Oriola Oyj

Good morning, everyone, and a warm welcome to Oriola's Q4 and full year results webcast. I am Tuas-Tenius Örnjärm from Oriola's Investor Relations. With me today, I have our CEO, Katariina Gabrielsson, and CFO, Timo Leinonen. After the presentation, we open up for your questions. As a reminder, in the Q&A, we prefer to focus on the questions relating to Oriola's business and financial development, and take questions on Kruunan's Apotek only within the scope that we can comment on. You can send in questions to us 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. As Tua mentioned, we will today discuss the quarter four and full year results. I will start with the highlights and comments on the operating environment, and then Timo takes you through the financials. At the end, I will also discuss the strategic investments that we announced early January. 2023 was yet again an eventful year for Aureola. We achieved strategically important milestones when we announced in October our refined strategy, new financial targets and a new sustainability agenda. These are the key elements that form the solid foundation for building the future Areola. Last year, our focus was on strengthening our distribution business and our role as an infrastructure company in securing the availability of pharmaceuticals in society. Throughout the year, we have seen that the distribution business has developed strongly, and we have, for example, signed several new distribution agreements, and our market share has been stable. As a result of this, the distribution business grew by 7.3% on a constant currency basis in 2023. The growth in distribution has offset the impact of the Swedish dose dispensing business, and the group's net sales grew by 2% to 1.6 billion euros. When we look at EBIT and exclude the negative impact of Sven's dose, we can see a strong improvement of 64% from last year, with adjusted EBIT at 19.5 million euros compared to 11.9 million last year. All in all, we have successfully managed the inflationary pressure, both with strict cost control and by price increases. Operating expenses were below last year's level, including transport costs in Sweden. We have also improved efficiency in our operations, especially in Enköping, which we can also see as a positive contribution on the EBIT level. I should also note that the reported adjusted EBIT declined to 16.7 million euros due to Swedish dozed business, which we are now in the process of divesting. During the year, Kronans Apotek implemented a new organization, harmonized its assortment, completed the rebranding of 191 pharmacies and optimized its network by closing some pharmacies, resulting in more than 500 pharmacies operating today under one brand. In addition, Kronans Apotek continued to invest in its omnichannel operating model by strengthening its e-commerce capabilities. Kronans Apotek is today the biggest pharmacy chain in Sweden, measured by numbers of pharmacies, and with its market share of around 24% and a growing e-commerce, it is now set to improve profitability and strengthen its business and brand in the long term. Kronans Apotek is an important strategic partner for us, and we will actively support its value creation as major shareholders. We have also today published the notice to the annual general meeting, which we will have on the 19th of March. The Board of Directors has presented their dividend proposal, which is €7 per share. The proposal is in line with our dividend policy of paying out an increasing annual dividend. In 2023, we successfully managed to navigate in an overall unstable operating environment. Cost inflation stabilized at a high level, interest rates increased strongly, and the Swedish krona remained weak throughout the year. In addition, consumer confidence was impacted as consumers' expectations of their own economy weakened. However, due to the relatively stable nature of our industry, the value of the pharmaceutical distribution market continued to grow steadily in both countries. In the fourth quarter, volumes in the pharmaceutical distribution market in Sweden grew, while volumes in Finland declined. The challenge in the availability of some pharmaceuticals have remained tight across Europe, and energy and fuel prices have stabilized. We believe that the solid underlying long-term market drivers, such as aging population, well-being and health, remain unchanged. Let's now take a closer look at the markets. As said, despite uncertainties in the economy overall, the pharmaceutical distribution market grew in 2023. The Swedish market, measured in local currency, grew by 10% and the Finnish market by 3%. Our market share was stable year on year. Both in Sweden and in Finland, we have a market share of around 44%. In the dose dispensing business, the total market size in Finland grew by 10,000 patients, while our share of the market declined by 2 percentage points to 28%. To conclude, last year was good on many fronts, and we are set to develop our business further. And now, let's go to the financials, so let's hand over to Timo.

Thank you, Katariina, and good morning from me as well. Let's start with Q4. All in all, we can say that the solid development seen in the first three quarters continued in Q4 and the year ended strongly. On top line, company grew when measured in constant current. Invoicing grew in Q4 by 10% to roughly 1 billion euros, and net sales grew by 5% to roughly 400 million euros. Also, when looking at reported figures, we can see growth on top line despite of the weak Swedish krona and negative impact from Swedish Doge business. So, very solid quarter with the growth driven by distribution business. We also see an improvement in profitability when we exclude the negative impact from those business adjusted EBIT was 6.2 million compared to 1.7 million last year. We can see that the Q4 last year was not a very strong quarter. So improvement means that we are returning back to more normal level. The top line growth in distribution business is visible also on EBIT as well as lower operating expenses, which were largely driven by cost reductions in Swedish DOS business. But as Katarina mentioned in the beginning, we have made a good progress in operations and improvement efficiency, especially in end-shipping Sweden. And this is directly visible in our profitability. Now, moving on to the full year figures. We had a good full year 2023. Looking at the top line in constant currency, we see both invoicing and net sales growing. Invoicing grew by 6% to 3.8 billion, while the net sales grew by 2% to 1.6 billion. Growth is coming mainly from the distribution business. Adjusted EBIT without 20-dose business improved to 19.5 million euros from 11.9 million last year, meaning 64% improvement. But let's turn to the next page to have a closer look to that EBIT development. On this slide, we want to show the different elements in our EBIT development. The negative impact from Swedish Doge business for the full year of 2023 was 2.8 million euros on EBIT level. But I would like to draw your attention to our distribution and wholesale. These are preliminary, unaudited EBIT figures for the new segments. But as we have mentioned many times, we had a strong EBIT improvement year on year, driven by the distribution, but also in wholesale we saw a positive development. Group items include mainly savings in the shared function, such as IT and finance. We have managed the cost pressure quite well and operating expenses were below previous year's level, despite of the cost inflation. Efficiency improvements are also contributing positively to the full year EBIT. Now moving to the profit for the period. In Q4, the profit for the period was minus 2.8 million euros. Profit in Q4 was impacted by the loss of 3.9 million euros from Kruunen support debt and also increasing net financial expenses. Profit for the full year was minus 20.7 million euros. The items taking the profit down were the employment losses of 21.4 million euros that were recognised in Q3, a total loss of 4.8 million euros recognised from Kroon and Sabotec, as well as increase in net financial expenses. Due to higher interest rates, net financial expenses have increased by almost 7 million euros. This increase was mainly related to higher interest rates in loans and sold receivables, and also that the comparative figures include interest income of 3.5 million from discontinued operations. Adjusted profit for the period, which is profit for the period excluding, for example, impairment loss was 1.1 million euros and adjusted EPS was 0.01 euros. In Q4, our financial position remained strong with the positive cash flow in Q4. Net cash flow from operating activities in 2023 was 9.6 million, of which changes in working capital accounted for minus 13.2 million. Increase in inventories and trade receivables has impacted working capital negatively. Strong fluctuation in net working capital is typical for Aureola's interest. Net cash flow from the investing activities was minus 3.5 million. Net cash flow from financing activities was minus 28.3 million euros, including the dividend payment of 11 million in April. Liquidity remained on a good level at the year end, and cash position was approximately 140 million euros at the year end. During the last year, we have strengthened our balance sheet. Following this, net debt level has decreased and was, at the end of the period, 21 million euros negative. We have repaid loans, issued less commercial papers and have less lease liabilities, which means that despite a bit lower cash position compared to previous year, our net debt position remained negative. just to inform that the sold trade receivables at the end of the period were at the current average level. To conclude, we can say that our financial position is strong with the solid cash flow and gearing on the negative side at 12%. Equity ratio was 19% and the main reason to this was the negative net result due to goodwill impairment made during Q4 in connection of those dispensing business. Then let's move to look at Kroonan's Apotech. In the joint venture Kroon and SapoTech, integration projects are proceeding with several actions being implemented, albeit benefits are not yet fully visible. Realized synergies were behind the plan, while integration costs also were below estimates. In 2023, realized synergies were 13.5 million and integration costs were 6 million euros. We have booked a loss of 4.8 million euros for 2023 in our books. Krunas Apothec is an important strategy partner for us and we will actively support its value creation as a major shareholder. Krunas Apothec expects its full profit potential to materialize by the end of 2025. Next, a short update of Svensk Du's divestment. We announced the sale of Svensk Du's in October last year. And only a couple of weeks ago, we informed that the Swedish competition authorities have decided to move the investigation into phase two. Due to this, we now expect the transaction to be complete on the second quarter of this year. And then a reminder about our new reporting segments. As of this year, we have two reporting segments, and here you can see preliminary and audit net sales and EBIT figures for the segments. We will publish the restated segment information during Q1. Then last but not least, so few words about our outlook. Looking at the market, we expect the pharmaceutical distribution market to continue to grow. However, the continuation of weak consumer confidence might impact the wholesale market development. And the inflationary environment and related cooperation may impact the profitability. With these assumptions, we accept the adjusted EBIT excluding those dispensing business in Sweden for the year 2024 to increase from the adjusted EBIT for 2023, which was 19.5 million euros. And now I would like to hand over back to Katariina.

Thank you, Timo. As many of you might be aware, we also announced a strategic investment early January, and I would like to briefly comment that. But before I comment it, I would also like to take a step back and remind you of the refined strategy that we launched at the end of October. In the strategy, we have set three strategic goals, of which the second goal is about enhancing efficiency and operational excellence. We said that this strategic goal consists of actions to increase warehouse capacity and efficiency by investing in both infrastructure and technology, all supporting our long-term ambition to improve profitability. The investment that we announced in ERP and warehouse management is exactly a response to this, as well as the fact that we are now initiating an in-depth investigation of the different options for developing our logistic operations in Finland in the long term. This investment comprises of renewal of our ERP and warehouse management during the years 2025 to 2027. We are today running two separate systems, so the aim of the project is to have one common system which will enable us to harmonize our business processes, strengthen data management and enhance customer experience. This means also that we will be in a better position to respond to future customer and business needs. And this will support us in managing the business in a cross-market operating model. The value of the total investment is about 35 million euros. The project will start in 2024 and the new system will be deployed in phases during 2025 to 2027. And we will start with the deployment in Sweden and then go to Finland. Now I want to conclude our presentation with a couple of key takeaways. As said, we had a strong year overall. Market grew and we saw our business growing and profitability improving, driven by distribution business. In line with our dividend policy, the board is proposing to the AGM a growing dividend of 7 euro cent per share. For this year, we expect adjusted EBIT to increase from the 2023 year's level of 19.5 million euros. As a final note, I would also like to extend my warmest thanks to our people for their engagement and also their dedication and hard work. Also, I want to take this opportunity to thank all customers and partners for the collaboration last year and also all the shareholders for their continued trust in us. And with this, we are ready and open for your questions.

All right. Thank you so much, Katarina and Timo. As a reminder, you can send in your questions through the chat. And in the Q&A, we prefer to focus on the questions relating to Oriola's business and financial development and take questions on Kruunan Sappotec only within the scope that we can comment on. And we will start with the questions about Oriola. So here's a question to Timo. Short-term interest-bearing debts have increased and long-term interest-bearing debts have decreased. Does this indicate that there will be debt structuring in 2024 as indicated in earlier webcast Q2 23?

Well, yes, it's a question of the normal or natural kind of timing and maturities of the debt. So basically we are, as kind of normal procedures, kind of probably negotiating some new loans this year and also paying something out. But that's a normal kind of standard maturation.

Okay, good. How do you see your underlying development in 2024? Synergies from the JV were above your EBIT in Q4, meaning your underlying business was loss-making.

In kronas.

It doesn't define it more closely, the question.

But I would assume, yeah. Yeah, because our business was profitable, as we have said, and we are very happy about that one. And basically not commenting that much about the crew, because it's their job. But yeah, if the synergies were up also, it means that at least some parts of the business have been struggling.

Yeah. Okay, so there's no further questions on Oriola at this point, so let's take a couple of those that have come on the Kruunan Saboteek. The net debt of the JV was at Euro 93 million. Do you see a need for recapitalizing?

There has not been any discussions on that one, still.

Okay. And then how would you describe full potential of JV in EBITDA percentage or in euros to be by the end of 2025?

So we have stated that we are going to get synergies, first of all, 25 million yearly basis during that or 2026. And then, of course, the improvement on underlying business when all the integration is made so is wanted. So basically, that's the only thing we have been commenting.

Following on this one, you have reported that JV will have about 25 million euros one-time costs within three years. You have reported so far about 10 million euros. Will there still be 50 million euros one-time costs in the coming years? And if yes, what kind of costs will be reported?

So, that's mainly the Krunas Apoteettu comments, but basically we don't have any kind of different information on that one, so. Yeah. That's what they are saying, yeah. And of course, when we are talking about what kind of integration costs there are, so there is kind of massive work still going on with the different pharmacies and rebranding, also with the IT systems to integrate them and so on, so basically.

I can add one thing on Kronos. I think we can say it like this, that during this year we have done a lot of things that is basic work in Kronos. And we should remember also that we have rebranded all the pharmacies. So right now we have done all the pharmacies, that's more than 500 pharmacies in the same brand. We also have the same customer club and so on. So you can say that the integration process and the synergies have started to be a ground for the future work in these cases. That's something we should remember. It has been, yes, like you see in the figures, a struggling year. But these kind of things we can say because that's also common knowledge. And we should remember that because that's the base and fundament for the future.

Thanks. Then there just arrived two questions on Oriola, so let's take them. Can you just remind us what the wholesale segment and distribution segments include?

In distribution segment we have our distribution businesses in Finland and in Sweden and of course those dispensing business in Finland currently because Sweden is on the sales process. And in wholesale segment we have our wholesale businesses in Finland and in Sweden and advisory business as well.

Following up on that, would you like to give some flavor on the differences of the wholesale business in Sweden and Finland?

I can do that. You can say that in Finland, we have had a wholesale business for quite a while. And in Finland, we have like both our own brands that we are then selling to the market. We also have brands that we sell very close together with other companies, like the Gefulus brand, for example. And our own brand, if I give an example of that, is Dexal and Apotekarin also. We also then have exclusivity rights for Finland in some of the areas that we then are using in this warehouse segment. And on top of that, we also then have the, you can say, the products and assortment that we sell, that also other warehouse wholesalers sell. So that's the main three parts that we have in Finland. In Sweden, we are mainly having like the full assortment for pharmacies. So you can say that we have everything. And in Sweden, we are then building up these two other building blocks where we're then looking for exclusive products and then also looking for our own products.

Good. Thank you. And then a question to Timo again. So would you consider raising interest-bearing debt in 2024?

Not necessarily, of course, the fluctuation in our business in networking capital is high and that we need to take into account when we are kind of thinking of interest bearing debts as well. But more, I would like to see kind of more balanced in that sense that 7 million euros is interest rates, so it's quite high.

Okay, then there is one more question. So just a reminder that if you have any questions, so please send them to us through the chat. So what is the most significant risk for Oriola in 2024?

I can start. I will say like this. If I look at the guidance that we said here about increasing the profitability, I'm quite confident at that one. The thing I see can maybe harm us is, of course, the confidence on the consumer in the end. Because we know that we have a high inflationary environment around us. We can also say there is a lot of things that has happened during the last years. And to some extent, this is quite soon the new normal. So we need, as a company, to balance that. And if I then look at what we are saying is that we have a strong distribution business. We see that the pharmaceutical market is growing, and that is also a stable market. As an infrastructure company, it's so that this part will continue to grow because people are in aging. We have an aging population and all these other things that is supporting us. And then we have the wholesale segment. that is maybe more affected about the inflationary environment than the pharmaceutical side. But here we really see that we have a possibility to grow.

Good. So then one more question and this is back to Timo. So how do the rising interest rate environment affect Oriola's business in general and the result?

Yeah, so basically if interest rates are rising, so also the interest costs are rising, if thinking that the net debt is in the current or cross-debt is in the current level. But otherwise not that kind of clear, kind of significant effects.

Okay, I think these were all the questions for today. So thank you everyone for joining us. Our next scheduled event are the publication of the annual report during week nine, so in a couple of weeks time, and then the AGM on 19th of March. In the meanwhile, if you have any questions, please don't hesitate to contact us. Thank you everyone.

Thank you.