Oriola Oyj

and welcome to Oriola's interim report for January-September presentation webcast. My name is Robert Andersson and I'm the CEO of Oriola. What a year it has been. We started in quarter one with a hoarding of products at the end of the quarter, moved into a lockdown of the societies during quarter two with a very significant effect on our operations and market. And then into quarter three, which has been kind of Moving back to normal, particularly at the end of during summer and then after summer again back to a, I would say, more ambiguous situation both for the market and our operations. The ambiguity is clearly caused by the second wave, where at the moment we still see that the Demand for medicines has remained at a lower level. The elective healthcare is not in full speed. And also as a consequence of the situation, our cost to serve our market, our operations and our cost to serve have been impacted during quarter three. Online sales, on the other hand, has been growing very significantly continuously throughout the quarter. It's not only been negative things, we've also been able to do quite a few of smaller positive things during the quarter, and I want to mention a few of them. In addition, obviously, to grow faster than the market in online, we've ramped up a number of COVID-related adjacent services, developed, ramped up, and getting to a commercial implementation. During the quarter, also, our dose dispensing business has developed very well. We've been able to execute on a much more effective and efficient level than in the past. And we now, although we have been delayed, partly due to COVID, partly also due to other challenges in our Enköping ramp-up, We are now clearly seeing that within a few weeks the ramp-up will be completed, and our focus can now shift finally into getting the efficiencies and effectiveness in place. I talked about, and I'll talk a little bit more about the good progress in service sales and development. So as mentioned, we grew 71% in our online business. We have launched new product categories during the quarter. The market, the online market, and we're talking now obviously about consumer and Sweden. The online market grew by 53%. Market 53, Oriola 71. New product categories being implemented. Good development. We started click and collect services during quarter two and rolled it out throughout a majority of our pharmacies. Now we have click and collect in all our pharmacies. This is obviously something that our pure play online competitors cannot do. We also launched during quarter two COVID-19 antibody testing in our pharmacies. And we have now administered 45,000 tests year to date. That has resulted in a kind of extra adjacent, as we talked about, revenue of close to 20 million SEK. We also during quarter two started, launched, started negotiating and agreed on creating a national medicine stock service in Sweden. In Finland, we have it, part of our Huoltovarmus lines. But in Sweden, that hasn't been the case. So this was created during quarter two, and now it has been well established. My clear understanding is that this will become not a sort of temporary phenomenon, but it will be established as a permanent solution. And we are very much in the middle of that. and uh... Whereas during last year we ramped up quarter four, first from the beginning of quarter four last year, we ramped up our ERP, new ERP for dose dispensing in Sweden. We have now during the year gradually been able to improve, stabilize, improve and get to efficiency and effectiveness in our processes. Also, we've had new management taking care of this and it's looking good. So not just negative. COVID is also bringing us some positive things. Moving over to the key figures. You've been used to seeing typically high single or even double digit invoicing and net sales growth from us until quarter two. In quarter three, quarter two was negative. In quarter three, we have seen invoicing constant currency growing at minus 2.4%. net sales in constant currency growing at minus 0.1%. So clearly not a normal market. Profitability wise, we had a quarter which was a clear bounce back from the minus 0.3 million we experienced in quarter two. But as I've said, clearly we haven't had a normal market. We haven't had the sort of demand and we have had a challenging execution environment. Still a clear bounce back to 6.3 compared to quarter two. If you then go down to looking at the quarterly development, you've seen quite a sort of rocky road up and down. A very weak quarter four last year, a rather strong quarter one this year. COVID sort of, we lost a quarter, as we said, we lost a quarter due to Q2 due to COVID slight loss. Now we are bouncing back and the number 6.3 still has been rather significantly impacted by COVID. We believe we can develop positively into the next quarter and onwards, assuming we do not have the kind of quarter two market with lockdowns and so on. If you look then at where the deviation or the waterfall comparing Q3 2019 to Q3 2020, consumer was doing quite okay, I would say, considering the marketplace. We had a negative deviation coming from the channel mix, but we had positive deviations coming from quite significant cost savings. Pharma was the BA that was hit the worst during quarter three. It's a combination of, on one hand, a change in certain contracts here in Finland, where among others, as we have reported, we lost Orion's non-pharma products from the beginning of this year. and a few other smaller contracts as well. Whereas then in Sweden, we've had a negative deviation coming from mainly from our challenges, continuous challenges in running and chipping during ramp up during COVID in an effective and efficient way. For our expert services within Pharma, we've seen a positive development now during quarter three, which actually also is a positive thing during quarter two. Everything was pretty, pretty, pretty laying low in expert services. And then the retail business area clearly developing positively, very much driven by DOSE and within DOSE, it's DOSE Sweden. So if we then move on to the operating environment. The consumer market has again, as I've said, has again been very much dominated by the online development. We saw from a year ago, the online share of the total pharmacy market was around 11%. That went up to 17 plus percent at the end of quarter two. And you can see the share of online going up almost vertically during quarter two. Now the situation has stabilized on a high level. We don't expect the share of online to go down. We expect it to stay on a high level and probably over time to further increase. As said, we have been able to capture this growth and play a significant part in this market. If you look at the sort of dynamic of the market, I don't see really big changes in the market shares. There are sort of plus minus. The tens of percentages and sometimes percentages, but the market dynamic has been pretty solid. You can see that year on year Apothea, the pure online player, is the key clear winner. And the biggest pharmacy chains have been sort of stable or maybe even in some cases a little bit negative. Compared to the end of Q2, we saw now an increase in Rx, in subscription medicines, going from 72% of the market in Q2 to 74% now. My take is that this is related to people who hoarded Rx medicines at the end of Q1, now coming back at the beginning of Q3 and refilling there. their medicine cupboards at home. OTC and traded goods are consequently going down a little bit in the relative comparison. Then moving over to wholesale market, we've lost some market share in Finland. That's purely related to the mentioned customer contract situation and we've gained some market share in Sweden. Same here, purely related to contracts and here we have communicated that we won MSD in Sweden from quarter four last year onwards and that is clearly impacting the situation. As you all know, this is a rather stable market. Things are not typically moving dramatically up or down. Then the retail market, which we normally describe by the number of those patients and our share of the TGOTC product supply for the Swedish market, as well as our market share, if we call it that, in staffing services. Dose dispensing continuing to grow, now standing in the market at 230,000, our share 97,000 patients out of this, no change in market share really. The Finnish market significantly behind the Swedish market, standing at 55,000 patients, our share of that 23,000 patients, a slight year-on-year decrease in market share, but I would say this is within the margins. Our supply, we are still supplying about 25% of the traded goods and OTC products for pharmacies in Sweden. Not a big change there. And we supplied about 200 Finnish pharmacies with our staffing services during quarter three. I'll jump over the business area description and go directly into consumer quarter three 2020. A slight growth in net sales. As said, purely driven by online, we've seen a decline in brick and mortar, particularly within shopping centers. The traffic has been much, much lower than normal still during quarter three. And whereas then rural areas, I would say, have moved back more or less to what we could call normal, but all growth driven by online. and the share of OTC and traded goods is down and then as a consequence or sort of in combination with the share of lower margin RX going up, this is also very much a consequence of the strong online trend where the traded goods and OTC products are much more sort of suitable for online distribution. But if we look at the adjusted EBIT at 4.3, I think that's a pretty good result in a still difficult market. Moving on to Pharma. Pharma had a difficult quarter still, and we saw that the market decreased by about 0.5% in constant currency. pharmaceutical sales slowed down, inventories were building up, but pharmaceutical sales slowed down, and we had the, already mentioned, negative impacts created by changing the customer agreements, combined then with particularly high costs to serve in Eindköping in Sweden, in our distribution center, which was related on one hand to COVID phenomena, i.e. sick leave rates and all kinds of additional costs, but also to the sort of finalizing the ramp up of the site so that we can then start working on the efficiency and effectiveness going forward. The adjusted EBIT slightly up compared to quarter two, but fairly significantly down compared to a year ago, this is where we will now start moving into, hopefully, into a better situation when we have end-shipping ramped up. And finally, retail. There we saw actually the best quarter since the retail business area was formed at the beginning of January last year. Net sales grew by almost 5%, driven to a large extent by, on one hand, dose dispensing, on the other hand, to some extent by COVID-related products, i.e. face masks and sanitizers and so on. But really, the profitability improvement, 1.2 million up from a year ago and 1.8 million up from quarter two, was very largely driven by dose dispensing. Where as said, we are seeing a quite good situation going forward. We also have a stable contract situation there, where we are supplying Stockholm, Flenslandsting and Skåne region now over the next couple of years. So let's move into the financial review. I won't comment on invoicing and net sales and adjusted EBIT, because I think I've done that already. But if we move into the profit for the period and earnings per share, you can see that the reported profit for the period was 3.7, up from 1.6 quarter two, also up from two million a year ago, quarter three last year. Quarter three last year was impacted by some write downs, adjustment items. As a consequence earnings per share at two cents up from minus one in quarter two and up from one cent a year ago. Cash flow wise, we had a slight positive in quarter three, following also, I would say slight positive in quarter two and a slight negative in quarter one. Year to date cash flow from operating activity stands at 13 million. We have invested 23 million, including the 50 million SEC that we invested in doctor.se during the spring and early summer months. An investment that according to all the KPIs that I'm looking at this is looking very good. And we have kept a fairly strong financing for cash position due to the uncertainty that the market has been facing. Then moving to the net interest-bearing debt, there are no really significant changes here. As you can see, we are, since the end of quarter two, we have continued to keep, as I said, a good cash balance to have the sort of possibility to act and react in the marketplace. And I would actually here move to the summary slide, the key takeaways for the quarter. And here again reiterating that the quarter was still very much impacted by the pandemic, but also that we have, in spite of the pandemic, we have been able to develop business in many areas and also make progress on many significant projects. But the second wave causes ambiguity, and that's one of the reasons why we or the main reason I would say why we went out yesterday with a press release related to the outlook. The demand for medicines has been lower, clearly lower than normal, and we have had a negative impact on our cost to serve. Online has been capturing all the growth in the consumer market and much more than sort of not just the growth, but eating brick and mortar. And it's not only negative. We have been able to create, develop, commercialize services that we probably would not have been able to create, develop, and commercialize otherwise. And we have been able to do things that our pure online competitors cannot. The Endshipping ramp up is finally coming to an end. It's been a long and rocky road. Now we will be able to shift focus to efficiency, effectiveness. And during all of this, during another difficult quarter, I think we can still, as a company, as a group of people working hard every day, we can be proud of getting up every morning and going back to sleep every night and say, we have delivered on our purpose health for life. Thank you. Obviously, the session will now be followed by, the presentation will now be followed by a Q&A session. So I invite questions here.

And here we start. What should we expect from Q4 as it seems that you have quite a lot to do to reach the new guidance? Which factors will improve adjusted EBIT from the last year's Q4?

Well, to begin with, last year's Q4 was Nothing short of a catastrophe, I would say. So, I mean, we are expecting quarter four to be better than quarter three. That is based on the assumption that we will not have a lockdown of the society. We will not experience a quarter, have another sort of quarter two market. But it's many, many, many streams. There is no silver bullet. But obviously a significant portion is part of the improvement is that we have dose delivering, we have consumer in pretty good shape with a strong online, with new services. We have entropy being ramped up. And pharma, where the fundamental market dynamics are as such good, strong, the demand for our products and services are increasing. And as long as we can get to a normal execution, that will also develop positively.

Could you describe the potential cost savings and efficiency improvements regarding end chirping ramp-up? The ramp-up phase has been a long process and it will finally be completed in Q4, according to your estimates. What kind of benefits from this ramp-up completion should we expect in Q4 2020 and going forward to 21?

So first of all, I think there's been a little bit maybe of a misconception and maybe we haven't been communicating very clearly either on this. There is no sort of immediate step function coming from sort of finalizing the ramp up. It's now... So when the ramp up was a tick in the box ramp, it doesn't mean that the profitability will shift like this. It means we will move into from this to this. And it's a long journey of hard work. But the fact that we are now can concentrate on working on the efficiencies is already going to start show now going into quarter four. That's our expectation. Then it will continue quarter by quarter, month by month, week by week, day by day during 2021. Some people here internally have compared the situation to the challenge we had a couple of years ago here in Manka, where in a way, once we got things in place, in order, you started to see month by month, quarter by quarter improvements coming over a number of quarters. No immediate silver bullet fix it, immediate fix, unfortunately.

So let's stay in Enchirping. When will it be an efficient part of the company's operations during the next Q1? Have you made assessment why it has been so costly and difficult? Sorry, when will it be? When the efficiency will be part of the company operations. Next Q1.

So quarter one, we will be more efficient than we are now, but we have not reached the ultimate efficiency during quarter one. I would say that this is a, again, maybe repeating what I said, just compare it to the Manka two years ago, three years ago. Once we get the system working, you saw gradual improvements quarter by quarter for about a year. Then obviously in Entöping we also have the subsequent project, which is then moving the current sort of operating environment or ERP from the old system to the SAP that we have now perfected here in Mankaa. That will then give another boost to efficiency, but that's then 2022 rather than 2021.

Could you give a little color on what is your targeted margin level in pharma and retail segments after the efficiency and chirping are achieved?

We haven't been talking about margin levels and I'd rather not comment on that because I will be proven wrong anyhow.

You mentioned that 75% of the 20 million savings targeted in 20 by 20 excellence program will be completed by the end of the 2020. What is the 25% that you haven't been able to save and is it going to be reached in 2021? Or are you saying that targeted 20 million savings will not be reached completely?

So very good question and I was expecting that. So out of the 20 million by the end of 2020, we are now expecting to reach about 15. The delta there is very much related actually to the end chirping ramp where we have reached most of the other targets, but the end chirping efficiency improvement will be sort of delayed into 2021. That's the biggest chunk of sort of negative deviation versus the target. So we will reach the 20 million, but not by the end of the year, this year, as we were practicing.

I am still struggling to understand why your results dropped so heavily from last year, even though sales and invoicing were flatties year on year. Was this a mix problem or a cost problem?

So I think you have to go then back to the sort of the BA by BA, BA by BA analysis and and there if you go from from you you break up the delta from 9.1 last year to 6.3 this year i mentioned the channel mix for consumer the very significant growth of online online is less profitable than brick and mortar and all the growth and more is coming from online. That means that the brick and mortar profitability also is suffering. So there's a channel dynamic there. What we are doing obviously is to save cost as much as we can, But in a way, the market also, I would say, has not been normal. Normally we see a growth of 5% or so. Now it was a growth of 1 or 2%. For pharma, it is the change in certain contracts in Finland. and the Enköping ramp up in Sweden that has been. And that delta there versus last year was 2.2 million. So that's the lion's part of it. 0.7 for consumer, 2.2 for pharma makes about 3 million. Then we had some positive in dose and in group items there's a slight allocation change and there are some projects that we didn't have last year which impacted that. But channel The consumer market with online channel growth, contracts in Finland, in Köping, Sweden for pharma.

Cost to serve was an issue for you in Q3 and you also talk about a challenging operating environment. Can you please elaborate on some of the major practical challenges?

So, I mean, just to pick an example, we've had a very high level still during quarter three of sick leaves, particularly in Enschöping. We've calculated about 400,000 euros of direct sort of COVID related costs for Enschöping during quarter three. And in a way, the indirect costs are hard to estimate. But I would say that the profit for Q3 this year was impacted by roughly 2 million coming from direct COVID and indirect COVID-related impacts.

You said after Q2 that the result would have been up year on year had it not been for COVID-19. Was that the case also in Q3? And how large impact do you estimate from this on EBIT level?

Yeah. So, I mean, if we did 6.3 now and I said, you know, roughly two million, direct and hard to guesstimate the indirect impact on Q3, but we would have been at least I would say very close to last year had it been a normal market.

Why is operating cash flow so much behind last year and are you expecting full-year cash flow to reach your last year level?

So, this again is... One significant part here is the change in the customer contracts that we've been talking about. It's kind of a one-time hit that hit us in quarter three. Quarter two, it was mainly related to the COVID hassle, I would say. Quarter three, we had a one-time hit related to the customer contract. And now I don't top of my head remember the last year's cash flow. Let me study my book here and maybe get some help from Helena.

So to the question, so we are not expecting this year's cash flow to be on the same level as last year. So last year we had some exceptional items there, like including some additional factoring, but this year we are not expecting that, so our cash flow will be lower versus then last year.

That was my expectation as well, but thank you for supporting.

I have understood that you have been working on strategy refresh. When should we hear of the results?

Well, the simplistic question to that is when the board decides that the time is right to communicate. And that is not up to me to decide. Yes, we have been working on strategy, we have been working on different scenarios and that scenario work is still ongoing and the board has said that until the scenarios are ongoing, we will not communicate any new sort of targets.

How would you describe or estimate the Oriola EPS and free cash flow in 2021 to 2022 relative to 2019 to 2020?

Improving.

That was what I had in my mind. Thank you all, unless there aren't any more questions coming from the audience.

And I would maybe add improving significantly.

We hear you loud and clear.

OK. Well, thank you. If that's the end of the questions, then thank you very much. See you hopefully safe and sound in three or four months, maybe because it's a year end. So it takes a little bit longer to compile it. Thank you very much. Bye bye. Have a nice weekend.