Oriola Oyj

Good morning, everyone, and a warm welcome to Oriola's Q1 Results webcast. I am Tuas Tenusörnjälm from Oriola's Investor Relations. With me today, I have our CEO, Katariina Gabrielsson, and CFO, Timo Leinonen. Hi. First a note about the change in our reporting. As of January we have two reporting segments instead of the one that we had before. The two segments are distribution and wholesale and we published comparative figures for the segments in March. The Q1 report has been prepared according to the new reporting structure. And after the presentation, we open up for your questions. And you can send them to us already during the presentation. As a kind reminder, in the Q&A, we will focus on questions relating to Oriola's business and financial development. We can answer questions on Kruunan Saboteek, but only within a limited scope. Finally, please remember that we are recording this webcast and the on-demand version will be published on our website. Before handing over to Katariina, here is the customary disclaimer that we all should be aware of. And now, without further ado, Katariina, please go ahead. Thank you, Tuva.

Good morning and welcome everyone also on my behalf. We will start today with quarter one highlights and a couple of comments on the operating environment and markets. And then I will end my part with a review of the segments. And after this, Timo will take you through the financials before we continue with the Q&A. To begin with, I believe that we can say that we had a good start of the year. In quarter one, the sales grew by 4% to 375 million euros. This was driven by both distribution and wholesale segments. Usually, here, we would comment the constant currency figures, but in quarter one, the Swedish krona did not cause any significant head or tailwind year on year, so we will focus on the reported figures. Also, profitability improved in Q1. Adjusted EBIT when excluding the loss from the Swedish dose-dispensing business improved by 14% to 4.5 million euros, while the reported adjusted EBIT was 4 million. The improvement in profitability was supported by lower operating expenses and freight costs. A brief comment about the refined strategy that we launched in the end of last year. The implementation is progressing well and key milestone was of course the announcement of the ERP and warehouse management investment in January. This project is well up to speed and proceeding accordingly to plan. But I also want to comment that we are focusing a lot this year on engaging with our senior management. This is an essential part of rolling out the strategy so that we ensure alignment and strength and our common understanding of our priorities, but also importantly, develop our leadership. And then, finally, a couple of comments on the joint venture company Kronans Apotek. In quarter one, e-commerce continued to grow steadily, while the customer flow in the brick-and-mortar pharmacies was weaker year on year, which resulted in reduced volumes market share and adjusted EBIT. And you might have seen last week that we announced regarding Kronans. But let me recap if you haven't seen it. Last week, Kronans Apotek got a new CEO. The previous CEO, Erik Sjögren, did an important job with the integration of Kronans Apotek and Apoteksgruppen. But now it's time for the company to go into the next phase of its development. Kronas Apotek will continue to develop its customer experience and product range, both in physical and in digital stores. The focus remains on long-term profitability improvement, integration activities and business development. For this role, the board has appointed Tomas Rupsis, who has vast experience in retail and fast-moving consumer goods, both in the UK and in Ireland. And he has also been the CEO of Maxima, the biggest retail chain in Lithuania. When looking at the overall operating environment, we saw a slight stabilization compared with last year. Cost inflation has slowed down and energy prices have been stabilizing, while we saw fluctuations in the fuel prices. Although the consumer confidence indicators, both in Sweden and in Finland, have slightly improved from the earlier significant drop, they have still been below historical averages. So, all in all, consumer confidence is still weak. The pharmaceutical distribution market continued at a steady growth in Q1. Still, the challenges in the availability of pharmaceuticals have continued in Europe. Since we now have two new reporting segments, we also want to provide some additional market information relating to the wholesale segment. But first, if we look at the pharmaceutical distribution market, we saw that the market value in Sweden grew by 7% in the first quarter and by 4% in Finland. Our market shares were stable year on year with a share of 42% in Sweden and 45% in Finland. In the Finnish dose dispensing business, we had a market share of 29%. With regards to the consumer health market, we want to give you some indication of market size and growth, while we will not comment on the market development on a quarterly basis. Based on external market data, the value of the market is estimated at around 1.5 billion euros. The historical growth has been about 3% and that is expected to continue, although with significant differences between the categories. In Sweden, for example, products such as vitamins, dietary supplements and sports nutrition are expected to see increased demand, while in Finland consumers are expected to demand more natural and clean products with high quality ingredients and available in easy to use formats. And then before I dive into the segments, I want to make a brief reminder of what the segments includes. We changed the reporting in the beginning of this year so that it can be more transparent and also give better visibility into our businesses. The distribution segment consists of pharmaceutical, logistics and dose dispensing services. This is the largest segment that we have, with an annual net sales of 1.2 billion euros, which equals about 79% of the group net sales. The wholesale segment consists of wholesale of traded goods and over-the-counter or OTC products, parallel import and special licensed medicines, as well as advisory services. The annual net sales of the segment is about 306 million euros. The wholesale business is a bit more profitable because of the type of products and services that we sell in the segment and that is also what you can see on this picture. Next I will discuss the segments in quarter one and also start off with the distribution segment. In Q1, the net sales grew by 4% to 294 million euros. This was largely driven by the steady market growth. Profitability improved by 29%, with adjusted EBIT increasing to 4.1 million euros. When we exclude losses from the Swedish DOS business, adjusted EBIT was 4.6 million euros, which is 1 million above Q1 last year. Profitability improvement was supported by a lower cost base compared with the previous year. Freight costs were lower thanks to operational improvement and lower fuel prices, and operating expenses were lower due to cost reductions in the Swedish dose dispensing business. In the distribution business, we focus on our core and continue to build on the good development we saw last year. In quarter one, our market shares were stable year on year, as you saw earlier, and we have gained new customers and renewed important distribution contracts to support our growth going forward. Then looking at the wholesale segment. In quarter one, the net sales grew by 5% to 81 million euros. We saw solid growth in the Swedish wholesale business and also good development in advisory services. Profitability, on the other hand, declined slightly from 3 million to 2.8 million euros. The decline was related to low volumes in the Finnish wholesale business. Going back to our refined strategy, growing the wholesale business is one of the three strategic goals that we have in the strategy. In long term, we want to grow the business by developing our brand portfolio and product categories. And this is something that we will take some time. During the start of this year, our focus has been on building our offering and technical capabilities to better meet the needs of our growing customer segments. In addition, we have made appointments in key leadership positions. So really building a solid foundation for the growth is what we have started to do. Now, Timo, let's go over to you and look at the financials.

Thank you, Katariina, and good morning from me as well. As Katariina said in her opening words, we had a good start for the year with the solid growth on top line and good profitability improvement as well. Invoicing increased by 6% to 908 million euros. Because there was no significant head or tailwind in Swedish K9Q1, I will not specifically comment on the constant currency figures. On net sales, we saw a solid growth of 4%, ending to 375 million euros. Inverting and net sales growth was driven by both distribution and wholesale segments. Adjusted EBIT increased from 3.5 million to 4 million euros, and when we exclude the losses from the Swedish dose dispensing business, we see an adjusted EBIT of 4.5 million euros compared to 3.9 million euros Q1 last year. And then let's look at net sales and EBIT bridges. On net sales, the growth is largely driven by the distribution segment, where growth was 17.6 million euros. In wholesale, net sales grew by 3.6 million euros, which is also positive considering the smaller size of the segment. Group items on net sales is not significant, while the Swedish dose dispensing business contributed positively on net sales by 3 million euros. This gives a total of 375 million euros in net sales. On the EBIT side, we also see a good contribution by distribution with EBIT improvement by 1 million euros and offsetting the decline we see in wholesale and group items. Excluding the loss of 0.5 million euros from Swedish those dispensing business, EBIT was 4.5 million euros. And then just to remind that we have started in the beginning of this year a big ERP project where actually we are taking the system into use starting from 26 and continuing to 27 as well. And costs related to that ERP progress recognized in the income law statement during the first quarter were in total 0.7 million euros. And most of these were allocated to the group items. And I said, so it's not in that sense to our current operative work and the benefits are coming later. Overall profitability improvement was supported by the lower operating expenses and freight costs. The decrease in freight costs were related to the operational improvement and lower fuel prices. And now moving on to the profit for the period. In Q1, profit for the period was negative 2.3 million euros, hence earnings per share negative at one euro cent per share. We had adjusted items of 0.3 million euros in Q1, and they were related to the sale of the dose dispensing business in Sweden. There are two main drivers for the profit development. The loss from Kruunan's apotheke and increased net financial expenses. In Q1, we recognize a loss of 3.5 million euros from Kruunan's apotheke compared to the loss of 0.5 million euros in Q1 last year. As we know, the interest rates increased significantly last year, and in Q1, our net financial expenses increased year on year from 1.5 million euros to 2.2 million euros, although our debt level has decreased. So a decline in the profit for the period compared to Q1 last year. Then looking at the cash flow, net cash flow from operating activities in Q1 was minus 11.3 million euros. Of these, changes in the working capital accounted for minus 15.4 million euros. And just to remind that it's very typical in our interest that the working capital fluctuates strongly from quarter to quarter. In Q1, increase in inventories and decrease in trade payables have impacted working capital negatively. When we look at change in the cash flow from the end of the year, net cash flow from operating activities was minus 11.3 million euros, from investing activities minus 0.7 million euros and from financing activities minus 16.6 million euros. The change in financing activities cash flow reflects repayments of the debt and commercial papers. At the end of the period, we had 29 million euros less commercial papers compared with the end of the period Q1 last year. All in all, the cash position is strong with the cash and cash equivalent at 110 million euros at the end of the period. In Q1, we have continued to strengthen our balance sheet by lowering our debt level. We have repaid loans and issued less commercial papers, and the amount of lease liabilities has also decreased year on year. Following this, our interest period in debt was down 40 million euros from Q1 last year, and at the end of the period, our interest period in debt amounted to 100 million euros compared to 130. 8 million euros at the end of the Q1 last year. Cash and cash equivalents amounted to 110 million. This gives a negative net debt position and gearing of minus 6.2%. The amount of sold trade receivables at the end of the period was 93 million, which is somewhat lower than the previous year's level, but still at the current average level. To summarize, I want to say that we have a strong financial position with a good cash flow and gearing on the negative side. Equity ratios has declined from 22.8 to 17.3, but is stable compared to the previous quarters. Then move on to shortly comment on Krunas Apotec. In Krunan-Sapote, e-commerce has continued a steady growth, while the challenges have been more related to the weak customer flows in the physical pharmacies. This has resulted in the lower volumes, decline in the market share and adjusted EBIT as well. Adjusted EBIT declined from zero to minus 5.5 million euros. In Q1, realized synergies in Krunen and Sapotec were 3.6 million euros and one of course relating to integration amounted 1.6 million euros. And for Q1, we have recognized a loss of 3.5 million euros in the consolidated statement of comprehensive income. Krunas Apotec remains an important strategy partner for Oriola and Oriola will actively support Krunas Apotec value creation as a major shareholder. And in Krunas Apotec is expected to full profit potential to materialize by end of 2025. And then it's going to the sale of the Svensk DOSAP, so nothing new to comment on relating that one. We announced the divestment in October last year. In January, we informed that Swedish competition authority decided to move the investigation into phase two, and we are still waiting for a decision, but expect to get it during the Q2 this year. Then, coming at last to our guidance, and as I said, we are expecting our guidance of outlook remandances, we expect the adjusted EBIT excluding those dispensing businesses in Sweden for the year 2024 to increase from the adjusted EBIT for 2023, which was 19.5 million euros. As a key assumption, we expect the pharmaceutical distribution market to continue to grow. However, a continuation of the consumer confidence might impact the wholesale market development. Also, the inflammatory environment and related cost pressure may impact profitability. And with this, I'm ready to hand over back to Katariina.

Thank you, Timo. Before we take your questions, I want to summarize with three key takeaways. The net sales grow and profitability improved year on year, which I'm very pleased about. And we saw positive development in both segments, but especially in the distribution improved to financial performance. And it did it really well. We have a solid financial position and have strengthened the balance sheet by decreasing our interest bearing debt significantly. And last but not least, with our refined strategy, we have a clear direction forward and a good understanding of our goals and shared priorities. And with this, we are ready for questions. So let's see if Tuva, you have got something and please, Timo.

OK, great. So thank you, Katarina and Timo, for your presentations. We have a couple of questions in the chat already, but as a reminder to everyone that please keep sending them to us and we will take them. And of course, as I said earlier, we will focus first on Oriola's business development and financial performance, and then take some questions on Kroon and Sapotec, if there are something. So let's start with the first question. So the first questions go to Timo. So what do you consider as a minimum level of cash in bank?

Well, if seeing on the kind of end of the month, of course, we are kind of following it kind of day to day inside the month as well. So basically somewhere around 60 to 70 million might be kind of the level where it should be on lowest at the month end.

All right. With this size of business.

Yeah, with this size of business, of course, yeah.

And then what is average maturity of short-term interest-bearing debt in months?

So, commercial papers are, of course, short, like from one to six months maturity in that sense. And basically, if the income, our balance sheet, so there is one loan that is in maturity in June and we are thinking of paying it out. And then there is one loan that is on maturity on December. And that's what we are going to renegotiate.

Okay, then we have a question about ERP. So do you expect ERP costs to remain at the level of 0.7 million euros in each quarter in coming years, 2024 to 2026?

Well it a little bit fluctuates depending on in what phase and what we are actually doing in ERP projects because actually how the kind of IFR rules are going so it depends so what kind of system you are kind of building and we have kind of different 30 different businesses to kind of attach to each other so basically this level is probably what we are going to see at least during the this year but having said that so we have decided to be open in all the kind of our interim reports so how much we are spending on this

Okay, thank you Timo. So at the moment there are no more questions in the chat, but let's wait for a few seconds because we know there is a small lag between the live and us here in the studio. But seems that there are no more questions. So everything was clear for today. So thank you everyone for joining us today. And next report is coming out on 18th of July. So see you then, if not before that.

Thank you.