Galenica - Annual report 2023

16. Leases

Right-of-use assets

in thousand CHF	Real estate	Other right of-use assets	Total right-of-use assets
Net carrying amount as at 31.12.2021	215,239	257	215,496
Addition	23,456	76	23,533
Reassessment of existing lease contracts	35,497	12	35,509
Depreciation	–51,059	–197	–51,255
Impairment	–1,644	–	–1,644
Reversal of impairment	1,492	–	1,492
Addition to scope of consolidation	3,951	52	4,002
Disposal from scope of consolidation	–444	–	–444
Translation differences	–	–4	–4
Net carrying amount as at 31.12.2022	226,489	196	226,685
Addition	22,104	139	22,243
Reassessment of existing lease contracts	31,297	5	31,302
Depreciation	–52,726	–118	–52,844
Impairment	–37	–	–37
Reversal of impairment	508	–	508
Addition to scope of consolidation	5,756	–	5,756
Disposal from scope of consolidation	–4,025	–	–4,025
Translation differences	–	–6	–6
Net carrying amount as at 31.12.2023	229,366	217	229,583

Lease liabilities

in thousand CHF	2023	2022
Net carrying amount as at 1 January	233,178	223,051
Addition	22,243	23,533
Reassessment of existing lease contracts	31,299	35,509
Interest expense on lease liabilities	2,972	2,455
Repayment of lease liabilities (including interest)	–55,173	–54,914
Addition to scope of consolidation	5,756	4,002
Disposal from scope of consolidation	–4,228	–455
Translation differences	–6	–4
Net carrying amount as at 31 December	236,041	233,178
– of which current lease liabilities	50,484	50,173
– of which non-current lease liabilities	185,557	183,005

Leases recognised in profit or loss (restated)

in thousand CHF	2023	2022 (Restated) 1)
Rental income from operating leases (included in other income)	1,690	1,762
Short-term lease expense (included in other operating costs)	–1,282	–1,154
Low-value lease expense (included in other operating costs)	–51	–17
Variable lease expense (included in other operating costs)	–4,045	–4,002
Depreciation of right-of-use assets	–52,580	–50,620
Impairment of right-of-use assets	–37	–1,644
Reversal of impairment of right-of-use assets	508	1,492
Interest expense on lease liabilities	–2,951	–2,400

1) Figures restated (refer to note 4, Discontinued operations)

The total cash outflow for leases including short-term leases, leases of low-value-assets and variable lease expenses was CHF 60.3 million (previous year: CHF 59.4 million).

Maturity profile of undiscounted lease liabilities

in thousand CHF	2023	2022
Up to 3 months	13,477	13,371
In 3 to 12 months	39,648	39,339
In 2 years	47,719	45,869
In 3 years	39,588	37,945
In 4 to 5 years	57,021	54,879
In 6 to 10 years	43,829	45,534
In more than 10 years	5,003	5,303
Total future cash flows from undiscounted lease liabilities	246,284	242,240

Possible future cash outflows related to extension options in an amount of CHF 192.6 million (previous year: CHF 183.1 million) are not included in lease liabilities because it is not reasonably certain that these options will be exercised.

The cash outflows for variable lease expenses in 2024 is expected to be similar to the amount recognised in 2023.

Galenica has entered into various lease contracts that have not yet commenced as at 31 December 2023. The future lease payments for these non-cancellable lease contracts amount to CHF 40.3 million (previous year: CHF 38.9 million).

Accounting principles leases

Galenica has lease contracts for furniture, vehicles and a large number of contracts for real estate, mainly store locations, which include fixed rental payments and variable sales-based components. The significant majority of these lease contracts concerns locations of the pharmacies in the operating segment Products & Care.

Galenica determines the lease term as the non-cancellable term of the lease, together with any periods covered by an option to extend the lease if it is reasonably certain at inception of the contract to be exercised. Galenica has the option, under some of its leases, to lease the assets for additional terms of several (three, five or more) years. Galenica applies judgement in evaluating whether it is reasonably certain to exercise the option to renew. In doing so, Galenica considers all relevant factors including economic incentives. Galenica reassesses the lease term if there is a significant event or change in circumstances that is within its control and affects its ability to exercise, or not to exercise, the option to renew (e.g. a change in business strategy of the underlying asset).

Galenica uses the recognition exemptions for lease contracts that have a lease term of 12 months or less and do not contain a purchase option (short-term leases), and lease contracts for which the underlying asset is of low value (low-value assets).