Oriola Oyj

Good morning, everyone, and a warm welcome to Oriola's Q3 results webcast. I am Tuas, the new senior from Oriola's investor relations. With me today, I have our CEO, Katariina Gabrielsson, and CFO, Timo Leinonen. Hello. This morning, right after the publication of the Q3 report, we also communicated about Oriola's strategy, financial targets and sustainability agenda, as well as new reporting segments. This means that we have a lot to cover within the one hour that we have reserved for this session. As usually, we will take your questions at the end, but you may of course 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 Katarina, here is the customer disclaimer that we all should be aware of. And now, without further ado, Katarina, please go ahead. Thank you, Tuva.

Good morning and welcome also on my behalf. As Tua mentioned, we will today discuss the Q3 results, our strategy and financial targets. I will start with the highlights and comments on the operating environment, and then Timo takes you through the financials. After that, I will discuss the strategy and financial targets. Looking back at Q3, I would summarize it as a quarter with solid sales development supported by the good development in the distribution business, especially in Sweden. Net sales on a constant currency basis were 376 million euros, which is at last year's level. Profitability was mainly burdened by lower volumes in the Swedish dose dispensing business. Adjusted EBIT declined from the previous year to 4.4 million euros. On a constant currency basis, adjusted EBIT was 4.7 million euros. So with the further weakening of the Swedish krona, we start to see some FX impact on the EBIT line as well. Here I want to highlight that when looking at adjusted EBIT without the Swedish dose dispensing business, we have improved during the whole year and in Q3 adjusted EBIT excluding Dose Sweden was 5.2 million euros compared to 4.8 million last year. Operating expenses were below last year's level, mainly driven by cost reductions in the Swedish dose dispensing business, and our financial position has remained strong with a positive cash flow in Q3 and networking capital at a normalized level. After the reporting period, we announced about the sales of Svens dose to Apotekstjänst Sverige. The sale of Svensdos means that Aureola will be exiting the dose dispensing business in Sweden. As many of you will know by now, Svensdos has lost market share during the past 12 months due to the loss of public tender contracts. During our ongoing strategy process, we were not able to identify a recovery of the business within the foreseeable future, mainly due to the prevailing tender market structure and dynamics in Sweden. The sale of Svensk Dostar Protection gives continuity to the dose business and, on the other hand, supports our decision to strengthen focus on our distribution business. We will continue to offer dose dispensing services to pharmacies in Finland, where the market structure is different. Going forward, we plan to deepen the cooperation with Apotextions by supplying pharmacy health products to them. The agreed sales price in cash is 110 million Swedish krona, approximately 9.5 million euros. The transaction is subject to customary approval by the competition authority and we expect to complete the transaction no later than in quarter one next year. You will hear more about the financial impacts by Timo later on. Next a few words about the operating environment. In the third quarter, we saw that the volumes in the pharmaceutical distribution market were somewhat softer than in the first half of the year. But when looking at the market value, we can still see a steady growth both in Sweden and Finland. We also believe that the solid underlying long-term market drivers such as aging population, well-being and health remain unchanged. The availability of raw materials for pharmaceuticals has continued to be tight, which has affected the availability of some medicines in Sweden and Finland. On the cost side, energy and fuel prices have remained stable. Then we move on to look at the market development. As said, the market continued to grow in value. The market in Sweden, measured in local currency, grew by 9% in Q3 and growth year-to-date was 10%. In Finland, the market grew by 2% in Q3, while growth year-to-date was 3%. Our market share was stable year-on-year. In Sweden, we had a market share of 44% at the end of September and in Finland, 45%. In those dispensing, the total market size grew by 10,000 patients, both in Finland and in Sweden. Our share in the Finnish market declined by three percentage points to 28%. With this, I'm ready with my first part and I would like them to hand over to Timo.

Thank you, Katariina, and good morning for me as well. In my part of the presentation, I will first discuss Aureola's financial development and comment on Kroon and Sabotech, and then discuss the financial impact of the sale of Sven's tools and the new segmenting report, which we announced today. As Katarina mentioned, on top line, the company is growing when measured in constant currency. Invoicing grew by 6% to 921 million euros in constant currency. Net sales in Q3 grew by almost 1% to 376 million euros in constant currency. Growth is mainly coming from our volume business, the distribution of pharmaceuticals. We saw good development, especially in Sweden, and this has offset the decline from the Swedish dose dispensing business. The currency headwind is significant with both reported invoicing and net sales declining year on year. Adjusted EBIT declined to 4.4 million euros. Adjusted debit is behind last year in Q3 and year-to-date as well, when we look at the figures, which includes Sven's dues. In Q3, adjusted EBIT was 4.4 million euros and year-to-date 11.3 million euros. The impact of weak Swedish krona was 0.3 million euros negative on EBIT line in Q3 and 0.6 million negative year to date. The decline in EBIT came solely from the Swedish dose dispensing business. Excluding the Swedish dose dispensing business, we were above last year's level. The distribution business in Sweden, where we saw good development in top line, also contributed positively to EBIT line. The cost inflation has stabilized, but is still on high level. Operating expenses were below last year's level, mainly due to cost reduction in Swedish dose dispensing business. In Q3, we had adjusting items totaling 21.6 million euros, mainly related to the Sven's dues transaction, and I will discuss more those later on. The impairment loss of 21.4 million euros that was recognized in Q3 is the main reason to the drop of profit for the period. Other items that impacted profit for the period were the lower EBIT, due to loss of business in those dispensed in Sweden, higher financial expenses due to rising interest rates, and the loss of 0.6 million euros from Krunas Apotheke. In Q3, we book a future decrease of 1.1 million euros to the fair value of doctor.se. This was due to the price levels of realized transactions being lower level. In total, a decrease of 20.6 million euros has been recorded to the fair value during the reporting period of January, September. The booking has no impact on profit and loss account and our ownership of the shares of Dr. Punkes has not changed. As the profit for the period declined, EPS declined as well. In Q3, our financial position remained strong. Gas flow from operations in Q3 was positive at 10 million euros. The most material thing, as typically in our industry, was the fluctuation in networking capital, which is now on the long-term average level. Investments year-to-date have been lower than in previous years. Liquidity remained on a good level on Q3, with a cash position of 130 million euros at the end of the period. Net debt level has decreased throughout the reporting period and was at the end of September 2 million euros negative. Just to inform that trade receivables at the end of the period were at the current average level, roughly 90 million euros. In the comparison period, the discontinued operations accounted for 67.1 million euros on the trade receivables and roughly 16 million in cash. As said earlier, our financial position remains strong, and it is quite stable, excluding the networking capital that fluctuates, as mentioned before. Equity ratio was 19% and carrying 10.5% negative. As said, we recognize the future decrease of 1.1 million euros in the fair value of doctor.se. In a total, a decrease of 20.6 million euros has been recorded during the reporting period. The change is visible in other long-term assets and in equity in balance sheet. Aureola's ownership of the shares of Doctor.se has not changed during the reporting period, only the valuation. The impairment of goodwill of 21.4 million euros relating to the dose dispensing gas generating unit impacts balance sheet. And now let's move to Krona's Apotech. In Q3, Krona's Apotech had net sales of 275 million euros, which is somewhat below last year. The weak Swedish Krona impacts, of course, due to reported figures. EBIT A was 1.8 million euros compared to 3.6 million euros in Q2 and 1.7 million euros in Q1. Profitability was impacted by lower customer flows. Adjusted EBIT was 0.8 million euros compared to plus 2.3 million in quarter two and zero in quarter one. The decline of adjusted EBIT relates to the lower revenues compared to QQ, which were mainly affected by customer flows. EBIT and net results were of course burdened by the amortization of purchase price allocations related to the forming of JV. The focus with Kruunan Sabotech reminds on operations and integration activities, and the integration and synergies work has been progressing according to the plan. Realized synergies were 3.5 million during Q3 and year-to-date 8.2 million euros. In Q3, we booked a loss of 0.6 million compared to the profit of 0.2 million in Q2. We are committed to the ownership and we see that on the long term, this will bring value to our shareholders. We have commented on this many times, but next I will summarize the financial impact. The accurate sale price in cash is 110 million Swedish krona, approximately 9.5 million euros, and we expect to complete the transaction no later than the first quarter of 2024. As of October, Svensh Deuce has been classified as an asset held for sale. In Q3, we have recognized an impairment loss of goodwill of approximately 3.3 million euros relating directly to the transaction. In addition, we have recognized an impairment loss of goodwill of 18.1 million euros to the dose dispensing cash generating unit in Q3 2023. This means that the total impairment loss on goodwill amounts to 21.4 million euros. We also estimate the record on expense of 3.0 million euros for the translation differences at the completion of the transactions. The impairment and reclassification of translation differences has no cash flow effect. But as Katarina mentioned in the beginning, the Swedish dose dispensing business has lost market share, and to give visibility on the impact, we also released Oriola's net sales and adjusted debit figures, excluding the Sven's dose business. And we have also given the new outlook for adjusted EBIT, which is now excluding DOS Sweden. In Q3, excluding Swedish DOS business, Oreos net sales were approximately 350 million euros and adjusted EBIT was 5.2 million euros. The impact of Sven's dues on EBIT in Q3 was 0.8 million euros negative. And for January, September, net sales were slightly above 1 billion euros and adjusted EBIT was 13.3 million euros, which means that in comparable figures, we were 2 million ahead of the whole last year. Like I mentioned, we gave a new outlook for this year on 13th October, when we announced the Svensk Doge investment. We expect the adjusted EBIT excluding those dispensing businesses in Sweden for the year 2023 to be on the same level as adjusted EBIT for 2023. This means 19.7 million euros. Things that worries us about the Q3 are the continuing softening of the market in volume and weakening demand, rising inflation and weaker than anticipated Swedish crude. On the other hand, We do expect the pharmaceutical distribution business to continue to grow in value and the distribution business has been performing strongly year to date. We will continue to manage our costs strictly and mitigate the high cost inflows. And the final note from me is about our new segments we announced also today. As a response to the feedback and improved transparency in our financial reporting, we have decided to make changes in our segment report. The new segments will also reflect the new strategy, which Katarina will soon tell you about. As of 1st of January 2024, we will have two reporting segments, distribution segment and wholesale segment. The distribution segment consists of pharmaceutical logistics and those dispensing services, while the wholesale segment consists of wholesale of traded goods and over-the-counter products, parallel imports and special licensed medicines as well as advisory services. According to preliminary unaudited figures, distribution segment net sales in 2022 were approximately 1.2 billion euros and adjusted EBIT was 23 million euros. Wholesale segments net sales in 2022 were approximately 350 million euros and adjusted EBIT was 6.5 million euros. We will publish our unaudited restated segment information during Q1 2024, after publishing our financial statements. And the Q1 report will be prepared according to this segment reporting structure. With this, I'm ready with the financials and let Katariina continue with the strategy.

Thank you, Timo. It is my pleasure now to change the focus from looking backwards at the previous quarter to look forward in the longer term. I will now discuss our strategic ambitions and goals, as well as go through our new long-term financial targets. For the past years, Aureola's focus has been on the long-term transformation of the company. We have been developing the commercial and supply chain excellence through systematic activities while ensuring profitable growth, efficiency and a collaborative culture. We have focused on our core business and our role as an infrastructure company in securing the availability of pharmaceuticals in society. Consequently, the transformation journey has also meant reconnecting with our roots as our strength is in the wholesale and distribution business. Now we're taking the next step to build a new Aureola by introducing our refined strategy. We aim to be the leading specialist of wholesale of pharmaceutical and health products. Please note that this definition includes warehousing, wholesale and the distribution of pharmaceuticals and health products, as well as advisory services. The strategy aims to capture the full value of our operations, strengthen our position in the markets, and to create a long-term shareholder value. With the strategy, we are enabling health every day in accordance with our vision, and I will return to the three strategic goals in just a short while. We are in a good position to become a company with high efficiency in our distribution business, to grow our share of high margin wholesale and advisory businesses, and to become a company with a customer-centric mindset. We see that there is significant growth potential in wholesale of health products together with the pharmaceutical distribution business. Additionally, advisory services will continue to be a part of our integrating service offering also in the future. And I will come back to our businesses a bit later in this presentation. We have set three strategic goals. The first goal, strong partnerships, puts the customer in the heart of everything we do. We improve customer value through commercial focus and excellence. We develop data and insights driven business, include forward looking data management. This creates higher value services to our customers. With the second goal, enhanced efficiency, we continue to improve our profitability. This consists of actions to increase warehouse capacity and efficiency by investing in both infrastructure and technology. With business-driven digital solutions and an infrastructure fit for purpose, we improve our speed in implementation and operational excellence. Additionally, the activities include supporting organic profitable growth. This is focused on large yet efficient volumes and customer segments. The third goal, portfolio and market expansion, is about seeking profitable growth through our service portfolio and market presence. We grow the wholesale business by developing existing brands and new brands, product categories and customer segments. Activities also include investments in specific differentiating and digital services. Next, I want to share some thoughts on our businesses. The strategy enables us to strengthen the value creation in our main businesses while providing an excellent customer experience. In distribution, we offer pharmaceutical logistics and dose dispensing services. Our wholesale business focuses on traded goods and over-the-counter OTC products, as well as parallel imports and special licensed medicines. Traded goods are sold to pharmacies and retail in Finland and Sweden. OTC are sold to pharmacies and retail in Sweden, while in Finland only to pharmacies. Parallel import and special licensed medicines are provided to pharmacies in both countries. The advisory business provides expert services to pharmaceutical companies and pharmacies. We will continue in our current cross-market operating model, and this means that we are not planning any structural organizational changes. Additionally, our new sustainability agenda is a key part of our business strategy. We believe that sustainability should be part of everything we do. We foster a healthier tomorrow through our services and products and minimize the impact of our operations on the environment. As part of the strategy process, we have redefined our sustainability agenda based on a materiality analysis that was conducted during the spring. Our agenda drives our actions forward and supports us in reaching our ambitions long-term sustainability goals. We create value for various stakeholders throughout the entire value chain, from employees to customers and shareholders, as well as the communities in which we operate. Our sustainability agenda is divided into three key sustainability themes. Environment includes our efforts in pursuing net zero impact on climate. Social integrates our actions to advance a sustainable people journey, which guides our work in leadership, employee engagement and well-being at work. It also aligns our activities with human rights regulations. Governance and society is about our essential role in society in safeguarding deliveries of pharmaceuticals and other health products. It also includes our commitment to high ethical standards in our operations. To summarize our ambitions, here are our targets. In accordance with the strategy, we have announced following ambitious long-term financial targets. The three targets reflects our ambitions levels in growth, profitability and equity. We have also set a new dividend policy. The first target is sales growth at the rate of market growth, and our expectation is a minimum of 4%. The target reflects mainly organic growth and will be adjusted for currency effects. Second, an adjusted EBIT margin of above 3%. We are expecting the profit to more than double and reach 40 to 50 million euro level. And the last one, return on equity of more than 20%. All targets are important, but our main focus is on profitability. The board of directors has also changed the dividend policy to an increasing annual dividend of two-thirds of the net profit. Here we want to emphasize that large acquisition or investments may temporarily weaken the ability to dividend payout. We have also set ambitious long-term sustainability targets. We continue our work to achieve carbon neutrality across our supply chain by 2030 and to ensure safe and accurate deliveries of pharmaceuticals and other health products. We also promote a culture of fair treatment that develops capable individuals and empowers our leaders. As a new commitment, we will set science-based climate targets. This means aligning our emission reduction targets on a scale required to keep global temperature increases below 2 degrees compared to pre-industrial temperatures. The full set of long-term sustainability targets are presented on our web page oreola.com. To conclude our presentation today and to sum up with a strategy, we aim to become the leading specialist in wholesale of pharmaceuticals and health products. Free strategic goals are guiding us forward to achieve this, with key market drivers supporting our profitable growth. Our people, common purpose, values and sustainability agenda are a strong foundation for developing a collaborative culture. And if I'm looking to myself, I'm personally very, very excited about this. And I feel that we now have a strong, ambitious and inspiring strategy to take us forward. And I think that we are in a good position to become a company with high efficiency in our distribution business, to grow our share of high margin wholesale and advisory businesses, and to become a company with a customer-centric mindset. With this, we are ready with the presentation and open for your questions.

All right, thank you so much Katariina and Timo for the presentations. We have some questions in the chat and maybe we now first take questions that are relating to the joint venture and then we move on to questions that that are related to Oriola. So, first question for the joint venture is, reported one of items during past 12 months are now 4 million euros. In February 2022, they were told to be totally 25 million euros. during three years period. Will there still be about 21 million euros one-off items during two years, or how much one-off items are still expected?

Of course, we cannot totally comment on that, what it is going to be in the future. basically there is still quite a significant kind of investment we need to make or one of items when for example integrating ERP systems and that kind of things so it needs kind of significant resources as well but of course having said that so we are spending as little as possible one-offs when doing that but still there is quite a lot of coming

Okay, then the next question. Are there some other adjusted items related to adjusted EBIT in JV than amortizations based on purchase price allocation, meaning 1 million euro in one quarter, like step-up write-downs related to inventory?

There is kind of some one of items, but not significant, which are mostly related to the integration. But the most significant thing is obviously those kind of purchase price allocations or depreciations for them.

Okay, thanks. And then we continue with, has net sales of JV been reported in constant currencies or in actual currencies?

In actual currencies.

Okay. And what is the difference between those two calculations?

I don't have the number in detail, but basically the effect is similar than what we are having in our numbers. So there's roughly one grown up, to Euro kind of difference what it was about a year ago.

Okay. And then we continue to a question about profit improvement in Kronan's Apotek. So do they have any profit improvement measures in addition to the ongoing integration work?

Of course, constantly we are kind of having them, monitoring them, and basically when seeing that, for example, if kind of seeing what kind of pharmacy network we are having and kind of integrating them as well. So it's kind of integration work, but at the same time, obviously we are looking at which pharmacies are profitable and which are not.

Okay, and then the last question about the JV. So what is the current adjusted EBIT target of JV and how has this been considered in the financial targets of Oriola?

So basically we have not kind of announced or connect kind of future prospect in sense of future profitability of the JV. But having said that, so basically what was announced in the beginning when the JV was formed that we are seeking 25 million Euro's kind of integration benefits and the underlying kind of EBIT should be, or profitability should be improved based on that one. So that has not changed anyway.

Then we move on to questions about Orjola. So you mentioned continuing volume decline in Q4. Have you been able to sign new distribution contracts and RDs in Finland or Sweden?

What we can say is that we can see that the market is softening a little bit in quarter three. And of course, we can't like really see what's happening in quarter four. But if you look at the confidence of the consumer, we can see that, of course, it's on a low level. If we look at our contracts, we are constantly trying to sign new contracts that is profitable. And what we can see now in the second half of this year is that we are benefiting from the contracts that we signed in the beginning of this year.

Okay, then what has been the profitability level of Finnish dose dispensing business? How much of goodwill is related to the Finnish dose dispensing business?

So the only thing with which we can actually communicate that it's profitable because we have not given out any specific numbers in there. And basically also when those dispensing business is kind of one cash generating unit including Sweden and Finland and now obviously when when we made quite a big amortization of goodwill. So of course, we take in the picture also the profitability of Finnish business. And having said that, so... it should be quite on the right level when we are kind of getting out from those businesses in Sweden after that one. So we don't see kind of any kind of further kind of needs for goodwill impairment related to the business in this stage.

Okay, and then there is another question about the volumes still for this year. So you highlighted negatives in Q3, i.e. softer volumes and weakening demand. Where have you seen weaker demand quarter to quarter? And how well have you taken this into account in your full year guidance?

I can take the volumes. But if you look overall, you can see that, like we said before, that especially in traded goods and these kind of products, the consumer confidence is quite important. And that, of course, is a little bit troubling to some extent. But then we also have the stable pharmaceutical market. where we can see that it's much more stable than the other markets that we have. We can also in that market see a little bit softening markets, but not as much as in the other ones. And going to the guidance, do you want to take that?

So I think the only thing I can say is that basically our guidance is kind of... based on our latest estimates. So we have taken into account all the aspects that we know currently to make a kind of proper estimate.

All right. Then we have a few questions about the new financial targets. So the first one is, you don't have any balance sheet target. Can you give some comments what kind of debt level you are willing to have?

So obviously we were discussing about that one and basically if going for example to curing ratio so we want it to be balanced and not kind of exceeding what we are kind of having previously but not giving kind of out specific target and the reason why we are not having a specific target for the full balance sheet is that our networking capital is fluctuating heavily during the months and so on so basically that the influence is there as well and that's why we kind of chose the equity ratio as a Or regional equity, for example, to kind of show that we are kind of targeting to increase our shareholders' kind of profitability in that sense. But for the full balance sheet, so the reason is the heavily fluctuating net working capital. We don't have any guidance on that.

Okay, then how large additional investments are required to reach target levels?

Well, that's what we have not communicated as well. We know that we need kind of some infrastructure investment during the future coming years. And then, of course, we would like to kind of invest to the businesses as well, both organically and inorganically, as we have said before. But then when going to the real kind of numbers in that one, so obviously there are kind of discussions we have to need to have from case to case with our board of directors. But when there is coming kind of bigger investments, so obviously we are kind of announcing them as well.

But I think we can also say that our financial situation is so that we can do this investment, as we see.

Okay, then about the timeframe for the financial targets. How would you like to comment that?

I got a question yesterday from the board, in fact, and at that point we said that three years is a too short period, but 10 years is a too long period.

Good. Then if we move on to the next questions. So there are two questions about the EBIT target. And could you show us an EBIT bridge, how you are going to reach your EBIT margin target of above 3% or talk about where the improvement comes from?

I can start. If you look at what we have in our portfolio and the distribution of pharmaceuticals, the market level on that one on the benchmark is around 3%, if you're doing that on a good level. And then if you go to a wholesale part, normally it's higher than that. And since we are growing the wholesale part in our businesses, and that's the plan that we have, and also advisory services, that is even more profitable than the wholesale part. That's where you have the balance. Growing that one will also give a better EBIT percentage. And of course, being more efficient in the distribution side will grow that part.

Good, thank you. So there's a follow-up on that. So are you expecting fast turnaround in wholesale segment profitability?

I will not call it turnaround, but it's like what we said here before. We are not guiding on specific years here, but of course we will do whatever we can to do this turnaround or whatever we call it, transformation journey or strategy project as fast as we can.

Okay, great. Then there is a question about M&A. So what kind of acquisitions are you looking for, i.e. which business country and potential size?

We are looking for acquisitions that fits our company. We haven't really said in which countries and so on, but of course we are in the Nordics and we are like based in Sweden and Finland. It's important for us to find things that is like adding on to the businesses that we have to still keep the goals of efficiency and also a customer-centric mindset and having products and portfolios that is then coming into this one. But it can be a distribution business, it can be a wholesale business and it can be an advisory services business.

Okay, good. So then it looks like we have one more question in the chat. And that's about the Swedish dose. So based on new reporting structure, could you give any indication on how profitability has evolved during 2023 when excluding Swedish dose?

So basically when seeding from quarter to quarter, so we have been improving as we have stated already in our kind of previous interim reports that basically business or the underlying business without French dues has been improved. And basically that's what we are aiming in the future as well.

Okay, so no further questions in the chat. So thank you everyone for joining us today. And if you have any follow-up questions or would like to stay in touch with us, please do not hesitate to do so. And otherwise, we wish you all a very good day.

Thank you.

Thank you.