Oriola Oyj

Welcome to the Oriola Corporation Interim Report January-March 2020 release. My name is Robert Anderson. I'm the CEO of the company. Due to the unusual situation we have, we are doing this quarterly release now only as a webcast. But that doesn't mean that you cannot ask questions. As usual, you can ask questions through the webcast, and we will save them for the end of the session, and we will try to answer them as well as we can. With me here today, I also have CFO Helena Kukkonen, who will also be able to take questions. Thank you all for joining. I have to start by obviously concluding the obvious that the quarter one has been really extreme in many ways. We've seen very strong invoicing and net sales growth as such continuing, but also growing further driven by COVID-19 pandemic impact. A good profitability development has been driven by and also impacted by the good sales. What we also have seen, however, is that due to the nature of the demand, which has been very sort of driven by a spike or peak in the middle of March, we've had extra additional cost of delivering, picking, packing and delivering the goods. In Finland, our logistics operations has continued to perform in a very solid way. with good order fulfillment and good efficiency. In Sweden, we've had a bit more challenging situation, since we are in the middle of a ramp-up of our new Entköping facility. That ramp-up has been a little bit delayed now due to the focus on day-to-day operations. We remain committed to our strategic programs 20 by 20 excellence and CX customer experience. However, today we are in the current market situation, we are prioritizing day-to-day operations, and that may mean that we will experience slight delays in these programs. I want to also start by commenting on the COVID pandemic impact on our business. I have to say that I'm really proud of our organization. We've done a fantastic job during difficult times. The market has been really unusual, behaving unusually, but we have been able to continue driving business as usual in this unusual situation. Early on in February, we implemented extra health and safety measures for our employees to secure that we are not impacted by the pandemic or our operations are not impacted by the pandemic. I mentioned already that we experienced historically high order levels in March, mid-March. Demand on a Friday afternoon went up by 50 percent compared to what we are expecting. in this difficult, for certain products particularly, in this situation, it is really difficult to run an efficient and cost-efficient activity. And the consequence is that we have done night shifts and weekend shifts, which is then impacting our bottom line. We have, however, I think, been able to live up very well to our purpose, our expressed purpose, health for life. We have been safeguarding availability of medicines to patients who need them, and the sort of the societal support has been strong and good. Our business environment has changed extremely fast, and this was really during March. We've seen that the government's restrictions have impacted consumer behavior significantly. And here we also see a difference between Sweden and Finland because of the governmental approaches in the two different countries. All of this considered, the current short-term market remains uncertain. It's difficult to predict the future. We have worked very significant numbers of overtime, and we have been able to also keep business running in spite of higher SIC levels than normal. Looking at the numbers for the quarter, I think I can be quite pleased with the numbers this time. Invoicing grew by almost 8% in reported and almost 10% in constant currency. Net sales grew by almost 16% in reported and almost 18% in constant currency. Driven partly by the pandemic, but there's a good underlying growth. Profitability adjusted EBIT-wise, we had the best quarter now since 2017, best quarter one since 2017, landing at 6.9, which is an 86% year-on-year increase, and also in constant currency, this 6.9 would convert into 7.1 million euros. Reasonably good, and if we look at... where the improvements are coming from. First of all, last year's trend line, we had a good development quarterly from quarter one to quarter three, and then a big disappointment in quarter four. Now, quarter one again is, in my opinion, we are pleased with these numbers. and if you then look at the bridge between quarter one last year and quarter one this year, you can see that the majority of the improvement is actually coming from consumer. Consumer has been able to benefit from the increased demand and the main part of this improvement is actually coming from our normal brick and mortar operations. Pharma should have been able in a normal growth situation to benefit from the increased volumes. However, working night shifts, as I mentioned, 10,000 hours of overtime, night shifts and weekends is eating up in a low margin business like this, where you have a customer province of delivering with 99.5% availability within 24 hours, you have to keep the business running. And responding to spikes in demand is challenging and costly. To some extent, retail has also been impacted negatively by the COVID phenomenon. We have been prioritizing pharma products, medicines, and have been forced to deprioritize the less urgent products that are typically the retail portfolio. But there's still a good positive development largely coming from those patients and products in Finland. Then looking at our operating environment. Those who are following us regularly are familiar with these graphs. You can now see that the online share of Swedish pharmacy market has taken a very significant step up during quarter one. A year ago, the online market was about 10% of the total market. Now, at the end of March or the month of March, we saw the online market was 14.2% of the total market. So we see a very strong growth here, and it's logical and understandable what is happening. People do not necessarily want to go to pharmacies. They want to get their medicines, and they are actually quite pleased to have them delivered to their home door in a situation like this. As a consequence also, the big change in market shares is actually that Apothea has grown from 5% market share a year ago to 7% now in the past quarter, quarter one. And we can now see that Apothea is actually bigger than the fifth biggest physical pharmacy chain. The other phenomenon we can see here is that the traded goods is growing at the expense of Rx medicines. The wholesale market, Finland and Sweden, has grown significantly. Finland 11%, Sweden 15%. Our position here is continuing to be very strong. Oriola had 43% market share in Finland during quarter one, down a little bit from a year ago, which is mainly related to the loss of Orion's non-med products that we talked about in connection with quarter three last year. In Sweden, on the other hand, we've grown from 40 to 46 percent, which is mostly related to the addition of MSD as a wholesale customer in Sweden, which we also talked about at the end of quarter three last year. The retail market is best described by the number of those dispensing customers, which at the end of the quarter was about 225,000 in Sweden, out of which 100,000 were served by Oriola with a 43% market share. In Finland, the market was about 55,000 patients, out of which 40% or 22,000 were served by Oriola. Our role as a supplier or a wholesaler or acting for principals within the traded goods and OTC product supply for pharmacies in Sweden has remained pretty stable over the quarters. We are serving 25% of the total market of 1.2 billion euros. Our staffing services has been developing reasonably well. We served 167 pharmacies during quarter one, which is up from 150 pharmacies a year ago. This is out of a total of 819 pharmacies in the market. I will not go through this slide as it should be familiar to you. However, I will comment now on the business areas individually quickly. For consumer products, We saw a growth of 10% in net sales. The sales were really driven by the COVID demand in March. There was hoarding of particular painkillers and cold medicines in both countries, in Sweden and Finland, but the consumer, obviously, is mainly Sweden, really. Kroonan's Apotex online sale continued to grow. We grew 40%, 45% in the quarter versus a market growth of 48%. However, in March, our growth was 96%. So we had a really strong month of March there. A share of OTC profitable, I would say, OTC and traded goods was down, which is a sort of consequence of the online phenomenon, whereas then our share of low margin RX in the portfolio has been increasing. The adjusted EBIT graph here, or bars, show a good, very good development, over 90% increase year on year, as said, very much driven by our real main core business, i.e., brick and mortar pharmacy sales. We also had a slightly positive calendar effect versus last year. And these are good numbers. They are somewhat positively impacted by the COVID, but the underlying business is reasonably solid as well. Going to pharma. Quarter one for pharma, we saw Very strong growth, constant currency, 24%. Again, driven by good underlying pharmaceutical market growth, and then also the COVID pandemic related demand increase. Profitability for pharma was very much impacted by what I described earlier on, thousands of hours of overtime, high freight costs, quick shifts in how we had to deliver, and all of this costs money, as said, and with low margins to begin with. Unfortunately, we were not able to turn the additional revenue into bottom line impact. So ending up at more or less the same level as a year ago in the quarter one last year. Moving over to retail. Retail growth pretty good as well, 11% in constant currency. driven by the number of those dispensing patients, in Sweden particularly, and the increased demand for healthcare products at the end of quarter one. The healthcare products were growing particularly well in Finland, and the combination of this and those dispensing patient growth impacted a bit positively. We were also impacted negatively by higher costs, in particular in Sweden, in the operations and distribution center, and also retail was held back to some extent by the fact that we were forced to prioritize pharmaceuticals, Rx products during the worst demand peaks. Now then, over to finances. And this picture is now showing the reported profit for the period. We can see that we've had a actually 300% growth year on year. Our quarter one 2020 is actually positively impacted by 0.6 million euros release of restructuring costs. So there's a bit of a boost in there. The earnings per share consequently also three times quarter one last year. Cash flow. Quarter one typically is relatively weak for us. We are satisfied with the basically break-even cash flow from operating activities. And we have been working hard on securing that we have cash available. So through financing activities, we have been able to grow the cash available at the end of the quarter versus the end of last year. Looking at our debt situation, not much change, in a way, on the overall numbers compared to the last couple of quarters, and comparing to the end of 2018, we actually are down, quite nicely, I would say, considering the change in IFRS 16 reporting. The situation is reasonably good here as well. Now, if I'm then trying to summarize the quarter in one slide, we obviously had a very strong top line development. This is a continuation of previous quarters, I would say, but also a a very special quarter that was impacted by the COVID effects. The COVID effects were positive for us. We are in that unusual situation that the pandemic actually increased our business, but it also caused quite significant additional costs. The business environment has become quite difficult to read at the moment. It is not a normal principal or consumer behavior, principal product or rush or push, or consumer behavior, demand behavior, which is really driving the market. But it is actually the government's decisions on restrictions of free movement and other phenomena that is very much deciding the market in the next foreseeable future. We obviously hope that the market will start to ease up as soon as possible, but until then we are in a situation which is hard to read and somewhat unpredictable. And one of the phenomenon that we would also would like to sort of lift here is to see we have all been working remotely. We have been able to keep business going doing so. People have worked really hard and learned to sort of operate in a digital and online environment. We've seen it particularly also in our pharmacy operations in Sweden. Digital and online is not going to go away, but will continue to be a more significant part of our lives going forward. So to sum up then our outlook for 2020, we are reiterating our Our outlook, we say that adjusted EBIT on a constant currency basis is estimated to increase from the 2019 level. And with that, I sum up my presentation and look forward to questions from you all. Thank you.

So we have quite a few questions here. All segments did see about 10% organic growth in Q1. Are you flagging that lockdowns are likely to impact Q2 negatively? Should we assume much lower or even negative sales growth in Q2?

What I said is that Q1 has been extreme, and we've seen hoarding of product in quarter one. The start of quarter two has been weaker than we were planning originally, and as a consequence, I would believe, of the hoarding that we experienced particularly during March. But I also want to say that the market is extremely difficult to read. And if we would have, for instance, a government decision to open up the markets to normal, we would see a demand peak immediately. If the governments will decide to close down more, we will probably see a demand decrease. So it is not a normal consumer behavior or principal pharma company product behavior, which is ruling the market. It is really policy. Policy is how to fight the COVID pandemic, which are very much deciding the market behavior at the moment.

Okay. You did note that warehouse migration activities at Endjerping were currently on hold. Do you expect to complete these by year end and should be assumed completion of 20 by 20 program by the year end?

So again, very much depending on how the pandemic develops, how long we will have restrictions. When it comes to the ramp up during March, we were not able to proceed as planned. We have now in April picked up the speed again. And if the market behaves reasonably normally, we are obviously continuing the ramp. Um, but I just want to flag is that it's really difficult to know what the next few months will bring. Um, because it is not, it is so much, uh, sort of decided or defined by COVID pandemic actions taken by governments and other stakeholders. Um, the 20 by 20 program. is continuing, but in a situation where we are putting all our efforts into delivering our customer promise and our purpose, we have not been able to execute at the speed that we were hoping at the beginning of the year. Now, again, I said we have not given up on the targets, but I want to flag that there are some risks of delays.

What drove margin improvement at consumer and retail? Should we view these levels as new normal, or was there merely benefit from margin whoring?

So I would say that the question was consumer and retail. Yes. Yeah. So in consumer, I would say we definitely had a positive impact from the March demand peaks. In retail, a slighter, but yes, positive. Again, I would kind of make the disclaimer that it's really hard to guesstimate how the market will behave in the next quarters. There is no doubt that we've had a slightly positive impact in particularly consumer during quarter one.

Should we assume 2019 like group cost in 2020? I think your ambition has been to strive for 50% lower level.

Group cost?

Yes.

I'm not familiar with a ambition to have 50% lower group cost. I'm looking at Helena. Yeah, so basically we are... I don't think we have commented on group cost, but I wouldn't expect any major changes there.

Do you see COVID-19 pandemic will drive online business in Swedish pharmacy market even faster than previous years?

I would say that... And that was kind of my last bullet point on the second last slide, is that the market is not likely to go back to pre-COVID situation. we believe that online is going to play a more important part. Online sales, but online everything basically, is going to be much more impacting the markets overall. Not just the pharmacy market, but any market.

We will still continue. How does this affect your consumer segment business in terms of numbers of brick and mortar pharmacies and profit margins and market share?

I would say on the basis of the last four weeks, we are not planning any changes. We have our strategy and our plan. Obviously, we are monitoring the development extremely carefully on a daily basis, weekly basis and monthly basis. I only reiterate what I've said before. I think we will see a stronger online profile in the market going forward. And we've seen that quarter one has gone already now from about, what was it, 12% to 14% in one quarter of the total market. There is a very significant effect there.

Has your strong demand in consumer segment continued in April, and what are your expectations for Q2 in the segment?

So, first of all, we do not communicate quarterly expectations. Our guidance is annual. But I can say that, and I think I did it already, We've seen a kind of a hangover from the hoarding in March has resulted, I would say naturally, in a lower demand at the beginning of quarter two. People have their Panadols and Buranas and Alvedons at home and they don't need more. It's a bit like the toilet paper. I don't think there's a same demand for toilet paper right now that there were a month ago.

You said in February that your guidance for 2020 profit improvement will be more balanced towards later part of the year. Is this still a valid assumption?

That is still a valid assumption. That's related to the big improvement actions we have ongoing in terms of in-trapping ramp, in terms of 20 by 20, in terms of CX customer experience, all of these. have a stronger impact on the second half of the year, stronger positive impact on the second half of the year.

You said in February that your capital expenditure in 2020 would be around 35 million euros. Now you have lowered that number to 25 million euros. Could you explain where does this change come from?

So the change is coming from, on one hand, we have reprioritized our activities. We are currently saving costs and delaying, intentionally delaying some programs. Some programs are also quite difficult to execute in the current market environment where you need to be sort of working closely with stakeholders and other suppliers. So it's a combination of holding back to keep our cash position stronger, to keep our costs lower, but also a delay which is related to the ability to execute on the programs in the current situation.

Thank you. Those were the questions that I had. And thank you, people online.

Anybody else who still wants to fire the last one or are we closing here? Okay. Thank you. Good questions. Stay healthy and safe and have a great weekend. Thank you.