Oriola Oyj (ORIOLA) Earnings Call Transcript & Summary

Sorry about the language, but you don't want me to speak in Finish. That would not be a good idea. Dear shareholders, Oriola Board of Directors, management and also all employees. Also on my behalf, I wish to welcome all of you, both here in Hanaholmen and also the one who is following us online. Warm welcome to Oriola Annual General Meeting 2023. My name is Katarina Gabrielson, and I'm since May last year, the CEO of Oriola. Although I joined Oriola already in 2012 and have been a member of the Oriola management team since 2019. During the past 10 years with the company, I have had the opportunity to work across various business units, which has given me a solid experience and also insight of our business. Looking at 2022, it's fair to conclude that the year truly was really eventful and for the whole company, I will say, and in an extraordinary and rapidly changing environment that we have, we can really see that we have done a lot of things during the year. In my presentation, I want to go through what Oriola as a company is today and how last year's key events have reconnected us with our roots. I will also discuss the sustainability work that we are doing and also the financial performance in 2022. And I will conclude with presenting our priorities for this year and also with a recap of our outlook. We are a leading distributor of pharmaceuticals in Sweden and in Finland, and we are forerunner in providing advisory services to pharmaceutical companies. We have a long tradition in the sector and have been working for Health for life for more than 100 years. We are securing the distribution of medicines to patients and to customers, and that is a key element in the Nordics welfare societies and the health care system. And we are proud of our important societal role to enhance the availability and also the safe use of medicines and health care products. In 2022, our invoicing was EUR 3.6 billion. We made approximately EUR 20 million in adjusted EBIT and employed 933 people. We have a strong market position in both Sweden and in Finland. And you can also say that our competitive advantage comes from local scale and also the services and from our capability to offer high-quality expert services to our pharma customers. Our operating environment is generally very stable. In 2022, we save the -- we saw that the availability of raw materials for pharmaceutical products decreased significantly due to the global supply chain disruption, which meant that our role to secure the availability of medicines became increasingly important. I'm also very proud of how well our supply chain and the warehouse operations have worked and shown exceptional adaptability during these times. Our business has an essential positive impact on the society and the health and well-being of individuals. Sustainability is embedded in everything that we do, and it's also really important for what we do. And we have set an ambitious long-term sustainability goals, which are guiding the work that we do. Next, I would like to present the people that I'm working with, and I'm also really happy then to hear have some part of the Oriola management team. Last year, we organized ourselves as a cross-country market organization. And I will comment that a little bit more later on in this presentation. And we made also new appointments in the management team. First is Petri Boman. He joined the Oriola company in October, and he is Chief Supply Chain Officer. And he's unfortunately not here today. Then we have Hannes Haselrot, who is over here. He is already a member of the management team already before, and he was appointed Chief Commercial Officer. That's a position he assumed in October after the finalization of the joint venture of Swedish pharmacy Holding AB. Then we have Timo Leinonen, and he joined Oriola in December as our Chief Financial Officer. We have Mikael Nurmi, who is not either here today, and he is the Chief Digital Officer, and he joined us this year in January. And last, but not least, you have already met, Peter Sandstrom; Petter Sandstrom, not Peter, our General Counsel, and he has been with us in the company since 2008. In addition to this team, we are in the process now of also then hiring a Chief People Officer. Together with this team and also with our people that are working in the group, we work towards our targets, and we have also full [ team ] ahead for transformational change that we don't do. After this introduction and words, I will also now then look to more present details of the key elements that we did last year. And like I said before, we had a really eventful year then in 2022, not only for Oriola, I would say, for the whole society also. And if you look at Oriola, you can say that we continued to implement the short-term turnaround plan that we initiated then in 2021. The aim of this plan was to improve the profitability and also the efficiency to reduce the complexity in the structure in the operations also and to sharpen our focus. And I will say that we achieved all of these goals during this year. And we will continue also to work on the goals for this year. In addition to the turnaround plan and the cost savings initiatives, it was also prepared for the joint venture and the pharmacy operations in Sweden and implemented -- we also implemented a new operating model in our own business. And I will also come back to some of this topic later. During the last year, we strongly focused on the transformation and increasing our profitability. We were able to improve our financial performance significantly through our 4 key priorities. And the key priorities last year was then cost savings, optimized operational efficiency, drive cultural change and also improve the customer experience. The key deliveries within our turnaround program during last year, where the implementation of simplified operating model during autumn as well as implementing rigorous cost management. With this, we were able to successfully reduce operating costs through the operational efficiency and to mitigate the inflationary impact. We also made tactical changes in our business structure, including exiting the pharmacy business, Kronans Apotek, and the divestments of the pharmacy staffing service company, Farenta Oy. We also improved our customer relationship management by developing our key account management services and the digital platforms. In addition, we improved our product portfolio and enhanced supplier management to be able to serve our customers more efficiently. Next, I want also to recap something about Kronans Apotek transaction because this was really a significant highlights and significant step also in our transformation. The pharmacy business that we had in Sweden, Kronans Apotek was combined with the pharmacy business of Euroapotheca into a new joint venture called Swedish Pharmacy Holding AB. The new company has decided now also to use the brand Kronans Apotek in the future. The new company is the third largest player in Sweden by revenue and Oriola owns then 50% of this company. Following this transaction, Oriola will now focus on the distribution of pharmaceuticals as well as providing a wide range of high-quality services to our customers. We are committed to a long-term ownership in the joint venture and remain confident that transactions will be value creative for Oriola. Another important milestone that we did last year was to implement the new operating model that I already mentioned a little bit about. In the new operating model, which we implemented in October after the Kronans Apotek transaction was completed, we established cross-market responsibilities to create synergies and achieve operational, commercial and supply chain efficiency. -- [ excellence is called, not efficiency ]. We have combined our knowledge and expertise to become more agile and efficient. Our aim is to capture the full value of our core operations, the wholesale and distribution of pharmaceuticals as well as expert services to pharmaceutical companies. We continue to have a strong local presence and work closely together across countries, also the teams and also business units. Next, I want to highlight some of our activities and results in the field of sustainability. As I mentioned before, sustainability is really embedded in everything that we do, and that's in line with also our purpose Health for life. We improved the fundaments for a healthier life in the context of society, people and planet. Our sustainability program is integrated in the group strategy, and we have set ambitious long-term goals of sustainability. The key topics within each of the focus area, the prior test, based on the materiality assessment, and they are aligned with the United Nations Sustainability Development Goals. We are, at the moment, updating this materiality assessment and that should support our development work to prepare for the upcoming sustainability reporting changes and also, of course, our priority standing in the group. The materiality survey is open, and that's open until Friday this week, the 21st of 24th of March. And I would be really, really happy if you would go in and also do this survey because it's really valuable for us to hear from your views on which sustainability topics that is the most relevant for Oriola. So if you would like to do that, please go to our homepage, oriola.com and take -- there you will find that survey. As next, I will comment on long-term sustainability goals and also the performance during last year. We are committed to carbon neutrality in our own operations by 2025 and overall by 2030. In our own operations, that is Scope 1 and 2, our carbon footprint consists of direct emissions, including refrigerating leagues and emissions from purchased energy for electricity and heating. These emissions account for about 23% of our total emissions. And here, we have made a good progress in the long term and decreased the emission by 70% compared to the base year 2019 level. For example, in 2022, we installed a new cooling system in our distribution to create an area in Sweden. And that investment decreased the Scope 1 and 2 emissions by 6%. The Scope 3 emission, that's covered indirect emission, that we don't have full control over, and that is for supply chain, and that accounts for about 7% to 8% of our emission. In this area, the biggest impact comes then from transportation and distribution. Therefore, we have the tight collaboration and dialogue with our transportation companies and transportation partners in order to reduce emission. We can, for example, optimize the routes and also our capacity efficiently and also expand the use of more alternative fuels in this area. And we will continue our long-term work on these areas and reduce our carbon footprints. And with the planned initiatives for this year, we also have offered sustainability goals and that we continue to work towards. One important KPI for us to measure is the pharmaceutical delivery accuracy, and that's an indicator for picking accuracy of the ordered pharmaceuticals. We have commitments to deliver pharmaceuticals to pharmacies and hospitals, pharmacies within 24 hours of ordering. So I'm very pleased now that we can say that we have like a 99.6% of that achieved in Finland, and that's above our target that is done on that 98% because this is really, how should I say, important target for the pharmacies. In our efforts to reach the carbon neutrality, we are systematically working on improving energy efficiency and also the waste recycling. Our energy consumption comes from lightning and ventilation as well as cooling and heating. We are aiming to use only renewable electricity and carbon neutral each by the end of this year 2023. And this means that we are looking at a good improvement from the previous year when the ratio was at 91%. Most of the waste generated in our operation comes from packaging material, like cardboard and plastics off the goods arriving at our warehouse and distribution centers. We aim to further decrease waste, use materials efficiently and also increase the recycling to reach an 80% to 70% recycling rate in 2023. We have systematically improved our capabilities to sort waste, and we currently have over 10 different sorting categories in Finland and in Sweden. Last year, we also introduced 2 new sorting categories at the Swedish distribution center. Overall, in 2022, the recycling rate improved to 83% from 79% in 2021. We have also been recognized by external sustainability ratings, and it has been great to see that our ratings have improved in these areas. So all in all, I can say that I'm very pleased to have these achievements, and it's also taking steps in the right direction. Then let's share some information on our financial performance. There were several factors in our operating environment, driven by global uncertainties and the geographical situation that impacted Oriola last year. Consumer confidence weakened, inflation accelerated significantly driven by rising energy and fuel prices. The labor cost in Europe increased and availability of raw materials for the medical products became tighter in the second half of the year due to COVID restrictions in especially China. And which on the other hand, has affected the availability of some of the medicines through Europe, also here in Finland and Sweden. However, despite the increased economic uncertainties, the pharmaceuticals market continued to grow in 2022. In the first quarter, consumers prepared for crisis by holding pharmaceuticals, especially in Sweden, we could see this phenomenon. And societies enhanced the pharmaceutical reserves as well. During the latter part of the year, markets demand returned to a more normal level, while the growth slowed somewhat in Finland in the fourth quarter compared to the previous quarters of the year. The combined pharmaceuticals wholesale market in Sweden and Finland has developed positively for a longer period and has reached about EUR 8 billion in value. We are on a growing market with our historical compound annual growth rate of 6%. Market growth is driven by several market trends. And if I mentioned some example, you can say take the aging population and also the increasing spending in well-being and health care overall products that we have seen in the society. Looking at the individual wholesale markets, we can also see that the health growth in both Sweden -- that these products grow both in Sweden and Finland. In Sweden, the value of the pharmaceutical distribution market at wholesale prices and measured in Swedish krona grew by 8% in 2022, while growth in Finland was 3.9%. Our market share in Sweden declined, though, slightly due to customer contract losses in the first half of the year, while the market share in Finland improved. In the dose dispensing business, where we offered pharmaceuticals and dose dispensing for private and public health care sector operators, the total market size increased somewhat and was approximately 260,000 patients in Sweden and 100,000 patients in Finland. In Finland, our growth was slower than the market, while the number of patients remained on the same -- remained stable. In Sweden, where the regional customers have run tender processes from time to time, we lost some of these tenders last year due to which the number of patients served and market share declined. To mitigate this, our dose-dispensing business in Sweden is already now focusing on new customer segments, and this is materializing in the -- in new contracts, and we are also continuing to participate in the regional tenders. Featuring the next is our financials. I'm pleased to present our solid performance despite the challenging operating environment that has been during last year. First of all, we can see that the invoicing grew by 1.7% to EUR 3.6 billion and measured cost in constant currency basis, growth was 4.9%. On the top line, we see that the net sales grew by 4.4% to EUR 1.5 billion, while growth on constant currency basis reached 7.6%. The net sales growth was driven by the overall good market's demand and new customer agreements in the pharmaceutical distribution business. The adjusted EBIT grew by 19% to EUR 17.8 million, mainly driven by net sales growth and the turnaround initiatives. The figure includes Oriola share of the net profit -- profit of minus EUR 2 million in the joint venture. So when excluding the joint venture impact, adjusted EBIT for Oriola was EUR 19.7 million. We implemented measures to achieve the earlier announced EUR 7 million cost savings in the first quarter. Part of these savings were related to continuing operations and were fully achieved in the end of the third quarter. In addition, we improved operational efficiency in our distribution centers and reduced operating expenses. All in all, I will say it's a solid performance after looking at the top line and the profitability. Continuing on our group key figures, we can see that the reported EBIT declined. We had adjusting items of EUR 10 million, which impacted negatively on the profit for the period and earnings per share. The adjustments were related to an impairment of other tangible and intangible assets not yet available for use and which have been development in progress. One of the big positives for the whole year was the strong cash generation. We can see a big improvement from the previous year, driven by good underlying business performance. We have also strengthened our balance sheet and had a negative net debt position at the end of the period. The decline in net debt was due to the pharmacy business combination and also the strong cash flow developments. This translates into a negative gearing ratio, which is also a positive indicator. And I'm very satisfied with the balance sheet and also the cash flow position at the year-end. And to conclude the financials, let's also look at the Board of Directors' dividend proposal. The Board is proposing a dividend of EUR 0.06 per share for the financial year 2022. It means an increasing dividend from the EUR 0.04 that was paid out last year. According to the proposal, the dividend record date is the 23rd of March and payment date is 14th of April. Next, I want to bring your attention to this year and also then what our position -- our priorities are for 2023. Following the major structure and the business model changes that we have completed on during 2022, we are now in the process of reviewing our strategy and also the financial targets. Meanwhile, we are still working towards these long-term financial targets of growth, the profitability and also dividend payout and our transformation journey continues also this year with the following key priorities. We are looking then at profitable growth, efficiency and also a culture. We want to be the preferred business partner in the Nordics and the forerunner in the advanced distribution of pharmaceuticals and in providing advisory services to pharmaceutical companies. We aim to drive profitable growth by, for example, offering proactive services and look for joint business opportunities with customers. We look to increase operational efficiency, for example, by improving stability and performance in deliveries. And we continue to improve our capital efficiency and to develop the inventory rotation while keeping the optimal stock levels. As a third priority, and it's also a very important priority, I would say, we have the culture. The value is created by our people in the company. And therefore, the collaboration, the accountability and also the empowerment are areas where we are really want to focus and also get more focus on. To conclude my presentation, I also wanted to recap our outlook for this year that we communicated in the connection with the financial statements released in February. And the financial outlook for 2023 is that we expect adjusted EBIT excluding the contribution from the joint venture Swedish Pharmacy Holding AB, to remain on the same level compared to last year. Dear shareholders, the year of 2022 was eventful, like I already said here. And that has required good adaptability and also resilience from the whole organization. And I would really like to thank all -- take the opportunity to thank all the employees at Oriola for their hard work and also commitment during this exceptional year. I also want to thank our customers and also our partners for the good collaboration and look forward to a close cooperation also with them during this year. We will continue to build our strengths and work on our transformation journey and continuously keep the best interest of our shareholders -- of the shareholders' mind. So as my final note, I also want to extend my sincere thank you to all of you who are here today to all the shareholders for the trust that you have shown us throughout the year. That's my last word. So thank you for listening.