Oriola Oyj (ORIOLA) Earnings Call Transcript & Summary

Good morning, and welcome to Oriola's Quarter 3 results presentation. I am Elisa Markula, and I started here in Oriola 2.5 months ago. And now let's review quarter 3 highlights. This was the quarter for improved profitability and the start of turnaround activities. In the third quarter, the pandemic situation continued to improve in both in Finland and Sweden with the most of the government restrictions were removed by the end of the quarter. The volume demand for pharmaceuticals and other health and well-being products recovered and nearly reached 2019 levels. And at the end of the quarter, that is -- what I mean, it is before the pandemic levels. Continued market recovery was reflected in our invoicing and net sales, which were both up by 4.8% in constant currencies. As demand picked up, our adjusted EBIT increased to EUR 10.4 million, exceeding clearly previous year and also 2019 year. All our business areas, especially Retail, improved their profitability. And we will look at their performance shortly. We started turnaround activities now in August, and the first results were actually visible at the end of the reporting period. In the beginning of October, we announced further turnaround measures. And I will come back to turnaround activities and action program in more detail later in this presentation. Pandemic still had an impact on the market. And also -- and here in Oriola's operations, our priority has been to ensure and secure health and safety of our own personnel. And we have been actually performing very well in our role to ensure distribution and availability of pharmaceuticals on the markets. Let's review a little bit more detail invoicing and net sales. The recovery market was visible in our net sales and invoicing. And in our -- both actually increased 6%; and in constant currency, roughly 4 -- 5%. So the recovery market was here visible clearly. Adjusted EBIT, as I said already, increased to EUR 10.4 million, which is a strong evidence of recovery and also the fact that change is possible when the market environment is improving and when focusing on right things internally. EBIT was above last year and 2019. And at the end of this quarter, we started also to see the first impacts of our cost savings which were initiated in August. And they are coming -- they were coming through already, helping to push Q3 above 2019. It is worth to mention that this was the highest quarter since actually 12 quarters, so since Q3 2018, so quite a remarkable achievement. Considering the business areas here and the impact on profitability, we can state actually 2 things. First, all business areas contributed positively to the EBIT development. And secondly, the Retail business area supported the result very well. And that was thanks to the good performance in the dose dispensing business. And actually, Retail was the key contributor here, as you can see from the numbers. Let's have a review about the year-to-date performance and invoicing and net sales. Invoicing increased EUR 4.3 million (sic) [ 4.3% ] to EUR 2.9 billion almost. And on a constant currency basis, invoicing was increased by 1.4%. Net sales increased by 4% to EUR 1.4 billion. And on a constant currency basis, the net sales increased by 0.6%. And this was impacted very heavily with the first quarter this year when the net sales were declining and due to the decreased demand and low volumes due to the pandemic. And then the profitability. Adjusted EBIT increased to EUR 14.7 million, which is above last year, EUR 1.7 million. And it is important to note that the generic cost increases, mainly salaries in Sweden, has been affecting this year-to-date result negatively. So this was year-to-date result. And let's have a look at our market environment. So first, pharmacy market. So value development has been growing in Q3 4.7% and year-to-date by 1.7% in Swedish krona. And Oriola was very close to this market development. And the market recovering from pandemic-related decline in customer traffic was meaning the low demand in our physical pharmacies. The physical pharmacy market demand started to slowly recover towards the end of the Q3 as the mobility of the people was increasing. It is obvious that the digital transformation of the pharmacy market is actually continuing but not anymore as fast as in 2020. And year-to-date, the total online pharmacy market grew by 24%, clearly slower than in 2020. In Q3, Oriola's online channel grew faster than the market, actually double. And that was also visible in our net sales, where we will come back to that shortly. And also year-to-date, our online sales have been growing double the market growth. And online pharmacies reached approximately 19% share of the total market by the end of September 2021 in total pharmacy market, so 19% compared to previous year when it was 16%. Oriola's market share, in the middle here, in the pharmacy market in Q3 was 16.2%. And during -- so this is the Q3 number. So there were no big movements either in the split of the sales between product categories inside the pharmacy market. So prescription products, pharmaceuticals were prevailing with the 73% of the total Q3. Then have a look next about the pharmaceutical market all in all in Q3. And we saw the slight recovery on the market also here during the third quarter especially regarding the volume development. And there where we already close -- or the market was close to the pre-pandemic levels. So this is very important to understand that volume development is the first sign of the market to recover and normalizing. And the value is growing by nature because there will -- there are always more expensive pharmaceuticals coming to the market. So volume development this year is something we follow carefully. And when we look at the value development in -- then it's in the price here. So Finland wholesale, the pharmaceutical distribution market grew by 6% almost and in the third quarter -- so that was the third quarter number. And then year-to-date, the growth was 2.5%. And while in Sweden, the pharmaceutical distribution market value at wholesale prices was 6.5% higher than in Finland, and year-to-date number is there 2.6%, so pretty similar year-to-date still like in Finland. Based on our estimate, our market share in this wholesale market was about 42% in Finland and about 46% in Sweden. Then retail markets. In dose dispensing business, Oriola is market leader in Sweden, and we have 42% of the market. And we have been growing also our market share in Finland, where we have now 36% from the market. And while this is happening, the growth is -- the number of patients have been growing in both countries. In Sweden, we have already over 100,000 patients. And in Finland, we have grown to 28,000 patients in our dose dispensing business. Then about the traded goods and OTC market value development in Sweden, we -- they also grew in Q3 almost by over 9%. And year-to-date, the growth was 4 -- a little bit over 4%. And our market share in the supply of these products for pharmacies was -- were stable, so 24%. Here in the below, we are talking about our staffing services. And the number of the pharmacies who are using our staffing services in Finland increased slightly to 204 pharmacies. So let's move a little bit more detail to look our performance in business areas. And first, about the Consumer. The recovery of the consumer traffic in pharmacies became actually fully visible only towards the end of the quarter. And the net sales increased by 5% to EUR 200 million. And in constant currency, the growth was 3.5%. Our online channel grew fast, as I already stated, and this was the main driver for the increase in net sales. Adjusted EBIT increased to EUR 5 million, which was already slightly above 2020 and in line with 2019 level. All in all, general cost increases, mainly salaries in Sweden, have been impacted result negatively and limited the improvement in the profitability development. Online continues to be our strategic development area here in Oriola. And we have been able to grow both year-to-date and Q3. But this is -- and it's already accounting for our total Consumer sales 8.5%. So all in all, to support this e-commerce business growth, we have been announced that we are investing in the new e-commerce logistics center in Enköping. And that will be -- the new warehouse will be ready during the second half of next year. And then let's move to Pharma and our performance there. Pharmaceutical market value and volume grow against 2020 and was already 2019 levels especially towards the end of the quarter, as I already said when we talked about the market environment. This means that the market is recovering. And thanks to this, during the third quarter, our invoicing increased 4.4%, and that was in constant currency. And adjusted EBIT increased to EUR 4.1 million driven by the increased volumes. Then Retail as our third business area, which has actually progressed very well in many areas. And as I told you in the market environment part, OTD (sic) [ OTC ] and traded goods market was recovering during Q3 with a growth of 9%, the total market growth. And reflected in our numbers, our net sales increased by 6 -- almost 7%, 6.6%. And on constant currency basis, that was 5% to EUR 127 million. And this was thanks to the growth in the number of dose dispensing patients and also increased demand for health and well-being product in Sweden. Adjusted EBIT increased to EUR 3.6 million and thanks to dose dispensing but also improvements in customer agreements and product mix in health and well-being product category. So that was about it. And then let's see some key financial KPIs. And the recovery is clearly visible on the net result as well. Profit for the quarter increased to EUR 6.8 million and earnings per share to EUR 0.04. And then about the cash flow in Q3 shortly. The cash flow was negative, minus EUR 16 million, driven by negative net working capital change, which is due to the strong fluctuation is quite typical to our business. And therefore, this decrease was happening with the fluctuation in net working capital. But the cash position returned to be normal level at EUR 86 million. And at the end of the last year, actually it was abnormally high because we took precautionary measures related to pandemic uncertainty on the commercial papers and loan markets. So that's the reason we have been repaying pandemic-related precautionary loans back. So let's move to the net interest-bearing debt. And that was EUR 136 million. And also, you can see from the graph and the table on the right-hand side that we -- our gearing is improving and we are back on normal levels in 2020 for the reasons what I just explained when we actually prepaid back our loans. So that was about the financial KPIs. And finally, at the end of the presentation, I would like to talk about the turnaround and also, first, about the timing and of our focus areas here in the near future. Firstly, turnaround is our first priority and thus also our short-term action plan for the coming months. This is what we do now. And I will in the next page then talk more about the content of the turnaround. If this is what we do, the other part is how we do it. As we are also fixing the foundation of this company, which is related to how we operate more efficiently in the new structure and which is country-based, this is the plan, and how we handle the customers and how do we improve processes, practices, our ways of working, in other words, we are also creating a new working culture here in Oriola. And as we are now concentrating in the turnaround in the coming months, we will do the fundamental business strategy during Q1 and Q2 next year. And that means that we have also rescheduled our Capital Markets Day into May 5. So this is what we have decided now to do with the CMD. And then let's move into the content of the turnaround and in more detail. So we have a concrete action plan how we improve our performance in all key areas. I see a lot of potential in Oriola, and we have that potential to improve profitability. We know now how to do and how -- what to do to improve our efficiency and grow together with the growing health and well-being market. First, we are targeting for cost savings through simplified operational model, decreasing the complexity and moving to country-based model, which is dramatically improving customer focus, reduce costs and thus improve profitability. We will also cut our cost base by concentrating to relevant value-adding projects which will have value to customers. And strict cost discipline and management has been started. We are also implementing net working capital improvement actions to enhance end-to-end sales and operations planning and, all in all, our supply chain planning. Operational efficiency structure will be one of our key focus areas. And it includes also optimizing our portfolio. It means smooth product changes as well as better warehouse management. Thanks to the planned country-based structure, we are able to serve our customers more individually and also locally with one touch point, which will be important part of our improved customer relationship management. Commercial excellence means all improvements related to the commercial management as well. We will also crystallize our core -- kind of core service portfolio and implement value-based pricing models. And we will increase internally our margin management and governance. So this is our action plan to improve Oriola's performance. And now this work has been started. And I can imagine you will ask how long does this take. To that question, it is hard to say one definite answer. But as this is our primary focus, we will rigorously concentrate into this and delivering results. To the next question which might arise from this, that how much we will deliver more profit, and I want to say that we will inform our progress in every quarter in our reviews and also every time we have something to inform. So this time, we will not give a definite one number target. So not this time. And just like we already did in the beginning of October, we announced the first phase of this transformation and turnaround. We announced that we plan to simplify our operating model and structure and started the restructuring negotiations. And the preliminary estimate of this annual cost saving is around at least EUR 7 million. So let's then -- as a final kind of summary, let's take some key takeaways from Q3. This was the quarter of recovery in our market environment especially towards the end of the quarter. And the volume demand picked up, and that is something what we follow very carefully. So almost reached the pre-pandemic levels in -- at the end of the quarter. Secondly, market recovery was reflected in our invoicing and net sales. And both were around 5% without currency effect. So we were very happy to see that we could deliver also in terms of profitability. And this was supported by the improvement -- improved market environment but also thanks to strong performance at our Retail business. But also all the business areas delivered and helped improve the profitability. So -- and also, we have started cost savings activities now in August. And some of the results were already visible at the end of the reporting period. In the beginning of October, we announced the further measures, and we will then also inform about this in due course. And then finally, going forward, we have initiated our strategy process here at Oriola and plan to publish that together of -- in the CMD on the 5th of May. So that is the key summary. And then about the guidance outlook for this year. Guidance is unchanged, that our adjusted EBIT is in constant currency stays on the same level or increases from 2020. Thank you from my part for now. And let's review if you have had any questions. So Tuula, welcome, and will you guide us through the questions?

Thank you. [Operator Instructions] Currently, still not any question. I don't know if you were so...

Comprehensive.

Comprehensive, exactly. But please, audience, if you have any further more questions to Elisa to ask now.

Or then you can also come back to me personally or -- and then we will, of course, answer to your possible questions at later stage.

Exactly.

So thank you. As there are no questions...

At least, not now.

So I thank you for your attention today. And let's come back to possible questions at later stage. Thank you.

Thank you.