Oriola Oyj (ORIOLA) Earnings Call Transcript & Summary

Good morning, everybody. Welcome to Oriola's half year financial report presentation. We are here at very sunny, Espoo office. And here with me, CEO, Katarina Gabrielson; and CFO, Sari Pohjonen. And my name is Tuula Lehto, Vice President of Communication and Sustainability of Oriola. [Operator Instructions] And after the presentation, we will go those through. But now please, Katarina.

Thank you, Tuula. Good morning, and welcome on my behalf also. I'm Katarina Gabrielson, the CEO of Oriola. And like Tuula said, we will also have presentations from Sari Pohjonen today. We will do this presentation in the same way as we did for quarter 1. It's based on the continuing operations and the discontinued operations. The continuing operations combined the old businesses areas, pharma and retail in Finland and Sweden into the new Oriola Services segment and discontinued operations consist of the Consumer segment, including the pharmacy operations in Sweden. In the second quarter, Oriola had a solid performance in both continuing operations and discontinued operations. The total net sales increased by 8% and invoicing by 4%. The comparable adjusted EBIT increased to EUR 8.6 million, which is 111% higher than in 2021. Continuing operations adjusted EBIT clearly improved, reaching EUR 5.5 million, and that is plus 170%. The result was driven by continuing high market demand and increased sales in all areas, particularly in Finland. The discontinued operations, Oriola Consumer, continued solid performance despite of the inflation pressure. The net sales decreased 3% but in constant currency basis, net sales increased by 1%. Inflation that started late in 2021 has further accelerated and has reached all-time high numbers in many markets. Our overall cost savings have been supporting to mitigate the inflationary pressure. Oriola's business is affected by increasing fuel, energy and labor costs as well as weakening consumer confidence. Also, we must again pay attention to increasing infection levels of COVID-19 that we can see all around us. Our turnaround actions, especially in operational efficiency, product pricing and portfolio management has been progressing well. These actions are even more important now when we are witnessing the increase in inflation. At the end of June, we also received a positive news from the Swedish Competition Authority in Swedish Konkurrensverket. As they approved the planned merger of Oriola's Kronans Apotek and Euroapotheca's Apoteksgruppen pharmacy business in Sweden. The preparations for the completion of this merger are ongoing, and the completion of the merger is expected to take place early October 2022. Let's now look deeper on our figures. And if we start with the continuing and discontinued operations, you can say that our invoicing increased by 3.5% to EUR 1,019 million compared to EUR 1,001 million previous year. The net sales increased by 7.8% to EUR 504 million compared to EUR 468 million in quarter 2 2021. Adjusted EBIT was EUR 15.3 million compared to EUR 4.1 million previous year. And it should be noted also that the adjusted EBIT includes a positive impact of EUR 6.8 million in quarter 2 from lower depreciations as discontinued operations, noncurrent assets are classified as held for sale are not depreciated. The comparable adjusted EBIT, excluding the positive impact from depreciation, was EUR 8.6 million compared to EUR 4.1 million last year. The improved performance compared to early years were driven by improved market environment, net sales growth as well as progressing turnaround actions in all businesses. If we then look at our operating environment, we can see that the consumer confidence has weakened during this quarter, and it has also been all-time high inflation. And this has changed the consumer behavior and especially consumer spending and also will probably continue to change in the long run. Also, energy and fuel prices as well as labor costs are increasing. The higher inflation that started in the end of 2021 has been accelerating after the heavy sanctions against Russia. And when we then look at the Oriola Services markets, we can see that the pharmaceutical wholesale market has been recovered compared to previous year then. And when we look at the value development at the wholesale prices in Sweden, the growth was around 9% in Swedish krona in the second quarter. In Finland, the market value grew by 5.6%. Based on our estimates, Oriola's share of the pharmaceutical wholesale market remains at the same level as previous years -- previous quarters. In dose dispensing, business Oriola offers pharmaceuticals and dose dispensing for private and public health care sectors. The total market size for dose dispensing was unchanged in both markets. Number of patients that Oriola is serving in dose dispensing business has been staying stable in Sweden at approximately 105,000 patients and are slightly growing in Finland to about 30,000 patients. If we then look at the pharmacy side, the pharmaceutical market value in Sweden grew by 5.5% in quarter 2. The total online pharmacy market growth was stabilizing from '21. The growth was 4% in the second quarter. The online pharmacy shares of the total pharmacy market remained at the same level. Oriola's online share -- online sales growth was also stabilizing, and it grew by 7%. The market share for Oriola in the Swedish pharmacy market in quarter 2 was unchanged. Then if we start to go through our segments and how the development has been in the segments. And let's start with the continuing operations that is then Oriola Services and [indiscernible] pharmacies. Both the pharmaceutical markets value and volume grew in quarter 2 in both Sweden, Finland. The quarter 2 invoicing increased by 3.7% to EUR 904 million compared to EUR 872 million. The net sales grew by 9.5% to EUR 395 million compared to EUR 360 million. This growth was driven by the market growth as well as new customer agreements in the pharmaceutical distribution and growth in dose dispensing. Adjusted EBIT increased to EUR 7.5 million compared to EUR 4.2 million driven by the market and net sales growth and other turnaround actions. However, cost inflations and production challenges, partly related to an external supplier limited to EBIT improvements. If we then look at the discontinued operations, the Consumer segment. The consumer net sales decreased by 2.5% to EUR 202.3 million compared to EUR 207.5 million. In constant currency, the growth was 0.7%. Our online channel growth grew slightly faster than the market in the second quarter. When we exclude the positive impact from depreciations, the comparable adjusted EBIT was EUR 3.1 million compared to EUR 2 million previous year. the performance was driven by increased sales and turnaround actions. Now let's take a deeper look at our financials details, and that will be taken on by our CFO, Sari Pohjonen.

Thank you, Katarina, and good morning also on my behalf. If we first take a look at our profit for the period and EPS, you can see that both of them improved significantly compared to the previous year. And our profit for the period, if we think about the year-to-date numbers, stood at EUR 20 million, and EPS for the quarter was EUR 0.07. Even paying attention to the fact that as we have classified Oriola Consumer as discontinued operations, there are certain depreciations, which are not done, but even taking that into account, our profit for the period has improved considerably from the previous year. Looking at our operating cash flow. I'm very pleased that the development, which we had again during the second quarter. So both the second quarter and especially if we take a look at the year-to-date number, we have been able to improve significantly compared to 2021. There are 2 sources for this improvement. Obviously, our result development is key there, but we have also paid a lot of attention to working capital management, which is part of our turnaround agenda. However, it's good to know that in our business, it's very typical for working capital to fluctuate a lot from quarter-to-quarter. As you can see from the historical data, there's a lot of deviation between -- or from one1 quarter to the other. That happens in our business. But regardless of that, I think we can conclude that we have been able to improve a lot during the first half of this year. And as you can see from the right-hand side, our overall cash position remained extremely strong at the end of the quarter. Then looking at our net debt development. On this one, I would like to point out that the numbers and the graph, they include only the continuing operations. So for continuing operations, our net debt was actually negative, minus EUR 10 million at the end of June. If we do include the discontinued operations as well, the same number was EUR 41 million. Even the EUR 41 million is the EUR 70 million improvement compared to the previous year, which is, of course, a significant change and a significant decrease in the net debt. On the right-hand side, there are more details on the numbers. They are not fully comparable as '22 numbers include only continuing operations. Most notably, there's a difference in the lease liabilities. But as said, the total net debt, including discontinued operations was EUR 41 million. And then looking at our equity ratio, which stood at 19.8% at the end of the quarter. These numbers are comparable to the previous year. And then also on the right-hand side, our gearing, which was negative for the continuing operations but on a more comparable basis, if we include also the discontinued operations, our gearing, including both continuing and discontinued, was 18.7%. Also there, a significant improvement compared to the previous year. And then just a reminder of our outlook for this year. The comparable adjusted EBIT is estimated to increase from the previous year's level. And once again, reminding everyone that the outlook is based on our current group structure, so including continuing and discontinued operations. And now handing back to Katarina.

Thank you, Sari. We now mentioned the turnaround several times during this presentation, and let's still go through the key areas of the turnaround and our focus area also in the coming months. Our turnaround short-term action plan consists of 4 key priority areas. It's the cost savings, it's efficiency network and capital management, it's excellent customer relationship management, and it's commercial excellence. When we look at the cost-saving priority, Oriola is focused on 3 main areas. First, we have simplified our operating model and move to a country-based model from the beginning of 2022. This is cutting our cost base with EUR 7 million from the first quarter onwards. To streamline our operations further, we have divested our pharmacy staffing business in Finland as of 1st of April this year. Secondly, we are focusing on reducing our operating costs. High focus has been in our distribution centers, especially in shopping. Third, rigorous cost control. We have and we will continue to implement strict cost control, which is even more important now when we are witnessing the all-time high inflation figures. Furthermore, we have an ongoing improvement activities in net working capital that Sari just mentioned. This is to enhance the end-to-end sales and this is done by enhanced operating -- end-to-end sales operations planning and supply chain planning. Also, we are crystallizing the optimizing our assortment portfolio. These actions are leading to especially better warehouse management. For us, excellent customer relationship management and commercial excellence means improvements related to the commercial management. During the second quarter, we have paid extra attention to these areas and gained good results. These activities are very important for us to mitigate the inflation impacts. This short-term action plan is our key priority, and we know what to do and where to focus on these points. To wrap up than the second quarter for Oriola, there are 4 important takeaways that I want you to bring with you. Firstly, we have a solid performance continued. Both net sales and invoicing increased. Also, the comparable adjusted EBIT increased to EUR 8.6 million from last year, EUR 4.1 million, and this was an increase of 111%. Secondly, we are currently witnessing an all-time high inflation, and that gives uncertainty for coming quarters. In quarter 2, we have managed to do cost savings to mitigate inflationary cost pressure. Inflation is mainly affecting our fuel and energy prices but also our labor cost in the long run. Thirdly, now when we are facing accelerating inflation numbers, it's even more important to take our rigorous turnaround action forward. Also progressing well as our efficiency is improving, and we have good product pricing and portfolio management in place. We continue to seek further measures and also to improve our profitability. Last but not least, we are now also speeding with the preparation to complete the planned pharmacy merger after the Competition Authority approval received in the end of June. This is our strong focus area on the second half of 2022, and it's important that we are like closing that deal. And then it's planned to be done in the beginning of October 2022. I also want to take the opportunity now here to also express my thanks to all of our employees. I'm really, really proud to work with all of you, and you have a really, really energetic way of fulfilling our purpose held for life. And you're doing that both for yourself, but also to all our stakeholders every day. And without your everyday commitment, this would not have been possible to achieve what we have done now in quarter 2 and the first half year. So with that, Tuula?

Thank you. And now we are ready to move the questions, what have started to float into the chat already. So I think we could start with you, Sari. There is a question about guidance that -- this is coming from Nordea, Joni Sandvall, that your guidance appears very cautious given EUR 20.1 million comparable adjusted EBIT after H1 after EUR 26.3 million.

Our guidance is unchanged. And as said, we are expecting our comparable adjusted EBIT to increase from the previous year. But maybe to elaborate a little bit more on it, obviously, as mentioned so many times, during this presentation or webcast also, the word inflation is impacting everyone's lives. So there are certainly cost pressures around and -- but as Katarina pointed out during her presentation, it's, of course, our task as management to try to mitigate them in the best possible manner. But yes, the outlook is unchanged. And I would still like to remind everyone that it includes both continuing and discontinued operations.

I think this is reflecting to Joni's next question, which goes to you, Sari, as well that, did Oriola have temporary cost savings during the Q2?

I wouldn't call the cost savings temporarily. Of course, we are talking a lot about our turnaround actions. Those are hugely important for us. And as already pointed out during the presentation, even more important now that the inflation is, in a way, hitting and hurting everyone. Obviously, overall, not only the turnaround actions, we need to be very clever with our spending. And if needed, then take some measures even on a temporary basis. But I would, in that perspective, say that the Q2 was a more normal quarter. There is nothing special that one could be highlighting about cost savings. So normal rigorous cost management and then also the turnaround actions that we have announced earlier.

One turnaround question here to maybe you, Katarina. Can you open your portfolio management actions and new agreements mentioned in the report? Should we expect similar invoicing levels in services going forward?

If I look for invoicing levels, it's really hard to say exactly what will happen on the markets. We know that we have a stable market, but of course, it's also depending on what the customers are doing. And like Sari said here before, that also, of course, is depending on the inflation point. But we are working with all our contracts, as we always do. And what we have done is then to like really put some effort in how do we will do this work and processes around that.

Good. Thank you. To you, also, Katarina, there is a question about this, in report, we mentioned these production challenges. Have these been resolved during the Q2? And how long you expect this to have effect on operations?

The challenges that I mentioned is resolved during Q2, most of it. So I don't see that it will like -- that kind of challenges will, at least, affect in the future. Then, of course, we never know if there will be other challenges, but it's also our job to minimize these challenges.

There's a following question more specifically related to [indiscernible] efficiency. What can we say about that one?

We are always, and I think it's also the management team's work to always work to be more efficient. And that's something that also is part of the turnaround. And I will say that will not stop with the turnaround. It will be something that we always should work with. So efficiency will always be high on the agenda for the whole management team and, of course, also the supply team.

And maybe a little bit to add on that, there's been good improvement and things are definitely going to the right direction. But there are still plenty of opportunities to improve.

Maybe to, Sari, to go through, there is a question related to consumer business that, why the turnover in consumer is up only 1%, but market is up 6%, and market share is still the same? What can you be -- elaborate that one?

Maybe it's a little bit good to remind, first of all, that we have closed some locations. So the number of pharmacies in our case is not fully comparable. Then we have also put even more focus on developing further our online operations. So that was reflected in the second quarter as well. There are always fluctuations even in the market and even in our sales from one quarter to the other. I wouldn't say that there was anything major neither on the market nor in our own operations during the Q2.

Maybe a bit following that one that, that what were the drivers to weakening the consumer?

I wouldn't say consumer weakening because we were able to improve our results. But in terms of net sales, I would just reiterate what I just said that we have been really focusing on further developing the online operations in our Consumer business, and those were actually growing faster than the online channel on average during April to June.

One more question related to consumer. The IFRS and depreciations, can you explain a little bit how those are going?

Yes. So when an asset or assets are classified to be discontinued, then certain depreciations and amortizations are not done any longer. So the impact of those, all in all, on a year-to-date basis is EUR 10.2 million to the result of the discontinued operations. That's just IFRS rules, which we are following.

Thank you. At least now I see one more question and this goes to Katarina, and it's related to our CMD. What is expected date for that one?

We are not putting out a date on that one now and that you see that also on the next event slide here. We have said that we will come back to that after the closing of the planned joint venture or merger with Apoteksgruppen and Kronans. And the reason for that is that we have a lot of focus now to really get that, that's taking place. So we will come back to that one as soon as we know more.

Now one more question was just floating in that, Sari, you could probably take this one that. Could you please elaborate how much of the continuing operation growth were driven by price increases/volume changes?

That we haven't quantified as such. But I would maybe as a general rule, say that, first of all, it's kind of the total invoicing better reflects the overall situation. There can be some more fluctuations in the net sales. What we have seen markets is good demand. But obviously, as mentioned also earlier today, we have been looking into the pricing as well. It's always on the management agenda, but particularly in a situation where inflation is impacting all the company. So there are elements of both in the outcome.

Let's get back to depreciations actually. Now there's a couple of questions related to why the depreciation in Consumer were so different in Q1 and Q2, and what are we expecting Q3?

I would like to just remind everyone that we were announcing the planned merger in the early days of February. So that is the time when it was classified as this kind of an asset. That's maybe the best thing to say about it.

Thank you. If there is no any other questions and, at least, I do not see at this point, then we will thank you, our audience, and we will get back then with the Q3 results then on October. And we wish all a very pleasant summer.

Thank you.

Thank you.