Oriola Oyj (ORIOLA) Earnings Call Transcript & Summary

Good day, and welcome to Oriola's webcast related to this morning news about Oriola Kronans Apotek and Apoteksgruppen to merge. And my name is Elisa Markula, and I'm the CEO of Oriola. And together here with me is our Chairman of the Board, Panu Routila. And today's agenda is like this. We go transaction in brief, strategic rationale, some financial implications, and let's review the new company in brief as well. And then let's talk about at the end of the presentation also about Oriola's transformation. [Operator Instructions] And now I hand our -- the word to our CEO -- sorry, Chairman of the Board, Panu Routila. Panu, please?

Thank you, Elisa. I am very pleased to announce that Oriola and Euroapotheca have signed a deal, a transaction to combine the Swedish pharmacy businesses into a new company. Kronans Apotek and Apoteksgruppen, respectively, will merge into one entity. The combination is expected to create the third largest player in Sweden, in Swedish pharmacy market by revenue, illustratively, EUR 1.1 billion of sales as calculated in 2020 numbers, while 2021 numbers are not yet out. Estimated combined market share will be about 25%. This transaction is expected to create significant synergies of EUR 25 million annual profitability because of the increased scale, market presence and also the capabilities in e-commerce. The new company will be owned 50-50 shareholding, and the expected completion is by end of 2022 on the second half of the year. Oriola's Kronans from our side merging into the new entity is valued at EUR 400 million and is transferring EUR 135 million -- about EUR 135 million debts into the new equity. Euroapotheca's Apoteksgruppen is valued at EUR 300 million and is also transferring EUR 82 million -- around EUR 82 million debts into the new equity. The strategic rationale of this entity, of this new joint venture is expected to create annual synergies of about EUR 25 million on EBITDA level by the end of the third year after the closing. Complementary pharmacy networks in changing market environment, Elisa will talk slightly about that in a little while. And this will be the third largest player in the Swedish pharmacy market by revenue. This is a significant step in Oriola's strategic transformation. Oriola announced at the coming announcement of Elisa last year that we are in a strategic and operative turnaround. We will talk more about this in our Capital Markets Day, which Elisa is going to hold in May 2022, and I wish you warmly welcome for that event. Oriola will focus on wholesale and distribution of pharmaceuticals as well as provide a wide portfolio of health and well-being products, those distribution, expert services and staffing services for pharmacies. The financial implications to Oriola are many. Oriola will receive -- in addition to this 50% ownership in the joint venture will receive a cash consideration of approximately EUR 24 million from Euroapotheca. This brings the shareholding to 50-50. Oriola's net debt and liabilities to decrease by about EUR 134 million due to transferring liabilities into the new company. Oriola will record an estimated onetime loss of approximately EUR 10 million, including the transaction costs. This amount is subject to change due to the timing of the closing as well as customary closing adjustments. The parent company, as such, will recognize a loss of approximately EUR 100 million as a loss -- as a result of the loan receivables that are not transferred into the entity. And there is still distributable equity well, which will be published in the conjunction of the next week Oriola's 2021 result presentation. Oriola will report this new company as an associated company presented on a one line above EBIT in the income statement. And now I hand over back to Elisa to continue with the presentation, please.

Thank you, Panu. So let's review a little bit what has happened on the Swedish pharmacy market during the last couple of years. And consumers are really shifting more towards online sales. And this means that the share of e-commerce is already -- has reached 19% of all sales in the pharmacy market in Sweden. All in all, this fast-growing pharmacy e-commerce has been further accelerated by the COVID-19 pandemic in -- since spring 2020. And this development has benefits for early adopters and also for pure online players, which have reached critical mass and profitability via lean digital operating model. Traditional pharmacy chains have invested also at the same time into e-commerce heavily, and also traditional pharmacy chains have to accelerate this digital growth. So our response to this is that this merger creates value based on synergies, what Panu just described. And it will also add scale and enables a faster digital transformation in Swedish pharmacy market. Let's review a little bit also what these 2 pharmacy chains are today. And let's start with Kronans Apotek. Kronans Apotek is familiar to you as a consumer business of Oriola. We call it business area consumer. And Kronans Apotek has established at 2010 chains when the state-owned system was released and then allowed the independent chains in Sweden. So Oriola has owned 100% of Kronans Apotek since 2012. And at the moment, we have 322 pharmacies and the online pharmacy business. Our growth on the online pharmacy business has been faster than the market. For example, year-to-date last year, year-to-date to Q3, we were growing 40%, and the market was growing 20%. So significant market growth, double the market in e-comm. And our market position in Kronans Apotek is #3 with 16% of market share. And we employ approximately 1,600 FTE in Sweden. Apoteksgruppen, in the meanwhile, is #4 in the market with 150 pharmacies, and their market share is around about 9%. They also have 43 pharmacies, which operate under Apoteksgruppen brand, on franchisee agreements and by independent entrepreneur -- via independent entrepreneurs. And this Apoteksgruppen was actually acquired 2018 by Euroapotheca. And what is this Euroapotheca then in the meanwhile? So it is Baltic Sea area, operating in Baltic Sea area. It's managing several pharmacy retail chains and wholesale companies in Estonia, Latvia, Lithuania and, of course, in Sweden. And they have nearly 4,000 employees. And at the moment, all in all, Euroapotheca, in this Baltic Sea region, has 600 pharmacies. And it was established '98. And Euroapotheca is a member of Vilniaus Prekyba, which is a leading diversified international retail group in Baltic Sea and Central Eastern Europe region. And they have close to 5,000 employees in -- then in Vilniaus -- sorry, 46,000 employees in the Euroapotheca and then Vilniaus Prekyba's total employee number. How does it look like then in brief with the illustrative combined numbers? And this is now based on 2020 numbers and consolidated financial statements from both companies from that year. And when this possible new joint venture will be finalized, Apoteksgruppen and Kronans Apotek will create a well-established #3 player in the Swedish pharmacy market. So very big market share already 25%, very close to the #1 and #2 on the market. So there will be, in the future, 3 big players in the Swedish pharmacy market. And as also Panu mentioned, there will be, at the moment, Apoteksgruppen and Kronans Apotek's pharmacy network is very much complementary to each other. And as said also, this combined entity is expected to have an increased scale and strengthened market presence, also increased competitiveness and increased efficiency a lot. The new company to be established will have over 470 pharmacies and full online pharmacy operations. All in all, 2,300 full-time employees and illustrative EUR 1.1 billion as 2020 numbers, so combined numbers. And these combined EBIT numbers doesn't reflect any synergy benefits. So these are just like for like. And EBITDA is EUR 59 million combined, and adjusted EBIT of EUR 24 million. And net debt, all in all, from Kronans, EUR 134 million and then EUR 82 million from Apoteksgruppen, which means all in all, EUR 216 million. So this is illustrative numbers of the potential merger when approved by competition authorities. And let's review a little bit this as a context in the Oriola's transformation as already mentioned here. The transaction is a very logical step in Oriola's transformation. As we stated in our Q3 interim report, we have entered to the first phase of the transformation, where structural changes are also included. And in the future, we will continue as a strong owner for the new planned joint venture and jointly be heavily contributing to the company's success. But it is clear that the remaining part of Oriola will concentrate B2B business in pharmaceutical distribution, wholesale of wide portfolio of health and well-being products and offering related services, such as dose dispensing, expert services and to pharmaceutical companies and staffing services to pharmacies. So many related services are offered already by Oriola and will continue. In all these businesses, we have room for improvement. And we don't want to compromise our important role in the society by delivering the pharmaceuticals and other health products to our customers and doing it with high quality and efficiently. And we have moved to the country-based operating model since beginning of this year. It's now in place, and we continue to further strengthen our B2B offering and strengthening our market position. And we execute our already published turnaround action plan, which consists of very many key elements such -- like cost savings through this simplified operating model, reduction of operating costs, and rigorous cost management will continue. We will focus on efficient net working capital management. And we concentrate also to deliver the best possible customer experience through excellent customer relationship management with one touch point to customers with this country-based operating model as well. And commercial excellence, we will concentrate also on that through portfolio crystallization, pricing models and enhanced margin management. So key takeaways from today's news are here, and this new company is the very concrete natural step change also in Oriola's transformation. And it is complementary pharmacy networks with Kronans and Apoteksgruppen. And it's expected to have increased scale and market -- stronger market position and presence and also work for the more competitive market, more efficient and by size being EUR 1.1 billion company with 2020 numbers and also combined market share around about 25%, the third biggest player on Swedish market. And the transaction is estimated to create annual run rate synergies around EUR 25 million in EBITDA level. And the synergies are expected to be realized in full by the end of the third year from close. And hereby, the remaining Oriola will concentrate on B2B business in pharmaceutical infrastructure being a really important role playing there as an infrastructure company and with distribution, wholesale of wide portfolio and many services to pharmaceutical companies and also to pharmacies. So thank you from my side now for your attention. And now it's time for questions. And please add your questions to the chat, and I will read them through and then hand over to either to Panu Routila or then to our CFO, Sari Pohjonen, who is also here and/or then I answer to that myself.

And here is a first question. Can you talk about Apoteksgruppen's e-commerce operations, current state and their market share? How do you plan to combine the 2 e-commerce operations after the merger? So I take -- there are many questions. So I take this one at this time now. And these are questions we can't really answer at this stage directly. But we have been -- Kronans Apotek Consumer business have been investing a lot to the e-commerce platform. We have been enhancing it by automization. And also, we have published that in the actually '22 second half. We are opening a new distribution center related to e-comm. So this is what we have now to tell you. And then these are questions which can then be answered post closing. Then there is a question about the -- can you give some more detail on the source of the expected EUR 25 million synergies? And I can also answer to this one. So synergies are coming from fixed cost, pretty much administration cost and also IT, e-comm and all these kind of sources. So that is the source of the synergies, and EUR 25 million stem solely from cost savings. At this stage, I would say that, yes. And then we have to take into account how much, of course, the market is growing and what this kind of more bigger unit can, as our entity, can offer in the very competitive market through the e-comm platform and physical pharmacy network. It's a totally game changer in the whole Swedish pharmacy market. Do you see any possible risks related to the approval of the merger from competition authorities? Well, at this stage, we don't actually speculate with these kind of things because this is subject to competition authority approval. And therefore, we don't comment so much related to this. There is more questions now come as well. So how have you arrived at used valuations as EUR 400 million enterprise value for Oriola Consumer segment, and you were suggesting about 20x EV/EBIT multiple. And maybe this is something that Panu could actually answer. So go ahead.

So the combination target was to reach a 50-50 ownership. And during the negotiations, we have come up to these valuations that finally, together with a cash contribution of EUR 24-point-something million, will actually make that both of the entities are then owning 50% each of the new joint venture. So that's how the calculation and valuation came through.

And continuation of this actually is that this would -- 50-50 would be -- assets would seem to be 65% for Oriola. But you explained that already that it's because of the net debt.

Yes. And because of the net debt, transferring net debts are then -- Oriola is transferring considerably higher amount of net debts to the joint venture.

And also receiving EUR 24 million.

Yes. Like I said.

Exactly. How will Oriola balance sheet tolerate EUR 100 million write-down from nontransferable debts? Do you see a need to beef up balance sheet in order to meet in-depth covenants? Where do these loans originate from? And maybe this is something which our CFO, Sari Pohjonen, can answer. So go ahead, Sari.

Yes. Good question. It should be noted that this is the impact on the parent company. So at Oriola Group level, we are estimating a onetime loss of approximately EUR 10 million. So the loan receivables are ones that the parent company currently holds, and those will not be transferred to the new entity. So EUR 10 million at Oriola Group level. The EUR 100 million is related to the parent company.

Thank you, Sari, and there are more questions. So this goes to Panu, this question. What is the plan for the joint venture? Will it be listed separately? Or could you also consider selling it?

It's a good question. It's -- the next 3 years, we will concentrate on capturing the synergies. We will have handful of job to do during the next 3 years in capturing these EUR 25 million annual run rate synergies. And both of the shareholders are fully committed to this work during the next 3 years period.

Yes. Thank you. And then related to the equity. So I try to capture now a little bit more of these equity questions. They pop up to the chat. So do you see a need to future equity injections into the joint venture as it will start with a high leverage ratio? Is this something, Panu, you would like to talk?

I can take that also. Thank you, Elisa. So the joint venture will have a good cash generation. And therefore, the leverage ratio will not be too high, and that has been calculated at the debt burden that the joint venture is receiving is well suitable for its balance sheet and its operations.

Thank you. And then I would actually ask again, Sari, back to the stage. There are questions related to balance sheet. And one question is related to that. So I take several questions then in a row. So take one at a time. Are you going to report the new company's balance sheet or net debt and EBIT in the future? How is the new company visible in your balance sheet? This is a question to Sari.

Yes. The new entity will be an associated company in terms of reported. So there will be a one-line consolidation above EBIT for Oriola's numbers. So in that respect, the balance sheet of the new company will not be included as a total in Oriola's balance sheet, but we will be following so-called equity methods. So one-line consolidation after the closing then.

And there are several questions related to this EUR 100 million loan receivables loss. So let's take them one by one. We said that parent company will recognize a loss of approximately EUR 100 million as a result of loan receivables that are not transferred. There are questions related to this. Why these loan receivables are not transferred, and what does this mean to our financials? And does this impact tax rate in the future? So why they are not transferred was the first one.

I would once again emphasize that this is related to the parent company in the group. The estimated impact at Oriola level is EUR 10 million onetime loss related to the transaction. Regarding the parent company and the receivables, typically in groups and in stand-alone entities within the group, you have in the company either receivables or payables. And this is the question also here, and those are not transferred to the new entity. And therefore, they will be written down in contraction of the closing as part of the transaction. But that is parent company only. So that is not Oriola Group level.

So this is not a real cash flow item.

No. No, it's a write-down, noncash item.

Yes. That was one question here. So I was repeating it. So how will Oriola account for the 50% holding associated company or full consolidation? I think we answered to that question by Sari.

Maybe you can repeat it still because it's an important part.

Okay. So it will be one-line consolidation above EBIT following so-called equity method.

And then there is a question, which we highly likely can't answer actually not now, but it is about the remaining Oriola's net debt, what that will be not to be accounted for the joint venture. But this is something we can only then comment after when we have released our Q4 and full year financial statements next week -- next Friday. Then there is a question related to what is the new pharmacy company's future plans. And does Oriola have an exit plan? And future plans, we can't comment, of course, right now because it's post-closing items. But then there's this question that does -- do we have an exit plan? Maybe, Panu, would you like to answer to that?

Yes. Like I said already earlier in this presentation that both of the parties, both of the joint venture owners, Oriola and Euroapotheca, are fully committed to capturing the synergies now. We will concentrate on that, completely on that and not speculate on the further outcomes of the JV.

Yes. Thank you. And those were the questions from you today. So we are available for possible questions also afterwards. You can find our contact information on the website and the press -- the stock release. So thank you for today, and have a good day.

Thank you.