Oriola Oyj (ORIOLA) Earnings Call Transcript & Summary

Good morning, everyone, and a warm welcome to Oriola's Q1 Results Webcast. I am Tua Stenius-Örnhjelm from Oriola's Investor Relations. With me today, I have our CEO, Katarina Gabrielson; and CFO, Timo Leinonen. First, a note about the change in our reporting. As of January, we have 2 reporting segments instead of the 1 that we had before. The 2 segments are distribution and wholesale, and we published comparative figures for the segments in March. The Q1 report has been prepared according to the new report [indiscernible]. And after the presentation, we open up for your questions, and you can send them to us already during the presentation. As a kind reminder, in the Q&A, we will focus on questions relating to Oriola's business and financial development. We can answer questions on Kronans Apotek, but only within a limited scope. Finally, please remember that we are recording this webcast and the on-demand version will be published on our website. Before handing over to Katarina, here is the customary disclaimer that we all should be aware of. And now without further ado, Katarina, please go ahead.

Thank you, Tua. Good morning, and welcome, everyone, also on my behalf. We will start today with quarter 1 highlights and a couple of comments on the operating environment and markets, and then I will end my part with a review of the segments. And after this, Timo will take you through the financials before we continue with the Q&A. To begin with, I believe that we can say that we had a good start of the year. In quarter 1, the sales grew by 4% to EUR 375 million. This was driven by both distribution and wholesale segments. Usually, here, we would comment the constant currency figures. But in quarter 1, the Swedish krona did not cause any significant hedge or tailwind year-on-year. So we will focus on the reported figures. Also, profitability improved in quarter 1. Adjusted EBIT, when excluding the loss from the Swedish dose-dispensing business, improved by 14% to EUR 4.5 million, while the reported adjusted EBIT was EUR 4 million. The improvement in profitability was supported by lower operating expenses and freight costs. A brief comment about the refined strategy that we launched in the end of last year. The implementation is progressing well and key milestone was, of course, the announcement of ERP and warehouse management investments in January. This project is well up to speed and proceeding according to plan. But I also want to comment that we are focusing a lot this year on engaging with our senior management. This is an accentual part of rolling out a strategy so that we ensure alignment and strengthen our common understanding of our priorities, but also importantly, develop our leadership. And then finally, a couple of comments on the joint venture, Kronans Apotek. In quarter 1, e-commerce continued to grow steadily, while the customer flow in the brick-and-mortar pharmacies was weaker year-on-year, which resulted in reduced volumes, market share and adjusted EBIT. And you might have seen last week that we announced regarding Kronans, but let me recap if you haven't seen it. Last week, Kronans Apotek got a new CEO. The previous CEO, Eric Sjögren, did an important job with the integration of Kronans Apotek and Apoteksgruppen. But now it's time for the company to go into the next phase, its development. Kronans Apotek will continue to develop its customer experience and product range, both in physical and in digital stores. The focus remains on long-term profitability improvement, integration activities and business development. For this role, the Board has appointed Tomas Rupšys, who has experience in retail and fast-moving consumer goods, both in U.K. and in Ireland. And he has also been the CEO of Maxima, the biggest retail chain in Lithuania. When looking at the overall operating environment, we saw a slight stabilization compared with last year. Cost inflation has slowed down, and energy prices have been stabilizing while we saw fluctuations in the prices. Although the consumer confidence in [ nature ], both in Sweden and in Finland, have slightly improved from the earlier significant drop, they have still been below historical outs. So all in all, consumer confidence is still weak. The pharmaceutical distribution markets continued at a steady growth in quarter 1. Still, the challenges in the availability of pharmaceuticals have continued in Europe. Since we now have 2 new reporting segments, we also wanted to provide some additional market information relating to the wholesale segment. But first, if we look at the pharmaceutical distribution market, we saw that the market value in Sweden grew by 7% in the first quarter and by 4% in Finland. Our market shares were stable year-on-year with a share of 42% in Sweden and 45% in Finland. In the finished dose dispensing business, we had a market share of 29%. With regards to the consumer health markets, we want to give you some indication of market size and growth while we will not comment on the market development on a quarterly basis. Based on external market data, the value of the market is estimated at around EUR 1.5 billion. The historical growth has been about 3%, and that is expected to continue, although with significant differences between the categories. In Sweden, for example, products such as vitamins, dietary supplements and sports nutrition are expected to see increased demand. While in Finland, consumers are expected to demand more natural and clean products with high-quality ingredients and available in easy-to-use formats. And then before I dive into the segments, I want to make a brief reminder of what the segments includes. We changed reporting in the beginning of this year so that it can be more [ assurance ] and also give better visibility into our businesses. The distribution segment [ consists of ] logistics and dose dispensing services. This is the largest segment that we have with an annual net sales of EUR 1.2 billion, which equals about 79% of the group net sales. The wholesale segment consists of wholesale of traded goods and over-the-counter or OTC products, parallel imports and special licensed medicines, as well as advisory services. The annual net sales of the segment is about EUR 306 million. The wholesale business is a bit more profitable because of the type of products and services that we sell in this segment, and that is also what you can see on this picture. Next, I will discuss the segments in quarter 1 and also start off with the dose -- with the distribution segment. In quarter 1, the net sales grew by 4% to EUR 294 million. This was largely driven by the steady market growth. Profitability improved by 29% with adjusted EBIT increasing to EUR 4.1 million. When we exclude losses from the Swedish dose business, adjusted EBITDA is EUR 4.6 million, which is EUR 1 million above quarter 1 last year. Profitability improvement was supported by a lower cost base compared with the previous year. Freight costs were lower, thanks to operational improvement and lower fuel prices, and operating expenses were lower due to cost reduction in the Swedish dose dispensing business. In the distribution business, we focus on our core and continue to build on the good development we saw last year. In quarter 1, our market shares were stable year-on-year, as you saw earlier, and we have gained new customers and renewed important distribution contracts to support our growth going forward. Then looking at the wholesale segment. In quarter 1, the net sales grew by 5% to EUR 81 million. We saw a solid growth in the Swedish wholesale business and also good development in advisory services. Profitability, on the other hand, declined slightly from EUR 3 million to EUR 2.8 million. The decline was related to Finnish wholesale business. Going back to our refined strategy, growing the wholesale business is 1 of 3 strategic goals that we have in the strategy. In long term, we want to grow the business by developing our brand portfolio and product categories, and this is something that we will take some time. During the start of this year, our focus has been building our offering and technical capabilities to better meet the needs of our growing customer segments. In addition, we have made appointments in key leadership positions. So really building a solid foundation for the growth is what we have started to do. Now Timo, let's go over to you and look at the financials.

Thank you, Katarina, and good morning from me as well. As Katarina said in her opening words, we had a good start for the year with a solid growth on top line and good profitability improvement as well. Invoicing increased by 6% to EUR 908 million. Because there was no significant head or tailwind in Swedish krona in Q1, I will not specifically comment on the constant currency figures. On net sales, we saw a solid growth of 4%, ending to EUR 375 million. Invoicing and net sales growth was driven by both distribution and wholesale segments. Adjusted EBIT increased from EUR 3.5 million to EUR 4 million. And when we exclude the losses from the Swedish dose dispensing business, we see an adjusted EBIT of EUR 4.5 million compared to EUR 3.9 million Q1 last year. And then let's look at net sales and EBIT bridges. On net sales, the growth is largely driven by distribution segment, where growth was EUR 17.6 million. In wholesale, net sales grew by EUR 3.6 million, which is also positive considering the smaller size of the segment. Group items on net sales is not significant, while the Swedish dose dispensing business contributed clearly on net sales by EUR 3 million. This gives a total of EUR 375 million in net sales. On the EBIT side, we also see good contribution with EBIT improvement by EUR 1 million and offsetting the decline we see in wholesale and group items. Excluding the loss of EUR 0.5 million from Swedish dose dispensing business, as such, EBIT was EUR 4.5 million. And then just to remind that we have started in the beginning of this year a big ERP project where actually, we are taking the system into use starting from '26 and continue to '27 as well. And costs related to that ERP project recognized in the income statement during the first quarter were, in total, EUR 0.7 million, and most of these were allocated to the group items. And as said, so it's not in that sense to our current operating work and the benefits are coming late. Overall, profitability improvement was supported by the lower operating expenses and freight costs. The decrease in freight costs were related to the operational improvement and lower fuel prices. And now moving on to the profit for the period. In Q1, profit for the period was negative EUR 2.3 million. Hence, earnings per share negative at EUR 0.01 per share. We had adjusted items of EUR 0.3 million in Q1, and they were related to the sale of the dose dispensing business in Sweden. There are 2 main drivers for the profit development: the loss of -- from Kronans Apotek and increase in net financial expenses. In Q1, we recognized a loss of EUR 3.5 million from Kronans Apotek compared to the loss of EUR 0.5 million in Q1 last year. As we know, the interest rates increased significantly last year. And in Q1, our net financial expenses increased year-on-year from EUR 1.5 million to EUR 2.2 million, although our debt level has decreased. So a decline in the profit for the period compared to Q1 last year. Then looking at the cash flow. Net cash flow from operating EBITDA in Q1 was minus EUR 11.3 million. Of these, changes in the working capital accounted for minus EUR 15.4 million. And just to remind that it's very typical now that working capital fluctuate as strongly from quarter to quarter. In Q1, increase in inventories and decrease in trade payables have impacted working capital negatively. When we look at change in the cash from the end of the year, net cash flow from operating activities was minus EUR 11.3 million; from investing activities, minus EUR 0.7 million; and from financing activities, minus EUR 16.6 million. The change in financing activities cash flow reflects repayments of the debt and commercial papers. At the end of the period, we had EUR 29 million less commercial papers compared with the end of the period Q1 last year. All in all, the cash position is strong with the cash and cash equivalent at EUR 110 million at the end of the period. In Q1, we have continued to strengthen our balance sheet by lowering our debt level. We have repaid loans and issued less commercial payables, and the amount of lease liabilities has also decreased year-on-year. Following this, our interest-bearing debt was down EUR 40 million from Q1 last year. And at the end of the period, our interest-bearing debt amounted to EUR 100 million compared to EUR 138 million at the end of Q1 last year. Cash and cash equivalents amounted to EUR 110 million. This gives a negative net debt position and gearing of minus 6.2%. The amount of sold trade receivables at the end of the period was EUR 93 million, which is somewhat lower than the previous year's level, but still at the current average level. To summarize, I want to say that we have a strong financial position with a good cash flow and gearing on the negative side. Equity ratio has declined from 22.8% to 17.3%, but is stable compared to the previous quarters. Then move on to shortly comment on Kronans Apotek. In Kronans Apotek, the e-commerce has continued a steady growth while the challenges has been more related on weak customer flows in the physical pharmacies. This has resulted on the lower volumes, decline in the market share and adjusted EBIT as well. Adjusted EBIT declined from 0 to minus EUR 5.5 million. In Q1, realized synergies in Kronans Apotek were EUR 3.6 million and one-off costs related to integration amounted EUR 1.6 million. And for Q1, we have recognized a loss of EUR 3.5 million in the consolidated statement of comprehensive income. Kronans Apotek remains an important strategic partner for Oriola, and Oriola will actively support Kronans Apotek on your creation as a major shareholder. And in Kronans Apotek, it is expected its full profit potential to materialize by end of 2025. And then coming to the sale of the Svensk Dos, so nothing new to comment on relating that one as we are not the divestment in October last year. In January, we informed that Swedish Competition Authority decided to move the investigation into Phase II. And we are still waiting for a decision, but expect to get it during the Q2 this year. Then coming at last to our guidance. And as said, so we are expecting our guidance or outlook to remain unchanged. We expect the adjusted EBIT, excluding those dispensing business in Sweden for the year 2024 to increase from the adjusted EBIT for 2023, which was EUR 19.5 million. As a key assumption, we expect pharmaceutical distribution market to continue to grow. However, a continuation of the weak consumer confidence might impact the wholesale market development. Also, the inflationary environment and related cost pressure may impact profitability. And with this, I'm ready to hand over back to Katarina.

Thank you, Timo. Before we take your questions, I want to summarize with the 3 key takeaways. The net sales growth and profitability improved year-on-year, which I'm very pleased about. And we saw positive development in both segments. But especially, the distribution improved the financial performance, and it did it really well. We have a solid financial position and have strengthened the balance sheet by decreasing our interest-bearing debt significantly. And last but not least, with our refined strategy, we have a clear direction forward and a good understanding of our goals and shared priorities. And with this, we are ready for questions. So let's see if, Tua, you have got something. And please, Timo.

Okay. Great. So thank you, Katarina and Timo, for your presentations. We have a couple of questions in the chat already. But as a reminder to everyone that please keep them on, keep sending them to us, and we will take them. And of course, as I said earlier, we will focus first on Oriola's business development and financial performance, and then take some questions on Kronans Apotek, if there are something. So let's start with the first question. So the first question goes to Timo. So what do you consider as a minimum level of cash in bank?

Well, if seen on the kind of end of the months, of course, we are kind of following it kind of day-to-day and to month as well. So basically somewhere around EUR 60 million to EUR 70 million might be kind of the level where it should be on lowest at the month end.

All right. With this size of business?

Yes, with this size of business. Of course, yes.

And then what is average maturity of short-term interest-bearing debt in months?

So maturity is the commercial papers are, of course, sort of like from 1- to 6-month maturity, in that sense. And basically, if the income our balance sheet, so there is 1 loan that is in maturity in June, and we are thinking of paying it out. And then there is 1 loan that is on maturity on December, and that's what we're going to renegotiate.

Okay. Then we have a question about ERP. So do you expect ERP costs to remain at the level of EUR 0.7 million in each quarter in coming years '24 to '26?

Well, it a little bit fluctuates depending on in what phase and what we are actually doing in the project because actually, how the kind of IFRS rules are going. So it depends. So what kind of system you are kind of building, and we have kind of different -- 30 different businesses to add that are kind of attached to each other. So basically, this level is probably what we are going to see at least during this year. But having said that, so we have decided to open in all the kind of our interim report, so how much we are spending on this.

Okay. Thank you, Timo. So at the moment, there are no more questions in the chat. But let's wait for a few seconds because we know there is a small lag between live and us here in the studio. But it seems that there are no more questions. So everything was clear for today. So thank you, everyone, for joining us today. And next report is coming out on 18th of July. So see you then, if not before that.

Thank you.

Thank you.