Orion Oyj (ORNBV) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to this webcast and conference call regarding our announcement earlier today that Orion Animal Health is -- or Orion is acquiring Belgian Inovet's Animal Health business. I'm today here in this Helsinki studio, with our CEO, Timo Lappalainen, and then we also have remotely online Orion's CFO, Jari Karlson, who is also representing our Animal Health business in the Orion Executive Management Board. Bonjour, Jari.

Bonjour.

Yes. Great. So we have Jari online. So we will shortly have a short presentation by Timo regarding the announcement and acquisition, after which then we will open the lines for questions. We will first take questions from the teleconference lines, and after that, we will then take all the questions we receive through the webcast chatbox. [Operator Instructions] And just before I let Timo to step in just a kind reminder about the disclaimer regarding forward-looking statements. But now, Timo, it's your turn, so please, the stage is yours.

Thank you, Tuukka. So today, we've announced a transaction. And to put this firstly into the perspective and why we are holding this is that, of course, we've told, over the past couple of years that the M&A is one tool in our toolbox and having the history that we haven't made transactions in our recent history, so we wanted to discuss a little bit more on this than we traditionally probably would have done given the size of the transaction and its impact in the overall group balance sheet or in P&L. But I give you a little bit on the meat in the bone. So there were, of course, a number of legal entities that are part of the Inovet Group, and here, they are listed. The seller is a family-owned Belgian private company who have built the company over past decades to a very successful business and buyer is Orion Corporation, as we traditionally have, so the legal entity is the mother company. And then the transaction consideration is roughly EUR 130 million on a debt-free basis. Transaction will be funded from our cash reserves. And as there will be assumption of debt and there will be also some deferred payments, so the immediate cash impact is roughly EUR 90 million. And the transaction was both signed and closed today. So we are now all cylinders go with that regard. And as we have outlined over the past few years, we are looking for growth opportunities in all of our businesses. And in this specific case, of course, the Animal Health business, will expand its portfolio, get a foothold also in food producing animals market and also then create an opportunity and a foothold for commercial sense in Western Europe and many important growth markets, especially in food for using animal markets. Furthermore, there is a new production unit that is being constructed and is specialized in manufacturing of animal health products. So this is something that we currently do not have, but we are producing both human and animal health and pharmaceuticals at the same facility. And of course, this is part of our growth strategy story. So what is actually the acquired operation in totality. So it is a unit that has more than 200 products, roughly a little bit less than 180 employees because there is manufacturing. There are numerous marketing authorization around the globe and the products are sold pretty much globally. An important asset for the company is that most of the products that are sold those are also manufactured within the premises, and when we look at the footprint that was acquired is the headquarters, the logistics packaging unit that resides in Belgium. And then we have -- in the Northern France, we have a facility that produces and also holds some other activities. And there, also the new facility is being constructed and one would expect that, that will be -- the construction will be finalized sometime next year. And then furthermore, of course, there will be validations and various regulatory filings that need to take place. And also, we have access to the sales offices in Budapest and also in the growth market in Vietnam. And here, you can see that the split of the business. So roughly last year, EUR 60 million. And by far, the majority is in livestock animals and the rest in smaller species or in companion animals. And the Orion existing animal health business and the acquired Inovet business, those complement very nicely each other. When we look at the geographies, there is no overlapping. So Orion traditionally has had its commercial footprint in Scandinavia and certain Eastern European countries, whereas the footprint by Inovet is focused in France and the Benelux countries. Now furthermore, there is no overlap in the products. When we look at the products because Orion's Animal Health business today is very much focused on companion animals, although we have still substantial livestock business and have had that even more so and VNB or the Inovet is much more on the livestock business. So when we look at that operations together from the production business -- product perspective, it's a very balanced portfolio in these 2 categories within Animal Health business. And then, of course, the geography that is now we have jointly and will be developing as a great opportunity to develop that further. So when we look at the overlapping -- so as I mentioned, there are no overlapping. We think that this creates a great new organization, new unit, that will have a lot of mileage for further geographical expansion and new operation will be also an attractive distribution partner for in-licensing new products. Of course, we will be looking for cross-selling opportunities, and needless to say, of course, access to new markets. Also, the opportunities for R&D and especially in production, as I said, we do not have a dedicated animal health production unit within the group but we will have that now, so that's something new for us. And of course, that creates new growth opportunities, both in inorganic way, and of course, also further in-licensing and we will continue to look at that to bolster this business further. With these introductory remarks, I'll open the floor for questions and invite also our CFO, Jari Karlson, to join the call. Jari is now in France -- was -- he took the announcement in France for our new colleagues. Jari is also responsible in the management team for Animal Health, and he will be taking an extra duty over the few couple of months to also lead the new Animal Health operation. With these words, I open the lines. And as Tuukka said, we will first take the live questions. So please.

[Operator Instructions] And our first question comes from the line of Harry Sephton at Crédit Suisse.

So I have 4, please. The first one was on the price of the deal. So it's around 2.1x sales, which I would say is relatively cheap in the grand scheme of the animal health industry. Can you maybe comment on the competitiveness of the bidding process? My second question is on where you see the value add from Orion. So you mentioned that you're not within the predominant part of the industry, which -- a predominant part of the deal, which is livestock. Would you say that this is more of a platform acquisition for Orion signaling your desire to grow within livestock? Or would you say that there is any synergies that you expect that you can deliver from this acquisition? My third question is on the main products of the portfolio. So you mentioned the 93% in livestock. Can you maybe give a split as to do approx the mix of what those products are, the mix of vaccines, anti-infectives and any detail there would be particularly helpful? And then my fourth question is on the growth from the portfolio. Can you give us an idea of whether there is any pipeline associated with this deal? And what you've seen in terms of the growth from the underlying portfolio ex any pipeline?

Okay. Thank you. So let me -- maybe we'll do that, and I'll start with the consideration. Of course, this is a friendly acquisition. We've known the seller here for already a couple of decades. And I guess, one could maybe say that this was a meeting of minds that both organizations recognize that there is value in creating a larger group and especially in the sense that this would provide an opportunity to complement each other's portfolios. There are no -- any major overlapping scenarios in either product side or in geographies. So in that sense, we feel that this valuation that was here created that was pretty much fully valued the opportunity that is there. So that -- maybe that's for that. And the seller is a private entity, and as such, wants to keep its things to itself. Then in terms of the value-adding to Orion. Maybe I will take them and then Jari can take the product split and the growth of the portfolio. So certainly, this will create us a platform in livestock, in terms of the production, in terms of the -- also in the markets where we currently are not, where there's customer intimacy also from that perspective so there's a direct access to customers. Now the synergistic effects, those will be more in the cross-selling opportunities. However, one has to remember that the target groups for livestock and companion animals in many countries are very different. Because in livestock business, you sell to large organizations, farmers or through buying organization. So it's more relating to business-to-business. There are, of course, something in some countries where the business runs through the vets as well. Whereas in companion animals, you still do quite a lot of business through veterinary clinics. But there, we are also seeing the consolidation of purchasing power. So this is clearly we would value this as a platform of creating entrée to new product market in large sense and also newer geographical markets. Then the third question was on the product split. I don't know if Jari, do you want to take this?

Yes. I can say a few words. So basically, the core product lines are various injectable livestock products, but Inovet has not had any vaccine production in their product lines. So antibiotics definitely are a big share of the total portfolio but not all of it. And also the injectables are the core focus in the future, which is, of course, reflected by all the fact -- also the fact that they are now here in France finalizing the new investment to a completely new injectable plant side or plant within the existing site where they have been operating for decades already so far. But the portfolio as such is pretty broad, like typically generic portfolios are. So no -- kind of, the key main products which are domain in the portfolio. But like I said earlier, they don't have vaccine production. So that is not in this call. And the business has been steadily growing over the last year, both here -- in their domestic markets in France and Benelux and then in the export markets, in many places especially outside of Europe, in Asia and also in Africa.

I wonder if that addressed also the fourth question, which was the growth of portfolio. So at this stage, as we are, of course, a little bit shy on the exact numbers because the deal closed only today, but maybe that will give you a flavor. So it has been a growth business over the years. As we know, livestock has been especially outside Europe.

And our next question comes from the line of Sami Sarkamies of Danske Bank.

Okay. Most of my questions have already been asked, but maybe a couple of follow-ups. On historical growth and margin profile, I mean could you be a bit more exact on whether it's been like a single-digit growth or double-digit growth in the past that the company has been able to achieve?

Okay. Maybe we could describe that, that the -- it has varied, but high single digit might be a good proxy. And of course, there are years when it has been even higher, but there are maybe specific reasons for that.

Okay. And when it comes to future growth potential, how material is this new production facilities? So I mean, will that sort of double the production capacity? Or, I mean, can you share any sort of take on that?

Well, it will be -- well, Jari, maybe because you're at the facility or in the vicinity of the facility, so maybe you are the right person to answer that.

So it's maybe difficult to give exact, but it will be a major growth in the capacity, and so far, one of the limiting factors for further growth has been identified to be that the capacity of the old smaller units started to be at the peak. So this would allow clearly continuous growth also for many years to come. But of course, in addition to the additional capacity, it is now a new modern facility while the old one was relatively old already. So also from that perspective, the change was needed, so not only because of the new capacity but also to the upgrade of the facility in all respects.

Okay. And finally, anything you can share regarding the margin profile, relative to your own Animal Health business? It seems that the profitability of VMD's are burdened by these growth investments, how materially? And do you expect this to be margin dilutive also in the long term?

Well, I think the -- that is a fact that as you mentioned, so the existing investment program, which is ongoing, of course, that is -- has been major and material investment for the unit. However, when we look at overall scheme of things, the materiality of the bottom line in the next couple of years, we do not think that, that materiality threshold will be exceeded. And as we do not break down the margins for our various businesses, including Animal Health, I think I'll better refer that to further discussions if we make a change in our policy. But at this time, I think the only thing I can say that it is not material in the group numbers.

Okay. And then on guidance, you chose not to update that even though this acquisition adds to revenues around 3% on annual level for this year. So why was it the case that you didn't upgrade guidance?

Well, we feel comfortable with our existing guidance given the geopolitical uncertainties that everybody are facing today, not only as a sector or the company but the entire global economy. So we took a little bit of a cautious look and want to see how the entire business and the year will evolve for the next couple of months and then we'll revisit when we have more clarity also for the remaining part of the year.

And currently, we have one further person in the queue, that's James Vane-Tempest at Jefferies.

I just have 2 remaining, please. Firstly, you talked about a big and friendly transaction. Just wondering if you can give a little bit more color on the process, whether it was competitive? And if so, was it more sort of private equity interest? Or is this just something which you were able to conclude yourselves? And then second question is, given this is, I guess, the larger deal you've completed for many years, just curious how this may impact your returns policy in terms of dividend? I know that it's being funded over existing cash reserves, but that would be helpful as well.

Okay. If I'll take the transaction part and then, Jari, you may want to address the capital allocation part. So the process was a transaction whereby, of course, as we have a private seller, he has various options, including not selling or just continuing the business or selling to somebody else. And we are not aware what might have been his other plans or plan Bs, should this transaction with Orion not have materialized this deal we did directly -- we negotiated this directly with the seller. So had there been other parties or other opportunities for him. Of course, as I said, the 0 option is always there to continue the business. We are not privy to that information. Then Jari, do you want to address the capital allocation and the return of capital to the shareholders?

Yes. So this is not -- I mean, of course, you all know that Orion has been a company with no net debt. So this size of a transaction to date doesn't really have any material impact on our capabilities to do dividend distribution. So this alone will not have any, as far as I can see, material impact on our capabilities. Then is, of course, a different thing what Board each year decides that what is a practical and right way to do the capital allocation. But that's not -- that decision is likely not really being impacted by this deal because it was not that large transaction.

[Operator Instructions] And we have a further question from Jamie Clark at Millennium.

Well done on what looks to be a good strategic acquisition for your business. I just wondered if you can comment on how you're thinking about M&A going forward? Are you still looking to do deals? If you were to see deals, would you be looking at more animal health than pharma?

We have said over the past years that we are looking for expansion in all of our businesses in both in generic space. In proprietary side, it is likely to be more on the lean licensing front as we have now concluded a deal this year and last year as well, and also in Animal Health side, as now this deal got closed. So this does not change our view how we will move forward the opportunities, how those present themselves, how is the fit to our strategy, and of course, always, we are disciplined with the valuation. So that is more the driving force. So having made this will not exclude or put weight on some other businesses from the capital allocation perspective, more or less. So we will continue to monitor the market and continued our discussions and evaluations of opportunities.

And maybe Jari could add about the firepower we still have left for M&A so that Jamie gets answer also to that?

Good point. Jari?

So we actually presented in our last Capital Markets Day a calculation where we were elaborating different capabilities to fund further growth profile by acquisitions, and there were basically 2 different considerations. One, our capability to raise more debt and still keep our financial target of equity ratio of 50% and then also including the fact that the AGM has now given the Board right to issue up to 14 million new Orion shares. And if we include both of those capabilities, we are talking about roughly 1 billion -- 1 million-type of transaction power without sacrificing the financial target of 50% equity ratio. And if we only use the debt even after -- with the current situation, we still have several hundred millions of capability to raise more debt without -- and still keep the financial targets. So I think there is still plenty of room to do more transaction, and at the same time, maintain the financial targets we have set a year back.

Okay. Brilliant. And it sounds like in your comments, you really had lots of discussions in various aspects of the market over potential transactions?

I'm sorry, could you please repeat? The line broke down a little bit.

Sorry, it sounds in your comments that you're still in discussions in -- with various parties over other transactions. So you don't lack firepower and you are talking to lots of companies, so other deals remain possible?

Yes. As I said, we are evaluating opportunities in all of our businesses.

There are currently no further questions from the phone lines at this time.

Okay. Thank you, operator, then we can turn to the webcast chat, and I have here a couple of ones from Iiris Theman from Carnegie. So thank you, Iiris, for the questions. So the first one would be, can you comment how Inovet's profitability compares to overall animal health sector?

Well, in the overall animal health sector, I think we have to differentiate the publicly traded companies which there is a significant variation also within that, and I mean, it is a very broad spectrum. And as one of the questions here highlighted the profitability has been under stress due to the -- or one of the reasons have been the recent construction. So I think from that perspective, in the recent year, it has been a little bit on the lower end. Also, of course, as a privately held company, there may also be a little bit different way of running and reporting numbers than maybe a public company does.

And maybe to add that the portfolio is almost fully generic.

True. Very good point. Thank you.

Okay. Thank you, Timo. And then the follow-up from Iiris was that do you see Inovet's margins to improve next year? Or is these investments that are going on at the org side are to burden profitability also next year?

Well, as we said and as Jari said, the facility is under construction. And whilst the technical construction would be completed sometime next year, there's still work to be done before the transition of the existing products from the old facility will take or will have completed to the new facility, and typically, that is a process that takes a couple of years. So I think there is -- that will not change the picture dramatically next year, but it will be more on the -- of course, on the demand side and how well we will be then able to satisfy the demand with the old facility given that this -- the capacity -- there's very little capacity left in that facility. So as we mentioned, this is a growth platform that we expect to utilize in the longer term, and this will create opportunities in the longer term. So overall, I think when we look at the incremental profitability next year compared to this year and including the Inovet, that would not be material from the group perspective.

Thank you, Timo. We have exhausted for now all the questions from the webcast. So all the webcast viewers, you have the chance still to type in questions, if you have any. And while we wait for few seconds, I still once more turn to the operator and ask whether there has been any new follow-ups on the conference call lines?

Currently, no further ones. [Operator Instructions]

Okay. It seems like we've exhausted all the questions. So thank you, everybody, and welcome to our half year's report on July 15. Thank you, everybody.