Oriola Oyj (ORIOLA) Earnings Call Transcript

Good morning, ladies and gentlemen. Welcome to this webcast, Oriola's Full Year 2019 Financial Statement Release. My name is Robert Andersson. I'm the CEO of the company. With me here today, I have Helena Kukkonen, CFO; Tuula Lehto; Group Communications Director; and Katja Graff, Finance and IR Manager. We will run through the slides that I have here to present for you, and then we will offer you the possibility to ask questions. In the room here today, we have a handful or 2 hands full probably, 2 hands full of participants. And -- but also, you can ask questions on the webcast online. Without further ado, I run into the presentation. So starting with quarter 4 highlights, we've seen good sales invoicing and sales development throughout the year, and quarter 4 was no exception from this. We've seen also tough competition from online in the Swedish pharmacy market. Online pretty much dominating -- starting to dominate certain product categories. And we've had higher-than-wanted cost levels in our Swedish operations, which are, to a large extent, on one hand, costs within the pharmacy business, but, to a large extent, related to the ramp-up of our Swedish distribution center in Enköping, which has progressed slower than planned. On the other hand, and this is really rewarding for us, all of us at Oriola to see that, our past -- I'm talking about past problems here in our distribution center in Finland, which started 2.5 years ago, are now definitely sort of fixed. We had an excellent execution -- quarter execution-wise with high levels of efficiency and reliability and leading also to good customer experiences. At the end of December, we sent out a press release, saying that we had discovered an error in our inventory valuation in Consumer BA, and that then has been now corrected and affected both quarter 4, but also the previous quarters for this year and as well as earlier years. And we have made good progress in many areas of our strategic programs, our 20by20 Excellence and Customer Experience program. I will cover both of these as well as all of the other topics here. And last but not least, our Board is suggested -- suggesting a EUR 0.09 per share dividend, EUR 0.09 dividend per share, which is at the same level as last year and the previous year. And very much the confidence to do this in spite of the weak -- relatively weak results is based on a strong cash flow that we've had throughout the year. Going to the key numbers. I mentioned already, we've had throughout the year, for the full year, in constant currency, invoicing grew 8.4% and in quarter 4, 7.6%. Net sales grew for the full year in constant currency 13.6% and in quarter 4, 15.9%. These are numbers that we obviously are very happy with. They are an indication both of a strong, strong market position in both -- in many areas of our business, a growing market as well as that our customers are reasonably at least happy with the services we offer. Then there is also in the net sales growth embedded a change in the way the contracts for some of our Pharma customers, where logistics customers where a couple of customers have changed from consignment stock to owned stock, which means that it's recognized as net sales. But all in all, in constant currency, the net sales grew by about EUR 200 million year-on-year, which is an achievement we are very happy with. Our challenge continues to be turning these good revenues into profitability. And if I'm looking at the last few years, you can see here on the slide, from 2015 to 2019, obviously, our challenges started in quarter 3, quarter 4 2017 with the new ramp of the new ERP system in Finland. And then there's been that -- we have fixed that problem. That challenge is now totally fixed, I would say. No doubt ticked in the box. But then the systems and ramp-up challenges have moved to Enköping to our Swedish operations. And then in the meantime also, the Swedish consumer market, pharmacy market has basically, I would say, reached a lower -- or declined to a lower profitability level. I will talk about all of these. But the main key challenges we have are for 2019 in the numbers are related to Enköping ramp-up and the consumer pharmacy market. When we met last time in this same room about 3 months ago, we were looking at this EBIT, adjusted EBIT trend. Trend line going from for this year from EUR 3.7 million, EUR 5.6 million, EUR 9.1 million, and I was obviously quite satisfied with the development. I communicated to all of you that don't get too carried away. There is a strong seasonality in this business, and everything is not yet perfectly in order. But I have to say that I did not expect a quarterly result of EUR 2.1 million. The reasons are mainly again related to our sort of Consumer business and as well as the wholesale -- Retail wholesale business, where both our Consumer business area and our Retail business area had weak results in quarter 4, and I will come back to those in a little bit more detail in a few minutes. The breakdown from year-on-year breakdown, quarterly breakdown also, basically shows the same consumer, a quite big decline in Retail, quite big decline. And then some high-cost items on group level compared to a year ago. But as said, I will come back to this. Then if we look at our -- quickly take a look at our operating environment and what has happened in the environment, we start with the consumer market. The general, the big trend is the growth of the online business, already now close to 12% or 12% by today. 12% of the online or the pharmacy market in Sweden is online. And the challenge for us here is that the products that have the highest profitability are the ones that very easily go to online. The nonprescription products, the sort of beauty products and health and well-being products where the margins are high, whereas the Rx, the prescription products, are mostly dominating the business in brick-and-mortar. And the profitability, the margin on these products, are obviously regulated by the authorities and are on a very different level than the traded goods products. Otherwise, we can see that the market grew by -- overall grew by 4%, which I think is a decent reasonable growth number, and the market shares have stayed on sort of full percentage point level, more or less the same as a year ago. Apotea, the leading online player with over 50% market share in the Swedish online pharmacy market, has gone from 4% a year ago to 6%. And this is really describing the trend very much. Now if then look -- moving over to the wholesale market. The wholesale market has grown nicely both in Finland and in Sweden, driven largely by, on one hand, sort of the basic underlying demands, but also by more expensive medicines being introduced. In Finland, we have a growth of 5%. Sweden, almost 8%. In Finland, we have gained market share, going from 43% a year ago to 46% at the end of 2019, a good achievement. We are happy with this. It's also based on the renewed confidence, I would say, that we have seen from our old customers. We have also signed up a few new customers that we talked about also in connection with quarter 3. In Sweden, the situation has also moved in the right -- in a good direction, going from 40% market share a year ago to 44% market share at the end of 2019. Here, we have also announced that we, for instance, we signed MSD and started deliveries to MSD at the end of -- at the beginning of quarter 1 -- quarter, sorry, quarter 3. And MSD is a very significant large customer. So they are bringing lots of volumes to us. Then over to something which is a little bit more complicated or less, should I say, unified or consists of many bits and pieces, our retail market. Dose dispensing market is growing nicely in both Sweden and Finland. We are now at 225,000 patients in Sweden and in Finland, 55,000 patients. Our market share in Sweden is 43%, up from 25% a year ago, which is very much driven or almost totally driven by the fact that we won the Stockholms läns landsting and started ramp-up in February, I think, a year ago, if I remember correctly. So we have it on board now since 1 full year, and we are the market leader in Sweden. In Finland, we are at par with our dear competitor and at 40% market share. But also here, we have seen our volumes trending up, and then I think this is related to an improved collaboration and better trust from our pharmacy customers that we have seen in the marketplace during particularly the second half of last year. Our Retail business area also handles, as you -- I believe you know, traded goods and OTC products, product supply for not just Kronans pharmacy chain in Sweden, but also our competitors, most notably Apoteksgruppen and Lloyds Apotek. We also serve Apotea, Apohem, [ ApoEx ] and many others. And here, our market share in that market has remained stable at 26% of the market, which has grown to EUR 1.2 billion. And then last but not least, within Retail, We have staffing services where we offer staffing pharmacists to work in pharmacies in Finland. During quarter 4, we served 155 of the 815 pharmacies that we have in Finland. Throughout the year, we have served 310 different pharmacies out of this 815. So we have basically, you could say, a 38% market share within the pharmacies or all the different pharmacies in Finland. 38% of them have used our services at some point during last year. Now then a few comments about our strategic initiatives. 20by20 Excellence, as you probably recall, the objective here is to achieve EUR 20 million annualized savings compared to 2018 by the end of this year. And here, I can say that we have made good progress. It's unfortunately not shown very well in our bottom line numbers, partly it's because the progress is not showing in 2019. It will be showing in 2020, but also the net effect of having actually a negative development in Enköping has been -- is our sort of key challenge here. Now Enköping will have to get efficiency and effectiveness and cost savings this year. And when we do that, I believe we will reach the EUR 20 million target. The other areas are developing well. We've seen good savings in Mankkaa, good savings in IT costs and many other areas. Then the customer experience -- sorry, sorry, Customer Experience program, very, very important. We were -- after our logistics challenges here in Finland. We were experiencing quite frustrated and dissatisfied customers, and we decided then that we will put an extra effort into making sure that we ramp up, we change our processes. We change our attitude. We go from an outside-in mentality to -- from an inside-out mentality to an outside-in mentality. We listen more to our customers. We changed our processes to respond to the customer needs. And I'm happy to say now that, after 1 year of focused efforts, we have managed to improve the overall Oriola NPS, Net Promoter Score, by 24 points. Those who follow NPS know that 24 points improvement in 1 year is very significant. We are on a good track. We are making this a systematic way of working. It will bring further improvements during this year. A few words about the situation in Enköping. I have been forced to communicate throughout last year, we pretty much, since we started, first, we have had a delay in the start and then, since we started a year ago in February, that we are in a situation where we are not able to run full speed. We want to secure deliveries. We've had very bad experience in Finland from failing to deliver as promised or as expected, and we are not yet -- we haven't been and we are not yet in a situation where we can run full speed ahead. We have started now the ramp-up of RX products in our automated -- in our robots since the 23rd of January. We are gradually ramping up the product portfolio so that, by the end of summer, we will have all our products basically in the new automated system, which means that when this is done we will be on a completely different cost level by the end of the year. In terms of, in a way, an indication of what this means in efficiency improvements, we can say that we go -- our number of order lines, the peaking of order lines will -- our plan is to grow by 50% from the level of last -- end of last year to the expectation end of this year. This will help significantly. It's mainly cost-efficiency improvements. Then something we haven't discussed before so much. And we want to bring up because a, it's been a focus for us throughout last year. We haven't talked about it a lot because we have -- we wanted to have a better story to tell. We are putting a lot of effort into sustainability matters. We have created a sustainability strategy, and we have set ourselves long-term goals for sustainability. And we divide these goals into 3 key areas: society, people and planet. We have sort of mapped our initiatives to the United Nation's Global Compact targets, which are the boxes you can see here. And when it comes to society, we are really sort of focusing on making sure that we are doing whatever we can to support people's health and well-being, medicine availability, the safe usage of medicines. We are promoting preventive health care, and we are reducing health care costs, among other things. When it comes to people, we are saying we want to make sure that we -- employee well-being is as good as it can. We are fairly equal and diverse. We offer fair equal and diverse employment. And we are obviously a good corporate citizen and we have -- our ethics and values are in the best category, and we measure this by employee Net Promoter Score and our employee engagement survey that we do twice a year. And then for planet, last but not least, very, very important. We produce a lot of waste material, cardboard and plastics and we consume a lot of electricity. We are focusing on waste handling, energy efficiency and circular economy. And here, our main target is around carbon neutrality, where our ambition is to be carbon neutral by 2030. There are other targets as well. And we've seen some positive effects actually of what we're doing. Many of you I'm sure are following the CDP score, Carbon Disclosure Project scores that typically are put together by the stock market analysts and for the stock market analysts. And here, we were upgraded from C level to B, 2 weeks ago, I think. I was actually contacted by the regulator in Finland asking me one evening, "What's going on with the Oriola share? It's up 5.5%. And have you had some leakages or whatever?" And I said, "No, I'm not aware. We don't have any insider projects." And I think -- we discovered then that the only thing that could explain this was this news that we had been upgraded from C to B. And that actually sort of, to me, shows that it pays to be sustainable. It is a good cause. It's worthwhile putting a lot of effort into, and we are very committed to this. Then I'll move over to the business areas, and I won't cover this because you should know it. But I'll say a few more words about Consumer to begin with. I mentioned that the market, for the full year, grew by 4%. And in quarter 4, the growth was in line with that. We have been growing at the speed of market, more or less. Our market share is staying at 17%. We have been growing faster than -- traditionally faster than the market in online because we have been investing a lot into online growth. Now in quarter 4, we did not manage to grow in value faster than the market. We grew 20% versus market growth of 32%. In volume, we actually grew at pace of -- at the pace of market or even a little bit faster. The reason really for the slowdown in quarter 4 was that we had a challenge with our online application, so i.e., the commercial application, which was down for a few weeks in October, November and which meant you could not buy certain medicines and mostly the most valuable ones. This is also one of the reasons why we've had this. We are upgrading our online IT systems and processes to be able to cope with the growth here that we see and which actually is, as such, a prerequisite for being -- executing our strategy of being an omnichannel player. The consequence of the online is also, as I've had explained in the past before, that the share of our products that are sort of in the categories OTC and traded goods, where the profits -- main profits are -- have been going down, a bit less than 1 percentage point from last year. And the previous year, that was also 1 percentage point. And this is also then leading to online typically sells cheaper than brick-and-mortar. You have to adjust your brick-and-mortar prices to correspond to the online prices. And all in all, we've experienced a tough environment where prices are constantly challenging, and we are spending on IT to build the online competencies. And then we are still sort of running a large chain of 323 pharmacies with 2,000 people working in them. Our main cost items are salaries and rent. 80% of the costs are salaries and rents. And with salaries and rents, they have a tendency to grow by about 2% every year. So what we have to do, what we can do is to close unprofitable pharmacies and also move more to online. And when we close pharmacies, obviously, we will let people go, and this is what we did at the end of last year as part of our 20by20 program. And we have closed 5 pharmacies, and we will close 3 more pharmacies during quarter 1. And the cost effects of those closures are not shown yet in our numbers. But the decline here both quarter-on-quarter and year-on-year are related to the market conditions, the market situation, one thing, and there's also the inventory correction, which is impacting the numbers. One thing that also I would say my understanding and expectation is that we will see a stronger seasonality in the future where quarter 4 is going to continue to be challenging. And the -- my logic here and my understanding here is that we've gone from a Black Friday to black week and I would say almost black month. November is pretty much a discount month in the online world nowadays. And that actually, I believe, will continue to be -- to sort of mean that the seasonality effect, quarter 4 may prove to be weaker than we are used to. Then for Pharma. Pharma, I would say, the situation is much more stable. The business is more stable by nature. Its long-term contracts with -- in partnership with strong big players, within net sales growing by 26.4% in constant currency to EUR 242 million in quarter 4. I talked about the drivers, the reasons for this. We've had very good cost savings and efficiency improvements now in Finland. And our key challenge in this business, for this business area, is our ramp-up in Sweden, where, as I said, we are starting to ramp up for the Rx, the medicine, the complicated products. And once we get these up and running in Enköping, the cost will go down, the efficiency will go up. Everybody will be happy. But it's -- I would say, we are moving in the right direction. It takes longer than I would love -- like to, but I think we are on the right track. Then Retail, I mentioned we had another -- we had a bad quarter. There's no other word for it, many different events, not 1 or 2 single. We've had a weak sales margin in Finland due to sell out of -- basically cleanup of old stock and sell-out of -- at low margins. We had a good growth in our -- those business. Those business grew by some 85% in terms of numbers of patients, obviously, driven by Stockholms läns landsting. We've had -- I've explained this before, but Retail is the business area which is mostly impacted by our Enköping ramp-up challenges because the retail products are the ones where we have started. Now I would say, the situation is that it's -- well, our ramp-up is stable now. We are not experiencing the kind of problems we had during quarter 2 and half of quarter 3. We are delivering reasonably well. We now need to sort of next step is to fine-tune and improve efficiencies. But we also had, had actually, I would kind of classify this as a positive event. We started up a new ERP in Uppsala in our Svensk Dos manufacturing facility on the 1st of October. The ramp-up went well. We are more -- we can scale now the business. The negative side of this ramp-up was that, when we got better systems, better control, we also discovered some weaknesses in our inventory management related to the previous system, and we took a hit on that in quarter 4. So I will now hand over to Helena to comment on the financials, and then I'll come back and sum up the year.

Thank you. So moving into the profit for the period and then earnings per share. So then in Q4, we ended up actually making a small loss. And this was then driven by the adjusting items. So we have the EUR 2.5 million impairment from the intangible assets, which then relates to the consumer online IT system renewal. And then we had some positive provision releases. And then the earnings per share, we ended up at 0 now for the Q4 and then EUR 0.04 for the full year. Looking at the cash flow. So cash flow was good for the quarter, EUR 21 million, and then very good for the year, EUR 84 million. And then looking at the EUR 84 million, so EUR 57 million came from the EBIT and depreciations, and then we had a EUR 27 million improvement in the net working capital. Then we had EUR 22 million in investments into IT, logistics and then also the pharmacies in Sweden. EUR 58 million financing activities. We paid out EUR 16 million dividends, and then we had EUR 22 million less commercial papers. And then we have the IFRS 16-related releases. And then at the end of the year, so we ended up actually EUR 5 million better cash position. And therefore then, when looking at the cash flow plus then -- then the cash at hand at the end of the year. So we have concluded then and are proposing a EUR 0.09 dividend. Also, when looking at the debt levels, what we have, so we can see that actually the whole 2019 was then impacted by the IFRS 16 changes. And now when we look at the sort of year-on-year on a quarterly level, last year, we had EUR 64 million. And now we ended up at EUR 120 million. And when we take the EUR 80-plus million away, so we're actually in a better position now versus than last year. We have less commercial papers, like I said, some improvements in the advanced payments. And then, of course, the lease liabilities are impacted by the IFRS 16. Cash position, EUR 5 million better at the end of the year. Also, something to note, we have 36% gearing at the end of last year. But then when we take the IFRS 16 and look at it on a comparable basis, so now we're at 22% at the end of this year, which is pretty good. So now handing over to Robert to summarize and talk about this year.

Back to summary of last year, which was categorized by great growth in terms of invoicing and net sales, categorized by high logistics costs, particularly in Sweden; starting with high costs in Finland as well; but I would say, clearly, clearly stabilized, improved and in good shape at the moment. We are looking with confidence into 2020 when it comes to our distribution center here in Finland. The Consumer result has been burdened by tough online competition, by the situation, as I explained, we have 80% of our costs in salaries and rents. And typically this means 2%-ish cost increases, which we can -- and at the same time, our pharmacists are working really hard. So we need structural change, and we have started those structural changes. In the meantime, we don't see any alternative, but then to continue to invest in online. And we have made good progress in our strategic programs. I'm particularly happy about the CX Experience, Customer Experience, where we are on -- clearly, on a decisively good track. Now, what do we expect for this year, year 2020? If I recap a little bit, this is now my -- actually my ninth quarter that I'm presenting. The first quarter I presented was my second day at Oriola, and I was standing in the same building, but in a different room. And I obviously didn't understand much of what I was talking about myself because I was -- had not had the time to get to know the company. Now obviously, for 2 years, we have fixed the SAP problem, which was a burning platform at that point. There is no doubt in my mind or I think anybody else's mind at Oriola that this has been fixed. It's working fine. We have changed the organization. 80% of management is new. We have changed the -- well, we have changed management. We have hired new talent. We have changed the organization a year ago. We split the organization differently, which gives better insight into what we are actually doing with business areas: Consumer, Pharma and Retail. We have put in place these strategic programs to get -- fix the customer experience to get cost efficiency and made progress on all of these. What we are not seeing yet is the bottom-line effect. I was hoping at the end of quarter 3 that this is actually now sustainable. We have had some difficulties during quarter 4, of which we have been communicating. Now -- but this year, 2020 is the year of execution. I do not foresee that we will start many new big things like we have done in the last couple of years. This year is a year of execution. We need to continue our 20by20 Excellence, gain efficiency, save cost, increase profitability. At the same time, of utmost importance, we need to work on the customer experience. We have defined as our customer vision that we are -- our customers see us as personal, professional and partners. We are on a good track to achieve this. We are working really hard to improve further. And then when we started the organizational change work some 15 months ago, maybe even 18 months ago, which ended up in the new organization a year ago, we also started a journey. We said we need to be more, in a way -- the objective is that we have higher engagement. Our people, our organizations are more committed to working for Oriola. They are more, in a way, integrated. And they are looking for synergies. We have many of synergy potentials. We have been able to sort of pick some of them, but there is more potential to come. I'm also happy to report that our employee engagement survey, which was conducted at the end of last year, showed a few percentage points of -- few percentage points, you could say, points increase versus the previous year. So we are on the right track on many of the -- I think the things we have done are the right ones. Now we need to start to see the bottom-line effects. And this year, obviously, we have to turn the trend. And to that extent, we are communicating this year that adjusted EBIT on a constant currency basis is estimated to increase from the 2019 level. The 2019 level is not satisfactory. It will have to change, and the trend will have to improve. So that was the end of the prepared presentation, and now we are open for Q&A and any other reflections from the audience.

How about that I start from online questions. The first one, where are you in terms of Enköping ramp-up? At which point do you expect to have finalized the ramp-up?

So I would say, at the end of this year, we are -- according to the current plan, at the end of this year, we will be fully up and running.

Then the next one. What is the plan for Retail business in Sweden?

So the plan for Retail business in Sweden is significant profitability improvement. We are looking at our business model. We are looking at the way we are executing, but there's really a huge correlation between the efficiency of Enköping and the success of the Retail business in Sweden. That cannot be understated.

Do you foresee a clear margin improvement in -- at Retail in 2020?

Yes.

Okay. Should one interpret dividend proposal as a sign of confidence as you continue to pay more than you earn?

Yes, absolutely. I mean, if you look at our balance sheet, if you look at our level of investments, if you look at the cash flow we are generating. The Board, yesterday, in its meeting, was extremely confident that this is the right level of dividend to pay.

And then do you have different products or brands in online versus brick-and-mortar? Or do you sell -- or are you selling the same products?

So we have -- you could say every pharmacy has a basic assortment, and then they may have slight differences. But -- and the basic assortment for online is -- now I don't know, is the same. However, our mix in online is very different. We sell, to a large extent, the prescription medicines in online. And if you look at our online focus and you compare with the market leader, they have like 75% is non-prescription. And in our case, it's the other way around -- or not quite, 75%, but say 60% prescription and 40% other products. Thank you. Good questions.

It's Petri Kajaani from Inderes. You don't open anymore your EBIT between Finland and Sweden. But as I remember, in -- between 2014, 2016, you made this EUR 60 million EBIT. And it was divided between Sweden and Finland, sort of EUR 40 million Sweden, EUR 20 million Finland. Could you comment on how is your EBIT distributed at the moment?

So yes, you are very right. We don't report market-wise, but business area-wise. But as I have many times, in a way, reiterated, we are back on track in Finland. Our profitability in Finland is going from disastrous to weak, to okay, to pretty good at the end of last year. And now, in a way, the challenges we have in Sweden where Enköping is not efficient and the overall pharmacy market profitability has gone down. So that maybe is the best indication I can give you. I won't give you numbers.

Okay. And about your pharmacy chain in Sweden, do you have to close a lot of pharmacies during this year? Or how do you see the -- your chain operating for the foreseeable 12 months or so?

So as we've mentioned, we have -- we are obviously closing and opening every year. And we've had a sort of a net plus/minus no increase for a couple of years. Now with the negotiations and 20by20 actions, we decided at the end of second half of last year, we decided to do a net closure of 8. So taking out down our level, we're still opening and closing, but we are on a lower level. Now we don't have at the moment a plan to take another sort of net-net step. We are now implementing this. At the same time, obviously, we are sort of balancing between safeguarding market share, which is very important strategically as well as operationally and efficiency, and that's the balance we are trying to optimize now during this year. We may come back -- we may say that we are closing more, but there is no plan at the moment.

Okay. Is there any strategic choices or M&A opportunities that you can make your chain more profitable?

I would say that the way the market is developing, it is a case for consolidation. You have the government. You have the biggest retailer [ICA] with [indiscernible] and then you have 3 smaller chains, of which we are, by far, the biggest. And then you have an online competitor, which is sort of really dominating the market development. It's not going to look like that 2 years from now. Further questions?