Oriola Oyj

Good morning, everyone, and a warm welcome to Oriola's Q2 Results webcast. I am Tuas-Denius Örnjelm from Oriola's Investor Relations. With me today, I have our CEO Katariina Gabrielsson and CFO Timo Leinonen. Hello. After the presentation, we open up for your questions. You may send in your questions through the chat already during the presentation. 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. Good morning and welcome everyone also on my behalf. Today we will discuss our second quarter results. I will start with the highlights and comments on the operating environment. And then Timo will take you through the financials. And before the questions and answers, I will give a couple of closing remarks. So let's start with the highlights. I'm very pleased to say that in quarter two, our distribution business has performed very well with the stable market shares. This has supported a solid net sales growth of 3% to 407 million euros measured in constant currency. Profitability in the second quarter declined from the previous year to 3.4 million euros. This decline was due to the low volumes in the Swedish dose dispensing business. But when looking at the cost side, we can see that our operating expenses were below last year's level. We have been restructuring the Swedish dose business to minimize costs. And our efficiency in the Swedish operations has improved year on year. In the second quarter, we booked a positive contribution of 0.2 million euros from Kronans Apotek. The integration has proceeded, which brings synergies, savings, and the customer inflow in the pharmacies was good in the second quarter. Like discussed in connection with the quarter one report, we have a clear strategic direction to focus on our core business and the profitability improvement in the core business. Our strength is in the distribution business, which has performed strongly in the first half, and where we have new customer onboarding in the second half of this year. On top of this, we also continue to focus on the long-term transformation of the company, which I will comment on in the closing remarks. Then a few words about the operating environment. To start with, we saw that the overall market demand in Q2 was good, both in Sweden and Finland. Consumer confidence is currently at a very weak level due to cost inflation and raising interest rates, as well as the weak Swedish krona in Sweden is also affecting. Nevertheless, this economic uncertainty or weak consumer confidence has not impacted the pharmaceutical market. Typically, in an economic downturn, the traded goods would be impacted first and then the over-the-counter product that you also name OTC. The availability of some pharmaceuticals, which has been an issue since the last year, saw slightly improvement during the second quarter, but still the challenge remains. On the cost side, energy and fuel prices have stabilized, just like the overall cost inflation, but on a high level. Then let's move on to look at the market development. The pharmaceutical wholesale market contributed a healthy growth both in Sweden and Finland. In value and local currency, the market in Sweden grew by 10% and in Finland by 3%. Our market share was stable year over year. In Sweden, we had a market share of 45% and in Finland of 44%. In those dispensing, the total market size in Sweden increased by 10,000 patients, while the markets in Finland was flat at 100,000 patients. As communicated earlier, we are now at the low point with regards number of patients in Swedish dose business and serve currently some 11,000 patients, while the volume in Finland has remained flat at 30,000 patients. The decline in Sweden is related to the tenders that we lost last year. The regional customers in Sweden organize public tender processes from time to time, and we continue to participate in these. The Swedish dose dispensing business continues also to focus on new customer segments to develop the business, and this is already visible in new contracts. But there will be no fast recovery back to high volumes. We estimate to continue with this level of patients in Q3 and Q4. Significant volumes growth is a long-term target. With this, I'm ready with my first part and would like to hand over to Timo. Please.

Thank you, Katariina, and good morning from my path as well. So when going to the finances, so let's start with our profit and loss account and invoicing net sales and adjusted EBIT. So, as Katariina already mentioned, so solid performance in distribution businesses and significant currency impact in our invoicing and net sales. So, when seen in constant currency, so invoicing was growing 6% and growth was mainly coming from our volume business distribution of medicines. And when going to the net sales, so it was declined because of those dispensing business and currency fluctuation, but grew 3% in constant currency. Adjusted EBIT declined as expected to 3.4 million euros due to those dispensing business and more closely about EBIT on next page. If seen adjusted EBIT, so we were unfortunately behind last year's figures in second quarter and year to date as well. And if just seeing kind of technical changes, so impact of week Swedish ground was 400,000 euros during the whole first half of the year compared to numbers in constant currently. And then other thing, we had a 0.2 million euros adjusted steel item related to operational changes in companies. But having said that, so I have to mention that decline in EBIT came solely from those dispensing business. And the rest of the business portfolio as a whole improved their profitability. And to improve our profitability, we had and we have different actions going on, including strict cost control and price increases in different services. And of course, the efficiency in operations in general. When going lower to the profit of the period, so profit for the period declined from the previous year to one million euros. Profit was burdened, of course, by the lower EBIT, as mentioned before, and it came mainly from or solely from those Sweden. And of course, the rising interest rates had an impact on our profit for the period. Having said that, and also what you can read from the report, so we booked a positive contribution for the first time from Grunan Sabotec after the merger in last October by 200,000 euros compared to first quarter, minus 500,000 euros and 2.8 million during the last quarter of 2022. And as said in the report, so we made a decrease in fair value of doctor.exe stock valuation because of the fair value booking model and booking had no impact whatsoever on profit and loss account. And as the profit of the period declined, declined EPS as well. When coming to the cash flow, so in Q2, cash flow from operations were positive by 19 million euros. Having said before as well, the most material thing is the fluctuation in net working capital in our cash flow. And now, the net working capital is on long-term average level. So, having said that, we see that it is kind of normalized from the very good end of 2022. And when seeing the cash flow as the whole, so we have to take into account that we paid dividends of 10.9 million euros during the Q2, which is obviously seen in our cash position as well. But having said that, so liquidity remained and cash position remained good during the whole second quarter of the year. When coming to the net debt level, so as I said already before, so I see that net debt level now is on the normalized level after the exceptionally good year end on 2022. Net debt was 9 million euros at the end of June. And the most important thing, as said, in the cash flow as well, is the fluctuation of our net working capital, which affects the cash position in that sense. And just to inform that if you are kind of seeing the comparable number from the last year, so it includes trade receivables and gas position also from the discontinued operations, which were at the end of June 2022. The trade receivables were 66.4 million euros and they had cash in 42.5 million euros in our balances during that time. Then when seeing the balance sheet as a general, I see that it remains strong. We have room to invest if needed. And of course, it's quite stable, excluding the fluctuation of networking capital, which is normal and was mentioned before as well. We have a long-term target to have our adjusted gearing lower than 70% when you are taking into account that sole trade receivables are kind of seen as a net debt or debt item. And the comparable number for that one was around 50. So we were well in line in our long-term target. And when talking about that decrease of the valuation of Dr. Puntek's shares, so that 19.5 million is visible in long-term assets, in the balance sheets or asset side, and then in the equity of the other side of the balance sheet. And just to mention that Oriola's ownership in the shares of Dr. Point Assay has not changed during the reporting period, only the valuation due to fair value valuation method. A few words about Grunan Sabotex, meaning official name, Swedish pharmacy holding company. The net sales was, to the second part, roughly 290 million euros, and it was slightly below the last year's level. Of course, weak Swedish crown impacted also to these reported numbers. EBIT A was 3.6 million euros compared to the 1.7 million in the first quarter of this year. So significant improvement there. And seeing the adjusted EBIT was 2.3 million euros compared to zero in the first quarter and minus 2.8 million in the fourth quarter of last year. So we see the improvement there as well. And the realized synergies for the second quarter was 2.5 million euros. We see that the integration of the companies in Grunan's apotheosis is going in the right direction. And of course, the profitability is improving after a little bit slower start than expected when the JV was formed. And as said before as well, we booked 200,000 euros positive contribution from the shareholding to our profit and loss account compared to minus 500,000 in the first quarter and minus 2.8 million in the fourth quarter. So basically in that sense, we are improving as well. And having said that, so I have to remind that we are committed in the long term ownership and we see that on the long term, this will bring value to our shareholders. Then finally, coming to our outlook of 2023, so our guidance remains unchanged and we expect that adjusted EBIT is to remain on the same level as 2022. And as Katarina also mentioned, at the moment we are at the lowest point in those weed and number of patients, and we expect it to remain roughly at the same level now. And as we stated before as well, so for the the decline in the profitability came solely in the beginning of the year from those dispensing business so it means that all the other businesses has been improving so what in general worries us is that that if swedish crowns exchange rate is continuing to weakening so of course it has an effect to our reported numbers not that much in in real business because most of the cost and sales are done in Sweden, in Swedish crowds. And also, we are monitoring quite closely the consumer confidence, what is happening especially in Sweden. If we are thinking of the positive things, what we see, so when we look forward, we expect that pharmaceutical distribution market is continuing to grow. And as Katarina mentioned, before as well our focus and strength is in distribution business and it has been performing strongly during the first half of the year as well and second half of the year will be supported by the new customers we have won and they are starting to bring railway news as well during the second half of the year. we also have implemented some price increases in q2 and during the beginning of the year and we are continuing to do so forward or going forward as well and also in in the businesses so we are maintaining a strict cost control throughout the company And based on those, so we think that despite of those dispensing business where we have had challenges and we have challenges, so basically the other businesses are improving. But that's roughly about the numbers. So now back to Katarina.

Thank you, Timo. Before we conclude the presentation, first a brief update on the sustainability. Our sustainability work has been guided by ambitious long-term goals and a systematic approach to development. Therefore, I'm really, really happy about the latest achievement in the Ecovadis assessments that we have got. We have been awarded the gold medal in this rating and the result places us among the top five performing companies worldwide. In the previous assessment in 2021, we got the silver medal, so our performance has improved. This is a great recognition and demonstrates our commitment to sustainability. The regulations for sustainability reporting are also getting stricter, both in EU and on a global level. The new reporting standards, which make sustainability reporting mandatory, are expected to be published in August, and we are already preparing to be compliant in 2025. Then last, a few words on our strategic direction and key priorities. This is a recap of what we said in connection with the first quarter report, but I feel that this is an important message for us to convey. We have a clear strategic direction. We focus on our core business and profitability improvement. Our strategy work continues with scenario work on our portfolio value added smaller businesses, as well as the core businesses. To ensure sustainable growth and shareholder value, we are further developing our commercial and supply chain excellence while ensuring profitability, efficiency and collaborative culture. As you might remember, our commercial operating model focuses on collaboration across the markets. And I'm very, very pleased that we are on the right path. We have seen good progress with the signing of new distribution contracts onboarding during the second half of this year, as Timo also mentioned. In addition to this, we have done several actions to enhance our key priorities. We have strengthened our commercial capabilities by sale trainings, focusing on account management to support a unified customer experience. We have also implemented a new customer segmentation, which will help us to focus and increase our understanding of how we can create relevance and growth. In supply chain, we have continued the work on simplifying and harmonizing our processes, including core IT systems. In addition, we have improved efficiency in deliveries through improved demand supply planning and tighter collaboration with the sales teams. Our priority is to develop a strong culture. And during the second quarter, we engaged with all our people in Sweden and Finland to renew Aureola's value description to form a strong base for a collaborative culture. Lastly, now in this presentation, I want to give you a summary of our second quarter. Our net sales grew by 3% in constant currency. This growth was driven by our core business, the distribution of pharmaceuticals and traded goods. Following a good market growth and stable market share, we saw solid development in both Sweden and Finland. Profitability was burdened by Swedish dose business, where the volumes have now reached the lowest point. On the cost side, our operating expenses were below last year's level. We have adjusted the cost base in dose business by restructuring, improved efficiency in Swedish operations and maintained strict cost control. Our guidance remained unchanged. We expect the pharmaceutical distribution market to continue to grow. Our strength is in this distribution business that has performed strongly during the first half of the year and where we have new customers onboarding during the second half. We continue with price increases and strict cost control to mitigate the high cost inflation. With this, we are ready now with the presentation and open up for your questions. So I think there has come some questions to one. Please, Timo, if you join me.

Certainly, we have a number of questions. And if there's any more questions coming in, let's take them as well. So like we did in the Q1 webcast, I think we start with the questions concerning the joint venture, and then we move on to the questions concerning Oriola. So... There are questions related to Kruunansa Apotek and their numbers. Adjusted EBIT A of JV for H1 2023 was 5 million euros, which is 10 million euros less than EBIT A of the joint companies in H1 2022, when it was 15 million euros. What kind of operative costs have increased by 10 million euros?

Well, if I start, so basically of course there is quite a lot of integration work going on and that means that basically when coming to IT systems in general kind of forming the new company and so there is kind of overlapping costs which are coming down as we see in the synergies as well but then of course at the beginning of the year so basically the basic business has been on the lower profitability level and it used to be before and that is improving as well.

Okay. So when do you expect JV to reach EBIT A level of joint companies, 30 million euros in 2022?

As stated before, so we are not giving comment on the kind of forward looking on JV and that's the question that has to be raised with the management of the Kruunan Sabotech.

Okay. And relating to this, so when are you expecting more material improvement in JV's profitability? I think you answered that already. Good. So then what kind of costs are classified as one-time costs in JV?

So basically what they are seeing is going to the integration, for example, when they have to integrate the IT systems and then there has been kind of a double premises cost and that kind of thing. So when they are kind of closing down certain premises and basically they are not using it anymore. So that kind of cost, but not as long as they are using all the premises. But basically kind of normal integration or overlapping cost in that sense, which is generated when they are doing the integration work.

Okay. Relating to this, how do you calculate synergies generated on JV level? Is it included directly in Oriola's P&L or is it reflected in JV's EBITDA?

it's reflected solely in JV's PNLA. So basically, we are not calculating. So we are taking kind of official numbers from the profit and loss account, and half of that is coming as a contribution from our profit and loss, which means that when we are kind of booking the positive contribution, so taking out all the kind of including all the kind of one of items and that kind of things in kind of reported profit and loss account. So basically it has had a positive or the kind of net profit has been positive during Q2.

Okay, and then, for the time being, the last question relating to JV. So, has JV any other debts than IFRS 16 debts in its net debt amount? And if yes, what kind of debts and how much?

They are having other debts as well, kind of normal bank loans and stuff, which we kind of transferred from our part as well to the JV when it was formed. And then, of course, they are kind of using asset. They are also selling or financing their activities by selling trade receivables and so on. But basically, we are not disclosing anymore. kind of on details what they are having there. But there is other debts as well than just IFRS.

All right, thank you. Then we move on to questions related to Oriolan. And there are a couple of questions which are overlapping, so I'm trying to combine those while we take the questions. So there's questions relating to the new customers. So are your new customers starting to contribute your sales and EBIT already in Q3 or more in Q4? And relating to this, there is another question, how much new customers will support invoicing in H2?

There is customers coming in both Q3 and Q4. And of course, since there is also long lead times on this one, you can say that when you start to work, that also means that in the end of the year, there will be even more than in Q3, but also already in Q3. The numbers we are not disclosing because we haven't really told the contract and so on, but we will come back and hopefully be able to show a little bit more about this one after vacation period.

All right, thank you. Katarina, would you like to comment on how much the distribution cells increased during H2?

We are not doing this on a segment basis, but what we can say is that distribution in Sweden and Finland both grew. And if you remember when we showed the market share in quarter one, we had lowered our market share and now we are on par with last year. So that means, of course, that we have been growing, especially in Sweden, compared to where we were in the beginning of the year.

All right, thank you. And then we move on to the EBIT. So what was the negative EBIT impact from Swedish dose dispensing in Q2? Following cost restructuring, are you able to reach breakeven level in the business?

As I said, we are not commenting kind of numbers for our different businesses. But having said that, so the impact was significant, as said, so basically all kind of losses compared to the last year came from those businesses.

Okay, thank you. Then there is a question on the debt side. So has Oriola any plans to reorganize its debts to reduce net interest in a situation where there is actually no debt but still high net interests?

To come in that, obviously, we have also strategy work going on, and part of the strategy work is to optimize our balance sheet. Our balance sheet structure is coming still from the time when we had Krunen Sabotec as a part of the Oriola. And a clear plan is to go through during the second half of this year, and of course, start the actions if needed and when needed.

Okay, thank you. Then there are questions relating to the guidance. So you are Euro 3.3 million below 2022 adjusted EBIT level after H1. What are the main drivers behind expected profit improvement during H2 if Swedish dose dispensing volumes will remain low in H2?

Like we said before, we have a good performance and also new customers coming in the volume businesses that we have. Our core business is the distribution of pharmaceutical and assortment business. And that is something that we are really calculating that it will continue. We can also see that the market is growing in these areas. And that in combination with price increases and also cost control is something that we are taking into this calculation. And of course, when we look at the numbers, we are also taking into account now that we are losing those dispensing that will stay on the level that we have now for the quarter three and quarter four. I don't know if you want to add something, Timo?

Okay, then follow up on the guidance. So does your guidance imply that you do not expect a weaker consumer confidence to impact your numbers? If so, why do you think a weaker consumer confidence will not impact traded goods, etc., etc.? ?

If you look at consumer confidence, we are in a market where people prioritize medicines. If you are sick, you normally want to have the medicines. So in that case, we are in a stable market. Yes, traded goods especially can be impacted. What we normally see with traded goods is that you buy a little bit cheaper products. And for us, it can affect to some extent on the profitability and sales. But we're also in a business where we sell as a service. We are a service provider in this aspect. And that means that it doesn't matter so much for us about the volumes or like the price on the products that we sell, since we are invoicing more like as a service for the transportation and picking and packing. That's the reason.

Okay, so we have one more question. So just a reminder that if there's any questions that you would like to ask us, please send us through the chat. So there's a question on the M&A. So Katariina mentioned potential growth via M&A within pharmacy business. Do you plan M&A in Sweden, other Nordic countries or in broader Europe?

This is something that we mentioned first time, in fact, already in quarter one. And we don't have, I will not comment it exactly where we are looking and what we are looking on, because this is very early in our area right now and our markets. But the change is that we are now open to look in this kind of direction instead of just keeping the business that we have or divesting the business. That's a little bit the message that we want to send to you. And when we are ready to go more further into it, we will come back to you.

All right. So thank you, Katariina and Timo. This was now the end of the Q&A, and we are ready with this event. And just a reminder, our next scheduled event is the Q3 interim report that we will publish on the 31st of October. And in the meanwhile, if you have any questions, please don't hesitate to contact us. So thank you everyone for joining today and we wish you all a good rest of the summer. Thank you.

Thank you. Bye.