Oriola Oyj

Good morning and welcome to Oriola Q1 2021 result webcast. Thank you all for joining us today. My name is Tuula Lehto and I'm Oriola's Communication and Sustainability Director. I have here with me our CEO Juko Hakala together with our CFO Helena Kukkonen. They will walk us through our Q1 result presentation. There will be time for Q&A session after the presentation. Please feel free to start adding your questions to the question chat box during the presentation. Now it's time to go to the presentation.

Please, Jukka. Good morning. My name is Juko Hakala. I am the interim CEO of Oriola. Please be welcome to this Q1 2021 interim report call also on my behalf. Q1 of this year was a challenging quarter for Oriola and also for the entire pharmaceutical markets in our operating region. This was an unfortunate development after a slight recovery of our market and Oriola's business in Q4 2020. The third wave of the amplified COVID-19 pandemic affected significantly both Finland and Sweden's societies in Q1. The pandemic had a significant adverse impact on Oriola's operating environment and now also especially in Sweden. General risk awareness and stronger restrictions set by authorities, now also in both countries, extensively impacted consumer behaviour, which led to a declining demand. These pandemic related effects in our societies had a clear adverse impact in the market demand. The pharmacy market in Sweden declined by 6% year over year, when it grew by 11.7% a year ago. Also, the combined overall pharmaceutical market declined in Sweden and Finland by nearly 6%. This was also against the growth of 14.7% and 10.9% respectively a year ago. In addition to the overall volume decline, there were three additional important and adverse market impacts on the demand from the pandemic. First, decline in the important prescription and over-the-counter categories. For example, volumes in elective care were down, and seasonal demand drivers such as influenza epidemics were nearly non-existing in Q1, affecting the whole pharmaceutical market. The market demand in both countries was also fluctuating in an unusual way within the Carter in volumes and in categories. We estimate that these two adverse pandemic impacts to be temporary in nature. The third adverse impact of the pandemic was the fall in demand in physical pharmacies in Sweden. We also estimate that this adverse pandemic demand effect in physical pharmacies is also largely temporary in nature and related to, for example, governmental restrictions in Sweden. So in a declining market, Oriola's invoicing and net sales declined. Both of these top line figures decreased by 6% on a constant currency basis. which also corresponds to the market decline numbers in both of our operating countries and communicates a fairly stable overall market share in Q1. The positive exception in market share was e-commerce in Sweden, where once again we increased our online sales at a pace clearly faster than the market. Oriola's growth was 80% in comparison to market growth of 41%. Unfortunately, in Q1, our adjusted EBIT declined significantly to €0.3 million. There were several drivers impacting to this profit. Most important one was pandemic-driven pharmaceutical market volume decline and changing product mix. Also, the decrease in demand in our physical pharmacies is important. factor. The third factor was the demand fluctuation driven inefficiency in our operations. And fourth key year on year difference is the relatively strong comparison period based on the pandemic related positive peak in demand in March 2020. Additionally, there were a few smaller drivers, both positive and negative. I will discuss those in more detail on the following slides. But before going on there, though, a couple of additional important points. In the middle of the amplified pandemic and true to our role in the society, we focused on securing reliable deliveries of pharmaceuticals and solid service levels in our societies. We succeeded well in this important task and our customer satisfaction feedback, for example, in Finland was very high. And second important point is that in Q1 we started a new short-term initiative called Focus 21. We did this especially due to the significant temporary and adverse pandemic effects of the COVID-19 accelerated pandemic in our market environment. This initiative simplifies the focus of our 2021 activities to reach our strategic and business performance goals for the year. I will soon elaborate this initiative also in more details. Next slide, please. As discussed, in constant currencies, our invoicing and net sales decreased by 6%. In reported currencies, they decreased by 2.4%. In invoicing, to 942.5 million. and net sales decreased by 2.1% to 450.2 million. Both of these declines were driven by temporary market-driven decline in pharmaceuticals demand and low volumes in both of our operating markets. Next slide, please. Then a bit more detailed comments on our Q1 profit. The adjusted EBIT decreased unfortunately to 0.3 million euros due to several drivers. I mentioned the decrease in prescription and over-the-counter pharmaceuticals demand and changes in the product mix. Those had a major impact on our profitability. And for example, as a change of the product mix, the lack of seasonal influenza pandemic, which created a market-wide lack of demand for cough and cold medicines. Also, consumers increasingly chose to go to online instead of visiting physical pharmacies due to movement-related restrictions posed in Q1. And the third factor was the inefficiency in operations due to exceptional volume volatility in our operations in Q1. And as mentioned, we estimate that these pandemic-related impacts are temporary in nature with the exception of the shift to online. Moreover, we saw generic cost increase mainly from salaries in Sweden and customer agreement changes. We have communicated also in our earlier quarters. And on a more positive note, the dose dispensing business of our retail segment developed well and impacted the result positively. Let's stay on the previous slide. To provide further transparency to our pandemic impact, we have now provided an estimate in euros of the net pandemic effect to our profitability in Q1. We estimate that in Q1 the pandemic impact was in the range of 45 million euros, including the impacts of the pandemic. In this estimate, we have compared Oriola's first quarter performance to a normalized market environment, excluding the pandemic effect. Also, when reading this estimate, it's useful to consider our message a year ago, that in Q1 2020, we received a tailwind from the pandemic due to historically high order levels of pharmaceuticals and golden pain products in the beginning of the pandemic, March 2020. Then before we go on, just a couple of comments of the key segment profitability changes. When we take a look at the segments also and their impact on profitability, we see clearly that the challenges faced in consumer are the major reason in the EBIT decline. Consumer's impact in profitability decline was significant, 6 million euros, and the segment adjusted EBIT decreased to minus 0.6 million. This was due to lower volumes and changes in product mix. Customer traffic was low in pharmacies, and we also had general salary increases in Sweden. Pharma's contribution to profitability was also negative, minus 1.5 million euros as the segments adjusted, EBIT decreased to 2 million euros. This impact was from the low demand in many categories like cough and cold pharmaceuticals, but also due to changes in customer agreements, as we have discussed in previous quarters. The exceptional volatility in volumes caused inefficiency in our operations, which especially influenced our pharma segment. And retail business area had a positive contribution to the profitability, increasing by 0.8 million euros and to 1.1 million euros. This was mainly due to the positive development of its dose dispensing business. Next slide, please. So in quarter one, the COVID-19 pandemic got more amplified with increasing impacts in Oriola's operating environment and now especially in Sweden, which constitutes a larger share of Oriola's business operations. And to respond to this situation, we started a short term initiative named Focus 21 in the first quarter. This initiative simplifies our focus in this year and drives forward our drives us forward to reach our strategic and business performance goals for the full year. Focus 21 includes three key targets. First, prioritize value creation and profitability in everything we do. Secondly, simplify and prioritize development activities planned for this year. And thirdly, and very importantly, increase focus and balance for Oriola's employees to ensure strong execution of our priorities also amid the pandemic. Within Focus 21 and in our business areas, we have a broad range of rigorous actions to be executed. Just to name a few examples. We relentlessly prioritize and simplify our development projects. We execute strong P&L efficiency and profitability measures. We accelerate introduction of new business services, similar to the ones we have communicated last year. For example, the click and collect in our pharmacies, the click and drive in our pharmacies and corona tests yielding additional revenue for us. And we create further improvements in strategically important e-commerce business. So this Focus 2021 initiative, it will defend our profitability also through measures geared to increase our top line. We are also focusing on cutting costs in this exercise, but not only that. And on top of the actions in our business segments, We will have a specific program focusing on our businesses in Sweden in total within the Focus 21. In this program called Focus Sweden, we will work in a new way and across our Swedish organizations to secure strong execution of our business plans in Sweden, which is our largest market. And then finally, before we move on, a couple of comments on our existing strategic programs, 20 by 20 and customer experience. Both of these will be combined into the Focus 21 initiative for focus and prioritization of this year. So let's then move on to discuss a couple of more words on the operating environment. and looking into the consumer markets in quarter one. As already discussed, pharmacy market in Sweden declined quite strongly by 6% against the growth of 11.7% a year ago. Oriola's Kruunan Sabotex market share remained nearly intact with 1% point difference in overall market and strong growth in e-commerce. Within the market, we are faring also well against our traditional competitors and falling slightly behind the strongest e-commerce players. Next slide, please. In pharma, the market decline was similar to that of the consumer, nearly negative six percent in both markets, Finland and Sweden, against also a market growth of 14 and 10.9% respectively last year. Oriola's market share remained unchanged in Sweden and nearly unchanged in Finland. Next slide, please. The market impact was visible in retail as well, but it was not as remarkable as in consumer and pharma. Oriola's market share remained intact in all of our retail businesses, And then perhaps let's move to look at more detailed business segment comments. A couple of words on the consumer segment. The amplified pandemic hit strongest our consumer segment in Q1. The net sales declined by 6.4% and in constant currencies to 189.4 million euros. The decline was driven by lower volumes in physical pharmacies, customer traffic was low. And it is also worth to note that the Q1 last year was impacted positively by the accelerated sales of pharmaceuticals in the start of the pandemic. Consumers' online sales in the strategically important e-commerce business continue to grow strongly with 80% growth, again outperforming the overall market development of 41%. Profitability fell, unfortunately, to the red numbers, minus 0.6 million euros, based on several drivers, most importantly, lower volumes in prescription and over-the-counter pharmaceuticals and changes in product mix, lower demand in our physical pharmacies, and the cost increase related to general salary increases in Swedish markets. And then on to pharma, please. For Pharma, the quarter was hampered by the exceptionally high volume volatility. Net sales decline of 6.3% to 228.7 million euros in constant currencies was driven by low pharmaceutical volumes and their high volatility. The EBIT decrease was related to lower volumes in many categories, for example, and importantly, the cough and cold medicines. Volatility of volumes created inefficiency in our operations, and also changes in customer agreements had a negative impact to profit. Then on to retail. In retail, the first quarter, was solid, even though the market was in temporary decline due to the pandemic. Net sales declined slightly due to the soft demand. On a positive note, in a challenging market environment, retail improved its EBIT, mainly due to the positive development of its dose dispensing business. Also improved customer agreements in health and well-being product category in Sweden had a positive impact on the result. And then we could move on to the financial review, and I invite Helena, our CFO, here to discuss that part.

Thank you, Juko. Moving into invoicing and net sales. Like Jukko said, we had an invoicing and net sale decline of 6% in constant currency, driven by the decline in pharmaceutical demand and low volumes in both markets. Looking at the adjusted EBIT, our adjusted EBIT decreased to 0.3 million due to several drivers, which Jukko already went through. The pandemic had a big negative impact on our result. When we look at the profit for the period, we made a loss of 1.7 million, which was impacted by the adjusting item where we have cost for the termination of the CEO service contract. Therefore, earnings per share was minus one cent. Our cash flow for the quarter was minus 14 million euros. This was driven by the low result and change in net working capital, coming from the payments out and then higher receivables at the end of March. Our cash balance declined by 32 million, driven by the operative cash flow, investments and less commercial papers versus then end of the year. And then internet interest bearing debt. It has increased by 22 million from the end of December, which is driven by the change in cash. There are no other big changes versus the end of December. And then I will hand back to Juuko for the summarization.

Thank you, Helena. Then we take the key takeaway slide, please. slowly but surely. Here we are. Thank you. So to wrap up, I want to highlight three key takeaways from Q1. The market environment for all pharmaceutical companies in Finland, and particularly now in Sweden, was like never before. It had a major implications to consumer mobility and behavior and the demand of pharmaceuticals. The pharmaceutical volumes were low in many product categories, especially in prescription and over-the-counter pharmaceuticals. Seasonal demand drivers such as influenza epidemics virtually non-existed this winter. Digital transformation in pharmacy market continued strong as consumers shifted to online channels. Oriola succeeded again to grow clearly faster than the market. And then going forward, Focus 21 is a key short-term initiative for Oriola. Within that, we will simplify our strategic focus and concentrate on reaching our strategic and business performance goals also amid the pandemic. Focus Sweden program within Focus 21 forms an important element. It will strengthen our businesses and competitiveness in Sweden, which is our largest operating country. Next slide, please. And before we close the presentation part, here is the outlook for 2021, which is unchanged. And with the outlook confirmation, it's time to conclude the presentation part of this session and open up for Q&A. So I invite questions here.

Thank you. There actually are some questions coming in already, and we could start with Petri Kajaani from Inderes. He's asking, how have you estimated the net negative four to five million euro EBIT impact of COVID-19 pandemic to normalised market environment.

Thank you for the question, Petri. Would it be Helena, perhaps you, if you take that?

Yes, we have estimated what the normal market would be without the pandemic and then calculated what the impact for us was during the Q1.

Thank you. Sami Sargamias from Nudia, if we move to his questions. One of his questions is continuing Petri's question. How would you split the COVID headwind between the segments? Four to five million.

I think it's quite symmetric to the key messages of our interim report, the consumer. impact of the Q1 overall year on year was the largest. Pharma had the second largest impact and retail had less.

Sami is continuing on consumer. You did say that majority of COVID-19 headwind took place in January, February. Did March look clearly better and what is your current estimate regarding COVID-19 headwinds in Q2 and beyond?

That's naturally a question which we are very active on. The estimation of the progress of the pandemic in our societies is a difficult topic also for the governments of our societies. So as a company operating within the Finnish and Swedish societies, it is It is difficult to estimate the progression of the pandemic in our societies. It has actually surprised our societies in the past year with the variants and different phenomenons. So therefore, we don't provide an estimate on the pandemic progression. However, I think the question had a note of the quarter itself. Towards the end of the quarter, as we look at the key society figures of the pandemic effect, March was a little bit better month for the societies than January and February.

Thank you. One more from Sami. Your OPEX grew by 6-7 million from last year in Q1. Can you open up reason for this and will you do something about it during this year?

Shall I start and if you, Helena, continue? So important observation. When we compare this quarter to last year's quarter, last year, the pandemic effect was positive in March and January and February last year didn't have a pandemic effect. This quarter was a full pandemic quarter. And as we have communicated, the pandemic creates operational inefficiencies. to a company in our line of business as the safety precautions and activities within the logistics are more sophisticated and redundant within the pandemic restrictions. That's, I think, one key aspect there. Naturally, a second key aspect is the e-commerce business. And I would name those two things mainly.

I would say e-comm and then of course then in Sweden we have the sort of the statutory or generic salary increases also then impacting. Last year there were no in Sweden but this year there are and they are a little bit higher versus than the normal levels.

That's an additional point, yes.

Some more questions related to consumer from Petri Kajani. First goes to our physical pharmacy network. You have more than 300 pharmacies in Sweden at the end of Q1, which is three more than a year ago. Could you explain why are you increasing the number of physical pharmacies during the time when consumers tend to move fast forward online?

That is an important question. We are actively optimizing our pharmacy network. We are building new pharmacies to new growth centers. That is an important activity which we trust to be the right activity. At the same time, we keep a close eye on the optimal performance of the pharmacy network, which is one of the topics that we will continue to focus on under the Focus 21 exercise.

Then one for consumer segment profitability. Could you describe the factors behind the weak profitability and how much of this was volume related, cross-margin related and related to operating costs?

The key factors in consumer were the overall demand of volumes. That was the main, the overall demand of volumes and the changes of the product mix of those volumes. That was the largest factor in consumer profitability decline. The second one was the drop in the physical visits within the pharmacies. We also operate in a regulated business in our pharmacy network. So the liberties for us to administer, for example, closings of pharmacies or pharmacy hours are more limited within the pharmacy business as it would be in a more sort of freely operated retail business. So therefore that was a very important factor as the physical visits declined and our core structure short term in that respect is less resilient. And then there was the third aspect I think that Helena also mentioned there and we had in the interim report we had some general cost increases in our Swedish pharmacy business during quarter one. Helena would you have additional comments?

No I think you explained it well.

Thank you. Then let's move to end-sharping. Petri is asking how the end-sharping is going forward. Is there still extra cost related to progress and have you already changed some efficiency or cost savings from the end-sharping performance?

This is an important topic. NSherping is progressing as planned, with the exception of the pandemic effects. The increased and accelerated pandemic effects in Q1 did slow down the progress of NSherping, as the staff in NSherping is focusing on reliable deliveries and operating under an amplified pandemic situation in the Swedish operating environment. that did have a temporary effect on the progress of the end-shirping efficiency measures. But outside of that, the end-shirping efficiency measures are progressing as planned a little bit slower than originally planned under the temporary effect of the pandemic.

There were some other questions about the fluctuation and end-shirping. I think those were already nicely covered here.

We have mentioned as one key aspect in the interim report this pandemic driven volume fluctuations in demand. What this in practice means is that The structures of our demand, category by category, have been unusual in Q1. The greatest example is this lack of cough and cold medicine demand almost entirely, which usually is something that drives Q1 profit. So this has created a challenge for estimation of the demand as it behaves in such an unusual manner. And this is a market wide effect. Oriola is subject to this effect in the same way as other companies in our market are, especially in Sweden and Q1. And therefore, that unusual behavior of the demand and the volatility of categories influences our efficiency.

There was also related to this fluctuation and end chirping that now when we are going forward with the end chirping, can we manage better this kind of a fluctuation situation and improve efficiency from end chirping performance.

We are actively managing the situation and these pandemic effects. I'm quite proud of the way that we are responding to these new events. You can rest assured that we are very active in both driving the precision and profitability against these demand effects, and we are adjusting. Something that is more temporary in nature, that is difficult to respond to, is for example demand fluctuations in deliveries. In our sector, even if there's a single medicine going into a pharmacy, that delivery needs to happen, even though the volume within that delivery is lower. We work in a regulated sector, so that kind of effects are difficult to influence as it is regulation-based deliveries irrespective of the volume within those deliveries. But outside of that, we are actively driving adjustments and also verifying our profitability.

There's from Iris Terman one more question related to higher online sales. How big negative impact higher online sales year on year had on EBIT?

I think we haven't disclosed that number. This would be an important topic for us to discuss in the capital markets. When we are describing, I think in further detail, transparency of our market behavior, perhaps pricing will be a topic there to be discussed. Important topic in the Swedish market between the physical and online channels. And of course, we have commented earlier on, and it's quite evident that the online pricing at the moment is lower. given that companies in that market are there for market share. They are all capturing market share. But I propose that further than that, we would come back to the topic in Capital Markets Day.

Good, thank you. Let's move to Focus 21 questions. There is some related on that one. First from Petri from Inderes. Do you have concrete examples on actions you are going to take in the Focus 21 program, which are going to improve current profitability?

One example, which I think we mentioned in the interim report, which is something we have done in Q1, was the prioritization of our development efforts for this year. Our development portfolio for this year was populated against a more normal market environment and demand. As we recognized these temporary pandemic effects accelerating in Q1, we responded to that, for example, by prioritizing our development efforts. And as an outcome of that prioritization activity, one third of our development efforts have been simplified, rescheduled or even canceled in order for catering for this demand landscape that we have faced.

There's also questions related to financial targets for Focus 21. What kind of targets are included in this program?

Today we communicate that the objective of Focus 21 is to verify the reaching of our strategic and business performance goals of the year, also amid the accelerating pandemic. So that's the key target. We keep our overall annual targets both strategically and business performance wise, irrespective of these temporary pandemic effects.

Thank you. Then I think there is one more question from Anssi Raussi from OP Markets. How much costs are you expecting from NCHRP in SAP implementation 2021? Did we see some costs already in Q1?

I perhaps yield this to Helen. I believe we haven't commented particular ERP implementations. We work in a business where there are multiple businesses. We have multiple ERPs serving those businesses. They also go quite deep in our operational processes and we consistently keep them up to date and also update them as most companies which have such an ERP landscape. So these projects are part of the portfolio that we have prioritized and simplified, but I think we haven't commented on particular ERP projects.

And it seems that there is no more questions coming at this time, so it's time to thank you. for good questions and then we will see on our next quarter