Oriola Oyj (ORIOLA) Earnings Call Transcript & Summary

Welcome to this Oriola Corporation Financial Statement 2020 Info. My name is Tuula Lehto. I'm Oriola's Communication and Sustainability Director. With me here are our interim CEO, Juko Hakala; and our CFO, Helena Kukkonen. Today, we go through the presentations. And afterwards, there's a possibility for questions. Please, Juko, you can start.

Thank you, Tuula, and welcome to this financial statements webcast also from my behalf. Please let me introduce myself. My name is Juko Hakala. I am the Chief Executive Officer of Oriola since February 1 this year. My task is to lead Oriola in the interim period as the company is currently active in the recruitment of the new CEO. And without further ado, let's move into the topics of the day, starting with quarter 4 highlights. Quarter 4 was a better quarter for Oriola. Naturally, in the quarter 4, as previously in the year, the COVID pandemic continued to impact Oriola's business environment. Restrictions for citizens in both Sweden and Finland continued to impact business volumes in pharmacies also in quarter 4. The health care elective care volumes continued to stay below customary levels, influencing our demand. And on a positive note, the Swedish online market continued its strong growth. On quarter 4, the pharmaceutical volumes continued the decline in a comparable manner to the previous quarters. There was a 2% to 3% increase in the market value and a related net sales increase of 1.5% in our business. Importantly, our online sales in the Swedish Consumer business grew by 107% versus a market growth of 66%. And our profitability developed to EUR 8 million driven by many parts of our business. In the Consumer, we increased EUR 3.3 million improvement from multiple areas. And in Retail, the dose business improvement were significant factors. We continued -- and we continue today committed to our cost control focus as well as our strategic programs, customer experience and 20by20. Then on to the full year 2020 highlights. What an exceptional year it was. During the year, COVID pandemic had a significant impact on Oriola's operating environment and operations. We started the year in Q1 strong as the outcome in COVID pandemic produced historically high order levels for our pharmacies in Finland and Sweden. Profitability-wise, Q1 was a step start for the year with its EUR 6.9 million of adjusted EBIT. We then moved into Q2, which we labeled the lost quarter with its negative EUR 300,000 of adjusted EBIT. The restricted consumer mobility, especially in April, May, impacted buying behavior and the use of health care services negatively. Public health care focused on the preparations for and treatment of COVID-19 patients, which resulted in a partial standstill of the elective care. In addition, securing pharmaceutical deliveries in all circumstances raised operational costs for Oriola across the board. By Q3, the growing infection rate after the summer and speeding up towards Q4 kept us on our toes. The number of infections increased rapidly towards the end of the year. More restrictions for the citizens were set in Finland and especially in Sweden, affecting our demand. The volumes of elective care stayed below the customary level. And moreover, the changes in buying behavior, based on the restricted consumer mobility, affected negatively to the demand for health and well-being products. However, we had also learned to adapt to the pandemic operationally and also accelerated important adjacent services like click and collect, click and drive, the COVID testing services of our pharmacies. Also, our profitability started to recover in Q3 with EUR 6.3 million of adjusted profit for the quarter. And through Q3, we landed on to quarter 4, which we discussed on the previous page. So the year was exceptional, and equally exceptional was a continued decline in pharmaceutical volumes, 0.7% negative in the full year. And a significant slowdown in the market growth as well, from 6% to 7% we experienced in 2019, down to 4%. Our net sales continue to grow but equally slower, 3.8% versus almost 13.6% in 2019 in constant currency, except in our online sales, which grew significantly throughout the year. What was very important for us throughout the year was that the distribution and the availability of pharmaceuticals was secured well during the pandemic in both of our markets. We performed seamlessly our important role in the society and our purpose, health for life. There were no medicine shortages on the market. We built a national medicine stock service in Sweden. Pharmacies and distribution centers have been working throughout the pandemic. We have had strict safety measures for our employees, and importantly, our NPS has stayed stable or increased, particularly in Finland. So despite these changes and many changes in our demand and this important full year operational characteristics, our profitability remained on the 2019 level in EUR 21 million. The Board of Directors proposes to the AGM that a dividend of EUR 0.03 per share is paid for 2020. In addition, it is proposed that the AGM would authorize the Board to decide on the payment of an additional dividend up to a maximum of EUR 0.03 per share. Then we can go into the numbers. Thank you. Yes. Here, we can see the full year numbers on high level. There's a small increase in invoicing full year, 0.9% versus 6.1% in 2019. There's a slight increase in net sales full year, 4.6% in comparison to 10.9% in 2019. And there's a slight increase in full year adjusted EBIT, up to EUR 21 million in comparison to EUR 20.5 million in 2019. So the quarter adjusted EBIT was EUR 8 million. It was up EUR 5.9 million from quarter 4 2019. And the key factors were the Consumer EBIT, which was up EUR 3.3 million based on cost savings in -- for example, in our marketing and support functions; our Retail EBIT, which was up EUR 1.5 million, especially contributed to by the dose business in Sweden; and some recovery in our assortment business in Sweden. The Pharma stayed stable or was down by EUR 0.1 million driven mainly by changes in our customer agreements we have discussed earlier in the year about as well, our Enköping ramp-up as well as the COVID-19-related additional costs. And finally, and importantly, our group items were EUR 1.3 million less than in quarter 4 2019. Let's then take a look at the operating environment. In our consumer markets, the total pharmacy market in Sweden grew in both quarter 4 and in full year 2020. Oriola continued to have 17% market share in the total market. And for the total pharmacy market, the share of higher profitability, prescription, RX and over-the-counter pharmaceuticals declined, while the share of the traded goods increased. So there was a categorical change in the market as well. And importantly, as mentioned earlier on, our online sales outgrew the market growth at 100% -- 107% for the quarter and 85% for the year. Then on to the wholesale markets. In the Q4, the wholesale market value increased slightly in both Finland and Sweden. However, the market volume decreased in Q4 as well as in full year 2020. Oriola market share was flat year-on-year in the Q4 in Sweden, and it was down in Finland. And in Finland, the key factor contributing to that difference was, for example, the contracts, the Orion nonmed, which was also discussed in the interim report sessions earlier in the year. In retail markets, Oriola market share has been stable in the dose dispensing markets in both Sweden and Finland. The traded goods and over-the-counter product supply for pharmacies in Sweden has been stable at 25% of the total market. And during Q4, we served 121 out of 819 pharmacies in Finland with staffing services. That concludes the operational environment. And why don't we then move in discussing the business areas. The Consumer Q4. Net sales increased slightly. There was a significant online sales growth, as mentioned earlier on. In the brick-and-mortar, unfortunately, an opposite effect, demand continued to decrease, especially in the shopping centers. There was an essential improvement in profit coming from multiple areas. And most important of those areas was cost savings in marketing and support. The EUR 4.4 million quarter 4 adjusted EBIT led us to a full year 2020 adjusted EBIT increase of 2.7% in Consumer being at EUR 14.4 million for the full year. In Pharma, the net sales for quarter 4 stayed flat. Pharmaceutical volumes slowed down, as we discussed in the highlights, due to the pandemic, and the continued elective health care stayed down in both of our operating markets. The Q4 wholesale market volume change in Sweden, for example, was minus 5%; and in Finland, minus 2%. The profit was negatively impacted in Pharma by changes in customer agreements. Also, the Enköping ramp-up continued to impact our profit as well as the continued COVID-19-related additional costs. The EUR 4.1 million Q4 adjusted EBIT in Pharma led to a full year 2020 adjusted EBIT decrease of EUR 4.9 million being at EUR 12.8 million for the full year. Naturally, 2020 was a challenging year for Pharma. And the key profit impacts for the full year in Pharma were the same as in Q4: changes in customer agreements, ramp-up in Enköping and COVID-19-related additional costs. In Retail, there was a bit higher net sales increase, 5.3% in constant currency. Demand for the products related to the pandemic remained active, especially in Sweden. Masks and hand sanitizers are good examples of these. There was improved profitability in Retail, especially coming from dose dispensing and the assortment Sweden business area. 0.7% -- I'm sorry, EUR 0.7 million Q4 adjusted EBIT led to a full year 2020 adjusted EBIT increase of EUR 2.9 million in Retail being at EUR 2 million. The most significant factor also for the full year EBIT in Retail was the dose dispensing business in Sweden. Then on to a few additional financial review slides, I will ask our CFO, Helena Kukkonen, to discuss this. Helena, please.

Thank you, Juko. Hello also from my behalf. So moving into the invoicing and net sales. So starting with the invoices. During the year, we had a small or flattish growth versus then the sort of the normally seen higher growth rates. Invoicing now reaching EUR 3.8 billion in the full year versus the EUR 3.7 billion in 2019. And for the quarter, there was actually a negative growth of minus 1.7% in constant currency, which was then driven by the lower volumes. On the net sales side, we had a moderate growth driven by the higher-priced pharmaceuticals and also the e-comm growth. Net sales for the full year reached EUR 1.8 billion versus then the EUR 1.7 billion in 2019. And for the quarter, the growth was moderate, 1.5% in constant currency. And then moving into adjusted EBIT. So for the adjusted EBIT, we ended the year with the best quarter for the year being EUR 8 million now. Improvement in our profits came across our businesses, Consumer improving the most by EUR 3.3 million. And the improvements came from multiple areas, including the cost savings, cost savings in marketing, support functions and so on. Pharma, on the other hand, was more or less flat sort of year-on-year. Some changes in the customer agreements and also on the cost to serve and positives coming from the expert services improvement. Retail clearly improved from last year by EUR 1.5 million. And then this was, like Juko was saying, driven by dose dispensing. And on the group level, we also had some cost savings. Profit for the period and earnings per share, moving into this one. So profit for the period was EUR 4.1 million, which is a clear improvement than from the low level last year. Profit was impacted with the adjusting items where we had a EUR 1.2 million cost related to an onerous contract in Retail, which we now then booked in Q4. Earnings per share was EUR 0.02 for the quarter. And for the full year, it was EUR 0.06, up from the EUR 0.04 last year. Moving into cash flow. So we ended the year with relatively good cash flow being EUR 46 million for the quarter. This was driven by the good cash flow and incoming payments at the end of the year. For the full year, our operating activities cash flow was EUR 58 million. We invested EUR 31 million into our IT, logistics and pharmacies. Also here, we have included EUR 5 million for the investment of the Doktor.se, which we did in Q2. On the financing side, in Q2, we withdraw the EUR 70 million loans to secure our cash position, and now then ended the quarter with a good cash position at EUR 168 million. Our net interest-bearing debt levels have -- actually slightly higher versus than a year ago, but then on the other hand, reduced by EUR 30 million since the end of September. And this was then driven by the higher amount of cash and also lower amounts of commercial papers and loans versus the end of September. Juko, would you like to talk about the Q4 takeaways?

Thank you, Helena. So a few key takeaways of the quarter. Our operating environment was still very much affected by the pandemic, and this influenced both the market growth, the volumes declined as well as the market demand categories. Also, the demand channels continue to change, yielding a strong online growth for Oriola's Consumer business in Sweden. Our profitability developed favorably in many areas, especially in our Consumer operations and in the dose business, in Retail segment, all the while our Pharma and distribution businesses continued to experience a similarly high cost to serve as in Q3. Very importantly, we continue to succeed in delivering our purpose, health for life, and availability of pharmaceuticals well in our operating markets. This has naturally been vital for Finnish and Swedish societies and is a point of big thank you to the people of Oriola who have gone the extra mile and worked hard in the quarter and throughout the year of 2020. In 2021, we now continue to focus on the same key topics: profitability, our strategic programs and maintaining reliable operations. And then a few more words about 2021 and moving into the outlook. The COVID pandemic is continuing and expected to continue during 2021. The severity and duration of the pandemic remain unclear in our operating environment. We now understand and have much adapted to the effects of the pandemic at Oriola, but we cannot estimate the length or the severity of its continued duration. Hence, our outlook for the year is that our adjusted EBIT on a constant currency basis stays on the same level or increases from the 2020 level. Additionally, and before we are closing the presentation part of this webcast, I wanted to announce that we will hold a Capital Markets Day on the 25th of November 2020 (sic) [ 2021 ] and once the new CEO of Oriola has started. We have not had one for quite some time, and we welcome you to discuss Oriola and our thoughts on way forward in this event. More information to follow. Now this is the extent of our presentation, and this session is now followed by a Q&A. So I invite questions at this point.

Thank you, Juko. There are actually some questions online. We can start with Petri Kajaani from Inderes is asking about our guidance. We heard just some words about it, but there is a question about the lower bound of guidance. It states that operating profit might stay at the same level than 2020. What are the risks that might lead to this scenario since we have -- since you have the 20by20 Excellence cost savings coming through this year, Enköping ramp-up, price efficiency improvements and cost savings and your 2020 profitability was very weak due to the COVID? So help me understand how this is possible with the guidance.

Thank you for the question. And Petri, this is a really important question, and I understand also the diversity in the question. In simplicity, the uncertainty in our operating environment is related to the pandemic. The length and duration of the pandemic and the severity of the pandemic, this is the uncertain factor. And that's the factor also in the guidance that sort of concludes the uncertainty we have. Outside of the pandemic effect, those are key topics that I mentioned in the question, which are also influencing our profitability, and I think they are moving ahead as planned and as indicated earlier on. So there is no change when it comes to 20by20, for example, or the Enköping ramp-up, which was completed at the end of the last year. Naturally, what we have communicated on the Enköping ramp-up is that we now move into the efficiency and effectiveness phase of the improvements in Enköping. And it will not be -- I think we said in Q3 that it will not be a silver bullet, rather, it will be a steady improvement path. And this is progressing as planned.

Petri actually had also a couple of more detailed question about the Enköping. So one, what you did not mention yet what Petri is asking is this cost savings targeted for this year, can you describe those for him?

Well, in Enköping...

From Enköping.

From Enköping?

Yes.

I would like to come back to that topic in Q1, also the topic of 20by20, I think, which was in the earlier question. And naturally, in 20by20, we did reach 75% of the planned savings at the end of 2020. And the pandemic had also a slowdown impact on resolving the final sort of 25%. So what we are doing inside of this prioritization activity for '21 is that we are combining these effects. And I'd like to give a bit more holistic overview of that in Q1. But there is no change, I think, in essence, in those plans.

Then there's a question from Iiris Theman from Carnegie. What are the reasons -- these are mainly for the Consumer area now. What are the reasons behind the sales increase of 6% year-on-year in Consumer? And how do you see the development in the short term?

The net sales increase in Consumer was market-driven. Q4 was a more active quarter in the market. So it's actually coming mostly from demand. Of course, there's this category change of the online growing faster than our brick-and-mortar, which has its profitability effect, but we can clearly connect the net sales to the market phenomenon, which, of course, in 2020, the market was fluctuating quarter-by-quarter. So Q4 was a better quarter in that respect.

Iiris is also continuing that, again, we expect -- or assume that the margins in Q1 '21 in Consumer will be improved from this 2.6% year-on-year.

We're not giving outlook, I suppose, on that level. But I think the best indicator is to take a look at the pandemic, how it's going, because that has a direct impact on the demand, which then, of course, has a direct impact in our business operations. So I would -- that would be the best way I can perhaps respond on the Q1 2021 at the moment.

Good. Then I think some of those areas were covered, then we can move to Sami Sarkamies from Nordea. There were questions related to -- still kind of like this, our guidance that, what would need to happen that we -- that Oriola will land at the previous year level?

On the 2020...

Yes, level.

Level. I think it would then mean that the pandemic continues, and the severity of the pandemic stays in a sort of similar impact levels as it was in 2020.

Then there is a question related to dividend. As you suggest that divided cuts suggest that the desire to delivery from current high levels. Can you discuss the ambition level here? What are the debt EBIT, equity ratio and gearing level would you view as a sensible target in the medium term?

Which one of us takes this?

Of course, we have set our long-term targets, and we have no change. We haven't communicated any new sort of gearing targets, for example. So those are still valued. And if there would be any changes, we would communicate about those.