Oriola Oyj (ORIOLA) Earnings Call Transcript

Good morning, everyone, and a warm welcome to Oriola's Q2 Results Webcast. I am Tua Stenius-Örnhjelm from Oriola's Investor Relations. With me today, I have our CEO, Katarina Gabrielson; and CFO, Timo Leinonen. After the presentation, we open up for your questions. You may 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 customary disclaimer that we all should be aware of. And now without further ado, Katarina, please go ahead.

Thank you, Tua. Good morning, and welcome, everyone, also on my behalf. Today, we will discuss our second quarter results. I will start with the highlights and connections -- and comments on the operating environment; and then Timo, will take you through the financials. And before the question-and-answers, I will give a couple of closing remarks. So let's start with the highlights. I'm very pleased to say that the quarter 2 -- in quarter 2, our Distribution business has performed very well with stable market shares. This has supported a solid net sales growth of 3% to EUR 407 million measured in constant currency. Profitability in the second quarter declined from the previous year to EUR 3.4 million. This decline was due to the low volumes in the Swedish Dose dispensing business. But when looking at the cost side, we can see that our operating expenses were below last year's level. We have been restructuring the Swedish Dose business to minimize costs, and our efficiency in the Swedish operations has improved year-on-year. In the second quarter, we booked a positive contribution of EUR 0.2 million from Kronans Apotek. The integration has proceeded, which brings synergies savings and the customer inflow in the pharmacies was good in the second quarter. Like discussed in connection with the quarter 1 report, we have a clear strategic direction to focus on our core business and the profitability improvement in the core business. Our strength is in the Distribution business, which has performed strongly in the first half and where we have new customer onboarding in the second half of this year. On top of this, we also continue to focus on the long-term transformation of the company, which I will comment on in the closing remarks. Then a few words about the operating environment. To start with, we saw that the overall market demand in quarter 2 was good, both in Sweden and Finland. Consumer confidence is currently at a very weak level due to cost inflation and raising interest rates, as well as the weak Swedish krona in Sweden is also affecting. Nevertheless, this economic uncertainty or weak consumer confidence has not impacted the pharmaceutical markets. Typically, in an economic downturn, the traded goods would be impacted first and then the over-the-counter products that you also name OTC. The availability of some pharmaceuticals, which has been an issue since the last year, saw a slightly improvement during the second quarter, but still the challenge remains. On the cost side, energy and fuel prices have stabilized, just like the overall cost inflation, but on a high level. Then let's move on to look at the markets development. The pharmaceutical wholesale markets contributed a healthy growth, both in Sweden and Finland. In value and local currency, the market in Sweden grew by 10% and in Finland by 3%. Our market share was stable year-over-year. In Sweden, we had a market share of 45% and in Finland of 44%. In dose dispensing, the total market size in Sweden increased by 10,000 patients, while the markets in Finland was flat at 100,000 patients. As communicated earlier, we are now at a low point with regards to number of patients in Swedish dose business and serve currently some 11,000 patients, while the volume in Finland has remained flat at 30,000 patients. The decline in Sweden is related to the tenders that we lost last year. The regional customers in Sweden organize public tender processes from time to time, and we continue to participate in these. The Swedish Dose dispensing business continues also to focus on new customer segments to develop the business, and this is already visible in new contracts, but there will be no fast recovery back to high volumes. We estimate to continue with this level of patients in quarter 3 and quarter 4. Significant volumes growth is a long-term target. With this, I'm ready with my first part and would like to hand over to Timo, please.

Thank you, Katarina, and good morning from my part as well. So when going to the finances, so let's start with our profit and loss account and invoicing, net sales and adjusted EBIT. So as Katarina already mentioned, so solid performance in Distribution businesses and significant currency impact in our invoicing and net sales. So when seen in constant currency, so invoicing was growing 6% and growth was mainly coming from our volume business, distribution of medicines. And when going to the net sales, so it was declined because of dose dispensing business and currency fluctuation, but grew 3% in constant currency. Adjusted EBIT declined as expected to EUR 3.4 million due to dose dispensing business and more closely about EBIT on next page. [ If ] seen adjusted EBIT, so we were, unfortunately, behind last year's figures in second quarter and year-to-date as well. And if just seeing kind of technical changes, so impact of weak Swedish crown was EUR 400,000 during the whole first half of the year compared to numbers in constant currency. And then other thing we had EUR 0.2 million adjusting item related to operational changes in companies. But having said that, -- so I have to mention that decline in EBIT came solely from dose dispensing business. And the rest of the business portfolio, as a whole improved their profitability. And to improve our profitability we had, and we have different actions going on, including strict cost control and price increases in different services and, of course, the efficiency in operations in general. When going over to the profit of the period, so profit for the period declined from the previous year to EUR 1 million. Profit was burdened, of course, by the lower EBIT, as mentioned before, and it came mainly from the -- or solely from Dose Sweden. And of course, the rise in interest rates had an impact on our profit for the period. Having said that and also what you can read from the report, so we booked a positive contribution for the first time from Kronans Apotek, after the merger in last October by EUR 200,000 compared to first quarter minus EUR 500,000 and EUR 2.8 million during the last quarter of 2022. And as said in the report, so we made a decrease in fair value of Doktor.se stock valuation because of the fair value booking model and booking had no impact whatsoever on profit and loss account. And as the profit of the period declined, declined EPS as well. When coming to the cash flow, so in Q2, cash flow from operations were positive by EUR 19 million. Having said before as well, the most material thing is the fluctuation in net working capital in our cash flow. And now the net working capital is on long-term average level. So having said that though, we see that it is kind of normalized from the very good end of 2022. And when seeing the cash flow as the whole, so we have to take into account that we paid dividends of EUR 10.9 million during the Q2, which is obviously [ seen ] in our cash position as well. But having said that, so liquidity remained and cash position remained good during the whole second quarter of the year. Then coming to the net debt level. So as I said already before, so I say that net level -- net debt level now is under normalized level after the exceptional good year-end on 2022. Net debt was EUR 9 million at the end of the June. And the most important thing, as I said, in the cash flow as well is the fluctuation of the -- of our net working capital, which affects to the cash position in that sense. And just to [ inform ] that if you are kind of seeing the comparable number from the last year, so it includes trade receivables and cash position also from the discontinued operations, which were at the end of June 2022, the trade receivables were EUR 66.4 million, and they had cash in EUR 42.5 million in our balance sheet during that time. Then when seeing the balance sheet as a general, so I see that it remained strong. We have room to invest if needed. And of course, it's quite stable, excluding the fluctuation of net working capital, which is normal and was mentioned before as well. We have a long-term target to have our adjusted gearing lower than 70% when you are taking into account that [ sold ] trade receivables are kind of seeing as a net debt or debt item. And the comparable number for that one was around [ 50 ]. So we were well in line in our long-term target. And when talking about the decrease of the valuation of Doktor.se shares, so that EUR 19.5 million is visible in long-term assets in the balance sheet or asset side and then in the equity of the other side of the balance sheet. And just to mention that Oriola's ownership in the -- shares of Doktor.se has not changed during the reporting period, only the valuation due to fair value valuation method. A few words about Kronans Apotek, meaning official name Swedish Pharmacy Holding company. The net sales was to the second quarter roughly EUR 290 million, and it was slightly below the last year's level. Of course, a weak Swedish crown impacted also this reported number. EBITA was EUR 3.6 million compared to the EUR 1.7 million in the first quarter of this year. So significant improvement there. And seeing the adjusted EBIT was EUR 2.3 million compared to [ 0 ] in the first quarter and minus EUR 2.8 million in the fourth quarter of last year. So we see the improvement there as well. And the realized synergies for the second quarter was EUR 2.5 million. We see that the integration of the company since Kronans Apotek is going in the right direction, and of course, the profitability is improving after a little bit slower start than expected when the JV was [ formed ]. And as I said before as well, we booked EUR 200,000 positive contribution from the shareholding to our profit and loss account compared to minus EUR 500,000 in the second -- first quarter and minus EUR 2.8 million in the fourth quarter. So basically, in that sense, we are improving as well. And having said that, so I have to remind that we are committed in the long-term ownership, and we see that on the long term, this will bring value to our shareholders. Then finally, coming to our outlook of 2022 -- sorry [ '23 ]. So our guidance remains unchanged, and we expect that adjusted EBIT is to remain on the same level as 2022. And as Katarina also mentioned, at the moment, we are at the lowest point in Dose Sweden number of patients, and we expect it to remain roughly at the same level now. And as we stated before as well, so for the decline in the profitability came solely in the beginning of the year from dose dispensing business. So it means that all the other businesses have been improved. So what in general worries us is that if Swedish crowns exchange rate is continue to weakening, so of course, it has an effect to our reported numbers. Not that much in real business because most of the cost and sales are done in Sweden in Swedish crowns. But -- and also, we are kind of monitoring quite closely the consumer confidence what is happening, especially in Sweden. If we are thinking of the positive things, what we see. So when we look forward, we expect that pharmaceutical distribution market is continuing to grow. And as Katarina mentioned before as well, our focus and strength is in Distribution business, and it has been performing strongly during the first half of the year as well, and second half of the year will be supported by the new customers we have won, and they are starting to bring [ very good ] news, as well during the second half of the year. We also have implemented some price increases in Q2 and during the beginning of the year. And we are continuing to do so forward going forward as well, and also in the businesses, so we are maintaining a strict cost control throughout the company. And based on those, so we think that despite of the dose dispensing business, where we have had challenges and we have challenges, so basically, the other businesses are improving. But that's roughly about the numbers. So now back to Katarina?

Thank you, Timo. Before we conclude the presentation, first, a brief update on the sustainability. Our sustainability work has been guided by ambitious long-term goals and a systematic approach to development. Therefore, I'm really, really happy about the latest achievement in the EcoVadis assessments that as we -- that we have got. We have been awarded the gold medal in this rating and the result places us among the top 5 performing companies worldwide. In the previous assessment in 2021, we got the silver medal. So our performance has improved. This is a great recognition and demonstrates our commitment to sustainability. The regulations for sustainability reporting are also getting stricter, both in EU and on a global level. The new reporting standards, which make sustainability reporting mandatory are expected to be published in August, and we are already preparing to be [ comply it ] in 2025. Then last, a few words on our strategic direction and key priorities. This is a recap of what we said in connection with the first quarter report, but I feel that this is an important message for us to convey. We have a clear strategic direction. We focus on our core business and profitability improvements. Our strategy work continues with scenario work on our portfolio of value-added service -- smaller businesses, as well as the core businesses. To ensure sustainable growth and shareholder value, we are further developing our commercial and supply chain excellence, while ensuring profitability, efficiency and collaborative culture. As you might remember, our commercial operating model focuses on collaboration across the markets, and I'm very, very pleased that we are on the right path. We have seen good progress with the signing of new distribution contracts onboarding during the second half of this year, as Timo also mentioned. In addition to this, we have done several actions to enhance our key priorities. We have strengthened our commercial capabilities by sales trainings, focusing on account management to support a unified customer experience. We have also implemented a new customer segmentation, which will help us to focus and increase our understanding of how we can create relevance and growth. In supply chain, we have continued the work on simplifying and harmonizing our processes, including core IT systems. In addition, we have improved efficiency in deliveries through improved demand-supply planning and tighter collaboration with the sales teams. And our priority is to develop a strong culture. And during the second quarter, we engaged with our -- all our people in Sweden and Finland to renew Oriola's value description to form a strong base for a collaborative culture. Lastly, now in this presentation, I want to give you a summary of our second quarter. Our net sales grew by 3% in constant currency. This growth was driven by our core business, the distribution of pharmaceuticals and traded goods. Following a good market growth and stable market share, we saw solid development in both Sweden and Finland. Profitability was burdened by Swedish Dose business, where the volumes have now reached the lowest point. On the cost side, our operating expenses were below last year's level. We have adjusted the cost base in those business by restructuring, improved efficiency in Swedish operations and maintained strict cost control. Our guidance remained unchanged. We expect the pharmaceutical distribution market to continue to grow. Our strength is in this Distribution business, that has performed strongly during the first half of the year and where we have new customers onboarding during the second half. We continue with price increases and strict cost control to mitigate the high cost inflation. With this, we are ready now with the presentation and open up for your questions. So I think there has [ come some ] questions, Tua. And please, Timo, if you join me here.

Certainly. We have a number of questions, and if there's any one -- any more questions coming in, let's take them as well. So like we did in the Q1 webcast, I think we start with the questions concerning the joint venture, and then we move on to the questions concerning Oriola. So there are questions related to the Kronans Apotek and their numbers. So adjusted EBITDA -- EBITA of JV for H1, 2023 was EUR 5 million, which is EUR 10 million less than EBITA of the joint companies in H1, 2022 when it was EUR 15 million. What kind of operative costs have increased by EUR 10 million?

Well, if I start, so basically, of course, there is quite a lot of integration work going on, and that means that basically, when coming to IT issues stems in general kind of form into a new company. And so there is kind of overlapping costs, which are coming down, as we see in the synergies as well. But then, of course, at the beginning of the year, so basically, the basic business has been on the lower profitability level, and it used to be before, and that is improving as well.

Okay. So when do you expect JV to reach EBIT -- EBITA level of joint companies, EUR 30 million in 2022?

As stated before, so we are not giving comment on the kind of forward-looking on JV, and that's the question that has to be raised with the management of the of the Kronans Apotek.

Okay. And relating to this, so when are you expecting more material improvement in JV's profitability, I think this you answered [indiscernible] already.

Yes. The same question, so that one is not new.

Yes. Good. So then what kind of costs are classified as onetime costs in JV?

So basically, what they are only seeing that is going to the integration, for example, when they have to integrate the IT systems, and then there has been kind of a double premises costs and that kind of thing. So when they are kind of closing down certain premises and basically, they are not using it anymore. So that kind of course, but not as long as they are using the premises. But basically, kind of normal integration [ or ] overlapping costs in that sense, which is generated when they are doing the integration work.

Okay. Relating to this, how do you calculate synergies generated on JV level? Is it included directly in Oriola's P&L? Or is it reflected in JV's [ EBITDA ]?

It's reflected solely in JV's P&L. So basically, we are not calculating. So we are coming taking kind of official numbers from the profit and loss account and half of that is coming, as a contribution from our profit and loss account, which means that when we are kind of booking the positive contribution, so taking out all the kind of -- or kind -- or including all the kind of one-off items and that kind of things in kind of reported profit and loss account. So basically, it has had a positive or the kind of net profit has been profit -- positive during Q2.

Okay. And then for the time being, the last question relating to JV. So has JV any other debts than IFRS 16 debt in its net debt amount? And if yes, what kind of debts and how much?

They are having other debts as well kind of normal kind of bank loans and stuff, which we kind of transferred from our part as well to the JV when it was formed. And then, of course, they are kind of using as said, they are also selling of -- financing [ their ] activities by selling trade receivables and so on. But basically, we are not disclosing anymore kind of on details, what they are having there. But there is other debts as well than just IFRS.

All right. Thank you. Then we move on to questions related to Oriola. And there are a couple of questions, which are overlapping, so I'm trying to combine those, those while we -- well, we take the questions. So there's questions relating to the new customers. So are your new customers starting to contribute your sales and EBIT already in Q3 or more in Q4? And relating to this, there is another question, how much new customers will support invoicing in H2? So Katarina.

There is customers coming in both Q3 and Q4. And of course, since there is also long lead times on this one, you can say that when you start to work, that also means that in the end of the year, there will be even more than in Q3, but also already in Q3. The numbers we are not disclosing because we haven't really told the contracts and so on, but we will come back and hopefully be able to show a little bit more about this one after vacation period.