Oriola Oyj (ORIOLA) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. My name is Robert Andersson. I'm the CEO of Oriola. Welcome to Oriola's Half Year 2020 Financial Reporting. We are doing this as a webcast, which means that you can type questions at any point in time. We will try to answer them as well as we can at the end of the session. When we met about 3 months ago, talking about the quarter 1, we had an exceptional period of about 2 weeks at the end of March, where we had experienced significant holding of medicines and pharmaceutical and health care products. We were -- had experience of a couple of weeks of lockdown in our societies. We didn't fully understand how long it will continue and what the impact will be. Now with the benefit of hindsight, we can see that obviously quarter 1 was in a way, positive for us as a company. The market was boosted by the holding. And then quarter 2 has been very depressed. The lockdown has impacted consumer behavior significantly. People have not been in the shopping malls, haven't been behaving in a normal way. What we didn't understand at the end -- at the end of quarter 1 or beginning of quarter 2 was that the -- basically healthcare systems would be, to a large extent, closed down or focused only on serving COVID patients. That has meant that the -- well, the elective healthcare has been very low -- on very low levels during quarter 2. In Finland, based on the key statistics, we've seen about 1/3 of the elective health care has been -- the market has been about 1/3 down. In Sweden, it's been down about 50%. This has meant that operations have not taken place. Noncritical operations haven't taken place. People haven't been going to -- for dental, surgery or dental care for that matter or visiting medical centers. All of this has resulted in less prescriptions being written, less consumption of medicines, a lower market. In this market situation, which has, by the way, probably been, I can't tell for the rest of the world, but in our 2 main markets here, it's been a significant impact on -- resulting in a significant impact on both sales and obviously, profitability. In the societies, we have an obligation to serve the health care system and patients with safe supply of medicines. Our focus throughout this period has been on our employee safety, being able to run our operations and secure and safeguard availability of pharmaceuticals throughout in any situation. This has, in fact, resulted in higher operating cost for us. The weak result in quarter 1 -- sorry, quarter 2, obviously puts additional pressures on us to deliver on our cost control, on our strategic programs of customer excellence and 20by20 savings. This was what I was referring to. So all in all, we call this a lost quarter. Going to the key figures. Invoicing was down by 4.7% year-on-year and 7% quarter-on-quarter. Net sales was down 2.8% year-on-year and 5% quarter-on-quarter. Normally, as you -- who follow us know, we have been typically reporting quite often double-digit growth numbers. So the sort of the slowdown is quite significant for us. And to add insult to injury, it's not just been a slowdown, but it's also been a high volatility in demand, ups and downs, which, from a cost perspective, from serving the market doing or -- having effective, efficient work has been quite negative. We were reporting quite good numbers during -- in quarter 1, at the end of quarter 1, now in a way with this lost quarter, as I call it, we are back to, in a way, square 1. We are back to where we were at the second last week of quarter 1, you could say. Now if we go a little bit deeper into what has happened, we can see here now the quarterly development over the last 6 quarters. We were going, developing positively during the first half of 2019 and had a -- had then a poor quarter 4. There were a number of write-down issues and also cleaning up of retail stock. And then we bounced back in quarter 1 of this year. The bounce was partly boosted by COVID, but not so much because it really impacted us only for about 2 weeks. And now then this dramatic shift where we are in a way down to a small minus. When we look at the numbers and we have now been able to calculate and assess the impact of COVID, we can say that we would have had 2 quarters of year-on-year positive development had it not been for COVID. So quarter 1 was, as said, slightly impacted, but clearly better than quarter 1 '19. Quarter 2 would have been better than quarter 1 -- than quarter 2 '19 had it not been for COVID. If we look then at the deltas year-on-year, we can see consumer and pharma have been mostly hit. Consumer, most of our business areas quite significantly negative. For Pharma, it's a combination of COVID impact and our contract base which is slightly worse than a year ago. And for Retail, it's been a sort of a little bit mixed bag, where we've been selling a lot of hand sanitizers and a lot of face masks, but the costs to serve has been increased quite significantly. And all in all, this leads then to a 0 or a slight minus. Now if we go over to our operating environment, what has happened in our markets, dive a little bit deeper into that. First of all, the online, we were saying, I think, 3 months ago that we've seen a big uptake in the online market. Now that has been confirmed month after month now. At the end of quarter 1, we said quarter 1 online represented about 11% of the total market. Now it was close to 18%, it was 17-plus percent in quarter 2. Online market grew by 69%. It's very clear. This is where the growth comes -- has come in this situation. And I believe if we assume that the worst is behind us, online will not grow in the same way, but it will probably level off on a -- clearly on a higher level than before. Market share-wise, we had a pretty good quarter actually for consumer commercially. We gained market share in online, and we kept or slightly improved market share in our brick-and-mortar operations. Our biggest competitors actually have been coming down year-on-year, and the clear winner is Apotea, which has obviously benefited from the online trend. If you look at the product mix or the segment mix in the market, we see the same thing happening, which has been happening. The same trend that has been developing over a couple of years that RX is taking a smaller part of the whole market, and the growth is really coming from traded goods, which is, again, a phenomenon which is closely linked to the online growth. A few words about how the pandemic has sort of impacted, particularly digitalization. Obviously, online is part of the digitalization development. And here, we said, the online market grew by 69%. In this market, we managed to grow by 111%, which I think will -- is sort of showing that we have our sort of -- our capabilities are now in place to grow, to deliver on online -- on the online demand. We also have seen now that during quarter 2, a much wider group of people have started to utilize online. Previously, it was mostly young people. Now you see retired people, the typical sort of pharmacy target group also being much more digitally savvy. 82% of consumers start researching online before making any purchase. What we've done and what we have managed to, obviously, do to execute on our strategy during quarter 2 is to build a Click & Collect service, which is today covering 286 out of our 320 plus pharmacies. This has happened faster now due to the market situation due to COVID. And this is obviously something where we can have a competitive edge over our worst online competitor because they cannot do a Click & Collect, at least currently. They would have to partner with somebody. Then we've also seen that the digital health care market has grown very significantly, and our response in this area was to invest further into Doktor.se around, which was closed during quarter 2. Doktor.se is the second largest online digital medical center or, yes, doctor service, digital doctor service in Sweden, and they are -- they have grown phenomenally. Looking then at the wholesale market, the market growth in Finland, negative EUR 3.8 million is more or less in line with our understanding. I do not quite understand the reported market figure for Sweden. I think it is a statistical -- there is a statistical inconsistency somehow. There may be more expensive medicines related to the COVID situation. I think there may also be inventories stocked up in hospitals and so on, which haven't been sort of doing the -- taking care of the elective care. But this is -- will remain to be figured out. Our market share has declined a little bit year-on-year, but this already has happened during the first half, and it's mostly related to the loss of the Orion non-med products that we have been reporting earlier on. In Sweden, again, we have been growing market share, which is mostly related to the fact that we won MSD, MSD in quarter 4 last year. If we go then to the retail market, the patient -- the dose patient market has grown to 225,000 patients. Our -- we are the market leader here with 43% market share, as we had already a year ago, in Finland market is currently about 55,000 patients, our market is more or less stable at 40%. We are supplying 1/4 of the traded goods and OTC products for the market in Sweden, not just Kronans, but Apotek's Group and Lloyds and Apotea, among many others. For staffing services, quarter 2 has been challenging. The pharmacies in Finland have not been, as mentioned, visited by as many customers as normally. During quarter 2 last year, we served 225 pharmacies. This year, it was 159 pharmacies. I think the pharmacies have not, well, due to lower traffic, they haven't needed as much staffing services as before. I won't go through this. This should be familiar to you or would be familiar to you. But a few words about the Consumer -- our Consumer business area and quarter 2. I mentioned that we have been doing well in the market commercially. We have been growing and keeping market share. The overall net sales decreased by just under 2% to EUR 185 million in constant currency. The volumes decreased significantly, and significantly particularly in brick-and-mortar. The demand continued to move to online, as said, and we grew by 111%, which is an achievement in itself in a market, which grew by 69%. And the share of OTC traded goods, the most profitable products, decreased. If you look then at the adjusted EBIT numbers, we talked about the weak quarter 2 -- quarter 4, sorry, last year, and we had some write-downs and other negative impacts impacting that market. We had a boost -- boosted quarter 1 due to COVID, about EUR 1 million positive there and we had about EUR 0.4 million negative now in quarter 2. Basically without COVID, our understanding is that we would have had a positive improved quarter-on-quarter and a positive year-on-year development in EBIT. Pharma, net sales decreased by just under 5%. The sales decrease was driven by the lockdown. The elective health care scale-down and changes in customer agreements. And the profit here was clearly negatively impacted by the increased costs related to securing the distribution and the changes in our customer agreements. For Pharma, our understanding is -- analysis is saying that the quarter 1 was very slightly positively impacted by COVID. Quarter 2, on the other hand, was quite a lot negatively impacted by COVID. And we would have been about flat quarter-on-quarter, Q1/Q2, this year and slightly down quarter-on-quarter, year-on-year had it not been for the COVID impact and slightly down year-on-year is mostly related to the changes in the customer contracts. Then for Retail, sales actually increased, which is positive. It was driven by hand sanitizers and masks and by dose-dispensing patients, actually growing now in Sweden. We had a situation during April and May when our number of dose patients in Sweden actually declined, which was also due to COVID because actually these are typically people, old people, with a lot of -- a number of different diseases that they have been treated for. And the market for those kind of people declined actually in Sweden for natural reasons. For Retail, we've also seen high operations costs and the decreased demand for non-COVID products. People haven't been buying health and beauty products during this particular period. For Retail, we also see that we would actually have been -- if we eliminate the COVID impact, we would have grown quarter-on-quarter, and we would have grown year-on-year in terms of adjusted EBIT. I'll skip these because basically we have looked at them already. But if we jump into the profit for the period and the earnings per share, profit for the period we've sort of talked about the adjusted profit already. So the profit is obviously following this with a negative EBIT of EUR 0.3 million in quarter 2. Adjusted EBIT, we reported a loss of EUR 1.6 million after mainly financial expenses. This converts then into a minus EUR 0.1 (sic) [ EUR 0.01 ] earnings per share number. Cash flow wise, it has been a challenging quarter. Quarter 2 was at the end of quarter 1 and beginning of quarter 2, the basically the CP market dried out completely. There were about -- a period of about 10 days when it was impossible more or less to roll a CP or sign a new contract. During that period of time, we have taken the opportunity to renegotiate our debt structure, and we have now a much higher share of term loans compared to CP than we had before. I think this is a sound development for us. The quarterly cash flow was basically breakeven in quarter 1. And in quarter 2, a EUR 9 million positive despite the challenges in the marketplace. I think this is reasonably good quarter 2. Last year was boosted by sort of the rollovers from quarter 1 to a large extent. The change in cash. For the first half, we had cash at the end of quarter 4 '19, we had about EUR 71 million. We've had a positive cash flow from operations, EUR 8 million. We've had a negative of EUR 17 million from investing, which is mainly related to normal CapEx that we have and then the Doktor, SEK 50 million in the Doktor shares in securing our position in Doktor. And then the quite significant increase in financing activities, which is related to what I talked about, sort of the restructuring our debt structure with about EUR 70 million new term loans and then we will ramp down the CPs. A little bit to sort of get to a more healthy balanced cash situation, but -- and that will happen normally during the course of the rest of the year. When it comes to interest bearing debt, you can see that we are flat year-on-year. We are a little bit up quarter-on-quarter. Basically, the explanation is we have more cash. We have more debt, but the net year-on-year number is flat. And no drama as such involved in that. Then summing up our lost quarter. The pandemic has really impacted consumer behavior very significantly and the elective care has also been impacted, I would say, almost dramatically in some places. This market has been difficult. The market situation has impacted our sales and profitability quite negatively. I would almost say that the entire loss of sort of the quarter was related to COVID. The pandemic, on the other hand, has boosted the digital development, which we see as a positive thing. We believe that we will continue. It's not a sort of something which will end when we go back to normal or when we are back to normal. We will take this opportunity to develop our business in a digital direction. Our societal responsibility to secure operations and safeguard availability of pharmaceuticals has resulted in high costs for us during the quarter. But I think we can also be quite proud on what we have achieved in terms of delivering on our purpose, Health for Life. Medicines have been delivered. People have not been suffering because of lack of -- because Oriola couldn't deliver a product. Products have been delivered and -- safely to the patients to the extent that they have been able to need or consume them. And against this background and with the sort of insight into how the quarter developed, we had a very difficult May, month of May. We were declining in April. We had a difficult month of May, but we saw a good bouncing back in June. We reiterate our guidance, our outlook for 2020 and say that the adjusted EBIT on a constant currency basis is estimated to increase from the 2019 levels. So with this, handing over to Katja, who is helping us here with the Q&A session.

So here we go. Thank you all for the questions so far. The first question comes. What does it take for your online pharmacy business to turn profitable? And when could we expect this to happen?

So one of the things that has already happened is that we get scale. We have been subscale. We are now with this growth of 100-plus percent. We are in a different situation. We can -- it's more of an industrial operation than a kind of a small-scale operation. We have just made a decision to invest into a higher level of automation for the packing of the online products. And what also needs to maybe be understood is that during quarter 2, online has been also behaving in an extreme way. People have ordered 1 pack of paracetamol to be delivered to their home door. Nobody can sort of make a profit out of that. And now I think when we go back to a more normal behavior in the market on a higher level, we get better automation in our sort of back end. It will definitely show in better numbers for bottom line for online.

So then let's go to Enkoping. When do you expect to finalize the ramp-up and rates targeted efficiency in Enkoping?

So Enkoping ramp has been negatively impacted by the COVID situation. We haven't been able to run our programs as we were planning pre-COVID. I've said a few times that we have been -- our responsibility is to deliver medicines safely, and the focus has been on doing that during quarter 2. Now when we are moving back to normal, we are obviously able to put more efforts into the ramp. We are delayed compared to where we wanted to be, but I would still say that we -- my understanding, my -- well, my best understanding is that we will be -- the ramp will be done by the end of this year. We do not necessarily have the efficiency yet at the end of this year, that will go into the first half of next year. But the ramp itself will bring efficiencies. And efficiency, you could say, is something we will continue to trim throughout times going forward.

There's more detailed question on that same area. It was mentioned that in your report, you didn't mention Enkoping at all in the Pharma segment numbers. Did Enkoping ramp-up have some effect on weak Pharma Q2 profitability? Could you bring us up to speed on what are your own expectations? Well, you kind of mentioned that already what our expectations on the ramp-up in H2 '20.

So Enkoping, yes, we had -- as I think I mentioned, I have said, we had we had quite significant additional costs, both in Mankkaa, but particularly in Enkoping during quarter 2 to the tune of about EUR 2 million versus what we were planning. So not a good quarter for Enkoping, and that's obviously reflecting in both Pharma and Retail numbers.

Then could you give us some more color on how the changes in customer agreements affect profitability in Pharma?

Well, there is -- there are 2 main components at the moment, I would say. One is the Orion non med, which we have been as said talking about, we haven't been yet able to compensate for the loss of that. We have a basic agreement with 1 customer that they will come -- become our customer, 1 major pharma company, become our customer and here, again, the COVID has impacted the time with which we have been able to progress here. The other impact is 1 other customer, which we have not announced, which we lost in Finland from the beginning of this year. Our plan, obviously, is that and our ambition. And something we will do is, we will replace the Orion non med, and we will replace these other customer with other -- with new partnerships and customer relationships. But in the meantime, it is affecting Pharma negatively.

How has the customer behavior developed in July so far?

So July, we are definitely -- I mentioned already. Now we saw June, June bouncing back, particularly from mid-summer onwards, partly boosted by good weather in June when people were buying sunscreen lotion and probably some of the sort of the reserves of Burana and Alvedon have been consumed during quarter 2. So clearly a different market now compared to, say, April or May. I would say that the pharmacy market in Finland is almost back to normal. The pharmacy market in Sweden, volumes are almost back to normal, but the channel shift is sort of still not what it was a year ago. Online is a much -- takes a much bigger share of the market.

In terms of EBIT, you are now EUR 3 million below last year's level in H1. You are guiding for higher EBIT year-on-year, while COVID-19 has delayed the ramp-up of Enkoping, which implies that we are going to see more -- see, savings more into 2021. How are you going to grow your EBIT in 2020?

So yes, we are behind last year. On the other hand, we had a -- last year, we had a reasonably good quarter 3. We had a really weak quarter 4. On an average, average last second half of last year was not good. Our assumption is that the worst is behind when it comes to COVID in our 2 markets. However, if there is a significant second wave, the market will again be different. And -- but that we don't know, nobody knows. When it comes to Enkoping, I mean, we have been ramping. We have been ramping more slowly. We are a little bit delayed compared to what we were hoping for at the beginning of this year. But it's not so that everything would have been stopped, and nothing is happening. Enkoping is in much better shape now than it was, say, a year ago, and we're starting to now to see the reap the benefits of the ramp and the efficiency improvement activities that we have been conducting there. So that's the -- the market returning to normal. And Enkoping performing better are cornerstones of the better result in the second half.

Due to the COVID-19, sales have continued to move online. But you said that change in consumer behavior also impacted negatively the growth of the online sales in Q2. What is the reason behind the slower online growth?

No. That was a misunderstanding, I would say. COVID impacted consumer behavior sort of -- people have not been going out. People haven't been going to shopping malls. People haven't been going. Well, people have been told to stay home basically. They bought pharmaceuticals at the end of quarter 1, and they've been staying home then during quarter 2. What they have done, while staying at home is clicking and ordering 1 pack of paracetamol to their home door, and that has happened in, so the online has been clearly boosted. And so I don't -- I think there was a misunderstanding in the question somehow. Online has clearly been benefiting from the phenomenon from the market in quarter 2.

I think that clarified it. You seem quite upbeat regarding the underlying situation ex COVID-19. Just to be clear, how significant COVID-19 headwinds do you still anticipate in H2?