Oriola Oyj

Good morning, everyone, and a warm welcome to Oriola's Q4 and full year 2022 results presentation. I am Tuha Stenius-Örnjelm from Oriola's Investor Relations. We have today two speakers, our CEO Katariina Gabriasson and CFO Timo Leinonen. After the presentation, we open up for your questions. However, you may send in your questions already during the presentation. Kindly note that we are recording this webcast and the on-demand version will be available later today on our website. Before handing over to Katariina, here is the customary disclaimer that we all should be aware of. And now, without further ado, Katariina, please go ahead.

Thank you, Tuva. And good morning and welcome also on my behalf. And here you can see our agenda for today. I will also talk about now the business and operating environment and our new CFO, Timo Leinonen, will then provide you with more detailed insights into our numbers. Let's start to talk now about the summary of the quarter four. Our financial performance improved for the full year. However, in the last quarter, we had some headwind. Market demand for pharmaceuticals continued to grow in Finland and Sweden, and our invoicing and net sales at constant currency increased in the fourth quarter. I will go more into details a bit later in my presentation regarding this. Despite good market demand and a strict focus on lowering our costs, Aureola's financial performance weakened in the fourth quarter compared to the tough compassion figures from previous year. Our performance was burdened by the loss of public tenders and consequently patients' loss in the dose dispensing business in Sweden, as well as a loss of some distribution customers during first half in Sweden, with an impact on the fourth quarter volumes. In addition, the severe inflationary environment continued, increasing the transportation-related costs, which are reflected in our results. The performance was further weakened by the €2 million loss from the joint venture in Q4. We booked adjusting items of 10 million euros, mainly related to an impairment of other tangible and intangible assets not yet available for use and which have been developed and in progress. And this was reflected in our earnings per share. The impairment consists of several earlier years process automation development, outdated information technology and partially implemented projects that have been discontinued. I would also like to emphasize on negative net debt, and I'm really happy about that. And Timo will provide more insight on this in his part. We completed the short term turnaround plan that we have been discussing with you even over the recent quarters, and the cost savings were implemented as planned. This means improving efficiency, portfolio management and product pricing. Looking ahead, our focus will be on the longer-term transformation of Aureola, aiming at creating an even more agile, efficient and profitable company. And as we all probably know, we finalized the combination of the pharmacy business in Sweden to Swedish pharmacy holding AB. This was a major milestone for us as the transaction strengthened Aureola's business as a service provider to pharmaceutical companies and pharmacies, as well as simplified our structure. Sustainability is really at the core of our business, and I would like to take this opportunity to share some of the highlights from last year. In the sustainability area, we have achieved good ratings of our sustainability performance from third-party agencies in the past two years. This time, I would like to highlight our recognition for the environmental work in the Carbon Declosure Project. During 2022, we continued our environmental work And compared to the base year 2019 level, our initiatives had reduced CO2 emission from our own operations by 70%. This has been driven by increasing the share of renewable electricity and switching to renewable district heating at our distribution center in Finland. As much as 91% of our total energy consumption now comes from renewable or carbon-neutral sources. The rate decreased slightly from 2021, and this was mainly because of excluding Kronans Apotek from the calculation. In addition to cutting the CO2 emissions, one of our main environmental goals is to decrease waste and also use the materials more effectively and increase the recycling. In 2022, our company wide recycling rate increased to 83% compared to 79% in 2021. I'm very pleased with these achievements and just showing that we are taking the steps in the right direction in the sustainability area. Today, we have also then announced the board's dividend proposal that you will then be able to see here. Aureola board is proposing that the dividend of six cents per share will be paid out for the financial year 2022. This compares to the four cents per share that we paid for 2021. The annual general meeting will be held on 21st of March and the dividend record date is the 23rd of March and payment date is 14th of April. Next, I will talk about operating environment and the markets that we are working in. The operating environment can be summarized in the following way. Overall, there is good market demand and that continued. In Finland, the market continued to grow, but on slightly slower pace than in the fourth quarter, when comparing against the previous quarters. We can see no visible impact from the economic uncertainty on the market side. Availability of pharmaceutical raw materials became tighter, and this has implications on the supply of some medicine. And that's in fact not only for Finland and Sweden, but that's Europe wide. Then let's take a closer look on how the market has been developing and our performance compared to this. If we first look at the pharmaceutical wholesale market, we saw that the market continued to grow in the fourth quarter compared to the previous year. When we look at the value development at wholesale prices in Sweden, the growth was 8.3% in Swedish krona in the fourth quarter. In Finland, the market value grew by 1.9%. However, the growth slowed somewhat from the previous quarters of this year. Based on our estimate, Oriola's share of the pharmaceutical wholesale market was a bit lower in Sweden. Oriola's growth was slightly less than the market growth due to the loss of some customer contracts during the first half of the year, and that has impacted the fourth quarter volumes. The market share remained at the same level in Finland as in previous quarters. In the dose dispensing business, Aureola offers pharmaceuticals and dose dispensing for private and public health care sectors. The total market size for dose dispensing has increased slightly in both countries. The number of patients that Aureola is serving in the dose dispensing business was unchanged compared to the third quarter, when the number of patients declined year on year to approximately 75,000 patients in Sweden. In Sweden, the regional customers organize public tenders, processes from time to time, and due to these processes, we lost some regional customers in dose dispensing, and therefore the number of patients declined to about 75,000 patients compared to the 105,000 previous year. The dose dispensing business in Sweden is focusing on new customer segments to develop the business further, and this is already materializing in new contracts. The number of patients in Finland remained at around 30,000 patients. And with this market outlook and presentation, I'm now ready with my first part, and I would like to hand over to Timo and his financial presentation.

Thank you, Katariina. And just to start to introduce myself, so I'm Timo Leinonen and have been now Oriola's chief financial officer from the beginning of December. And basically glad to join the company. And this is now my first release with you and Webcast as well. So very glad to be here as well. Just to begin to a little bit highlight what Katariina just said. So, basically, quarter four has been kind of a quarter of transformation for us. First of all, the joint venture, where the Grunan-Sapoteetabres group and operations were combined, was finalized. Then we got or announced a new operation model beginning from October in the company. And then, of course, impairment and going through some balance sheet things has been quite vital for us, as we have announced also before. But let's go a little bit deeper into the financial and the numbers. First of all, if we see in our adjusted EBITDA for the last year, so solid improvement in the three first quarters and went according to plans. And then of course, Q4, a bit of the disappointment. But as Katariina already told, there are several reasons why we have that number in there, so 0.9 million euros. First of all, we booked from joint venture minus 2 million euros of our part of their losses in Q4. If seeing that so, we announced in the preliminary numbers only 800,000 losses, and the difference there is in purchase price allocations that came through when they were combining their accounting principles in the joint venture. So that's about it. Then there were those dispensing customers in Sweden that have an effect to our profitability in Q4. And as we have stated or stayed also in our future outlook, so impact will continue. But as Katarina also mentioned, we are seeking new customers, and a number of new customers are also improving in that business. And then, of course, in a fluttery environment, and also foreign exchange rates for the Swedish crown has been a little bit challenging, but also with the business and the cost level of the business, so we have mitigation going on, discussions with customers, discussions with subcontractors, and so on. When going to the bottom of the profit and loss account, again, solid performance, first three quarters, and of course, Q4 number shows to be quite different than it was in the beginning of the year. Losses, 8.1 million, including that impairment, roughly 10 million euros. And if we are excluding that one, so we were around zero level in profit for the period. And when chasing that to the earnings per share, so again, solid performance during three first quarters, we got seven cents of profit per share, or earnings per share, and minus four in Q4. And if we are excluding that impairment, so we were there on the zero level. But kind of seeing from excluding that, so earnings per share operationally was seven cents, and our dividend proposal is six cents, so basically we are in the bar there. One of the most positive things for the quarter and for the whole year was the cash generation of the company. I'm also very happy to see these numbers. When we started this year, we had cash in our bank accounts and so on. about 110 million euros and now it's 160 million euros. Of course, there is a big change in the balance sheet and also how this is generated when we have now only our continuous operations in our balance sheet as well, and Q4, they were kind of gas parts of the price of the kind of transferring our consumer operations to the joint venture and so on, and it has some effect, but at the end of the day, also the networking capital was very favorable for us during the Q4. And then, of course, coming from there to our net debt. So it was negative at the end of the year. There were two reasons. Of course, our balance sheet is changing quite a lot. consumer business or net debt items were taken out from our balance sheet. But then again, cash and cash equivalents, 160 million at the end of the year ended up so that our interest bearing debts were also 23.7 million negative. However, I have to say that in our business, so fluctuation of the net working capital might be quite high during the different periods. So I cannot promise that it's always in the future or near future will be negative, our net interest bearing debts. But very positive on that one, and then when seeing the gearing ratio also, so when the net interest and in-depth are negative, so gearing is also negative. Then a few words about Swedish pharmacy holding in Q4 2022. Net sales of the company were 293 million euros, adjusted EBIT minus 2.8 million euros, and that includes those purchase price allocations I was talking earlier. They were already, during Q4, able to realise some €1 million synergies, but then adjusting items, so what they had to spend money or lose profit to start to dig out those synergies were €1.9 million. EBIT A, so earnings before interest taxes and amortisations, was minus €1.3 million. euros and in this A we have those purchase price allocations, how we have calculated. And they have net debt of 95.3 million or had it at the end of the year. But as stated so, we booked loss from the company 2.0 million in Q4. last year. When seeing where the company is, so of course the joint venture has now formed in the last quarter of 2022, so the life of the company is really in the beginning, so they are in the middle of integration and so seeking out the synergies which were promised and so on, so we have to be a little bit patient to see when they are performing optimally from our point of view as well. But as I said, Aureola is committed to the long-term ownership for the company, and value creation would be also seen as a long-term investment. Finally, coming to our outlook for this year. We are expecting that our adjusted EBIT, excluding the contribution from the joint venture, will remain the same level as it was last year. The comparable number, as you see in the bottom of the slide, is 19.7 million euros. and when seeing which other things are affecting our outlook, so of course the negative impact from our profitability or from those Sweden and lost public tenders and consequently of patients there will have effect for us and then of course we are kind of quite carefully following the inflammatory environment and also effect rates, how it is in Sweden or how it's performing. But hey, that's all from my part and now back to Katariina.

Thank you, Timo. I will now conclude, as we have done during the previous quarter, by summarizing and also talking about the key priorities for this year. To wrap up Aureola's fourth quarter, there are five important takeaways that I want you to remember. First, the demand continued on a good level, while our profit was weakened by impairments. Our invoicing and net sales rose at constant currency. Secondly, we are still currently witnessing high inflation that gives uncertainty for the coming quarters. In quarter four, we managed partly to mitigate the inflationary cost pressure with our own savings from turnaround and other initiatives. Inflation is mainly affecting our transportation costs, but also the labour costs on the long term. Thirdly, our short-term turnaround activities were completed as planned. All the actions related to our 7 million euro cost savings target has been implemented in 2022 in both continuing and discontinuing operations. We have also progressed further in improving our efficiency, the portfolio management and the product pricing. Fourth, the combination of the pharmacy business in Sweden to Swedish pharmacy holding AB was completed in October. That was a major milestone for us. The transactions strengthened our focus as a service provider to pharmaceutical companies and pharmacies, as well as simplified our structure. And last but not least, our focus will be on the longer term transformation of Oriola, aiming at creating an even more agile, efficient and profitable company. And to conclude my presentation, I would like to use a slide that we presented during the investor days in November last year to remind you about what we are now talking about for 2023. And our transformation continues and our key priorities is profitable growth, efficiency and culture. And we will continue to be the preferred partner for our customers and to commit developing further our sustainability work in lowering the emissions and improving the circularity in our daily operations. We are focusing on our excellence in the distribution of pharmaceuticals and bringing value to customers through advisory services and that will remain the core of our business. And also finally, I would really also like to thank all our employees for their commitment and also all our customers for a good cooperation in this somewhat challenging environment that we are facing. And with this, we are now ready to take your questions. And Tua, I think you are the one who should fix this.

Thank you, Katarina and Timo, for your presentations. We have a couple of questions from the chat. Let's start with a question on the top line. Invoicing and net sales decreased in the fourth quarter, while the markets were growing. What were the main drivers behind this?

Mm hmm. Like I said before, at constant currency level, we in fact increased the sales, the net sales. And then, of course, we are affected about about like the inflationary parts and also about the those dispensing business that we have done lost these contracts and also done done done the patients. And this is like Of course, affecting us very much in the quarter four. And you haven't seen it so much earlier this year. Do you want to add something, Timo? No, that was good.

All right, thank you. And then we have a couple of questions on the joint venture, but I will maybe take one of those and then you can comment further how much we are commenting on that. So how do you see the joint venture evolution in 2023 as you are guiding excluding JV's profit share?

I can say it like this, that we are not commenting on the joint venture. We are guiding our own profitability and the adjusted ebit. And if there are questions to the joint venture regarding their future outlooks, then that should be going to the management team overall.

All right, good. Thank you. Then there's a question to Timo on impairment. Can you open up the impairments? Were they related to a specific business area or from various parts of the company?

Well they were in that sense kind of attached to the various part of the company. There has been kind of development plans in different stages of the kind of recent history so how we are going to improve Swedish operation and Finnish operation and what kind of computer or IT system we would have there and so on. And then actually when time has gone past, so basically we have kind of, or the kind of outlook for operations has changed and so on, that's the reason behind it. So several smaller different things, but when you are combining them together, so we are in that kind of quite significant amount in euros.

All right. And then a question on the Q4. Why were results for continued operations so weak in Q4?

Like I touched a little bit before here and also Timo, we can see in the continuous operations three major areas. The dose dispensing business, where we then have like lost contracts and also in that way patients. Then we have like the volume, even if we can see that the net sales in constant currency is growing, we are affected about the FX rate, the Swedish krona. And then we have the inflationary environment that has affected us. We have, to some extent, even that out with the cost savings that we do, but we still are like, we are not like say immune to that one.

All right. Then we continue on to the capex. So what kind of capex spending profile should we estimate in 2023?

Well, we have not stated that out yet, so basically, but the CAPEX in the continuous operations will be roughly on the same level that it has been before, so not kind of very big changes on that one.

Okay.

But to say that, so of course, we are now building or starting to build a new strategy as well, and so it might have effect to that one as well.

Okay, good. Thank you. Then we move on to cost inflation. So as seen in Q4, do you see continued pressure in H2-23 equally spread over the full year or more weight on H1-23?

i will say that's a hard one because it's like it's like speculating what will happen in the in the whole environment around us uh what we see now is of course like that we can see there's a weakened demand in still in both sweden and finland in the consumer and how they behave. If you look at the medicine side, we don't see as much as we do in other areas. But we can also see that there are signals on the market that it's going in the right direction. But I would like to not speculate on that because it's really, really hard. And I think you need a crystal ball to really be able to say where it's going. But we are monitoring it and we are taking the actions that we can take from our side.

Thank you. And then a question on the debt side. What is the average maturity profile of your interest-bearing debt and what kind of average interest rate do you currently have?

The current average interest rate is roughly 2.5, including the commercial papers, which are short-term and so on. And when seeing the maturity of the kind of long-term debt, so I think average is around three years currently.

Okay. Then a couple of more questions here. So first we go on the distribution customers. So how large distribution customers have you lost in Sweden?

It's not a significant amount, but you can see that it's affecting the quarter four. But we have also won some agreements now during the second half that will give like a balance for that to some extent, at least during the first quarters and first half of this year.

There's also a follow-up on that. What is the full year 23 impact of those lost contracts? Or how much was it in Q4?

Do you remember? I don't know. Not specifically. We are not commenting on individual customers, of course, and so on. But basically, there is no that kind of effect that we would say, for example, that there is significant outlook is that we are losing our revenues.

We can say it like this, when we are looking at the total, we can see that, like I said before, that we are balancing some lost customers with some new customers. And also the lost customer in those dispensing is to some extent also balancing up with new customers from other areas and profitability in other areas. So we are looking at the total and we give guidance on the total side.

Okay, then there's another follow-up question. So do you want to comment on what kind of large changes in distribution contracts are you foreseeing for 2023?

I don't think we should comment that because there is a tender process always ongoing also in the distribution side, both with customers that we have and also potential new customers. And that is the main daily business that we do and that we always will do.

Good. Then we have three part questions on the dose dispensing. I will take each one of them separately. So how many patients have you lost in dose dispensing in Sweden?

Like we said, during quarter three, we went from 105,000 patients to 75,000 patients. And that is what we have talked about.

In Q4.

Yeah, it happens in September, I think.

Okay. And then do you have any new dose dispensing contracts in the pipeline?

We are changing the market behavior, like trying to find new segments in the dose dispensing business. And we can see that we are succeeding with that. So there are new tenders coming in. In the dose dispensing side, there are big tenders in Sweden. And we will continue, of course, to be part of this bidding also.

Okay, and then the last questions on the dosispensing. So what is really your ability to win those contracts?

That's a good question. I would say we have the same ability as the other companies in this one. And a public tender has a special kind of like business, how should I say, logic. And we as well as the other ones are participating in these tenders in the best way.

Okay. Thank you, Katariina and Timo. It looks like there are no more questions on the chat for this time. If, however, there are any follow-ups or questions, please don't hesitate to contact us. The next scheduled events are the AGM on 21st of March, and then the Q1 report that we will release on 27th of April. So thank you everyone for joining today, and we wish you all a very good rest of the day.