Oriola Oyj (ORIOLA) Earnings Call Transcript

Good morning, everyone, and a warm welcome to Oriola's Q3 results webcast. My name is Tua Stenius-Örnhjelm, and I'm from Oriola's investor relations. With me today, I have CEO Katarina Gabrielson; and our new CFO, Mats Danielsson. After the presentations, we open up for your -- for the Q&A. [Operator Instructions] Also, as a reminder, in the Q&A we will focus on the questions about Oriola's business and financial performance. And the webcast will be recorded, and the recording will be available on our website later today. Without further ado, let's go to the disclaimer. So here it is. And now Katarina, please go ahead.

Thank you, Tua. And warmly welcome also on my behalf. This is the agenda for today. It's quite traditional. We will start with the highlights then the operating environment, the segments. And then you will meet Mats for the first time in these sessions, for the financial review before we go to the Q&A. If we then start with how the quarter 3 has been going. Overall, I'm really happy to announce that we have improved the profitability compared to a year ago. The net sales was EUR 424 million, which is up 19%. If we look at organic growth, it's 5%. And that's due to change from the consignment stock to inventory stock in one of the pharmaceutical companies. The adjusted EBIT was EUR 5.5 million, and that's a growth with 25%. And adjusted EBIT excluding the dose Sweden was EUR 5.4 million. The net sales growth was driven by the distribution segment, and that is also the reason why the profitability has improved. So the net sales growth and the lower freight cost is the reason for the improvement of profitability, the main reason. The refined strategy was launched 1 year ago. We announced it then in the webcast a year ago. And we can see a steady progress towards the goals in the strategy. I will also tell here that, even though we have seen changes in the management team during the third quarter, the management team is fully committed to the strategy and the long-term goals that we have in the company. A really important part in the refined strategy is the ERP project, and that is proceeding according to plan. We have in the quarter renewed and harmonized the processes. And we are in the end phase now of finalizing this phase of the project and then, of course, starting the build process. In the joint venture company Kronans Apotek, we can see that e-commerce sales was growing by double digits. And that's improving the e-commerce footprint in Sweden. In Sweden, this is really important since we know that the e-commerce segment is really large in Sweden. It's around 25% of the total pharmacy market. In the pharmacies, we can see that the result -- that volumes was more flat. And that has resulted in flat sales compared to a year ago. Then going to operating environment. The overall operating environment has stabilized. We can see that the consumer confidence in Sweden is on more normal level than in Finland where it's a little bit weaker. The cost inflation which is affecting Oriola mainly on the energy and fuel prices has been slowing down and has been more normalized now during the quarter. We can also see that this is most likely what will happen in the quarter 4. The challenges in the availability of pharmaceuticals continue in both Sweden and Finland as well as in Europe, and this is also something that we predict will continue for the ongoing quarter. The pharmaceutical distribution market is slightly continuing with a steady growth, and that is driven mainly by a good demand in high-value pharmaceuticals. This is a trend that we have seen. And we can also in this case see that this is something that we can -- will [ on go ] for the future. Then going to our segments. Let's start with the distribution segment. In Finland, we can see a stable market share in -- but a small decline in Sweden. The net sales was growing by 23% in this segment to EUR 351 million, and that is a 23% growth. Like I said before, this is because of our customer shifting then from consignment stock to inventory stock. And that means that the organic growth was 5%. We have higher market volumes and also price increases that is then supporting the organic growth. The profitability improved in this segment by 46%, with adjusted EBIT reaching EUR 5 million compared to EUR 3.5 million a year ago and, like I already stated, mainly depending on net sales growth and also lower costs year-on-year. I'm really pleased to see that we're also now building for the future in this segment. During the quarter, we have signed new and also renewed existing distribution agreements. And that will be visible also for the future quarters to come. And since we have a -- in the strategy that we will work more cross-market, I'm also really pleased to say that we during the quarter have signed a cross-market customer with volumes that will start during quarter 1 in 2025. In Sweden, we have entered a new sales channel, and that's the optician channel. And that gives also the opportunities for the wholesale segment. Since we have quite many products in the wholesale segment, that is then also a possibility to sell in this new channel. Then going to the wholesale segment. Wholesale segment is then consisting of the traded goods, the OTC products, the parallel import and the special licensed medicines as well as advisory services that we then have in Oriola's portfolio. The long-term strategic goal is to grow the wholesale business in this segment. The net sales was flat at EUR 74 million. And the profitability was also on last year's level. We can see that the Finnish wholesale business was stable, but the volume in Sweden was declining. We are in this segment now building for the future. And also in this segment, I can say that we have added new products and suppliers in the portfolio. That is then something that we will build on for the future. We also gained new listings. And that means then that we have new products coming into the customer portfolio -- and also introduced new products in the Finnish market. In Sweden, I'm really pleased to say that the Dexal brand has now been introduced. And that's the first time that we can see that we are taking some products from Finland and introducing them to Sweden. And that is then one part really important for the strategy growth in this segment. A year ago, we also announced that we should sell all shares in Svensk dos AB to Apotekstjänst Sverige AB. We signed that contract in October 2023. And I think all of you also remember that, during the spring, we were also announcing that the Swedish Competition Authority have announced that a sales to Apotekstjänst Sverige AB was prohibited due to negative effect of the competition in the market. It has also been announced that Apotekstjänst Sverige AB has appealed this decision. And during the autumn, there has been a process ongoing; and we're waiting for the outcome of this process in November. And this means that we will come back to this, of course, when we know more of the outcome. I will also tell you here now that there is one more instance that you can appeal [ to ], so it might be so that we'll take a little bit longer before we have really finalized this process. Oriola is still committed to sell this business to Apotekstjänst Sverige AB, but we are in the same time also, of course, considering other options if we get a negative verdict from the appeals, yes. But we will -- exiting the Swedish dose dispensing business because we still see that the tender market structure and dynamics in Sweden hasn't changed. With this, I will then turn over to Mats and the financial view. So welcome, Mats.

Thank you, Katarina. And also from my side, good morning and welcome to this presentation. My name is Mats Danielsson -- started at Oriola in mid-September; have a background in finance; worked in different companies, different industries. And as a CFO of Oriola, I will support and drive the strategic agenda that has been set and communicated already a year ago. But let's move to the quarter 3. If we look at net sales, we had an organic growth of 5%. If we look at the growth in the distribution segment, we see a significant increase. And that's, like Katarina also mentioned, it's mostly due to the fact that there is -- a customer has moved from consignment stock to inventory. If we look at wholesale, the development is flat. We have some -- a small decline in volumes in Sweden compensated then by other areas, so the total development is flat. And the total net sales increase is 19%. Looking at the adjusted EBIT going from EUR 4.4 million to EUR 5.5 million. We had, we have the biggest increase in distribution of EUR 1.6 million, of which EUR 0.8 million is actually the increase of Svensk dos. And the rest is related to lower cost, freight costs and other costs; and also increase in volume. Wholesale is flat and a 25% increase in adjusted EBIT. Looking at the year-to-date numbers. Invoicing increased 6%. Net sales, again have to take into account the move from consignment to inventory, 12% increase. And then the adjusted EBIT year-to-date is increasing from EUR 11.3 million last year to EUR 15.3 million. Of this EUR 4 million increase, Svensk dos is EUR 2 million. Svensk dos -- it's not so that Svensk dos is -- the profitability is improving. We have lowered the cost and kept it on a level where we are not making a loss. So that's the big change. Then the other EUR 2 million is mostly related to lower costs, increased volume. Now also good to mention the adjusted items that we are calculating. We have -- during the autumn, we have analyzed the appropriate accounting treatment of the ERP project. And it's a cloud arrangement, and now we have decided that, that will be -- the cost will be booked as expenses. Mostly we are estimating that -- out of the EUR 35 million that we have estimated the total project to be, that around 90% will be expenses in adjusted items and 10% will be capitalized. We have now also -- due to the fact that we have changed the principles, we have -- from last year, EUR 1.9 million has been through impairment then as a cost, in the quarter 3, of the ERP, the investment -- the adjusted items in the footnote also, EUR 4.4 million. So out of that, EUR 1.9 million is actually related to last year. Looking at the segments. Distribution segment's is -- share of net sales is 81%. Share of adjusted EBIT is 64%. If we look at the adjusted EBIT here, we have the EUR 2 million year-to-date of Svensk dos; otherwise, lower freight costs and other costs and volume affecting. And we have an EBIT margin, adjusted EBIT margin, of 1.3% in the distribution segment. Looking at the wholesale segment. Good to note that the share of net sales is 19%. The share of adjusted EBIT is 36%. If we look at the net sale, it was flat in the third quarter, but it's good to note that we have done a lot of activities. In Finland, there has been new listings, new products. And in Finland, there's a quite stable underlying volume. In Sweden, we have introduced Dexal. A small decline in volumes, which have affected also the net sales growth in total year-to-date; and also has an impact on the adjusted EBIT, if we look at the year-to-date figures of going from -- still going from 7.5 to -- EUR 7.1 million to EUR 7.5 million. And good to note also that we have an adjusted EBIT margin of 3.2% in the wholesale segment. Then we go to the net profit. There was an improvement in the net profit. Last year, we had a impairment write-down of dose Sweden, which impacted, of course, the EBIT. We have now the financial income and expenses. The boxes are very different sizes. The number is quite the same, but we have repaid debt. But that is not really seen in the numbers yet, but that will come because it has been done. The phasing will show that there is opportunity to reduce that a bit but at the same level as last year. Then we have a bigger loss in the joint venture, affecting our net profit and -- compared to last year. So minus EUR 2.3 million this year, EUR 17.9 million (sic) [ minus EUR 17.9 million ] last year. Looking at the cash flow, here we also see that we have a slightly improved effect from working capital this year compared to last year. We have repaid debt of 39 million this year, which is -- has affected, of course, the cash flow. We have paid a bit more dividends than last year. And we are ending up at EUR 83.9 million cash. And we have an operative cash flow that is slightly positive. Looking at the net debt, still on a low level. We have repaid. During the last 12 months, we have repaid EUR 51.9 million of debt. And having a cash balance at EUR 83.9 million currently, we consider that a quite good level, taking into consideration the fluctuations in the working capital that we have. Financial position: No big changes on gearing and equity ratio during the quarter. Kronans Apotek. Kronans Apotek has had a difficult year. The third quarter has been a bit better, if you look at the adjusted EBIT has been positive. Kronans Apotek is a very important strategic partner for us. And Kronans Apotek expects to reach the synergies of the EUR 25 million said earlier, and -- but the integration process has been more complex than expected, especially related to the ERP integration. And that will therefore take a longer time than anticipated originally. The outlook. We are keeping the outlook and expect the adjusted EBIT to increase from the adjusted EBIT for 2023. That was EUR 19.5 million. Thank you.

Then looking at the key takeaways that we would then want you to remember from this presentation. You can say that -- I'm really happy to say that we have improved the profitability in this quarter. We have also solid performance then year-over-year and -- year-to-date, sorry. And we are also then keeping the guidance. I also really want to now make sure for all of you that we are, like, in the management team really committed to deliver the strategy that we then announced a year ago. And we are, like, progressing towards the long-term goals that we have, with the full commitment even though there has been changes in the management team. So this is the key takeaways. And with that, I will say that we then go to the questions.

Great. So thank you, Katarina and Mats, for your presentations. We have a few questions on the chat. Let's start with those. And just a reminder to everyone that please keep on sending the questions throughout -- through the chat and also that we will focus on the questions about Oriola's business and financial development. And questions relating to Kronans Apotek, we will answer but only within a limited scope.

So the first question that we have is relating -- or there's a couple of questions relating to the ERP, so I think, Mats, these questions will come to you. So why were the ERP-related costs so high compared to Q2? And should we expect similar level going forward?

As mentioned, there was -- in quarter 3, there was EUR 1.9 million that was actually an effect of last year's. That was booked at -- as an investment or capital expenditure last year that we now booked as a cost according to the new principles how we are going to book the ERP costs.

Okay. And then following up on this one. I think you mentioned this already during the presentation, but I think it's good to repeat it. So you have earlier reported that 1/3 of total ERP costs will be handled in P&L, and rest in balance sheet. Is this still valid?

Now we have analyzed the agreements that we have. And we have discussed and analyzed and we have concluded that it's a cloud arrangement. And then we -- therefore, we need to book all those costs not as capital expenditure but as expenses. And there will be a small part just about 10% that we will be able to book as capital expenditure, mostly related to on-premise applications that we will build on the ERP.

Good. Thanks. And then there's a question relating to the dividend. So Oriola has previously said that about 2/3 of net profit will be paid as dividend. What is the net profit from which this ratio is calculated? Due to Oriola is reporting many net profit figures.

That's a good question, yes. And I don't remember exactly right now, but let's come back with that one and answer it in a proper way so we don't say the wrong. Because I agree. There is a lot of different figures. And let's make also, for the future, easier for everyone to understand how we calculate the things. And...

Thank you. And then there is a question on the Kronans Apotek synergies. "So on Kronans, does your comment mean that full synergies will be realized later than the earlier communicated end '25?"