Oriola Oyj

Good morning and welcome to Oriola's webcast and listen our final statement from 2021. My name is Tuula Lehto and I'm Oriola's communication and sustainability director. With me here at studio is our CEO Elisa Markkula and our CFO Sari Pohjonen. During the presentations, feel free to start including the questions to the chat, and we will take all those after the presentations. But please, Elisa.

Thank you, Tuula, and good morning also on my behalf, and welcome. Let's start reviewing Q4 and also the full year results. The year ended with improved profitability driven by the execution of the turnaround actions and positive market demand. The market really continued to recover both in Finland and in Sweden. That was the sign that the volume especially was close to 2019 levels, which is a clear signal for the recovery. Oriola improved its full-year adjusted EBIT to 26.3 million, which is actually 25% more than 2020. And in Q4, our adjusted EBIT increased to 11.6, which was over 45% above the 2020 numbers. During very exceptional second year with the pandemic, our focus has been ensuring the health and safety of our employees. In December, this principle was truly challenged by Omicron COVID variant. And also, I have to thank our employees who did the extra mile and the utmost in order to secure deliveries. And I would really, from the bottom of my heart, say a big thanks to our employees and for this great commitment to fulfil our important role in the society and fulfil our purpose, health for life, during these very exceptional times. And as final point after the reporting period, earlier this month, we announced that our consumer business and Apotexgruppen in Sweden is planning to merge. I will talk about that a little bit more later in the presentation. So, let's review the invoicing and net sales. The overall pharmaceutical market volume was, on the last quarter, slightly over 2019 levels, and this was also reflected in our performance in invoicing, which increased almost 8% to 1.1 billion euro. and it was clearly above 2019 and 2020. The same growth numbers applies to net sales, also increase was 7% for almost 500 million euro. So that was about the sales development and then the adjusted EBIT here throughout the quarters. As I said, 11.6 was the fourth quarter adjusted EBIT. And the biggest contributor to the EBIT development was retail with its good performance in dose dispensing and also the sales increase in health and well-being products. Also worth to mention that consumer improved adjusted EBIT also driven by the increased sales in physical pharmacies and in e-commerce. All in all, throughout the quarter, the strict cost control and improved operational efficiency in Mankaa and in Enköping, in our distributor centers, together with the preparations related to our new country-based operating model, really accelerated our performance and helped to push the profitability above 2020. Here is a summary of the full year and since 2017 invoicing, which is actually reflecting more our true top line, because the volumes are really how much our operations are then pushing through. pharmaceuticals. So in that sense, invoicing is quite important to look in our business. And all in all, you can see about the adjusted EBIT development that it was actually heavily amplified with the COVID-19 pandemic in the first quarter. And then throughout second, third and fourth quarter, the net sales started to improve. And then let's look a little bit about the operating environment, the market development in general terms before going detailed to our business areas. So about the pharmacy market first. All in all, there are a lot of numbers in this picture, but let's try to crunch them. Overall, the value development was very good in the fourth quarter. It was 4% in total pharmacy market in Sweden. And then year to date, due to quite low, especially Q1, was 2.3%. And all in all, the volume was also growing throughout the quarter four. And when the market was recovering from the COVID-19, the physical pharmacy market was growing also in the fourth quarter. But which is quite interesting, actually, is that the fourth quarter was the online pharmacy was not growing anymore so much like before. like, for example, the previous year. So, the growth was only actually 6%, when then last 2020 quarter 4 was 66%. So, this is interesting development. And all in all, the full year online pharmacy market was growing 19%. So only 19% compared to 2020 growth, which was 60%. And online pharmacies, total sales from the total pharmacy sales in Sweden was 17%. And previous year, it was actually 18%. Lower than the total market. Interesting development. When we talk about our online sales, we actually grow by 31% in the full year in online, and that was definitely more than the market development, which was that 19%. All in all, our market share in Swedish pharmacy market was 16% in the fourth quarter and 16.3% full year. So slightly lower than 2020 number. And there were no big changes or movements in the split of the sales between product groups, so prescriptions are prevailing with over 72% share. Which was also quite interesting from the pharmacy market, that the number of the physical pharmacies were declining in Swedish market by 22 pharmacies. And that means that still there are 1,400, even more, 1,411 pharmacies in Swedish market. So that was about the pharmacy market development, and let's review the pharmaceutical market development in Q4 and full year. We saw the slight recovery on the market related to Q4, especially regarding the volume development, which is an important indicator. When that starts to move, it's the first sign that the market The market is potentially truly recovering or normalizing. And because the value is always growing by nature related to the more expensive pharmaceuticals coming to the market. When we look at the value development in Finland, the pharmaceutical distribution market value grew by 4% in the fourth quarter. And in January, December, growth was 3%. And while in Sweden, actually, the development was pretty much the same. In total Q4, it was 4.6. And year to date, the market was growing the same number, like in Finland, 3%. And based on our estimate, our market share, Oriola's market share in pharmaceutical wholesale market was in Finland 44%, so growth since 2020, and then pretty flat, 46% in Sweden. And as a final slide related to the operating environment about the retail market, in dose dispensing business, we are market leader in Sweden with 41% of the market share. And we have been growing also our market share in Finland to 33. And this is thanks to the growing number of the patients naturally in both markets for Oriola. In Sweden, the traded goods and OTC pharmaceuticals value was growing quite heavily in Q4. So it was 9%. And then in Finland, sorry, then year to date, the growth was five. And our market share in the total sales of traded goods and OTC products was pretty stable in Sweden in Q4, 24%. So that was about the market environment, and let's review then the business area, performance respectively. And then start with the consumer. The sales were increasing, and that was improving the profitability. As said, market seems to be recovering, especially the physical pharmacy market was growing in the fourth quarter, And online market growth was more modest than what we have used to in previous quarters. So this was the total market. And our development of net sales was reflecting this development. And in Swedish crowns, the growth was 2% all in all. And Q4 adjusted a bit increased to 5 million and was above 2020 and 2019 levels clearly. And I said our online channel was growing faster than the market. And all in all, from our total sales of Oriola consumer business, our year to date online sales is accounting for 9%, around 9% of our total consumer sales. So we are supporting, naturally, this growth of online business. And we have already announced previously last year that we are investing in the new e-commerce logistics center in Enköping in Sweden. And that warehouse will be ready, expected to be ready on the second half of 2022. And let's review about the pharma increased sales and we were really focusing on securing deliveries as I already mentioned that we had quite hard the latter part of December especially. So, as already stated, the market demand was growing in both markets, and this means that when that is also reflected in our numbers, so the growth was nicely invoicing 7%, and the net sales increase by 8%. And the adjusted EBIT was on the same level than previous year, so 4.1. And this was actually driven by lower performance in expert services, and as well there was an ascent impairment reflecting the numbers. But the underlying performance in our distribution centers was improving clearly. And then finally retail, that really continued the strong performance in Q4 as well as in other quarters. And we saw really a positive development in Sweden. We don't have the numbers from Finland, but from Sweden we have these numbers which are reflecting the development. So that's then the case that our sales were growing roughly 3% and thanks to the growth in patient volumes in dose dispensing and increased demand for for health and well-being products. Adjusted EBIT increased to 4.6 in the fourth quarter, and thanks to very, very good development in those areas that I already mentioned. So that was about the retail. And then I think it is important here at the end of the 2021 also capture our achievements related to sustainability, because our purpose Help for Life is somehow, at least for me, it's a compass for us related to our sustainability work. And really last year again, it had a special meaning reflected in the situation with pandemic, when we were handling a large amount of COVID vaccines in both countries where we are operating. And in our sustainability work, we have set long-term sustainability goals, and those are improving people's health, best-in-class employee engagement, and carbon neutrality by 2030. And we also committed to United Nations Sustainable Development Goals, as well as Global Compact Principles. During the pandemic, the seamless availability of pharmaceuticals, including those already mentioned COVID-19 vaccines, and their high quality transport, that has been a central meaning to the society. and we developed an indicator to follow pharmaceutical deliveries and their quality and accuracy. We are measuring the ability to deliver ordered pharmaceuticals to pharmacies and hospitals and so forth. Indicator was now applied in Finland and it was 99.8 and during this year we are also planning to implement the same indicator in Sweden. We continued 2021, our roadmap to change to renewable electricity, and already 100% of the electricity in Oriola Group comes from renewable energy. sources, and 95% of our total energy consumption comes from renewable or carbon neutral sources. And this was a clear improvement from 10 to 20. And our target here is actually 100% in 2022. Most of the waste that we generate in our operations comes from the packaging materials and from the goods which are arriving to our warehouses and distribution centers. And in 2021, we improved For example, the collection of plastic packages and cardboard boxes, as well as improved collection of reusable wooden pallets to minimize waste and promote circular economy. And thanks to these operations, we managed to improve our recycling rate to 79. And the target for this year is 85. Also, we achieved EcoVadis in EcoVadis Silver, which means that Oreo lies among top 15 performing companies worldwide. All these indicators are a proven track record that we are doing the right thing on our path for a more sustainable planet. And then let's talk about here also about our turnaround activities. And it is naturally continuing. And we have the concrete action plan, which was already presented in Q3, result release. And here is some also now updated with some achievements. As I said already earlier that there is a potential in this company to improve our profitability clearly. We know what to do to improve our efficiency and grow together with the growing health and well-being market. So we have focused with the cost savings through the new operational model. We have decreased complexity and moved to the country-based operating model, which will improve customer focus, reduce costs, and thus improve the profitability. We have now cut our cost based on this operational model by 7 million euro. And that is visible then from this quarter 22 onwards. We have also improved our distribution center's efficiency and reduced other operating costs. For example, improved cold chain automation in end-shipping and many other activities. We have implemented also a strict cost control and cost management across the full organization. Secondly, we have ongoing improvement activities in networking capital management and we have enhanced our sales and operations planning and doing it constantly in full supply chain planning. And we are also crystallizing and optimizing our assortment portfolio. And these actions will be leading to better efficiency by smoother product changes as well as better warehouse management and thus bundling less capital in our operations. We have also taken significant steps related to our customer experience, which is really something to be proud of. At the end of 2021, we saw all-time high NPS, so Net Promoter Score, in Finland and very good progress also in Sweden. And now with this new country based operating model, we are able to serve our customers even more individually and locally with one touch point. And this will be important part of our improved customer experience and relationship management. For us, the commercial excellence means all improvements related to commercial management. We have started our core service portfolio crystallization and implemented value-based pricing models. We are on the road also to really improve our internal margin management. And this is our action plan to improve Orilla's performance. We have seen some results already of this work, but still many activities are in the planning table and of course also ongoing as we speak. And there might be the question, so how long does this take to see a full impact of these activities? It is hard to say. I would say that this is not a sprint, but this is not definitely either a marathon. It's a longer run. But this is our primary focus to improve efficiency in all our area. This is something we heavily concentrate this year. And we will naturally inform our progress in all these quarterly reviews. And now let's go through the financials in more detail. So I hand over to Sari Pohjonen. Go ahead, Sari.

Thank you, Elisa. And let's indeed take still a little bit more detailed look on our 21 full year results as well as the financial for Q4. In terms of the profit for the period, we saw a clear improvement also in Q4 in a similar manner as already in Q3. On a full year basis, though, the profit for the period was on par with the previous year. We had more so-called adjusting items in 2021 versus 2020. These adjusting items were mainly related to restructuring programmes, and the majority of those were recorded in the latter part of the year. As an example, restructuring related to the organisational changes that we have been implementing in order to be setting up the new country-based structure, which is now ready since the beginning of this year. If we then take a look at the earnings per share, also there a good development towards the end of the year. However, on a full year basis, we were also there on par with the previous year. So the full year basis, six cents per share as in 2020. And there the key difference, as I said, versus the operational development was then the adjusting items. In terms of the profit for the period, and also the earnings per share, there were no major differences between the financial items, nor with our effective tax rate versus the previous year. Then if we take a look at our cash flow development, firstly the cash flow from operating activities, as you can see from the slide, it's fairly seasonal, or it can vary a lot between the quarters. It is very typical for our business that there are high fluctuations in working capital, and we experienced those also during 2021. In the last quarter, our cash flow was 42 million for net cash flow related to operating activities. It didn't quite reach that. the level of 2020, however, I still think it was a good achievement and helped to improve our net debt position, and I'll get back to the net debt position in a bit. In terms of just looking at the cash levels, our total cash at the end of the year was significantly lower, than at the end of 2020. However, it's good to know that at the end of 2020, one could say that the level was somewhat abnormal, as the company had taken precautions to mitigate any pandemic-related actions or effects to the company's cash. Now we are more at the normal level and have been reducing certain items in our balance sheet. Then if we take a look at the net interest-bearing debt, I'm very pleased to note that it declined compared to the previous year. So from December 2020 to 2021, there was a decrease of 26 million here, and it's illustrated somewhat in more detail here as well. It's good to note that at the same time, we have been able to improve our gearing which went down to 46.5% versus 75 a year ago. And obviously, that is a very good achievement as well. And then if you take a look at kind of a more longer-term view, both on our equity ratio as well as the gearing, both thanks to the result development, our equity ratio and gearing improved, but it's also good to note here that the cash proceeds that were related to Oriola selling part of its holding in doctor.se during the Q2 that is visible both in the equity ratio as well as gearing for the year. But good improvement in both of those during the year. Then the dividend proposal. So the board proposes a dividend of €0.04 per share, and this is well in line with Oriola's dividend policy to pay out at least 50% of its earnings per share. And if we look at the earnings per share and dividend per share development from 2017 onwards, this is a more longer term illustration of both KPIs. And should the board proposal be approved by the AGM, the payout ratio would be approximately 64%. And comparing the proposed dividend to our share price at the end of December, it would indicate a dividend yield of approximately 2%. Then we will talk about our outlook and back to Elisa.

And yes, 22 outlook. So we estimate that Orialas adjusted EBIT will increase from 2021 level. And having said this, it's good to remember still that the COVID-19 pandemic still continue and that's amplification to our operations and the duration so forth is of course naturally unclear in our environment. And when we are a logistic company, increasing inflation and related cost pressures for labor costs to freight and an energy price may have also significant impact to Oriola's profitability. And please note that the outlook is based on the current group structure. And talking about the group structure, let's also review a little bit once more our last week's news in more depth about the planned merger of Kruunan's Apotek and Apotekskruppen. So what does this mean once more? And some highlights from the plant merger. I think the main point here is the key takeaway that clearly the combination is expected to create a third largest player. So when number three and number four are merging, possibly merging, it is a meaning that there will be a third very big player or serious player in the Swedish pharmacy market. A new company would be owned 50-50%. And the rationale behind is really to create 25 million EBITDA level synergies, and the synergies are expected to realize in full by the end of the third year from the closing of this potential merger. And as said, potential word, this is naturally subject to competition authorities, which is the approval is expected or expected outcome of that is coming highly likely on the second half of this year. And about the new company, a little bit in brief. This is the illustrative combination of financial information from 2020 numbers and forming a new potential joint venture. They will create a well-established number three player in the Swedish pharmacy market, and they have very complementary physical pharmacy networks at the moment. The potential there is really to combine scale. When number three and four is potentially merging, there is a natural scale effect and that means a strengthened market presence. And of course, with the current development of online, the new company is expected to focus strongly on the expanding e-commerce as well. And combined key financial here at the second part of the slide is that the net sales would be 1.1 billion euro and EBITDA with 2020 numbers roughly 60 million and adjusted EBIT as well, 24 million. And these EBIT numbers naturally don't reflect any synergy effects or benefits. Net debt would be with a combined entity 216 million. And let's also review the financial implications to Oriola, and Sari will run through this part.

Yes. Go ahead. So overall, in the valuation, Oriola's consumer is evaluated at approximately 400 million, whereas Apotex Groupen is valued at approximately 300 million. At the same time, some... debt and liabilities are expected to be transferred to the new company, 134 million for Oriola, which would then mean, of course, for the Oriola's part that our net debt and liabilities would be decreasing, and in addition to that, Oriola is expected to receive a cash consideration of approximately 24 million from Euroapoteka related to the transaction. If this will be approved by the competition authorities, Oriola Group is estimated to record a one-time loss of approximately 10 million. and this amount is including the costs related to the transactions. However, I would like to emphasize here that the amount is subject to change, first of all due to the timing of the closing, as well as also depending on some customary closing adjustments that might take place. And depending on the time of the closing, we are estimating that this would be recognized into the consolidated accounts of Oriola Group during 2022. At the same time, we are estimating that Oriola Corporation, the parent company of the group, would be recognizing a loss of approximately 100 million as a result of this transaction, For the 10 million at the group level and for the 100 million for the parent company, I would like to remind that these are the estimated impacts for our P&L and thereafter also to the balance sheet. However, from the cash point of view, the cash consideration is estimated to be approximately 24 million. So the rest is accounting, one could say. And then, should we receive the approval for the transaction from the competition authorities, thereafter, Oriola is planning to report the new company as an associated company, and it would be presented on a so-called one-line consolidation above EBIT in our income statement.

Yes, and then at the end, I would like to say about this potential merger that it is a really significant step in our transformation and a concrete structural change in this roadmap. And hereby, having said that, the remaining part of Oriola will concentrate more on B2B business in pharmaceutical distribution, wholesale of wide portfolio of health and well-being products and offering also related services such as those dispensing expert services to pharmaceutical companies and staffing services to pharmacies. And Aurila would be actively seeking, naturally, the value, increasing the value of this new company on the Swedish market as a very active owner here. And thank you. This is all from our side, and now we are ready for your potential questions.

Yes, thank you, Elisa, and thank you, Sari. I start to read here some of your questions, and please feel free to put more into the chat function. Let's go first to Sweden. There is a couple of questions, first related to pharmacy market. I think, Elisa, this could go for you. Petri from Inderes is asking that the interesting development in online pharmacy market, what kind of expectation do you have here going forward? And what kind of market share growth do you expect from online pharmacy going forward? So market development and... Market share.

I guess market share for Oriola or potential merger. So, it is a very good question in the sense that, as I said during the presentation, it was a kind of surprise that the development was only 6%. on total online business and compared to previous year, it was 66. So, clear slowing down. You have to also remember that in absolute terms, when the market is growing, still in online, it's of course quite, the growth rate is in relative terms going also down, because the absolute numbers are bigger, so maybe it is also a natural development, and when the restrictions are here affecting quite a lot, so it's hard to predict how the market will develop, but But all in all, it's very clear that the online market in pharmacy business will continue to grow. It's a natural phenomenon when we take all other retail business. Already in many businesses, it's Half of the business is going through online. And in pharmacy, it's still only 17%. And when this is possible in Sweden, and there are more players have come to the market, which are poor players. So I expect that the market development will continue towards online. And what is then our benefit is that we have omnichannel as well. And we have... clear understanding that they are bundled together and we have ways how to attract and how to use this omni-channel combination for our benefit. About the market share, I don't have that kind of crystal ball, but it is very clear that we are, as we speak, we are behind the development, because it's roughly 9% of our total sales only, and our market share is there in online. It's not so big as our... total market share 16%, so we have room to grow, and we are going to invest further into online with the new distribution center as well, which will come then second half of this year. So it's hard to say where we will end up with the market share, but we will grow, and that's our target also.

Thank you, Elisanne. The second one goes to you as well, I think. Let's stay in Sweden. There's a question about this country-based organization. First, let's go this one. Can you remind us about the reasoning and the goal moving to this country-based organization?

Yeah, the reason is actually that when I started here in this company, I think it was quite clear that we are somehow increasing the complexity by trying to handle two very different by legislation or regulation markets, Sweden and Finland from one kind of set or from one angle that we have pharma business and then we have retail business because these businesses are quite different, Finland and Sweden. The competition landscape and regulation landscape is very different. So I'm really believing, and I think the whole OREOLA organization was also welcoming this change, that this will clarify our role and also the structure and reduce complexity make it more simple that we can also then from the one stop shopping kind of angle serve our customers per country. Having said this, I think this was the right move, and we have lived now one and a half months in this setup, so I strongly believe that this will increase even further the benefits from the customer angle and from our own operational angle as well. We still have a lot of shared functions, so this is not changing that setup, but the business is served per country and that is also welcomed by our customers by far.

Thank you. Let's stay with you, Elisa, still, and more to maybe the COVID situation and how it has affected us. What kind of like, what extended Oriola Witnesses to impact of increased absence rate at personnel during Q4 and how the situation has developed now during the Q1?

It's a very good question and I reflected a little bit in the beginning of the presentation that it has truly challenged us. But I have to say that we have learned with this pandemic to live with these waves, pandemic waves coming and going. And we implemented quite fast the processes again, which are very familiar to us, to safeguard the deliveries and really focus on making sure that they are happening in time to pharmacies and hospitals. So what we did is that when the absence rates were really high, we worked overtime. Also, our office workers went to help in operations. So we focused with the utmost commitment and engagement from our employees to serve the customers. And also, we borrowed between the business areas, pharmacists, for example, in Sweden, from pharmacies to dose dispensing and safeguarded that way the deliveries. So as I said, I'm really grateful for our committed employees for making this extra mile and safeguarding this patient safety in both countries from our part.

Thank you. I think let's take the next one to Sari. You brought up cost inflation in our guidance. How broad-based is this cost inflation and what kind of magnitude are we talking about?

Well, I think all of us have been recently reading from the news different type of metrics coming from different parts of the world. And it started already a while ago on many fronts. So Oriola is not immune for those topics either. Of course, we are doing our best to mitigate the impact. but it's good to note that especially what was also mentioned here earlier, so labour costs, development in freight costs and energy prices in general, those are typically the most material to us. Of course, at the same time, as part of our turnaround, we are heavily looking into being more efficient and be able to operate in a more cost-efficient manner. But it is definitely a fact of life, unfortunately, right now, that there are cost pressures on many fronts, and we have seen inflation increasing in many countries recently. So, therefore, we have included that in our outlook as well.

Thank you, Sarjan, and thank you, Elisa. We do not have any further questions today. If there will appear any, we are then of course happy to answer those after this event. But now I think we thank everybody. Thank you.