Oriola Oyj

Good morning, everyone, and a warm welcome to Oriola's Q2 results webcast. I am Tuusten Usurniam from Oriola's Investor Relations. With me today, I have our CEO, Katariina Gabrielsson, and CFO, Timo Leinonen.

Good morning.

After the presentation, we open up for your questions, and you can start posting them to us already during the presentation. As a kind reminder, in the Q&A, we will focus on questions relating to Oreola's business and financial development. We can and will answer questions on Kronan's Apotek, but only within a limited scope. Finally, please note that we are also recording this webcast, and the recording 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 also on my behalf. We'll start today with quarter two highlights and a couple of comments on the operating environment and markets. And then I'll end my part with a review of the segments. After this, Timo will take you through the financials before we continue with the question and answers. In Q2 we saw good top-line growth, with net sales growing by 13% to 440 million euros. This was driven by both distribution and wholesale segments. Also profitability improved in Q2. Adjusted EBIT improved by 53% to 5.1 million euros, while the adjusted EBIT excluding Swedish dose dispensing business was 4.9 million. The improvement in profitability was supported by net sales growth, lower operating expenses and freight costs. We are implementing and rolling out our refined strategy, which was launched at the end of last year. The ERP and warehouse management investment that was kicked off in January has progressed according to plan. At the moment we are reaching the end of the design phase, which will allow us to move into the build phase during the second half of this year. Something that I have personally also focused quite a lot on during this quarter is to engage with our employees and talk about a strategy and what it means in different parts of the organization. These discussions have been fruitful and are, in my opinion, extremely important for creating alignment and commitment to our long-term goals. That is something that we will continue to do. And then, finally, a couple of comments on the joint venture company Kronans Apotek. In Q2, e-commerce continued to grow steadily, while the brick and mortar is stabilizing. Kronans Apotek got a new CEO in April and a CFO in May, and they have put in new measures to improve the performance. At the end of April, we came out with the news that the Swedish Competition Authority prohibits the sales of Svensk DOS AB to Apotex and Sverige AB due to negative effects on the competition in the market. We still think the agreement with Apotex and Sverige AB makes sense and is the most viable option for Aureola, because we have not seen any changes in the market structure and dynamics. We believe that the decisions taken by the authorities was not justified and that it was based on weak argumentation. This is why we, together with Apotekskans Sverige AB, have appealed the decision. The appeal process can take up to six months, so there will not be news about other alternatives before we have a clear ruling on this. And that will be sometime in early Q4. If we then have a look at the overall operating environment, we can see that the situation has clearly stabilized from a year back. Consumer confidence has slightly improved, cost inflation has slowed down, and we can see that energy and fuel prices have stabilized. In the pharmaceutical market environment, there are continuing availability issues across the whole Europe. We can also see that the demand for high-value pharmaceuticals is at a good level, and this is boosting the value growth in the pharmaceuticals market. On the other hand, the volumes, especially in the Finnish market, have declined, while in Sweden the volume was still growing at a low single-digit level. As said, the pharmaceutical distribution market's value has continued on a good solid growth in Q2, which growth at 7% in Sweden and 4% in Finland. In the Finnish market, our market share in Q2 was stable year on year at 45%, and in Sweden we saw a slight decline from 45% to 43%. In the Finnish dose dispensing business, our market share increased by two percentage points to 30%. On this page you can also see the data from the consumer health market. This is annual data and we will comment it only on annual basis. But as you can see the historical growth has been at 3% and the market is valued at around 1.5 billion euros. Let's then turn and look at how we performed in quarter two. I'll start with the distribution segment, which consists of pharmaceutical logistics and dose dispensing services. In quarter two, net sales grew by 16% to €358 million. This was largely driven by the steady market value growth in Sweden and Finland. Profitability improved to 30%, which adjusted EBIT increasing to €4 million. Profitability improvement was supported by net sales growth and a lower cost base which has offset the negative impact due to lower volumes in the move and the move of clinical trials under the management of advisory services in wholesale segments. Freight costs were lower thanks to operational improvement and lower fuel prices and operating expenses were lower due to cost reduction in the Swedish dose dispensing business. When we exclude Swedish dose business, adjusted EBIT was 3.8 million euros, slightly below last year due to the decline in volume and the move of clinical trials. In the distribution business, we will continue to build on the good development we saw last year. In quarter two, we have been successfully in renewing distribution agreements and implementing price increases, which will have a positive impact in the second half. Then, when we're looking at the wholesale segment, 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. In quarter two, net sales in this segment grew by 3% to €82 million, supported by a wider product portfolio in Sweden and growth in all customer segments. Profitability improved to 2.3 million euros. This is mainly related to the move of clinical trials which I mentioned earlier. Growing the wholesale business is one of our long-term strategic goals. During the start of this year, our focus has been on building our offering and capabilities. For example, we want to grow in the growing e-com channel in Sweden, and this has required us to develop certain capabilities in the warehouse in Sweden. This concludes my part, so over to you, Timo, for the financials.

Thank you, Katariina, and good morning from me as well. Let's first recap how we have performed in comparison in previous years. We can see good growth on top line, invoicing grew by 5% to €952 million, and net sales grew by 13% to €439 million. So solid growth, which we can be pleased about. Adjusted EBIT increased from 3.4 million euros to 5.1 million euros, an increase of 53%. And when we exclude the Swedish dose dispensing business, we see that the adjusted EBIT increased by 18% to 4.9 million euros. Let's then look at the net sales and EBIT bridges. On the net sales, the growth is largely driven by distribution segment, where growth was 49 million euros. In wholesale segment, net sales grew by 2.3 million. Group items on net sales were not significant, while the Swedish dose business contributed positively on net sales by roughly 3 million euros. This gives a total of 439 million euros in net sales. On the EBIT side, the chart shows that the development excluding Swedish dose where the EBIT in Q2 increases to 4.9 million euros. In distribution segment, EBIT excluding Swedish dose declined slightly, while wholesale saw some improvement. The decline in distribution is due to the decline in volumes and the move of the clinical trials under the management of advisory services in wholesale segment. This explains the positive development in wholesale segments as well. To summarize, in Q2, EBIT excluding Swedish DOS was at 4.9 million, and with the small positive contribution from Swedish DOS, reported adjusted EBIT comes to 5.1 million euros, compared to 3.4 million in Q2 last year. Overall, profitability improvement was supported by the net sales growth, lower operating expenses and freight costs. Then moving on to the profit for the period. In Q2, profit for the period was 2 million euros and earnings per share 1 eurocent. We had adjusting items of 0.5 million euros positive in Q2. These were related to the dose dispensing business and to the ERP implementation codes costs which in Q2 amounted to 0.6 million euros. In the dose dispensing business we received a compensation of 1.4 million euros from the court appeal on the tender process and we had cost of 0.2 million relating to the sale of dose dispensing business in Sweden. In Q2, we recognized a loss of 1.3 million euros from Kruunen Sabotech compared to the profit of 0.2 million euros Q2 last year. On the net financial expenses, we can see the positive impact of lower debt levels, as the net financial expenses decreased to 1.6 million versus 1.9 million last year. So, an improvement in profit for the period compared to Q2 last year. Then, looking at the cash flow. Net cash flow from operating activities at Q2 was 17.8 million euros. Of this, changes in the net working capital accounted for 11.5 million euros. It is, as said before as well, very typical for our industry that net working capital fluctuates strongly from quarter to quarter. In Q2, increase in trade payables have impacted working capital positively. When we look at the changes in the cash flow from the year end, net cash flow from operating activities was 6.5 million euros, from investing activities minus 1.5 million euros, and from financing activities minus 57.2 million euros. The change in financing activities cash flow reflects repayments of debt and includes dividend payment of 12.7 million euros. All in all, the cash position is strong with the cash and cash equivalents at 86 million euros at the end of the period. Like you saw in the cash flow, we lowered our debt level significantly compared to previous year. In Q2, we have repaid our term loans of 290 million Swedish crowns and issued less commercial papers. And the amount of lease liabilities has also decreased year on year. Following this, our interest bearing debt was down 63 million euros from Q2 last year at the end of the period. Our interest bearing debt amounted to 74 million euros compared to 137 million at the end of the Q2 last year. Cash and cash equivalents amounted to 86 million. This gives us a negative net debt position and carrying of minus 8.1%. The amount of sold trade receivables at the end of the period was 55 million, which is lower than in previous year due to the timing effect. And this, of course, also affects in our cash position. To summarize, I want to say that we continue to have a strong financial position with a good cash flow and caring on the negative side. Equity ratio has declined from 21.2 to 17.2, but is stable compared to the previous quarters. Then we move on shortly to comment Kruunan's apothecary. In Kruunen's Apotech, e-commerce has continued a steady growth while the brick and mortar is stabilizing. As Katarina mentioned, Kruunen has both new CEO and CFO who have already implemented new measurements to improve the business. In Q2, adjusted EBIT declined from 2.3 to 0.3 million euros. Although the result is not still satisfactory, we see that there is a significant improvement from Q1. In Q2, realized synergies from Kroon and Sabotex was 0.9 million euros, and one of costs relating to the integrations amounted to 1.9 million euros. For Q2, we have recognized a loss of 1.3 million euros in our balance sheet from Grunan. And just to notify that Grunan Sabotex still remains an important strategy partner for Oriola, and we will actively support Grunan Sabotex value creation as a major shareholder. Krunas Apotec expects its full profit potential to materialize by the end of 2025. Our guidance or outlook for 2024 remains unchanged. We expect the adjusted EBIT excluding the dose dispensing business in Sweden for the year 2024 to increase from the adjusted EBIT for 2023, which was 19.5 million euros. As key assumptions, we expect the pharmaceutical distribution market to continue to grow. However, the continuation of the weak consumer confidence might impact the wholesale market development. Also, the inflationary environment and related cost pressure may impact profitability. With this, I'm ready to hand over back to Katariina.

Thank you, Timo. Before we will take your questions, I want to summarize with three key takeaways that you also see on this picture. The net sales grew year on year with positive development in both segments. And I'm really, really pleased about that. When looking at the profitability of the underlying business, we can see a solid improvement from previous year. And last but not least, we have a solid financial position and have strengthened the balance sheet by decreasing our interest bearing debt significantly. With this, let's see if there has come some questions.

Great, thank you both Katarina and Timo for the presentation. So let's have the questions and just to remind everyone that you can post the questions to us through the chat in the webcast. So we have a question about distribution segment. Net sales in distribution segment grew by over 15% and this was commented as driven by value growth in the market both Sweden and Finland. However, market growths are presented as 7% and 3.8%. Oriola's market share is not growing. What is behind Oriola's outperforming the market? Have there been any changes within product portfolio comparing to last year?

You mean? Yeah, I guess so. Yeah. So basically thinking market in general. So so there is kind of differences always that which kind of medicines are sold more and less. And so so it seems that. the portfolio what we are currently having is kind of a little bit kind of has been performing stronger during the q2 but at the end of the day so there is no big changes in the market in that sense but it fluctuates a little bit from from from quarter to quarter

Okay, good. And then we have a question about the ERP costs. Why do you now treat ERP costs as adjusting items? Timo, please go ahead.

Yeah, just to give clarity to our reporting and information what we are giving to the market because If having those costs which are actually giving positive benefits only after several years, so it's very hard to tell how our underlying business is developing if we are having those costs embedded to everything. And basically that's why we decided that we want to have them or report them separately.

All right. So then a question relating to Svensk Duos. So according to latest news and court decision, you don't have the right to appeal. Would you like to comment this, Katariina?

I can comment. No, we don't have the right to appeal. But of course, we are behind Apotekstjänst AB's appeal. And we are fully supporting that. Like I said also in the presentation, we think that this is not a justified decision that was done by the Konkurrensverket. And we really think that there is strong argumentation in this appeal. And that also means, of course, that we will then not comment more on what we will do if this deal is not going through until this verdict has then been done.

Okay, we continue on Svensk Duos. Maybe this is more for Timo to comment. So what kind of earnings should we expect from Svensk Duos in second half? Some losses or around breakeven like Q2?

Well, that is one thing that we are not going to comment. Because at the end of the day, we are commenting only the profitability of the whole group. And it's one part of the group. But unfortunately, no comments on that.

I think we can say it like this, Timo. If you think like this, we are supporting the business. And of course, we are having the same volumes. So that we can comment. We don't see any changes in customers and so on.

yeah okay good so then uh what were the main reasons behind your low cash flow in q2 uh mainly kind of repayment of the loans and and that has been intentional like i i also in in the previous uh quarters have told that basically we want to get especially now when the interest rates are high so our kind of uh interest bearing debt position and I think that we have succeeded quite well on that one.

All right. So we have a couple of more questions, but just to remind everyone that please send them through the chat so that we can take them still today. But the next question is about the increase in number of personnel. So the increase was quite high during Q2. So why is that? And is there a risk of increasing OPEX?

I can take that one. You can say that what we do now is also looking at the wholesale segment. And during the first half, we have strengthened the wholesale segment. And that's part of the strategy work. And that we can see then in a slightly decrease in the number of personnel. We are not expecting that this increase will continue in this aspect because most of the parts that we need to do has now been done, at least as we can foresee at this point.

All right. And then the last question. So why didn't the good sales growth show in your profitability?

Timo, please. Well, there's kind of two parts, as it was stated also in our release. value of the sale is one thing so basically and there is the inflation and price increases and so on and volumes are another one so we have two different kind of agreements they are transaction based and basically value based and when when having kind of transactional based agreements so it's not fully come to the to the profitability and sales margin but of course when when we again see that basically volumes are starting to increase so that is affecting positively also to our profitability

All right. So thank you. There are no more questions on the chat. So let's thank everyone for joining us today and remind that our next webcast will take place on 30th of October when we publish the Q3 report. And until then, if you have any questions, please don't hesitate to reach out to us. And I would like to wish everyone a really good summer. Thank you.