Oriola Oyj

Good morning everyone and a warm welcome to Oriola's Q1 results webcast. I am Tuva Stenius Örnjälm from Oriola's Investor Relations. We have today two speakers, our CEO Katariina Gabrielsson and CFO Timo Leinonen. After the presentation, we open up for your questions. You may send in your questions already during the presentation. And kindly note that we are recording this webcast and the on-demand version will be available on our website later today. 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 everyone also on my behalf. Today, we are here to present our first quarterly result for this year to you. I will start with the highlights and comments on the operating environment. And then Timo takes over and we'll talk you through the financials. And before the quick Q&A, there will also be a couple of closing remarks from me. So let's now start with the highlights. Looking at the first quarter, I'm pleased to say that we had a solid start of this year, despite some uncertainties in our operating environment. Our net sales measured in constant currency were 370 million euros, which is at par with last year. We saw good development in the distribution of pharmaceuticals, especially in Finland, but volumes in Sweden were negatively impacted by the lower import of parallel medicines. In quarter one, profitability declined to 3.5 million euros, but this was in line with our expectations. There were mainly two reasons for the development. As we communicated in connection with the fourth quarter last year, the volume in the Swedish dose-depensing business have declined, impacting profitability, and further, our transportation costs in Sweden were higher. In addition, we experienced in the first quarter a challenging overall inflationary environment. However, with strict cost control, we were able to mitigate the pressure and operating expenses were below last year's level. As we have discussed before, we successfully completed our short-term turnaround last year. We now have a clear strategic direction and focus on a long-term transformation. In my closing remarks, I will also comment some more on this topic. Before we move on to discuss the operating environment, I want to remind you all that towards the end of Q1 last year, consumers hoarded pharmaceuticals, especially in Sweden, as a reaction to the war in Ukraine. This boosted the volumes, the sales, and to some extent profitability, and made Q1 2022 a somewhat tough compassion period. When looking at our operating environment, we can see that the overall market demand in Q1 was good, both in Sweden and Finland. The increased economic uncertainty has not impacted the pharmaceutical market. On the other hand, the tight situation in raw material supply that was seen already last year has continued and impacted the availability of some medicines across the whole Europe. Consumer confidence has weakened due to the high cost inflation and increasing interest rates. Typically, in an economic downturn, it would be the traded goods that would be impacted first and then the OTC over the counter products. On the cost side, energy and fuel prices have been stabilizing. The union negotiations were completely during the first quarter in both Sweden and Finland. And now we have a better understanding on the inflationary impact of labor costs in the coming quarters. As next, I will present more closely the market developments. The pharmaceutical wholesale market continued at a healthy growth, both in Sweden and Finland. In value and local currency, the market in Sweden grew by 10% and in Finland by 4%. Based on our estimates, Aureola's market share in Sweden was 43%, which is lower than it was the first quarter last year, while the share was stable in Finland at 44%. In Sweden, new businesses has partly offset the decline from the last year's lost business, but the decline in market share was related to lower volumes of imported parallel medicines. I'm really satisfied to inform that we have been winning new businesses during Q1. We have won more than five new contracts and the positive impact of these starts to materialize in the second half of this year. In dose dispensing business the total market size has increased by around 10 000 patients in Sweden and in Finland respectively. Aureola serves approximately 37 000 patients in Sweden compared to last year 105 000 patients and approximately 30 000 patients in Finland compared to 28 000 patients last year. The decline in Sweden was related to the lost tenders last year, as communicated in the fourth quarter. The transfer of these customers is materializing now as lower number of patients and lower sales. The regional customers in Sweden organizes public tenders processes from time to time, and we continue to participate in these. The Swedish dose dispensing business continues to focus on new customer segments to develop the business, and this is already visible in new contracts. With this, I'm ready with my first part, and I would like to hand over to Timo for the next part of the presentation. So, Timo, please.

Thank you, Katarina, and good morning, everyone. Let's go briefly in finances. As Katarina already mentioned, it was a solid start for the year. However, as I said, the exchange rates in Swedish krona impacted heavily on our top line, and that's the reason why our invoicing was below last year's level. But then, when coming to the net sales, so we were in line of the last year, except of course for the Swedish, or Sweden, which actually explains mostly the lower numbers in net sales. And when coming to the adjusted EBIT level, so we, as stated before as well, so we made changes in reporting of JV net results. Now it's reported after financial items and before taxes in our profit and loss account. And the reason was that we made it more transparent and simple to communicate on our own performance, which we are guiding in adjusted EBIT level. And also to highlight that we are measuring our joint ventures performance in the longer term and through the share value, which we obviously want to bring shareholder value to our shareholders as well on the longer term. And let's go more closely to the EBIT on next page. When seeing the EBIT level, so profitability was in line our expectation. Foreign exchange doesn't impact that much on our EBIT level. And the reason is, of course, that mostly our sales, net sales and also the cost base in Sweden is kind of measured in the Swedish crowds. However, the biggest impact came from those in Sweden, as we announced already earlier. Then how to maintain the good profitability level and expected profitability level in this inflammatory environment, so price increases have had some effect there, and then of course the good cost control and better efficiency in our operations than before have been affecting positively on our profitability. And as also Katarina mentioned before, so hoarding of medicines after the start of Ukraine war in first quarter in 2022 also impacted to the numbers what we have on that period there. And when going to the high inflatory environment, so especially the transfer transportation costs in Sweden were kind of higher level than what we expected. But despite of that, so our operating expenses were at last year's level due to good cost control overall in the company. Then when seeing the profit for the period, so net results, so it was declining one million euro from the previous year and was also in line of our expectation. The loss of joint venture, Swedish pharmacy holding company were spurring in the result and also the rising interest rates. And the result from JV was minus 0.5 million euros, but compared to the last quarter of 2022, so it was much smaller. Last year, it was on the last quarter, 2.0 million euros. And net financial expenses increased mainly due to the higher interest rates, and some effect came also from foreign exchange rates. And I think one of the positive things was that during this quarter, we didn't have any adjusting item. So basically when the operations are kind of starting to run smoothly and we don't need to do any adjustments. So of course it kind of supports net profit and earning per share as well. We've seen the cash flow, so cash flow was highly negative, but on expected level also in the Q1, our cash position was higher than normally at the end of last year, and of course it has when this comes to the normal level, so impact for the quarterly figures. And it comes from the high fluctuation of the net working capital, which is actually typical in our industry. Having said that, we can say that the change in the net working capital for the quarter was minus 38 million euros, while the cash position declined to about 43 million euros. So basically all the changes are coming from the net, changes of the net working capital. But having said that, so I also have to say that our cash position is on very good level and liquidity is in a good level. It was 119 million euros, our cash position at the end of the quarter. And then when seeing net debt, it was also on the last year's level, and just to notify that Q1 2022 cash and sold trade receivables included also discontinued operation. On cash, there were roughly 38 million euros from discontinued operation and sold trade receivables, 77 million in that one. But basically, when seeing the gearing, and our loans and so on, so everything is kind of on good level, and basically on the same level that what we really had last year. And otherwise also balance sheet remains strong and basically we are in good position if we kind of need to use our balance sheet somewhere, for example, in the investment and so on. Equity ratio is in good level and better level than what it was in the last year. and also the assets of gearing is in the very good level compared to what it has been previously, especially before the joint venture measure, what we did last year. Then a little bit about Swedish pharmacy holding. meaning Kroon and Zapotec, our joint venture. So, net sales was 280 million euros, which was slightly below last year, but as said also last year, the same hoarding of medicine affected here as well on the last year. Access to debit was about zero, and compared to minus 2.8 million on the last quarter of last year. So, we see the improvement in the profitability, and it shows that we are going in the right direction in synergies and integration as well. The adjusted debit was a result of the lower earnings from the pharmacy sales, as said, as well as increasing costs, mainly connected to the pharmacy stuff. So basically inflation in the salaries are affecting there as well. And as said, so we are using the equity method to book the results of JV to our book, so we booked a loss of 0.5 million euros compared to minus 2 million euros in Q4 2022. And as stated, so we are committed to the long-term ownerships, and we see that on long-term, this will bring value to our shareholders. Then shortly about our outlook for 2022, as stated also before, so it reminds on the same level what we had before. Of course, there is a technical change in the wording, because now we are reporting our joint venture on different place, but actually that was only taken out from the outlook that it's not excluded from our reporting in that sense, which we've all before as well. But as said, so our outlook is that we are expecting our agency a bit to be on the same level as it was in 2022, and the comparable number there was 19.7 million euros. That's all from my part. Please, Katarina, continue.

Thank you, Timo. So now you should know most of the things about the numbers, and I would like to continue with a few words on the sustainability and also an update on our key priorities before we open up for your questions. Sustainability is embedded in everything that we do, like we have communicated before. We have integrated our sustainability program in our group strategy and have also set ambitious long-term targets. We are committed to reach carbon neutrality by 2030 and by 2025 in our own operations. As a result of our long-term work, we have decreased emissions in our own operations already by 70% compared with the base year 2019. Another important KPI for us is to measure the pharmaceutical deliver accuracy, which is an indicator for picking accuracy of the ordered pharmaceuticals. We have committed to deliver pharmaceuticals to pharmacies and hospitals pharmacies within 24 hours of ordering. So I'm really, really pleased with 99.6% that we have achieved in Finland, which is above our target of 98%. In our efforts to reach carbon neutrality and our targets for the use of renewable energy and improving recycling rates, we have ongoing improvement projects at our sites related to, for instance, lead lightning, waste handling, heat recovery and also cooling systems. In addition to improving our operations, we have started the renewal of our sustainability program and to prepare for the upcoming requirements in the EU directives on sustainability reporting. To comply with these requirements, we completed a gap analysis to identify development areas in our actions and reporting. During March, we also completed a double materiality assessment among our stakeholders. We received more than 500 responses from across the various stakeholder groups. And I'm really, really happy about that we have that many answers. So thank you for all of you who have answered. The results of the survey provided us with very valuable input and feedback and will support us in identifying the material sustainability topics and building our future sustainability roadmap. We have also received questions on our strategy, and we have talked about this for quite a while, and we have earlier said that we are working on it. But in the meanwhile, our strategic direction is clear. We focus on our core business, profitability improvement, and our societal role as an infrastructure company in securing availability of pharmaceuticals. We will continue the strategy work with additional scenario work on our portfolio of value added smaller businesses. In summary, we want to be the preferred business partner in the Nordics. This means for us that we offer high quality and advanced distribution of pharmaceuticals and a wide assortment of health and well-being products to our customers. It also means that we provide advisory services to pharmaceutical companies and pharmacies. To ensure sustainability growth and shareholder value, we are further developing our commercial and supply chain excellence while ensuring profitability efficiency and collaborative culture. We will also support the value creation in our joint venture company Kronans Apotek. and gradually look for selective merger and acquisition targets to support our growth. We're looking a bit closer on our key priorities for this year. I want also to provide some examples of the initiatives that are ongoing. During the first quarter, we have continued to strengthen our commercial operating model to create better customer understanding, improve our customer journey and generate customer value. We also resumed our work with the personalization. This is to improve the customer centricity and experience by developing data driven business, customer segmentation models and by improving the offering and standardization and standardizing of services. In our operations and supply chain, we continued with efficiency improvements through simplified processes and improved demand planning. Another key action was the implementation of our information security, especially our monitoring capabilities and the security of our digital services environment. Since the beginning of this year, we have established a new performance management process that will focus on continuous dialogue and employee development. We also accelerated our commercial capability training and managerial change management training. So to conclude this presentation, I would also like to summarize the first quarter as follows. Our markets in Finland and Sweden were growing. Our net sales measured in constant currency were at last year's level. The adjusted EBIT was in line with our expectations. And lastly, our strategic direction is clear and we will continue to focus on a long term transformation. With this, we are ready now to go to the presentation and open up for your questions.

Great. Thank you, both Katariina and Timo, for your presentations. We have a number of questions that we have received through chat. They are related, of course, to Oriola and also the joint venture, Kruunan Saputeek. I was thinking that we would start with the JV questions and then continue with the Oriola questions. So... The first one on the JV is that on what basis are figures from JV company reported? IFRS or local Swedish GAAP?

They are on IFRS.

Okay. And how is adjusted EBIT calculated? How and by whom are on-time costs in JV calculated and how are synergy figures calculated? Both joint companies were profitable before merger with about 25 million euros operating profit. Why is that now zero? That was a long question.

Yeah, of course there is kind of integration costs that are burdening and also that when you are integrating kind of two quite sizable companies, so it has an effect to the numbers. And adjusted EBIT is calculated that we are taking out the integration costs, what we are having there and so on. And then synergies are kind of... Synergies that are kind of generated from the starting of the company. So basically what we have stated earlier is that we are expecting in 2025 roughly 25 million yearly level synergies from that integration. and basically that's calculated how we are targeting towards that one.

Okay, thank you. And then there is a follow-up on this. How much was operating profit of JV, and how much were depreciations of the company?

So basically, if we are talking of operating profit as an EBITDA, so we are not giving out that one. And the simple reason is that when we are in IFRS world, so basically the rental costs of those roughly 500 pharmacies are handled as a depreciation. So that's why we are kind of giving out EBIT A, which actually reflects the kind of operative results when we are in IFRS world. And having said that, so basically our depreciations below that EBIT A was roughly 2.2 million euros.

Okay. Then there is a question on the profitability. So how could you describe the profitability of JV? In website of JV, it is said EBITDA of JV is 600 million SEK. Is this still a valid number?

Well, We cannot comment on that one, because obviously, we have to take into account those. It's differently calculated that when we are calculating in IFRS, so EBIT A is one that we are following. But of course, when seeing the profitability, it is burdened by the heavy integration, what they are having currently.

All right. Then there are a couple of more questions on this topic. So, how has JV's market share developed during Q1? What is the main reason for soft performance of JV? The second part of this question you already a little bit answered, but do you want to comment on the market share?

Well, mostly the questions of the JV and market share should be kind of... as from the management of the jv itself so we are not in that sense commenting that one but of course we are following closely the market share as well and and it seems that there is a bit fluctuation in in sweden but again having said that so when we are kind of combining two companies in the integration so you have to be a little bit patient to see what is happening

Great. And then the last question on JV. So net debt in JV has decreased in Q1 about 12 million euros. Is this corresponding EBITDA of Q1 of JV?

As I said, we are not commenting the EBITDA in that sense, but basically net debt has been going down and obviously it is a good thing.

Okay, good. So, now we continue with questions relating to Oriola, and we start with questions on dose business. So, the dose dispensing market share in Sweden dropped from about 30% to 29% in 2022, due to lost public tenders, which were not mentioned in the written annual review, but mentioned briefly in the AGM annual review presentation. Could you please give some color on this? Why were these contracts lost and to whom? How do you see this business segment going forward?

Katarina. Yes. In the dose dispensing business, especially in Sweden, we have a tendering situation. That means that there is like regional tenders coming up from time to time. And we are taking part of these tenders together with two other players in the Swedish markets. Unfortunately, we are then in the situation where we have lost some tenders, and that's what we can now see in the numbers. We have also now one tender, but due to quite long lead times in this market, we will see that number of patients growing again in the later stage during the period. The dose dispensing business will have its lowest share as we see it now in the quarter two and we are mitigating some of these losses by the new segment that we have mentioned and that is going into the public side of the dose dispensing business in Sweden.

Good, thank you. And then there is a question still on dose dispensing. So do you consider dose dispensing as a core business, or could you consider divesting slash discontinuing that if you are unable to reach decent profitability?

The core business for Aureola is as we have communicated, like the distribution and assortment business, and then we also have this expert service business and so on, and those dispensing around it. Those dispensing business is something that we are here to develop. There is no decisions that we should like divest it or shouldn't continue to develop it.

Great. Then we continue with other questions on Oriolos Q1. So, what kind of costs are included in financial items as income and as costs? Is the level in Q1 to be continued same for the rest of the year? Timo.

Yeah, of course, mostly in the financial costs, so there is interest rates. I see that if nothing big happens in the market, they are actually quite on the level of what they normally or now in this current situation are. And then there is some effect rate kind of changes affecting, but to a smaller part with the effect rate, so we really know where we are going, but I don't see that as a kind of major thing for our financial items. And then on the income side, there is kind of some kind of interest what we are getting from our customers and so on, but that's kind of... kind of smaller thing compared to interest rates, what we are paying out.

Okay, thank you. So, we continue on the cost side. So, how large impact do you expect from one-time salary compensations, and when do these occur in 2023?

So they are occurring now during the first month of the summer. And basically the impact is not that severe for our profitability. And of course it's included our estimate as well.

All right. And then what were the main drivers behind lower operating expenses and how well are you able to maintain these cost savings?

so if starting so of course operative efficiency has increased in our operations so that's one thing and it has kind of multiple effects of course for example when going to transportation and so on especially in distribution business so if it the operation is running smoothly, so you have kind of less extra transport and that kind of thing. So basically that's where it's coming from. And then again, also kind of tight cost control everywhere in the group. So that's vital for us as well.

Okay, good. We have at the moment two more questions that we have received, but for everyone online, I would like to remind you that keep on sending those questions to us. We are happy to take them. So, has WICSEC increased material costs in brackets purchases in Sweden?

So mainly we are purchasing in Swedish crowns. So that's obviously a good thing. And it's also one thing why the effect to our profitability is not that kind of big in the group. But then I think more the question is that basically, Our customers are importing things from Eurozone or whatever. It's an inflammatory thing normally in society. That might affect consumer confidence and that kind of thing. It might affect our assortment business, which is a non-medical business. It's more like a general effect in the inflammatory environment. as itself and not kind of specific for us.

Okay. And then follow up on this one. So has Oriola been able to increase also revenues because of that, or has weak SEC had only negative impact?

At least when seeing from the numbers what we are reporting, it is a negative kind of impact. But having said that, the negative impact is coming to reported numbers in that cell so basically we are not losing kind of money because of the exchange rate that we have for example take swedish ground and change it to the euros and so on so kind of in normal business we don't see that effect that much

I can add one thing in this one, and that's like, if I look for overall how we work with the margins and with the contracts, we are always looking at possibility to make better deals or better contracts with our suppliers and also with our customers in these cases. That's our normally ongoing work in this environment.

Good. So then, a good bridge to the next question. So you mentioned that one focus area during Q1 was price increases. How this has proceeded and do you need further increases going forward in order to tackle the inflation?

I can say it like this, if I start and you can continue, Timon, since I started the other one. Like I said, we're always working on seeing the possibility to increase the prices in a relevant way to make both market competition level and so on, and being attractive to our customers. That's our job. And also working with indexes and all these kind of things is something that we do on a daily basis. And especially when we are in the situation as we are right now, it's really important to know what's happened around us and what we do. So I will say on-going business and don't expect that this is something that we will not continue to work with for a long, long time. Good. Thank you.

Perfect answer.

And then there are a few more. So how is it possible to have so much interest expenses, although net debt is about zero? Timo.

Yeah, of course, we have quite a lot of debt still, and then we are also kind of selling our sales receivables and the other way around. So, the cash position or liquidity is quite good, which obviously we need in this kind of business. But having said that, so unfortunately it is so that we are not getting same kind of interest rates from the cash position what we are having, that what we have to pay from our loans.

All right. And then a final question to Katariina. So, could you indicate the size of the 5-1 contracts in distribution?

We're not commenting each contract like that. So unfortunately, I can't. But you can say that we are always working with new contracts and finding new contracts and suppliers. And like I said, these contracts will start to show in the numbers in the end of the year. But since we're not commenting on contract levels, so unfortunately not.

All right, so thank you for the good answers and thank you everyone online for all the good questions. And if there are any follow-ups after the webcast, please don't hesitate to reach out to us. And we are now ready to conclude our webcast and to remind you our next report, the half-year report, is going to be published on the 21st of July. So let's meet then at the latest again. Thank