 -4 835 Eective tax rate -21,2 % -35,2 % 11. Earnings per share Accounting policies Earnings per share is 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. Earnings per share for the financial year attributable to owners of the parent are cal- culated 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 adjust- ed by the dilution eect of the share-based incentive scheme. 2021 2020 Profit for the financial year attributable to owners of the parent, EUR 20 094 607,63 8 686 658,43 Number of shares outstanding, weighted average 22 589 383 22 586 212 Earnings per share (EPS), EUR/share 0,89 0,38 Diluted earnings per share, EUR/share 0,89 0,38 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 equipment. Costs incurred subsequently are included in the carrying amount of an asset only if it is deemed probable 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 concerning 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 loca- tion and condition allow them to be applied as intended by the management. In 2018, the Group opened private clinics in Turku, Oulu and Seinäjoki. The Group acquired 3 Tesla high-field magnetic imaging equipment for the clinics in Oulu and Turku and a 1.5 Tesla high-field magnetic imaging device for the clinic in Seinäjoki. For the magnetic imaging equipment at these green field private clinics, the Group adopted a units-of-production based depreciation method eective from 1 January 2018. The amount of depreciation is based on the units of production derived from the magnet- ic imaging equipment. For the Group’s other machinery and equipment, the Group still uses straight-line depreciation. As the utilisation rate of imaging capacity is very low during the first years of a new operating location, the units-of-production method provides a more accurate reflection of the actual economic use of the magnetic imaging equipment in question than straight-line depreciation. 69 BUSINESS AND STRATEGY | SUSTAINABILITY | REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS 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 2021 36 2 937 29 370 5 572 55 584 172 539 94 209 Additions 0 792 8 337 0 1 793 10 921 Business combinations 4 39 43 Transfers between items 89 384 101 -785 -212 Disposals -564 -202 -766 Cost at 31 December 2021 36 3 026 30 549 5 572 63 496 172 1 344 104 195 Accumulated depreciation at 1January 2021 -410 -16 665 -33 130 -7 -50 212 Depreciation and amortisation -96 -2 463 -6 604 -1 -9 163 Transfers between items -3 -112 -116 Disposals 0 0 286 286 Accumulated depreciation at 31December 2021 -506 -19 131 -39 560 -8 -59 206 Carrying amount at 1 January 2021 36 2 527 12 703 5 572 22 454 165 539 43 996 Carrying amount at 31 December 2021 36 2 521 11 417 5 572 23 936 164 1 344 44 989 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 2020 36 9 512 26 604 5 579 53 237 179 2 223 97 370 Additions 136 458 5 455 0 1 171 7 220 Transfers between items -27 2 625 -7 391 -7 -1 835 1 139 Disposals -6 683 -317 -3 499 0 -1 020 -11 519 Cost at 31 December 2020 36 2 937 29 370 5 572 55 584 172 539 94 209 Accumulated depreciation at 1January 2020 -404 -13 678 -30 039 -12 -44 133 Depreciation and amortisation -170 -2 620 -6 012 -1 -8 803 Transfers between items 22 -684 -364 5 -1 020 Disposals 141 317 3 284 3 742 Accumulated depreciation at 31December 2020 -410 -16 665 -33 130 -7 -50 212 Carrying amount at 1 January 2020 36 9 108 12 925 5 579 23 199 167 2 223 53 237 Carrying amount at 31 December 2020 36 2 527 12 704 5 572 22 454 165 539 43 996 70 BUSINESS AND STRATEGY | SUSTAINABILITY | REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS 13. Intangible assets 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 classified as an intangible asset or a service contract. The arrangements in which the the Group has no authority on the software are ac- counted as service agreements which entitle the Group to utilize the cloud ser- vice provider's application software during the contract period. Application software license fees and related configuration or customization costs are rec- ognized (for example, in other operating expenses) when the services are re- ceived. 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 recogni- tion, 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 associat- ed with the following projects: • New operating model for fixed-price occupational healthcare agreements and a relat- ed occupational healthcare portal • Renewal of primary care service models, involving remote service models for munici- pal residents and mobile solutions (social and healthcare service centre concept) • Sports clinic concept • Pihlajalinna mobile application and website development with the aim of making AI-assisted digital services available to all customers. • Specialised care referral forwarding and coordination operating model developed for the Parkano social and healthcare partnership area • Takeover of social and healthcare services in Mänttä-Vilppula and the development of operating models • The three-year SYKKI project, funded with Tekes subsidies, aimed at creating an ef- fective and cost-ecient model for public social and healthcare services 71 BUSINESS AND STRATEGY | SUSTAINABILITY | REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS Intangible assets EUR 1,000 Goodwill Trademarks Development costs Customer rela- tionship value Non-competi- tion agreement Patient database Other intangible assets Other long-term expenditures Pre- payments Total Cost at 1 January 2021 173 607 7 762 6 348 8 397 7 507 5 677 6 605 10 404 47 226 355 Additions 21 232 2 775 985 4 011 Business combinations 15 301 2 175 9 8 17 493 Transfers between items 48 358 -316 89 Cost at 31 December 2021 188 909 7 762 6 369 10 572 7 507 5 677 6 894 13 543 715 247 949 Accumulated depreciation at 1January 2021 -5 479 -3 057 -6 893 -7 142 -5 411 -5 511 -3 919 -37 410 Depreciation and amortisation -776 -961 -1 622 -355 -232 -538 -2 215 -6 699 Transfers between items -48 -16 -64 Accumulated depreciation at 31December 2021 -6 255 -4 019 -8 515 -7 497 -5 642 -6 096 -6 149 -44 173 Carrying amount at 1 January 2021 173 607 2 284 3 289 1 505 365 267 1 095 6 483 47 188 944 Carrying amount at 31 December 2021 188 909 1 508 2 349 2 057 10 35 798 7 394 715 203 775 EUR 1,000 Goodwill Trademarks Development costs Customer rela- tionship value Non-competi- tion agreement Patient database Other intangible assets Other long-term expenditures Pre- payments Total Cost at 1 January 2020 173 607 7 762 5 968 8 397 7 507 5 677 7 650 7 751 443 224 763 IFRIC Agenda Decision concerning the custo- misation and configuration costs of cloud com- puting arrangements -755 -648 -1 403 Restated cost at 1 January 2020 173 607 7 762 5 968 8 397 7 507 5 677 6 895 7 103 443 223 360 Additions 380 114 2 796 311 3 603 Transfers between items 10 507 -708 -191 Disposals -414 -2 -417 Cost at 31 December 2020 173 607 7 762 6 348 8 397 7 507 5 677 6 605 10 404 47 226 355 Accumulated depreciation at 1January 2020 -4 702 -2 133 -5 414 -6 606 -5 105 -5 601 -2 511 -32 071 IFRIC Agenda Decision concerning the custo- misation and configuration costs of cloud com- puting arrangements 350 102 452 Restated accumulated depreciation at 1January 2020 0 -4 702 -2 133 -5 414 -6 606 -5 105 -5 251 -2 408 -31 618 Depreciation and amortisation -776 -924 -1 479 -536 -306 -688 -1 584 -6 293 Transfers between items 14 71 85 Disposals 414 2 417 Accumulated depreciation at 31December 2020 -5 479 -3 057 -6 893 -7 142 -5 411 -5 511 -3 919 -37 410 Carrying amount at 1 January 2020 173 607 3 060 3 835 2 984 901 572 1 644 4 694 443 191 740 Carrying amount at 31 December 2020 173 607 2 284 3 289 1 505 365 267 1 095 6 483 47 188 944 Other intangible assets include licences and computer software. * Pihlajalinna has changed its accounting policies and begun to retrospectively apply, eective from 1 January 2020, the IFRS Interpretations Committee’s Agenda Decision published in April 2021 regarding the recognition of configuration or customisation costs in a cloud computing arrangement (Software as a Service, SaaS). 72 BUSINESS AND STRATEGY | SUSTAINABILITY | REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS Impairment testing of goodwill Accounting policies 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 Op- erating Ocer (COO) and the other members of the Management Team, is responsible for the Group’s business operations and service oering to both the private and public sectors. The COO is responsible for preparing the Group businesses’ budgets with the help of the Regional Directors. The Group CEO is responsible for the resources, invest- ments and profitability of the Group’s businesses. Pihlajalinna’s cash-generating 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 determined by calculating the discounted present value of expected cash flows. The discount rate used in the calculations is determined using the weighted aver- age 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 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 state- ment. Previously recognised impairment losses on goodwill are not reversed. 2021 2020 Discount rate (pre tax WACC) 7,68 % 7,59 % Discount rate (after tax WACC) 6,36 % 6,39 % Terminal growth rate after the forecast period (5 years) 1,30 % 2,00 % The terminal period’s share of the amount of expected cash flows: 73 % 75 % The Group carried out its annual impairment testing of goodwill based on the situation on 30 November 2021 (30 November 2020). The result of the testing was that no im- pairment losses were recognised for the Group’s cash-generating unit, i.e. the Group as a whole, for the financial year that ended on 31 December 2021. The Group’s recoverable amount exceeded the carrying amount. EUR 1,000 2021 2020 Tested goodwill in total, Group 188 909 173 607 Goodwill as per the statement of financial position at the end of the financial year 188 909 173 607 Sensitivity analyses in impairment testing Based on the testing calculations, there is no need to recognise impairment. The CGU’s recoverable amount exceeded the carrying amount. The table below shows the required change in assumptions that would lead to the recoverable amount falling below the carrying amount. 2021 2020 Decline in EBIT margin more than 2 percentage points more than 2 percentage points Decline in volume more than 21 percentage points more than 19 percentage points Increase in discount rate more than 4 percentage points more than 4 percentage points Key accounting estimates and decisions based on management judgement The cash flow forecasts used in calculating value-in-use in impairment testing are based on the budget for 2022 approved by the Board of Directors. The budgeted growth of revenue and cash flow in 2022 is based on a market growth assumption of 4% based on economic forecasts for the Finnish economy and the management’s business targets, taking into account the declining trend in services related to COVID-19. Cash flows for the forecast period 2023–2026 are estimated in impairment testing using a moderate market growth assumption of 2%. The terminal growth rate applied after the forecast period is 1.3%, which corresponds to the long-term inflation forecast for the Finnish economy. The acquisition of Pohjola Hospital Ltd was not taken into account in impair- ment testing on the financial statements date. The date of the acquisition’s completion, 1 February 2022, was only confirmed after the end of the financial year. The assumptions of the development of prices and costs used in the cash flow esti- mates are based on the management’s estimates of the development of demand and the markets, which are compared with external information sources. The productivity and ef- ficiency assumptions used in the calculations are based on internal targets, with previous actual development taken into account in their estimation. 73 BUSINESS AND STRATEGY | SUSTAINABILITY | REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS 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). Pihlaja- linna applies the IFRS 16 exemption that allows lessees to elect not to recognise a right-of-use asset and corre- sponding 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 oce furniture. Furthermore, to make the accounting of leases easier, Pihlajalinna elects not to separate service compo- nents from leases, instead treating the entire agreement as a lease in its consolidated 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 in- cludes the following items: • original amount of the lease liability • direct expenses of the initial phase and • expenses due to restoring to original condition 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 mea- sured 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 mea- sured at the present value of future lease payments. In later periods, the lease liability is measured using the ef- fective 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. EUR 1,000 Right-of-use plots Right-of-use buildings and business premises Right-of-use equipment Total Cost at 1 January 2021 756 176 820 5 350 182 926 Additions 84 8 917 805 9 807 Business combinations 2 802 2 802 Transfers between items -670 -77 -747 Disposals -1 972 -491 -2 463 Cost at 31 December 2021 840 185 897 5 587 192 325 Accumulated depreciation at 1January 2021 -393 -75 838 -3 863 -80 094 Depreciation and amortisation -91 -17 885 -863 -18 840 Transfers between items 670 77 747 Disposals 1 112 336 1 448 Accumulated depreciation at 31December 2021 -484 -91 941 -4 314 -96 738 Carrying amount at 1 January 2021 363 100 981 1 487 102 832 Carrying amount at 31 December 2021 357 93 956 1 273 95 586 EUR 1,000 Right-of-use plots Right-of-use buildings and business premises Right-of-use equipment Total Cost at 1 January 2020 561 166 200 5 903 172 664 Additions 239 13 558 792 14 589 Disposals -44 -2 938 -1 345 -4 328 Cost at 31 December 2020 756 176 820 5 350 182 926 Accumulated depreciation at 1January 2020 -287 -60 562 -3 706 -64 555 Depreciation and amortisation -120 -17 604 -1 202 -18 927 Disposals 15 2 328 1 045 3 388 Accumulated depreciation at 31December 2020 -393 -75 838 -3 863 -80 094 Carrying amount at 1 January 2020 274 105 638 2 197 108 109 Carrying amount at 31 December 2020 363 100 981 1 487 102 832 Short-term leases recognised in the income statement, totalling EUR 115 (91) thousand, and minor leases recognised in the income statement, totalling EUR 734 (723) thousand, are practical exemptions provided by IFRS 16 applied by the Group. Lease liabilities relating to right-of-use items are specified in Note 22 Financial liabilities. 74 BUSINESS AND STRATEGY | SUSTAINABILITY | REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS 15. Other non-current receivables Accounting policies Right-of-use assets that have been transferred to a lessee under a sublease and classi- fied as financial leases have been derecognised from fixed assets and presented on the balance sheet as net investments in a sublease. EUR 1,000 2021 2020 Lease deposits paid 535 545 Non-current subleases 4 586 4 868 Other receivables 90 90 Total 5 211 5 503 Pihlajalinna subleased two care homes that it sold and leased back in May 2020. 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. 2021 5 187 601 502 431 341 3 313 16. Trade and other receivables Accounting policies At the end of each reporting period, the Group assesses whether or not there is objec- tive evidence of impairment regarding any individual financial asset. Objective evidence of impairment of loans and other receivables 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 impair- ment 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 expected loss. Key accounting estimates and decisions based on management judgement Determining the annual profitability of the Group’s fixed-term complete social and healthcare services outsourcing agreements may become accurate with a delay. The Group may not always be aware of the actual costs of the agreements at the time of preparing the financial statements, and the agreements may involve variable elements of compensation. The cost accumulation of public specialised care involves random fluctua- tion. In addition, individual cases falling within the scope of the hospital districts’ pooling system for high-cost care may influence the cost liability of specialised care consider- ably during the financial year, and between financial periods, in Pihlajalinna’s municipal companies. The fixed-term service agreements for all of the Group’s complete outsourcing arrangements are highly similar with regard to their principles and basic terms. Pihlaja- linna has calculated and recognised the variable compensation components and cost compensation under the agreements using the same criteria and model for all clients. Demands for the compensation of cost increases due to changes in services correspond- ing to the actual costs and investment costs that serve operations after the end of the term of the contract being the client’s responsibility constitute the majority of costs and variable compensation components that are specified with a delay. For 2021, the assess- ment of investment costs and COVID-19 related costs included in invoicing by hospital districts can only be carried out after the hospital districts have published their financial statements. Pihlajalinna has recognised only part of these legally justified claims in its income statement. The parties to the agreements are bound by an obligation to negotiate and negotiation is the primary procedure. If the obligation to negotiate does not lead to payment, the receivables are sought through legal action, which may further delay the collection of items presented in current receivables in the financial statements. EUR 1,000 2021 2020 Trade receivables 79 701 59 071 Prepayments and accrued income 11 362 15 734 Current subleases 601 518 Other receivables 479 448 Total 92 143 75 771 The carrying amount of trade receivables and other receivables corresponds to the max- imum credit risk involved at the end of the reporting period. Due to the COVID-19 epidemic, Pihlajalinna has reviewed the credit risk of receivables and the procedures used to estimate the credit risk. No significant changes have been observed in customers’ payment behaviour. The collection of trade receivables has been enhanced. The amount of receivables more than 90 days past due is significantly in- creased by withheld payments concerning trade receivables and trade payables between 75 BUSINESS AND STRATEGY | SUSTAINABILITY | REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS Jämsän Terveys and Mäntänvuoren Terveys and the cities of Jämsä and Mänttä-Vilppula. As described under ‘Risks and uncertainties in business operations’, if the negotiation obligation does not lead to payment, the receivables will be collected through legal action. This may further delay the collection of items presented in current receivables in the financial statements. The Group recognised EUR 547 thousand (EUR 316 thousand) in impairment losses on trade receivables during the financial year. Age distribution of trade receivables EUR 1,000 2021 Impairment losses Share of expected impairment losses Net 2021 Past due 25 897 -8 0,0 % 25 889 Less than 30 days 4 152 -12 0,3 % 4 140 30–60 days 2 333 -67 2,9 % 2 266 61–90 days 1 965 -133 6,8 % 1 832 More than 90 days 46 053 -479 1,0 % 45 574 Total 80 399 -698 79 701 2020 Impairment losses Share of expected impairment losses Net 2020 Past due 23 646 -8 0,0 % 23 638 Less than 30 days 3 783 -12 0,3 % 3 771 30–60 days 1 853 -66 3,6 % 1 787 61–90 days 2 216 -131 5,9 % 2 085 More than 90 days 28 263 -473 1,7 % 27 790 Total 59 760 -689 59 071 Key accounting estimates and the use of management judgement are discussed in Note 1 Revenue from contracts with customers. The management of credit risks related to trade receivables is discussed in more detail in Note 25 Financial risk management. EUR 1,000 2021 2020 Credit loss provision at 1 January 689 674 Credit losses recorded -547 -316 Change in credit loss provision 556 330 Credit loss provision at 31 December 698 689 Material items included in prepayments and accrued income EUR 1,000 2021 2020 Sales and income accruals 4 361 4 006 Personnel expenses 1 876 1 575 Expenses paid in advance 4 115 6 782 Other 1 009 3 371 11 362 15 734 The carrying amounts of the receivables correspond substantially 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 2021 2020 Current provisions 71 648 Non-current provisions 134 114 Total 205 762 76 BUSINESS AND STRATEGY | SUSTAINABILITY | REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS EUR 1,000 Onerous contracts Restructuring provision Total 1.1.2020 1 359 448 1 807 Increases in provisions 100 0 100 Provisions used -597 -448 -1 045 Reversals of unused provisions -100 -100 31.12.2020 762 0 762 Increases in provisions 20 300 320 Provisions used -645 -232 -877 Reversals of unused provisions 0 31.12.2021 137 68 205 18. Trade and other payables EUR 1,000 2021 2020 Trade payables 52 571 45 262 Accrued liabilities 65 915 57 572 Pre-payments 938 1 158 Other liabilities 5 683 5 359 Total 125 107 109 352 Material items included under Accrued liabilities: Wages and salaries and social security payments 42 425 32 675 Doctor’s fee liability 8 261 7 269 Allocation of sales 18 82 Allocation of purchase invoices 11 057 15 943 Financial items 65 191 Other accrued liabilities 4 087 1 412 65 915 57 572 The amount of trade payables is increased by withheld payments concerning trade receivables and trade payables between Jämsän Terveys and the City of Jämsä and Mäntänvuoren Terveys and the City of Mänttä-Vilppula, which are discussed in Note 16. 19. Deferred tax assets and liabilities Accounting policies Deferred taxes are calculated on temporary dierences 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 initial recognition of an asset or liability in a trans- action which is a business combination and, at the time of transaction, aects neither accounting profit nor taxable profit. In the Group, the most significant temporary dierences 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 dierence 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 trans- action, aects neither accounting profit nor taxable profit. Whether or not deferred tax assets can be recognised in this respect is always estimated at the end of each reporting period. The Group shall oset deferred tax assets and liabilities where these relate to the same taxation authority and the same taxable entity. 77 BUSINESS AND STRATEGY | SUSTAINABILITY | REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS Changes in deferred taxes during 2021: Deferred tax assets (EUR 1,000) 1 January 2021 Recognised in profit and loss Subsidiaries acquired 31.12.2021 Tax losses carried forward confirmed by tax authorities 2 438 108 2 546 Sales proceeds from sale and leaseback arrangements 253 -30 223 Provisions 590 -297 293 Share-based incentive scheme 122 -62 60 IAS 37, contingent assets 527 223 749 Eect of IFRS 16 715 58 774 Entries related to the IFRIC Agenda Decision concerning cloud computing arrangements 200 55 255 Other items 710 -209 83 584 Deferred tax assets on the statement of financial position 5 555 -154 83 5 484 Deferred tax liabilities Property, plant and equipment and intangible assets 4 498 304 4 803 Recognition of property, plant and equipment and intangible assets at fair value in business combinations 884 -597 435 722 Eect of IFRS 16 337 -1 336 Other items 42 -19 22 Deferred tax liabilities on the statement of financial position 5 761 -312 435 5 884 Changes in deferred taxes during 2020: Deferred tax assets (EUR 1,000) Restated 1.1.2020 Recognised in profit and loss Subsidiaries acquired Restated 31.12.2020 Tax losses carried forward confirmed by tax authorities 2 017 421 2 438 Liability to holders of Series B shares 1 557 -1 557 0 Sales proceeds from sale and leaseback arrangements 283 -30 253 Provisions 942 -352 590 Share-based incentive scheme 53 69 122 IAS 37, contingent assets 369 157 527 Eect of IFRS 16 452 263 715 Entries related to the IFRIC Agenda Decision concerning cloud computing arrangements 200 0 200 Other items 333 376 710 Deferred tax assets on the statement of financial position 6 206 -651 0 5 555 Deferred tax liabilities Property, plant and equipment and intangible assets 3 969 529 4 498 Recognition of property, plant and equipment and intangible assets at fair value in business combinations 1 503 -619 884 Eect of IFRS 16 192 145 337 Other items 61 -19 42 Deferred tax liabilities on the statement of financial position 5 726 35 0 5 761 * Pihlajalinna has changed its accounting policies and begun to retrospectively apply, eective from 1 January 2020, the IFRS Interpretations Committee’s Agenda Decision published in April 2021 regarding the recognition of configuration or customisation costs in a cloud computing arrangement (Software as a Service, SaaS). 78 BUSINESS AND STRATEGY | SUSTAINABILITY | REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS The recognition of deferred tax assets on the statement of financial position is justified when the Group is likely to accrue taxable income against which the losses in question can be used before they expire. The Group will primarily apply for the right to deduct all confirmed losses of its ac- quired subsidiaries. The Tax Authority has granted the right to deduct confirmed losses in spite of changes in ownership. 20. Financial assets and liabilities by measurement category Accounting policies When a financial asset or liability is recognised on the transaction date, the Group mea- sures it at its acquisition cost, which is equal to the fair value of the consideration given or received. Financial assets For the purpose of measurement after initial recognition, the Group’s financial assets are classified as financial assets measured at amortised cost and financial assets measured at fair value through profit or loss. The Group has no financial instruments classified as derivatives nor financial assets measured at fair value through other comprehensive income. Financial assets are derecognised when the Group has lost its contractual right for the financial assets in question or has transferred substantially all risks and rewards outside the Group. The Group’s trade receivables, loan receivables, lease deposits and cash and cash equivalents have been classified as financial assets measured at amortised cost using the eective interest method, taking any impairment into account. Financial assets measured at fair value through profit or loss consist of quoted and unquoted shares. The Group has no holdings of shares quoted in public markets. 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 payables and other liabilities as financial liabilities measured at amortised cost using the eective interest method. Transaction costs are included in the initial car- rying amount. Arrangement fees for loan commitments are treated as transaction costs. The Group classifies contingent considerations arising from M&A transactions as finan- cial liabilities measured at fair value through profit or loss. No interest is paid on liabilities 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 Group has no financial instruments classified as derivatives. Financial liabilities are classified as current liabilities, unless the Group has an uncondi- tional right to postpone their repayment to a date that is at least 12 months subsequent to the end of the reporting period. Available tax losses Tax values recorded Tax values not recorded Tax losses 2021 2020 2021 2020 2021 2020 Maturing within five years 1 944 3 681 736 Maturing later than within five years 21 916 18 752 2 547 2 438 2 225 1 312 Total 23 860 22 432 2 547 2 438 2 225 2 048 Taxes calculated on the basis of the Finnish tax rate (20%) 4 772 4 486 79 BUSINESS AND STRATEGY | SUSTAINABILITY | REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS 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 subject 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 eect of discounting is not significant taking the maturity of the receivables 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 essentially corresponds to their fair value, as the eect of discounting is not significant taking the maturity of the receivables into consideration. Level 3: The fair value is not based on verifiable market information, and information on other circumstances aecting 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 compa- nies. EUR 1,000 31.12.2021 Note Fair value hierarchy Fair value through profit or loss Amortised cost Total carrying amounts Fair values total Impairment of financial assets Non-current financial assets Other shares and participations level 3 1 476 1 476 1 476 Lease deposits 15 level 2 535 535 535 Other receivables 15 level 2 90 90 90 Current financial assets Trade receivables 16 79 701 79 701 79 701 Other receivables 16 level 2 479 479 479 Cash and cash equivalents 4 257 4 257 4 257 Total 1 476 85 062 86 538 86 538 Carrying amounts of financial liabilities Non-current financial liabilities Loans from financial institutions 22 level 2 90 838 90 838 90 838 Lease liabilities 22 level 2 87 857 87 857 87 857 Other liabilities 22 level 2 607 607 607 Current financial liabilities Loans from financial institutions 22 level 2 1 283 1 283 1 283 Cheque account with credit limit 22 0 0 0 Lease liabilities 22 level 2 18 392 18 392 18 392 Trade and other payables 18 52 571 52 571 52 571 Total 251 548 251 548 251 548 EUR 1,000 31.12.2020 Note Fair value hierarchy Fair value through profit or loss Amortised cost Total carrying amounts Fair values total Impairment of financial assets Non-current financial assets Other shares and participations level 3 126 126 126 Lease deposits 15 level 2 545 545 545 Other receivables 15 level 2 90 90 90 Current financial assets Trade receivables 16 59 071 59 071 59 071 Other receivables 16 level 2 448 448 448 Cash and cash equivalents 13 306 13 306 13 306 Total 126 73 460 73 586 73 586 Carrying amounts of financial liabilities Non-current financial liabilities Loans from financial institutions 22 level 2 91 879 91 879 91 879 Lease liabilities 22 level 2 95 475 95 475 95 475 Other liabilities 22 level 2 644 644 644 Current financial liabilities Loans from financial institutions 22 level 2 1 415 1 415 1 415 Cheque account with credit limit 22 0 0 0 Lease liabilities 22 level 2 18 705 18 705 18 705 Trade and other payables 18 45 262 45 262 45 262 Total 253 379 253 379 253 379 80 BUSINESS AND STRATEGY | SUSTAINABILITY | REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS 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 company after deducting all of its liabilities. Costs relating to the issue or purchase of equity instruments are presented as a deduction from equity. Reconciliation of the number of shares EUR 1,000 Number of shares Share capital Reserve for invested unrestricted equity Total Shares, total, 1 January 2020 22 620 135 80 116 520 116 600 Treasury shares held by the parent company on 31 December 2020 2 294 Outstanding shares on 31 December 2020 22 617 841 80 116 520 116 600 Shares, total, 1 January 2021 22 620 135 80 116 520 116 600 Treasury shares held by the parent company on 31 December 2021 25 900 Outstanding shares on 31 December 2021 22 594 235 80 116 520 116 600 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 compa- ny’s assets. The shares belong to the book-entry system. Reserve for invested unrestricted equity The reserve for invested unrestricted equity contains other equity-like investments and the share subscription price to the extent that this is not entered in share capital under a specific decision. Distributable funds The parent company’s total distributable funds amount to EUR 222,747,364.13, of which the profit for the financial year accounts for EUR 13,893,203.86. Dividends The Board of Directors proposes that a dividend of EUR 0.30 per share be paid for the financial year that ended on 31 December 2021. 22. Financial liabilities EUR 1,000 2021 2020 Non-current interest-bearing liabilities Bank loans 90 838 91 879 Other liabilities 607 644 Lease liabilities 87 857 95 475 179 302 187 997 Current interest-bearing liabilities Bank loans 1 283 1 415 Cheque accounts with credit limit 0 0 Lease liabilities 18 392 18 705 19 675 20 119 Interest-bearing financial liabilities total 198 977 208 117 At the end of the financial year, the Group had EUR 45.0 (40.0) million of unused committed short-term credit limits. In addition, EUR 45.0 (60.0) million of an additional credit limit, which is subject to a separate credit decision, was unused on the financial statements date. Drawdowns from the Group’s revolving credit facility are actually long-term by nature, although their maturity is 1, 3 or 6 months. Lease liabilities EUR 1,000 2021 2020 Non-current lease liabilities Right-of-use plots 305 286 Right-of-use business premises and buildings 86 963 94 605 Right-of-use equipment 588 583 87 857 95 475 Current lease liabilities Right-of-use plots 63 88 Right-of-use business premises and buildings 17 715 17 723 Right-of-use equipment 614 894 18 392 18 705 81 BUSINESS AND STRATEGY | SUSTAINABILITY | REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS 23. Changes in interest-bearing liabilities with no impact on cash flow EUR 1,000 2020 Cash flow Acquired business operations New instal- ments and lease liabilities Eective interest rate 2021 Non-current interest- bearing liabilities 92 523 -1 323 149 96 91 445 Current interest-bearing liabilities 1 415 -261 130 1 283 Lease liabilities 114 179 -19 822 2 801 9 090 106 248 Total liabilities from financing 208 117 -21 406 2 801 9 369 96 198 976 24. Capital management The goal of the Group’s capital management is to ensure that the normal requirements of business operations 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 issues. The key indicators concerning capital management are the equity ratio, the ratio of net debt to adjusted EBITDA and gearing. EUR 1,000 Note 2021 2020 Restated Equity 122 611 114 190 Total statement of financial position – prepayments received 456 127 440 179 Equity ratio 1) 26,9 % 25,9 % Interest-bearing financial liabilities 22 198 977 208 117 Cash and cash equivalents -4 257 -13 306 Interest-bearing net debt 194 720 194 810 Gearing 2) 158,8 % 170,6 % EBITDA 62 638 52 164 Adjustment items 2 698 2 609 Adjusted EBITDA 65 336 54 773 Net debt/adjusted EBITDA 3,0 3,6 * Pihlajalinna has changed its accounting policies and begun to retrospectively apply, eective from 1 January 2020, the IFRS Interpretations Committee’s Agenda Decision published in April 2021 regarding the recognition of configuration or customisation costs in a cloud computing arrangement (Software as a Service, SaaS). ** 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 aect cash flow are treated as adjustment items aecting 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 business- es 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 employ- ment relationships, as well as fines and corresponding compensation payments. Pihlajalinna also pres- ents costs according to the IFRS Interpretations Committee’s new Agenda Decision concerning cloud computing arrangements as adjustment items. Adjusted operating profit before the amortisation and impairment of intangible assets (EBITA) is presented as a new alternative performance measure. During the financial year, the Group acquired 60,000 of its own shares based on an authorisation granted by the Annual General Meeting on 15 April 2020. The shares were acquired in public trading on Nasdaq Helsinki Ltd at the market price prevailing at the time of purchase. The shares were used as part of the Group’s incentive scheme. On the financial statements date, the Group held 25,900 treasury shares. 1) The formula for calculating the equity ratio is 100 x Equity / (Total statement of finan- cial position – prepayments received) 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 inter- est 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 Ocer, together with the operative management, is responsible for identifying financial risks and for practical risk management. The goal of the Group’s risk management is to ensure sucient 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 cove- nants and assesses financial leeway in relation to the covenant maximums as part of the Group’s business planning. 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, interest rate hedging for the Group’s loan portfolio. The Group had no interest rate hedging arrangements in place on the financial statements date. However, due to inflation and the upward pressure on interest rates, the Board of Directors is considering hedging against interest rate risk. On the financial statements date, 54% (56%) of the interest-bearing liabilities were subject to fixed interest rates. During the financial year, the average annual interest rate 82 BUSINESS AND STRATEGY | SUSTAINABILITY | REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS on the Group’s interest-bearing liabilities was approximately 1.68% (1.87%). The duration, i.e. the fixed interest rate period, of the financing portfolio was 3.2 (3.6) years. The table below presents the Group’s interest rate position at the end of the reporting period. EUR 1,000 2021 2020 Fixed rate financial liabilities 107 567 115 790 Variable rate financial liabilities 91 521 92 535 Total variable rate position 91 521 92 535 The table below presents the eects 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. 2021 2021 2020 2020 Change 0.5 percentage points higher 0.5 percentage points lower 0.5 percentage units higher 0.5 percentage units lower Eect on profit before tax -458 0 -463 0 Since the Group has no material interest-bearing assets, its income and operating cash flows are not materially exposed to changes in market interest rates. Liquidity risk The Group monitors the amount of financing required by business operations by analys- ing cash flow forecasts in order to make sure the Group has a sucient 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 suciently long maturities for borrowings, as well as by obtaining financing through several financial instruments. Pihlajalinna has a five-year EUR 120 million unsecured financing arrangement with Danske Bank and Nordea. The agreement is valid until 9 March 2023. Pihlajalinna has started refinancing negotiations that are intended to be completed before the end of March 2022. The current arrangement comprises a EUR 50 million revolving credit facility and a long-term bullet loan of EUR 70 million. It also includes an opportunity to increase the total amount by EUR 60 million (to EUR 180 million), subject to separate decisions on a supplementary loan from the funding providers. On the financial statements date, the Group’s cash and cash equivalents amounted to EUR 4.3 (13.3) million, in addition to which the Group had EUR 45.0 (40,0) million in unused committed credit limits available. In addition, EUR 45.0 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 26.9 (25.9) per cent. The Group has good financial standing and its business operations are profitable, and therefore the company has not identified any significant risks related to the availability of additional financing. 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 princi- pal. 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 institutions 92 121 -2 958 -90 984 -265 0 0 Lease liabilities 106 248 -19 934 -16 175 -14 029 -11 942 -51 236 Other interest-bearing liabilities 607 -20 -57 -57 -57 -738 Trade payables 52 571 -52 571 Total 251 548 -75 483 -107 216 -14 351 -11 999 -51 974 EUR 1,000 Carrying amount at 31 Dec. 2020 less than 1 year 1–2 years 2–3 years 3–4 years over 4 years Loans from financial institutions 93 293 -3 526 -3 337 -90 960 -249 0 Lease liabilities 114 179 -20 387 -17 314 -13 626 -12 181 -59 060 Other interest-bearing liabilities 644 -20 -57 -57 -57 -794 Trade payables 45 262 -45 262 Total 253 379 -69 196 -20 708 -104 642 -12 486 -59 854 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 monitors 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. The calculation of cove- nants will continue with the creditor banks in accordance with the accounting principles confirmed in the original financing arrangement (frozen GAAP, i.e. excluding the IFRS 16 impact). The Group met the set covenants on 31 December 2021. Due to the changes in the operating environment caused by the COVID-19 epidemic, Pihlajalinna and the creditor banks agreed on a temporary adjustment to the covenants of the financing arrangement at the end of March 2020. The temporary covenants for the first and second quarter of the year were as follows: leverage must not exceed 4.25 and gearing must not exceed 140 per cent. The covenants of the financing arrangement – leverage of 3.75 and gearing of 115 per cent – took eect again when the covenants were reviewed in the third quarter of 2020. In connection with this, a permanent new margin ceiling was added to the financing 83 BUSINESS AND STRATEGY | SUSTAINABILITY | REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS arrangement. The margin ceiling will enter into eect if leverage exceeds 3.50. On 31 December 2021, leverage in accordance with the financing arrangement stood at 2.30 (2.78) and gearing was 91% (94%). Pihlajalinna and the creditor banks agreed on the acquisition of Pohjola Hospital Ltd and the financing of the transaction in a timely manner, before the turn of the year in addition to a temporary raise in gearing-covenant level to 140 per cent in the first half of the year 2022. The transaction was financed by means of the additional credit limit in February 2022. At the end of the reporting period, 31 December 2021, the loan amount to which the covenants apply was EUR 90.0 (90.0) million. 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 solvent 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 oers private customers financing via SveaRahoitus. This arrange- ment includes a check of the customer’s creditworthiness. The age distribution of trade receivables is presented in Note 16 Trade receivables 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. 26. Acquired business operations Acquisitions during the financial year 2021 EUR 1,000 Acquired entity Month of acquisition Industry Domicile Työterveys Virta Oy 4/2021 Occupational health services Oulu The business operations of Finla Työter- veys Oy’s Mänttä-Vilppula unit. 11/2021 Occupational health services Mänttä-Vilppula Accounting policies With respect to significant business combinations, the Group has relied on an external advisor on the estimates of the fair value of property, plant and equipment and intangi- ble assets. With property, plant and equipment, comparisons are made with the market prices of corresponding assets, and it is estimated how much the value of the acquired assets has decreased due to age, wear and tear and other such factors. With intangible assets, fair value measurement is based on estimated cash flows related to the assets. Since the acquisitions are not material individually, the following information has been consolidated: EUR 1,000 2021 Consideration Cash, basic transaction price 17 941 Total cost of the combination 17 941 On the date of acquisition, the values of assets acquired and liabilities assumed were as follows: EUR 1,000 Note 2021 Property, plant and equipment 12 30 Intangible assets 13 2 195 Right-of-use assets 14 2 801 Available-for-sale financial assets 1 Deferred tax assets 83 Trade and other receivables 1 552 Cash and cash equivalents 1 527 Total assets 8 188 Deferred tax liabilities 435 Restructuring provision 300 Lease liabilities 22 2 801 Other liabilities 2 012 Total liabilities 5 549 Acquired net assets 2 640 Goodwill generated in the acquisition: EUR 1,000 Note 2021 Consideration transferred 17 941 Net identifiable assets of acquirees -2 640 Goodwill 13 15 301 Transaction price paid in cash 17 941 Cash and cash equivalents of acquiree -1 527 Eect on cash flow 16 414 Customer contracts, non-compete agreements and patient databases were recognised in the acquisition as intangible assets separate from goodwill. The fair value of intangible 84 BUSINESS AND STRATEGY | SUSTAINABILITY | REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS assets has been determined on the basis of the standardised price level in business combina- tions and the discounted values of future cash flows. The remaining goodwill consists of expecta- tions about returns, the skilled workforce of the acquired companies and synergy benefits. The acquisition-related expenses, a total of EUR 366 thousand, have been recorded under other operating expenses. Had the acquired business operations been consolidated since the beginning of the financial year, the consolidated revenue for the review period would have amounted to EUR 616.3 million and operating profit would have totalled EUR 27.4 million. Acquisition of non-controlling interests du- ring the financial year 2021 In August 2021, Pihlajalinna increased its holding in Kuusiolinna Terveys Oy, a joint ven- ture with the municipalities of Alavus, Ähtäri, Kuortane and Soini. The transaction was made with the municipality of Kuortane. After the transaction, the Group owns 97 per cent of the company. 27. Subsidiaries and material non-controlling interests The Group’s structure The Group had 28 (30) subsidiaries in 2021. Of these subsidiaries, 14 (16) are wholly-owned and 14 (14) are partially owned. A list of all of the Group’s subsidiaries is presented in Note 30 Related party transactions. In 2021, the Group had 2 (1) associated companies and 1 (1) joint operation. Breakdown of material non-controlling interests in the Group EUR 1,000 Subsidiary Main business location Non-controlling inte- rests’ share of the votes Non-controlling interests’ share of profit or loss Non-controlling interests’ share of equity 2021 2020 2021 2020 2021 2020 Jämsän Terveys Oy Jämsä 49 % 49 % -1 653 -289 -1 422 231 Pihlajalinna Erityisasumispalvelut Oy Hämeenlinna 30 % 30 % -72 10 -209 -137 Dextra Lapsettomuusklinikka Oy Helsinki 49 % 49 % 414 436 851 653 Pihlajalinna Liikuntakeskukset Group several 30 % 30 % -245 -604 1 854 2 099 Suomen Yksityiset Hammaslääkärit Group several 37 % 45 % -3 -23 393 477 -1 559 -469 1 467 3 322 Summary of financial information on subsidiaries with a material non-controlling interest Jämsän Terveys Oy Pihlajalinna Erityi- sasumispalvelut Oy Dextra Lapsetto- muusklinikka Oy Pihlajalinna Liikunta- keskukset Group Suomen Yksityiset Hammaslääkärit Group EUR 1,000 2021 2020 2021 2020 2021 2020 2021 2020 2021 2020 Current assets 42 550 30 919 544 415 1 715 1 166 1 326 1 272 270 700 Non-current assets 1 808 1 810 4 524 2 582 1 369 1 712 37 694 40 725 2 087 2 070 Current liabilities 46 686 31 517 1 672 1 026 695 797 15 392 14 510 1 193 1 504 Non-current liabilities 481 647 4 062 2 421 18 168 18 239 21 246 20 84 Revenue 75 022 73 997 4 302 3 650 5 980 5 425 12 579 11 797 4 392 4 478 Operating profit -3 576 -698 -214 82 1 149 1 149 -458 -1 921 12 -80 Profit/loss -3 374 -591 -238 35 897 889 -823 -2 028 -7 -51 Share of profit/loss attributable to owners of the parent -1 721 -301 -167 24 483 453 -578 -1 425 -4 -28 Non-controlling interests’ share of profit/loss -1 653 -289 -72 10 414 436 -245 -604 -3 -23 Net cash flow from operating activities -3 911 -2 537 18 283 1 386 1 401 4 158 3 737 155 360 Net cash flow from investing activities -137 -125 -2 164 -126 -600 -772 -1 512 -286 118 -176 Net cash flow from financing activities -201 -209 2 146 -157 -793 -623 -2 620 -7 015 -255 -214 of which dividends paid to non-controlling interests -215 -123 -89 * Pihlajalinna has changed its accounting policies and begun to retrospectively apply, eective from 1 January 2020, the IFRS Interpretations Com- mittee’s Agenda Decision published in April 2021 regarding the recognition of configuration or customisation costs in a cloud computing arrange- ment (Software as a Service, SaaS). 85 BUSINESS AND STRATEGY | SUSTAINABILITY | REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS 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 involves 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 either a joint operation or a joint ven- ture. 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 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 carried 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 ven- ture 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. EUR 1,000 2021 2020 Interests in associates Ullanlinnan Silmälääkärit Oy 20 17 Digital Health Solutions Oy 288 Interests in joint operations Koy Levinpihlaja 40 40 Total carrying amount 348 57 Interests in associates Holding, % Name Main business location Industry 2021 2020 Ullanlinnan Silmälääkärit Oy Helsinki Healthcare services 37 % 37 % Digital Health Solutions Oy Sotkamo All legal business 18 % The Group's pro rata share of an associate's or a joint venture's profit for the financial year is presented separately in operating profit up to the carrying amount of the Group’s invest- ment in their shares. Interests in joint operations The Group owns 31% in Kiinteistö Oy Levin Pihlaja, which is consolidated as a joint opera- tion according to the pro rata share. 29. Contingent assets and liabilities and commitments Collateral given on own behalf 2021 2020 Sureties 4 407 4 401 Properties’ VAT refund liability 59 85 Lease commitments for o-balance sheet leases 849 794 Lease deposits 535 545 Lawsuits and ocial 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 dierence in views regarding whether the fixed annual price for social and healthcare services can decrease due to price adjustments amounted to approximately EUR 3.7 (2.6) million at the end of the financial year. Jämsän Terveys filed an additional counterclaim against the City of Jämsä. The additional counterclaim concerns the eect of changes in the services 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 oper- ations 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. In its counterclaim, Jämsän Terveys claims a total of approximately EUR 16 million from the City of Jämsä. The total amount of variable compensation under the counterclaim that Jämsän Terveys has rec- ognised as revenue and recorded in its receivables amounts to EUR 3.9 (3.8) million. The District Court hearings were held in January 2022. The District Court has announced that it will hand down its decision at the beginning of March. The District Court of Kanta-Häme issued a decision on the dispute between Pihla- jalinna and the municipality of Hattula on 11 June 2021. The District Court found that Hattula did not have the right to terminate the agreement. Nevertheless, Pihlajalinna was ordered to pay compensation totalling EUR 123,175, including interest, to Hattula as contractual penalties and damages for breaches during the contract period. Pihlajalin- na’s counterclaim was approved with regard to its basis but rejected with regard to its amount. Each party was responsible for its legal costs. On 31 August 2021, in arbitration proceedings brought against a subsidiary of Pihlaja- linna Group regarding a breach of contract, an arbitration court found that the claimant had suered damages of EUR 295,800 due to the unfounded termination of an agree- ment. The court of arbitration ordered Pihlajalinna to pay compensation for damages and the claimant’s legal expenses, totalling EUR 82,943, and, under joint and several liability, pay for the costs of the arbitration proceedings, totalling EUR 98,694. Pihlajalinna still has certain employment-related legal proceedings pending. These are not expected to have a significant financial impact on the Group. 86 BUSINESS AND STRATEGY | SUSTAINABILITY | REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS Company Domicile Holding % of votes Parent company Pihlajalinna Plc Tampere Pihlajalinna Terveys Oy Parkano 100 % 100 % Ikipihlaja Johanna Oy Jämsä 100 % 100 % Jokilaakson Terveys Oy Jämsä 90 % 90 % Pihlajalinna Lääkärikeskukset Oy Helsinki 100 % 100 % Mäntänvuoren Terveys Oy Mänttä-Vilppula 91 % 91 % Ikipihlaja Kuusama Oy Kokemäki 100 % 100 % Ikipihlaja Sofianhovi Oy Mänttä-Vilppula 100 % 100 % Wiisuri Oy Jyväskylä 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 Turku Oy Turku 92 % 92 % Pihlajalinna Erityisasumispalvelut Oy Hämeenlinna 70 % 70 % Pihlajalinna Oulu Oy Oulu 100 % 100 % 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 63 % 63 % Pihlajalinna Hammasklinikat Oy Tampere 63 % 63 % Laihian Hyvinvointi Oy Laihia 81 % 81 % Information on the associates is presented in Note 28 Interests in associates and joint ar- rangements. Changes in Group structure The following changes in group structure were implemented during the financial year: Merged company Target company Month of acquisition Pihlajalinna Seinäjoki Oy Pihlajalinna Lääkärikeskukset Oy 9.4.2021 Terveyspalvelu Verso Oy Pihlajalinna Lääkärikeskukset Oy 1.5.2021 Työterveys Virta Oy Pihlajalinna Oulu Oy 1.9.2021 Employee benefits of management EUR 1,000 2021 2020 Monetary salaries, Management Team 1 054 1 120 Share-based rewards, Management Team 226 381 Fringe benefits, Management Team 16 25 Salaries and other short-term employee benefits, Management Team, total 1 297 1 526 Salaries and remuneration EUR 1,000 2021 2020 Joni Aaltonen, CEO Monetary salaries 283 285 Share-based rewards 100 136 Fringe benefits 21 13 Total 405 433 Board of Directors Vice-Chairman of the Board Leena Niemistö 58 45 Chairman of the Board Mikko Wirén 345 259 Chairman of the Audit Committee Seija Turunen 53 35 Board member Kati Sulin 42 31 Board member Matti Jaakola (until 15 April 2021) 9 34 Board member Hannu Juvonen 41 35 Board member Mika Manninen 41 35 Total 588 473 Of the annual remuneration paid in shares, a total of 5,000 shares held by the company were transferred to the Chairman of the Board of Directors, with 1,212 shares transferred to the Vice Chairman and the Chairman of the Audit Committee each, and 808 shares to each member of the Board of Directors. 30. Related party transactions The Group’s related parties consist of the subsidiaries, associates and joint ventures. Key management personnel considered related parties consist of the members of the Board of Directors and the Management Team, including the CEO. The Group’s parent company and subsidiary relationships The Group’s parent company is Pihlajalinna Plc, which owns all of Pihlajalinna Terveys Oy’s Series A shares. 87 BUSINESS AND STRATEGY | SUSTAINABILITY | REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS According to the CEO’s contract, the notice period for dismissal is 3 months. The com- pany is liable to pay the CEO one-time compensation for termination amounting to six months’ total salary. The CEO’s pension benefits are according to the statutory pension scheme. The CEO is not a member of the Board of Directors. Related party transactions and related party receivables and liabilities: 2021 2020 Key management personnel Rents paid 834 892 Services procured 958 945 Trade payables 83 -3 The Group has leased several of its business premises from a member of the key man- agement personnel: the premises in Nokia, Karkku, Tampere and Kangasala. A Group company has an agreement with a member of the key management person- nel, under which the Group buys healthcare professionals’ services. 31. Events after the balance sheet date Pihlajalinna and Pohjola Hospital were combined The Finnish Competition and Consumer Authority (FCCA) unconditionally approved the combining of Pihlajalinna and Pohjola Hospital. The acquisition is an important element of Pihlajalinna’s growth strategy, and it strengthens the combined entity’s service portfo- lio in all healthcare specialities. The business combination also enables the geographical expansion of the service network, especially in the Helsinki Metropolitan Area and other growth centres. Growth potential is further strengthened by the new five-year service agreement signed with Pohjola Insurance in connection with the deal. The transaction was completed on 1 February 2022. As previously announced, the net debt-free purchase price, paid in cash, was EUR 31.8 million. Pohjola Hospital’s revenue was EUR 62.5 million in 2021 and EUR 59.4 million in 2020. Established in 2013, Pohjola Hospital is a chain of hospitals specialising in ortho- paedics, i.e. the treatment of musculoskeletal disorders and accidents. Pohjola Hospi- tal operates in five cities with university hospitals: Helsinki, Tampere, Turku, Oulu and Kuopio. The company had an average of 295 employees and over 300 practitioners in 2021. The purchase price allocation for the Pohjola Hospital acquisition is still being finalised. The calculation will be completed within one year of the date of acquisition, by 31 Janu- ary 2023. Pihlajalinna presents a preliminary purchase price allocation. Adjustments have been made to the opening balance sheet of Pohjola Hospital on 31 January 2022 based on the calculation. The fair value adjustments mainly concern right-of-use assets, other provisions and deferred taxes. EUR 1,000 Consideration Cash, basic transaction price 31 800 Total cost of the combination 31 800 The preliminary values of the assets and liabilities acquired for consideration at the time of acquisi- tion were as follows: Property, plant and equipment 358 Intangible assets 6 037 Right-of-use assets 112 771 Other receivables 4 612 Deferred tax assets 3 848 Trade and other receivables 8 584 Cash and cash equivalents 1 809 Total assets 138 019 Deferred tax liabilities 1 095 Other provisions 4 881 Lease liabilities 131 744 Other liabilities 8 458 Total liabilities 146 178 Preliminary net assets -8 159 Goodwill generated in the acquisition: Consideration transferred 31 800 Net identifiable assets of acquirees 8 159 Goodwill 39 959 Transaction price paid in cash 31 800 Cash and cash equivalents of acquiree -1 809 Eect on cash flow* 29 991 EUR 953 thousand of the costs related to the foregoing acquisitions have been rec- ognised in other operating expenses (IFRS 3 costs). The preparation of the acquisition cost calculation requires management estimates concerning the fair values of the ac- quired assets and liabilities. The preliminary acquisition cost calculation may be subse- quently adjusted based on further analyses and additional information. Adjustments to the fair values of the acquired assets and liabilities will aect the preliminary estimate of goodwill. These adjustments may be material. 88 BUSINESS AND STRATEGY | SUSTAINABILITY | REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS PARENT COMPANY FINANCIAL STATEMENTS, FAS Parent company income statement, FAS EUR 1,000 note 1.1. - 31.12.2021 1.1. - 31.12.2020 Revenue 1.1. 5 205 4 224 Other operating income 1.2. 459 464 Personnel expenses 1.3. -1 350 -1 625 Depreciation, amortisation and impairment 1.4. -2 004 -1 825 Other operating expenses 1.5. -4 795 -4 303 Operating profit (loss) -2 486 -3 065 Financial income and expenses 1.6. -565 -1 216 Profit (loss) before appropriations and taxes -3 051 -4 281 Appropriations 1.7. Change in depreciation dierence -32 -199 Group contribution 20 350 14 000 Income taxes 1.8. -3 373 -1 821 Profit (loss) for the financial year 13 893 7 698 The Shareholders’ Nomination Board’s proposals to the Annual General Meeting 2022 The number of members and composition of the Board of Directors: The Nomination Board proposes to the Annual General Meeting of Pihlajalinna Plc, scheduled to be held on 13 April 2022, that the number of the members of the Board be confirmed to be seven instead of the current six. The Nomination Board proposes that Hannu Juvonen, Mika Manninen, Leena Niemistö, Kati Sulin, Seija Turunen and Mikko Wirén, currently members of the Board of Directors, be re-elected as members of the Board of Directors. The Nomination Board proposes that Heli Iisakka be elected as a new member of the Board of Directors. Heli Iisakka, born 1968, M.Sc. (Econ.), is the CFO of Colliers Finland Oy. Iisakka is independent of the company and its major shareholders. With regard to the procedure for the election of the members of the Board of Direc- tors, the Shareholders’ Nomination Board recommends that the shareholders vote on the proposal as a whole at the Annual General Meeting. This recommendation is based on Pihlajalinna having, in accordance with the Nordic model of good corporate governance, a Shareholders’ Nomination Board that is external to the Board of Directors. The task of the Nomination Board is to ensure that, in addition to the qualifications of the individual can- didates for Board membership, the proposed Board of Directors as a whole has the best possible expertise and experience from the Group’s perspective, and that the composition of the Board of Directors also meets the other requirements stipulated by the Corporate Governance Code for listed companies. The personal details of the current members of the Board and the details of their posi- tions of trust are available at investors.pihlajalinna.fi/corporate-governance/board-of-di- rectors. The Nomination Board further proposes that the Annual General Meeting elect Mikko Wirén as the Chairman of the Board and Leena Niemistö as the Vice-Chairman. The Shareholders’ Nomination Board proposes that, due to the ongoing significant changes in the social services and healthcare sector and the company’s significant ongo- ing strategic development, the role of the Chairman of the Board of Directors should still be a full-time role for the next term of oce. The Nomination Board’s shared will is that, after this term, the role of the Chairman of the Board of Directors will no longer be a full- time role. Remuneration of the members of the Board of Directors The Shareholders’ Nomination Board proposes that the remuneration of the Chairman of the Board of Directors be kept unchanged, and that the remuneration of the Vice-Chair- man, the Chairman of the Audit Committee and the members of the Board of Directors be increased, with the following annual remuneration to be paid to the members of the Board of Directors to be elected at the Annual General Meeting for the term of oce ending at the close of the Annual General Meeting 2023: to the Chairman of the Board of Directors EUR 250,000; to the Vice-Chairman EUR 39,000, and to members EUR 26,000. The proposal is that the annual remuneration to be paid in company shares and cash so that about 40 per cent of the remuneration is used to purchase the company’s shares on behalf of the members and the remaining share of the remuneration is 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, 13 April 2022, 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 shares can be paid by transferring company shares in possession of the company to the members of the Board of Directors or by purchasing shares directly on behalf of the Board members within three weeks after the interim report for the period of 1 January–31 March 2022 has been published. If this is not possible due to legal or other regulatory reasons, such as insider regulations, the shares will be transferred or purchased at the earliest pos- sible time thereafter or, alternatively, the remuneration will be paid in cash. If the term of a Board member ends before the Annual General Meeting of 2023, the Board is entitled to decide on the possible recovery of the remuneration in a manner it deems appropriate. The Nomination Board proposes that each member of the Board of Directors be paid a cash attendance fee of EUR 500 per Board or Committee meeting. Reasonable travel expenses will also be reimbursed to the members of the Board in accordance with the Company’s travel policy. 89 BUSINESS AND STRATEGY | SUSTAINABILITY | REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS Parent company balance sheet, FAS EUR 1,000 note 31.12.2021 31.12.2020 Assets Non-current assets Intangible assets 2.1. 4 048 4 739 Property, plant and equipment 2.2. 2 155 2 454 Investments 2.3. 284 835 284 485 291 038 291 677 Current assets Non-current receivables 2.4. 37 39 Current receivables 2.5. 82 787 58 056 Cash and cash equivalents 2 179 7 840 85 002 65 936 Total assets 376 040 357 613 Equity and liabilities Equity 2.6. Share capital 80 80 Reserve for invested unrestricted equity 183 190 183 190 Retained earnings 26 152 23 553 Profit/loss for the financial year 13 893 7 698 223 316 214 522 Accumulated appropriations 2.7 1 018 986 Mandatory provisions 2.8 21 48 Liabilities 2.9 Non-current liabilities 90 368 91 066 Current liabilities 61 316 50 992 151 685 142 058 Total equity and liabilities 376 040 357 613 Parent company cash flow statement, FAS EUR 1,000 31.12.2021 31.12.2020 Cash flow from operating activities Profit for the period 13 893 7 698 Depreciation, amortisation and impairment 2 004 1 825 Financial income and expenses 565 1 216 Other adjustments (appropriations and taxes) -16 944 -11 999 Cash flow before change in working capital -482 -1 259 Change in net working capital -2 699 641 Cash flows from operating activities before financial items and taxes -3 181 -618 Interest received 1 449 1 154 Direct taxes paid -2 416 -70 Cash flow from operating activities -4 149 466 Cash flow from investing activities Investments in tangible and intangible assets -904 -769 Other investments -350 Cash flow from investing activities -1 254 -769 Cash flow from financing activities Proceeds from short-term borrowings from group companies 11 724 22 929 Loans granted to Group companies -17 973 -6 532 Repayment of short-term borrowings -501 Proceeds from long-term borrowings 20 000 Repayment of long-term borrowings -20 771 -10 734 Group contributions received 14 000 6 000 Interest paid -2 139 -2 344 Dividends paid -4 517 Omien osakkeiden hankinta -582 -692 Cash flow from financing activities -258 8 127 Change in cash and cash equivalents -5 661 7 824 Cash at the beginning of the financial year 7 840 16 Cash at the end of the financial year 2 179 7 840 90 BUSINESS AND STRATEGY | SUSTAINABILITY | REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS Notes to the financial statements 31 december 2021 Accounting policies Pihlajalinna Plc (2617455-1), domiciled in Tampere, is the parent company of Pihlajalinna Group. The company 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 impairment is considered to be permanent. Recognition of deferred taxes Deferred tax liabilities or assets have been calculated on the temporary dierences between taxation and the financial statements, using the prevailing tax base at balance sheet date. The balance sheet includes deferred tax liabilities in their entirety and de- ferred tax assets in the amount of the estimated probable receivables. 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 Pihlajalin- na mobile application and the company website will be amortised over their economic useful lives. Unamortised development expenditure included in intangible assets, which restricts profit distribution, amounted to EUR 489 (753) thousand 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. 1.1. Revenue EUR 1,000 2021 2020 Revenues by sector 5 205 4 224 Sale of services 5 205 4 224 1.2. Other operating income EUR 1,000 2021 2020 Rental income 116 116 Lease income from equipment 328 328 Insurance indemnities received 0 1 Capital gains on property, plant and equipment 19 Government grants received 14 0 459 464 1.3. Personnel expenses EUR 1,000 2021 2020 Wages and salaries -1 234 -1 514 Pension costs -100 -96 Other social security expenses -16 -16 Total -1 350 -1 625 Average number of employees during the financial year 3 3 The remuneration of the Board of Directors of Pihlajalinna Plc is included in the com- pany’s personnel expenses. The Annual General Meeting of 15 April 2021 decided that remuneration shall be paid to the members of the Board of Directors as follows: to the full-time Chairman of the Board of Directors EUR 250,000 per year; to the Vice-Chair- man of the Board and the Chairman of the Audit Committee EUR 36,000 per year, and to members EUR 24,000 per year. In addition, the Annual General Meeting decided that each Board member shall be paid a meeting fee of EUR 500 for each Board and Com- mittee meeting. The annual remuneration shall be paid in company shares and in cash, with approx- imately 40 per cent of the remuneration 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 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, 15 April 2021, been in possession 91 BUSINESS AND STRATEGY | SUSTAINABILITY | REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS 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 executed 11 May 2021, immediately after publish- ing the interim report, by relinquishing 9,848 of the company's own shares. Rest of the annual remuneration was paid at the same time in cash. If the term of a Board member ends before the Annual General Meeting of 2022, the Board is entitled to decide on the possible recovery of the remuneration in a manner it deems appropriate. A total of 5,000 shares were transferred to the Chairman of the Board, 1,212 shares to the Vice-Chairman of the Board and the Chairman of the Audit Committee, and 808 shares to the members of the Board of Directors. In addition, the reasonable travel expenses of the members of the Board of Directors are reimbursed in accordance with the Com- pany's travel policy. A summary of the remuneration of the Board of Directors and the Management Team is included in the Remuneration Report. 1.4. Depreciation and impairment EUR 1,000 2021 2020 Depreciation according to plan Intangible assets -1 593 -1 458 Property, plant and equipment -411 -367 -2 004 -1 825 1.5. Other operating expenses EUR 1,000 2021 2020 Voluntary social security expenses -111 -49 Facility expenses -120 -105 Vehicle expenses -19 -24 ICT expenses -3 560 -2 757 Machinery and equipment expenses -1 0 Sales, marketing and travel expenses -77 -36 Administrative expenses -848 -1 331 Other operating expenses, total -4 735 -4 303 Auditor’s fees audit fees 113 92 auxiliary services 6 5 119 97 1.6. Financial income and expenses EUR 1,000 2021 2020 Interest income from non-current investments From Group companies 1 449 1 154 From others 0 0 Interest income from non-current investments, total 1 449 1 154 Interest expenses and other financial expenses To others -2 013 -2 370 Interest expenses and other financial expenses, total -2 013 -2 370 Financial income and expenses, total -565 -1 216 1.7. Appropriations EUR 1,000 2021 2020 Dierence between depreciation according to plan and dep- reciation in taxation -32 -199 Group contributions received 20 350 14 000 20 318 13 801 1.8. Income taxes EUR 1,000 2021 2020 Change in deferred tax assets Income taxes on actual operations during the financial year -3 373 -1 821 Income taxes total -3 373 -1 821 92 BUSINESS AND STRATEGY | SUSTAINABILITY | REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS Notes to the balance sheet EUR 1,000 31.12.2021 31.12.2020 2.1. Intangible assets 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 1 607 Accumulated amortisation according to plan during the financial year -854 -590 Accumulated amortisation according to plan during the financial year -264 -264 Carrying amount at the end of the period 489 753 Other intellectual property rights Acquisition cost at the start of the financial year 1 615 1 615 Additions 43 Acquisition cost at the end of the period 1 658 1 615 Accumulated amortisation according to plan during the financial year -1 028 -789 Accumulated amortisation according to plan during the financial year -221 -240 Carrying amount at the end of the period 409 587 Other long-term expenditures Acquisition cost at the start of the financial year 5 264 4 082 Additions 787 645 Transfers between items 536 Acquisition cost at the end of the period 6 051 5 264 Accumulated amortisation according to plan during the financial year -1 871 -917 Accumulated amortisation according to plan during the financial year -1 108 -954 Carrying amount at the end of the period 3 072 3 393 Prepayments for intangible assets Acquisition cost at the beginning 6 440 Additions 73 103 Transfers between items -536 Carrying amount at the end of the period 79 6 Intangible assets, total Acquisition cost at the start of the financial year 8 492 7 743 Additions 903 749 Transfers between items Acquisition cost at the end of the period 9 394 8 492 Accumulated amortisation according to plan during the financial year -3 753 -2 295 Accumulated amortisation according to plan during the financial year -1 593 -1 458 Carrying amount at the end of the period 4 048 4 739 EUR 1,000 31.12.2021 31.12.2020 2.2. Property, plant and equipment Machinery and equipment Acquisition cost at the start of the financial year 3 472 3 411 Additions 112 172 Disposals -111 Acquisition cost at the end of the period 3 584 3 472 Accumulated amortisation according to plan during the financial year -1 018 -716 Accumulated depreciation on disposals and transfers 65 Accumulated amortisation according to plan during the financial year -411 -367 Carrying amount at the end of the period 2 155 2 454 Property, plant and equipment, total Acquisition cost at the start of the financial year 3 472 3 411 Additions 112 172 Disposals 0 -111 Acquisition cost at the end of the period 3 584 3 472 Accumulated amortisation according to plan during the financial year -1 018 -716 Accumulated depreciation on disposals and transfers 0 65 Accumulated amortisation according to plan during the financial year -411 -367 Carrying amount at the end of the period 2 155 2 454 2.3. Investments Other shares and participations Additions 350 Acquisition cost at the end of the period 350 Shares in subsidiaries Acquisition cost at the start of the financial year 284 485 284 485 Acquisition cost at the end of the period 284 485 284 485 Total investments 284 835 284 485 A full list of the Group’s subsidiaries is presented in Note 30 “Related party transactions” to the consolidated financial statements. 93 BUSINESS AND STRATEGY | SUSTAINABILITY | REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS EUR 1,000 31.12.2021 31.12.2020 2.4. Non-current receivables Receivables from others Lease deposits given 37 39 37 39 Total non-current receivables 37 39 2.5. Current receivables Receivables from others Other receivables 376 303 Prepayments and accrued income 2 195 1 483 2 570 1 786 Receivables from Group companies Trade receivables -43 30 Loan receivables 59 788 41 815 Prepayments and accrued income 20 445 14 426 80 190 56 271 Material items included under Prepayments and accrued income Group contribution 20 350 14 000 Allocation of sales 95 426 Accrued social security expenses 85 Other 2 109 1 483 22 639 15 909 Total current receivables 82 760 58 056 2.6. Equity 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 31 251 24 244 Dividends paid -4 517 Acquisition of own shares -582 -692 Retained earnings 26 152 23 553 Profit for the period 13 893 7 698 Total unrestricted equity 223 236 214 442 Total equity 223 316 214 522 EUR 1,000 31.12.2021 31.12.2020 Retained earnings 26 152 23 553 Profit for the period 13 893 7 698 Reserve for invested unrestricted equity 183 190 183 190 Capitalised development costs -489 -753 Distributable unrestricted equity 222 747 213 689 Number of shares 22 620 135 22 620 135 of which treasury shares 25 900 2 294 Number of outstanding shares 22 594 235 22 617 841 2.7. Accumulated appropriations Accumulated depreciation dierence 1 018 986 2.8. Mandatory provisions Onerous contracts 21 48 2.9. Liabilities 2.9.1 Non-current liabilities Liabilities to others Loans from financial institutions 90 000 90 000 Other non-current liabilities 332 1 030 Lease deposits received 36 36 90 368 91 066 Non-current liabilities, total 90 368 91 066 2.9.2 Current liabilities Liabilities to others Trade payables 297 2 056 Other liabilities 811 1 256 Accrued liabilities 3 062 2 297 4 170 5 609 Liabilities to Group companies Trade payables 1 72 Accrued liabilities 111 Other liabilities 57 035 45 311 57 147 45 383 Material items included under Accrued liabilities Personnel expense allocations 149 134 Interest allocations 65 191 Taxes 2 769 1 812 Other items 189 160 3 172 2 297 Current liabilities, total 61 316 50 992 94 BUSINESS AND STRATEGY | SUSTAINABILITY | REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS Other notes EUR 1,000 31.12.2021 31.12.2020 Collaterals and contingent liabilities Collaterals given on behalf of Group companies Other sureties 121 121 Pihlajalinna’s financing arrangements Pihlajalinna has a five-year EUR 120 million unsecured financing arrangement with Danske Bank and Nordea. The arrangement comprises a EUR 50 million revolving credit facility and a long-term bullet loan of EUR 70 million. It also includes an opportunity to increase the total amount by EUR 60 million (to EUR 180 million), subject to separate decisions on a supplementary loan from the funding providers. The financing arrangement includes the customary leverage (ratio of net debt to pro forma EBITDA) and gearing covenants. The calculation of covenants will continue with the creditor banks in accordance with the accounting principles confirmed in the original financing arrangement (frozen GAAP, i.e. excluding the IFRS 16 impact and IFRS Inter- pretations Committee's agenda decision on the accounting of the costs of configuring or customising a cloud computing arrangement). The Group met the set covenants on 31 December 2021. Due to the changes in the operating environment caused by the COVID-19 epidemic, Pihlajalinna and the creditor banks agreed on a temporary adjustment to the covenants of the financing arrangement for the first two quarters of 2020 at the end of March 2020. The original covenants of the financing arrangement – leverage of 3.75 and gear- ing of 115 per cent – took eect again when the covenants were reviewed in the third quarter of 2020. In connection with this, a permanent new margin ceiling was added to the financing arrangement. The margin ceiling will enter into eect if leverage exceeds 3.50. On 31 December 2021, leverage in accordance with the financing arrangement stood at 2.30 and gearing at 91 per cent. Due to the acquisition of Pohjola Hospital Ltd, Pihlajalinna and the creditor banks agreed, before the end of the year, on temporarily increasing the gearing covenant to 140 per cent for the first and second quarters of 2022. The Group has credit limit agreements valid until further notice, totalling EUR 10 million. The notice period of the credit limit agreements is one month. At the end of the financial year, Pihlajalinna had EUR 45.0 million (EUR 40.0 million) in unused committed credit limits. In addition, EUR 45.0 million of an additional credit limit, which is subject to a separate credit decision, was unused on the financial statements date. Pihlajalinna and the creditor banks agreed on the acquisition of Pohjola Hospital Ltd and the financing of the transaction in a timely manner, before the turn of the year. The transaction was financed by means of the additional credit limit in February 2022. At the end of the reporting period, 31 December 2021, the withdrawn loan amount to which the covenants apply was EUR 90.0 million (EUR 90.0 million). EUR 1,000 31.12.2021 31.12.2020 Lease commitments Within one year Between one and five years 569 451 Over five years later 71 214 95 BUSINESS AND STRATEGY | SUSTAINABILITY | REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS Auditor’s Note A report on the performed audit has been issued today. Tampere, on the date of the electronic signature KPMG Oy Ab Lotta Nurminen Authorised Public Accountant Dates and signatures to the report by the Board of Directors and the financial statements Tampere, 17 February 2022 Mikko Wirén Chairman Leena Niemistö Hannu Juvonen Kati Sulin Seija Turunen Mika Manninen Joni Aaltonen CEO 96 BUSINESS AND STRATEGY | SUSTAINABILITY | REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS 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 2021. The financial statements comprise the consolidated statement of financial position, 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 Finan- cial 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 financial position in accordance with the laws and regulations gov- erning the preparation of financial statements 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 Re- sponsibilities for the Audit of the Financial Statements section of our report. We are independent of the parent company and of the group companies in accor- dance 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 pro- vided 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 regulation (EU) 537/2014. We have not provided any non-audit services to the parent company or group companies. We believe that the audit evidence we have obtained is sucient and appropriate to provide a basis for our opinion. Materiality TThe scope of our audit was influenced by our application of materiality. The materi- ality is determined based on our professional judgement and is used to determine the nature, timing and extent of our audit procedures and to evaluate the eect 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 audit 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 mat- ters. The significant risks of material misstatement referred to in the EU Regulation 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 repre- sented a risk of material misstatement due to fraud. AUDITED FINANCIAL STATEMENTS 97 BUSINESS AND STRATEGY | SUSTAINABILITY | REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS The key audit matter How the matter was addressed in the audit Judgmental items relating to municipality outsourcing contracts (refer to notes 1, 16 and 29 in the consolidated financial statements) and emphasis of matter We draw attention to note 1 and the receivables totaling EUR 9.7 million presented in sections Key accounting estimates and decisions based on management judgement and Items that may, according to the management’s estimate, influence the profitability of complete outsourcing agreements with a delay. Circumstances described in the notes may aect the payments to be received for these receivables. Our opinion is not modified in respect of this matter. • A notable proportion of the Group’s reve-nue is based on long-term outsourcing contracts with municipalities. These in-clude both complete outsourcing con-tracts for social and healthcare services as well as other outsourcing contracts. • The Group’s profitability of complete out-sourcing contracts for social and healthcare services may become more accu- rate with a delay. The Group may not always be aware of the actual costs of the agreements during the financial year and there may be variable considerations in-cluded. • High level of management judgement, which can have a significant impact on the consolidated result and statement of financial position, is involved in the ac-counting for outsourcing contracts due to the extent of the contracts, definitions of contractual obligations and amendment clauses for changed situations. • In note 1 section Items that may, accord-ing to the management’s estimate, influ-ence the profitability of complete out-sourcing agreements with a delay the fol-lowing items relating to outsourcing con-tracts with municipalities are presented: • 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 dierence of opinion regarding the determination of the annual price totalled approximately EUR 3.7 million at the time of the financial statements. Jämsän Terveys filed an addi- tional counterclaim against the City of Jämsä. Jämsän Terveys Oy has included in its receivables a total of EUR 3.9 million from the city of Jämsä, associated with the eect of changes in the services under the service agreement on price and the service provider’s liability for fi-nancing investments by the hospi-tal district insofar as such invest- ments serve operations after the term of the service agreement. • Mäntänvuoren Terveys Oy has receivables totaling EUR 4.1 million from a client. The receivables are associated with an estimate of the investment cost li-ability in specialised care and cost increases caused by service changes. • Kolmostien Terveys Oy has receivables of EUR 1.7 million from a client. The receivables are associated with an esti- mate of the investment cost liability in special-ised care and cost increases caused by service changes • Due to the significant amount of account-ing estimates in relation to the result for the period and equity and the recei- vables being past due, recognized judgmental items relating to the municipality outsourc-ing contracts are considered a key audit matter. • We observed the judgmental items rec-orded in the consolidated financial state-ments through discussions with manage-ment, analytically and by per- forming sub-stantive testing. We obtained related agreements, calculations and administra-tive documents. • We obtained legal opinions on the ser-vice agreements and juridical basis for recognizing these items as well as their amounts from a law firm used by the Group. In addition, we inquired a repre-sentative from the law firm on these mat-ters in more detail. • We obtained legal representation letters about the legal dispute in district court. • We assessed the recognition principles applied to judgmental income and ex-pense items against IFRS principles and considered the appropriateness of the Group’s disclosures in respect of judg-mental items. • We assessed how the Group has re-ceived payments relating to previously recognized judgmental items and ob-tained a representation letter from the management about the collectability of these receivables. • We reported in more detail about the contents of these judgmental items to the Audit Committee and the Board of Direc-tors. Goodwill impairment assessment (refer to note 13 to 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 2021 includes goodwill totaling EUR 188.9 million. • Goodwill is not amortized but is tested at least annually for impairment. Determining the cash flow forecasts underlying the impairment 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 calcu-lations such as revenue growth rate, prof-itability and discount rate, by reference to the parent company’s Board approved budgets, data external 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 accu- racy of the calculations and compared the as-sumptions used to market and industry in-formation. • Furthermore, we considered the appropri-ateness of the Group’s disclosures in re-spect of goodwill and impairment testing. 98 BUSINESS AND STRATEGY | SUSTAINABILITY | REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS Responsibilities of the Board of Directors and the Man- aging Director for the Financial Statements The Board of Directors and the Managing Director are responsible for the preparation of consolidated financial statements that give a true and fair view in accordance with In- ternational Financial Reporting Standards (IFRS) as adopted by the EU, and of financial statements that give a true and fair view in accordance with the laws and regulations 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 determine is necessary to enable the preparation of finan- cial statements that are free from material misstatement, 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 applicable, 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 liquidate 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 state- ments as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes 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. Mis- statements can arise from fraud or error and are considered material if, individually or in the aggregate, 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 profession- al judgment and maintain professional skepticism throughout the audit. We also: • TIdentify 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 sucient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forg- ery, 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 eectiveness 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 Direc- tor’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 conclu- sions are based on the audit evidence 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 disclosures, and whether the financial statements represent the under- lying transactions and events so that the financial statements give a true and fair view. • Obtain sucient appropriate audit evidence regarding the financial information of the entities or business activities within the group to express an opinion on the consol- idated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible 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 com- plied with relevant ethical requirements regarding independence, and communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. 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 public 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. 99 BUSINESS AND STRATEGY | SUSTAINABILITY | REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS 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 unin- terrupted engagement of eight 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 be- came a public interest entity. Other Information The Board of Directors and the Managing Director are responsible for the other infor- mation. The other information comprises the report of the Board of Directors and the information included in the Annual Report, 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 information 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 applica- ble 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 misstate- ment of this other information, we are required to report that fact. We have nothing to report in this regard. Tampere 21 February 2022 KPMG OY AB Lotta Nurminen Authorised Public Accountant, KHT 100 BUSINESS AND STRATEGY | SUSTAINABILITY | REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS Information for shareholders Interim report January–September: Friday, 4 November 2022 Financial Statements Release, January–December In February 2023 Half-year financial report January–June: Friday, 12 August 2022 Interim report January–March: Thursday, 5 May 2022 Q4 Q3 Q1 2022 Q2 Pihlajalinna’s financial reporting in 2022 The interim reports will be published at approximately 8:00 a.m. in Finnish and En- glish, and they will be available on Pihlajalinna’s website at investors.pihlajalinna.fi. Pihlajalinna’s management organises information events for analysts and the media on a regular basis. Pihlajalinna complies with a silent period of 30 days and a closed window before the publication of results General meeting The Annual General Meeting of Pihlajalinna Plc will be held on Wensday, 13 April 2022 at 2:00 p.m.. The meeting will be held exceptionally without the presence of shareholders or their proxy representatives at Pihlajalinna's head oce at Kehräsaari B, 33200 Tam- pere. Right to participate The right to participate in the Annual General Meeting will rest with shareholders who, on the Annual General Meeting record date of 1 April 2022, are registered in the compa- ny’s shareholders’ register maintained by Euroclear Finland Oy Registration A shareholder who is registered in the company’s shareholders’ register and who wants to participate in the meeting by voting in advance must register and vote in advance by 7 April 2022 at 15 p.m. at the latest, by which time the registration will be completed and votes must have been received. Registration and voting in advance is possible at Pihlajalinna's website investors.pihlajalinna.fi/?sc_lang=en or a shareholder may submit the advance voting form available on Pihlajalinna’s Annual General Meeting webpages as of 25 March 2022, or equivalent information, to Innovatics Oy by email to the address [email protected] or by post to the address Innovatics Oy, Annual General Meeting/Pihlajalinna Plc, Ratamestarinkatu 13 A, 00520 Helsinki. If a shareholder partic- ipates in the meeting by submitting his/her advance votes to Innovatics Oy by post or email prior to the deadline for registration and advance voting, this will be deemed to constitute due registration for the Annual General Meeting, provided that it includes all information required for the registration and advance voting as set out above. The instructions concerning advanced voting are also available on Pihlajalinna’s Annual General Meeting webpages. Additional information about registration and advance voting is also available during the registration period by calling the number +358 10 2818 909 on weekdays from 9.00 a.m. to 12.00 noon and 1.00 p.m. to 4.00 p.m. Possible powers of attorney must be submitted either at the time of online registration and advance voting or by email to the address [email protected], or by post to the address Pihlajalinna Plc/AGM, PL Kehräsaari B, 33200 Tampere before the end of the registration period and voting period, by which time the above-mentioned powers of attorney must have been received. Payment of dividend The Board of Directors proposes to the AGMeeting that, based on the balance sheet confirmed for the financial period ending 31 December 2021, EUR 0.30 per share will be distributed as a dividend. As the amount of the dividend proposed by the Board of Di- rectors is lower than the minority dividend according to Chapter 13, Section 7 of the Lim- ited Liability Companies Act, the shareholders are entitled to claim the minority dividend referred to above. The minority dividend shall be distributed if the claim is supported by shareholders holding at least one tenth of all the shares in the company in a preliminary vote. The amount of the minority dividend corresponds to half of the profit of the parent company for the financial year, i.e. EUR 0.307 per share. A shareholder requesting a mi- nority dividend may vote in favour of the minority dividend in the advance vote, without having to make a separate request or counter-proposal. The dividend will be paid to shareholders who, on the dividend payment record date of 19 April 2022, are registered in the company’s shareholders’ register maintained by Euroclear Finland Oy. The Board of Directors proposes that the dividend be paid on 26 April 2022. 101 BUSINESS AND STRATEGY | SUSTAINABILITY | REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS Investment survey As far as Pihlajalinna is aware, the following investment banks and stockbrokers monitor Pihlajalinna and publish reports on the company: Pihlajalinna is not liable for the esti- mates presented in the analyses. • Danske Bank • Carnegie • Inderes • OP • SEB • Evli • Nordea Contact details Marko Savolainen, Chief Legal Ocer, +358 400 195213, [email protected] Tarja Rantala, CFO, +358 40 7749290, [email protected] Additional information is available in the investor section at investors.pihlajalinna.fi Pihlajalinna share price development 2021 4.2.2021 4.5.2021 4.10.2021 4.3.2021 4.8.2021 4.6.2021 4.11.2021 4.4.2021 4.9.2021 4.7.2021 4.12.2021 4.1.2022 4.2.2022 4.1.2021 14 13 12 11 10 9 8 Pihlajalinna OMX Helsinki 102 BUSINESS AND STRATEGY | SUSTAINABILITY | REPORT BY THE BOARD OF DIRECTORS | AUDITED FINANCIAL STATEMENTS pihlajalinna.fi KPMG Oy Ab Hämeenkatu 9, 4.krs 33100 TAMPERE Puhelin 020 760 3000 www.kpmg.fi KPMG Oy Ab, a Finnish limited liability company and a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. Y-tunnus 1805485-9 DomicileKotipaikka Helsinki 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 on the iXBRL marking up of the consolidated financial statements for the year ended 31 December, 2021, included in the Pihlajalinna Plc’s digital files [74370058MTRLEDOCHV67-2021-12-31-en.zip] prepared 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 Directors 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 consolidated financial statements included in the ESEF financial statements with iXBRL tags in accordance 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 Control 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 obligations in accordance with these requirements. The auditor applies International Standard on Quality Control 1 and accordingly maintains a comprehensive system of quality control including documented policies and procedures regarding compliance with ethical requirements, professional standards and applicable legal and regulatory 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 accordance with International Standard on Assurance Engagements 3000. The engagement involves procedures to obtain evidence whether; — 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; — 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. Pihlajalinna Plc Independent Auditor’s Reasonable Assurance Report on ESEF Financial Statements 18 March, 2022 2 Opinion In our opinion, the consolidated financial statements included in the ESEF financial statements of Pihlajalinna Plc identified as [74370058MTRLEDOCHV67-2021-12-31-en.zip] for the year ended 31 December, 2021 are marked up, in all material respects, in compliance with the ESEF Regulatory Technical Standard. Our audit opinion relating to the consolidated financial statements of Pihlajalinna Plc for the year ended 31 December, 2021 is set out in our Auditor’s Report dated 18 February, 2022. In this report, we do not express an audit opinion, review conclusion or any other assurance conclusion on the consolidated financial statements. Tampere 18 March, 2022 KPMG OY AB LOTTA NURMINEN Authori sed Public Accountant, KHT 74370058MTRLEDOCHV672021-01-012021-12-3174370058MTRLEDOCHV672020-01-012020-12-3174370058MTRLEDOCHV672021-12-3174370058MTRLEDOCHV672020-12-3174370058MTRLEDOCHV672019-12-3174370058MTRLEDOCHV672019-12-31ifrs-full:IssuedCapitalMemberifrs-full:PreviouslyStatedMember74370058MTRLEDOCHV672019-12-31ifrs-full:IssuedCapitalMember74370058MTRLEDOCHV672020-12-31ifrs-full:IssuedCapitalMember74370058MTRLEDOCHV672019-12-31PIH:ReserveOfInvestedUnrestrictedEquityMemberifrs-full:PreviouslyStatedMember74370058MTRLEDOCHV672019-12-31PIH:ReserveOfInvestedUnrestrictedEquityMember74370058MTRLEDOCHV672020-12-31PIH:ReserveOfInvestedUnrestrictedEquityMember74370058MTRLEDOCHV672019-12-31ifrs-full:RetainedEarningsMemberifrs-full:PreviouslyStatedMember74370058MTRLEDOCHV672019-12-31ifrs-full:RetainedEarningsMemberifrs-full:IncreaseDecreaseDueToChangesInAccountingPolicyRequiredByIFRSsMember74370058MTRLEDOCHV672019-12-31ifrs-full:RetainedEarningsMember74370058MTRLEDOCHV672020-01-012020-12-31ifrs-full:RetainedEarningsMember74370058MTRLEDOCHV672020-12-31ifrs-full:RetainedEarningsMember74370058MTRLEDOCHV672019-12-31ifrs-full:NoncontrollingInterestsMemberifrs-full:PreviouslyStatedMember74370058MTRLEDOCHV672019-12-31ifrs-full:NoncontrollingInterestsMember74370058MTRLEDOCHV672020-01-012020-12-31ifrs-full:NoncontrollingInterestsMember74370058MTRLEDOCHV672020-12-31ifrs-full:NoncontrollingInterestsMember74370058MTRLEDOCHV672019-12-31ifrs-full:PreviouslyStatedMember74370058MTRLEDOCHV672019-12-31ifrs-full:IncreaseDecreaseDueToChangesInAccountingPolicyRequiredByIFRSsMember74370058MTRLEDOCHV672021-12-31ifrs-full:IssuedCapitalMember74370058MTRLEDOCHV672021-12-31PIH:ReserveOfInvestedUnrestrictedEquityMember74370058MTRLEDOCHV672021-01-012021-12-31ifrs-full:RetainedEarningsMember74370058MTRLEDOCHV672021-12-31ifrs-full:RetainedEarningsMember74370058MTRLEDOCHV672021-01-012021-12-31ifrs-full:NoncontrollingInterestsMember74370058MTRLEDOCHV672021-12-31ifrs-full:NoncontrollingInterestsMemberiso4217:EURiso4217:EURxbrli:shares
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