Oriola Oyj

OMXH:OKDBV

Earnings Call Transcript 2019-Q1

[Tuula Lehto, Group Communications Director]

Good afternoon, ladies and gentlemen. Welcome to Oriola's Interim Report January-March 2019 Review. My name is Tuula Lehto, I'm Oriola's Group Communication Director, and I welcome you to listen this event today. Today, our agenda will be going through the Q1 results, looking a little bit at our new business segments. And our CEO, Robert Andersson, will come and tell you a little bit more about these issues. Once more, welcome, and questions will be taken at the end of the presentation.Welcome, Robert.

[Robert Wilhelm Andersson, President & CEO]

Thank you, Tuula. Thank you for coming on a Friday afternoon. Okay, now we have somebody entering. Welcome. So yes, we will run through the quarter 1 results. And if we start by highlights, what we think are the most sort of important topics for the quarter, we've reported over many quarters already that we are satisfied or even happy with the growth of invoicing and net sales. This was the case also this quarter. We've been growing faster than the market in Kronans online sales. This was the case again. We grew by 59%. Kronans online is also already becoming sort of a not -- significant is maybe a strong word, but a substantial part of the offering. However, the online is growing and it's becoming significant and it's already 10% of the total market. That is a challenge for us and it is -- in the short-term at least, it's affecting our results negatively. We have been promising, I would say, that we will ramp up -- start the ramp-up of our Enköping Distribution Centre during quarter 1, and we did. We -- in the last week of February, we started a ramp-up, and this obviously is a sort of really fundamental event for us to address the inefficiencies in Sweden operations, which we have been reporting about during the last couple of quarters. Looking at the overall -- the key numbers, I mentioned already, we were happy with invoicing and net sales. Invoicing grew 8.7% in constant currency, 5.4% in reported currency. For those who haven't followed us so much, the majority of our sales are in Swedish krona, while the reporting currency is euro and the Swedish krona has continued to deteriorate in value. Net sales grew by 5.8% in constant currency, 5.8%, and 2.3% in reported currency. These are numbers we are happy with. What we are not happy with, for fairly obviously reasons, is the conversion of revenue to profitability. And the quarter 1 adjusted EBIT was EUR 3.9 million in reported and EUR 4.1 million in constant currency, which obviously clearly sort of indicates where we are putting our main focus now going forward, i.e., improving profitability.I'll give you -- now that we have a new set of reporting segments, I'll give you a bit different overview of the market and the operating environment than we have been providing before. I'll be talking about when we took a look at the consumer market, the growth of online is a steady one. It's -- if you look at the trend curve here or the graph, it is growing quarter-by-quarter, more or less year-by-year, and it's becoming a significant part of the market. We have talked about the effects on the market dynamics where the profitable traded goods and OTC -- or more profitable traded goods and OTC products are moving into online, whereas the Rx medicines are then sort of dominating the brick-and-mortar space even more than before. And that causes some problems, challenges for us. Market share-wise, if you're looking at the competitors in the marketplace, there haven't been any sort of really significant changes except maybe that Apotea, which is the leading online pharmacy, went from a weak 4% -- low 4% a year ago to a strong 5% now in a year of the total market. And they've been growing 30% to 40% quarter-by-quarter, and it's starting to show. They actually had a SEK 2 billion turnover for the full year last year.Another sort of maybe noteworthy detail is that it looks like now Apotek Hjärtat is actually, short term at least, beating Apoteket AB. Apoteket AB has traditionally been the leading player and now Hjärtat. I believe we will see that Hjärtat actually passed Apoteket AB at the end of the quarter. Then if you look at the product split, as a consequence of the online growth, the -- partly the product -- the market is also being redefined, which means that the share of Rx from the total is going down and OTC and traded goods are going up. So it's not huge, but a year ago when we were looking at Rx 74% and traded goods and OTC together 26% now. A year ago, it was 75% and 25%. But it's a clear trend as well. The total pharmacy market grew by 5.9%, and the number of pharmacies was almost stable compared to quarter 4, end of last year, only 6% net increase in pharmacies, which is again is also a logical consequence of the online growth. If we look then at wholesale market, what's happened there. We've seen again good growth, Finland 4.2%, Sweden 7.6%. The market shares are fairly stable, and they vary mainly based on the sort of the pharmacy companies, our principals portfolio, how the portfolios are going up and down, the number -- or the split of the principals between the different competitors are changing fairly slowly. And in this case also, I think the -- we're up a couple of percentage points compared to a year ago, to 45% from 43% and in Sweden -- in Finland. And in Sweden, we are down 1 percentage point from 41% to 40%. But again, not much to read into these numbers. They are stable and the growth in the market as such is good. Then to say a few words about the retail market, which is maybe the -- where we see most of the sort of obviously change in how we are presenting things, because we didn't have report Retail as a segment before. We talked about dose dispensing in the past. At the end of quarter 1, our market share in dose in Sweden was 44%, clear market leadership. A year ago, we were at 25%. Now on the other hand then in Finland, our market share in dose was 39% in quarter 1, and here we've seen a decline from a year ago when we had 44%, if I remember correctly. The decline in Finland is related to -- is not really, I would say -- I don't see that decline necessarily continuing. We've actually had a good -- gained a lot of good deals in the last couple of months, which are -- which I will be showing in the coming quarters. What is pressuring us in dose on the other hand is price competition has increased quite significantly. Then what we haven't really mentioned or talked too much about in the past is that we're not just supplying traded goods, and our retail wholesale operations is not just supplying products for Kronans and some others, but actually in the Swedish market place, our biggest customers are Apoteksgruppen, Apotea, LloydsApotek and a few more. So we are actually supplying traded goods OTC products to 26% of the Swedish market, total market annualized of EUR 1.1 billion. In staffing services, we are -- in Finland. We are the leader with the biggest number of pharmacists for hire. And during quarter 1, we supplied 150 pharmacies with our pharmacists. Annualized -- typically on an annual basis, we would -- we will -- we are likely to supply up to 350 pharmacies with hired personnel. And here the demand is actually growing very significantly. Now then over to strategic initiatives. These are nothing new. We have talked about this in the -- already before in connection with quarter 4. This is more of a reminder. And I also already said earlier that obviously looking at the adjusted EBIT for quarter 1, it is obvious that we are focusing our efforts very much on our 20by20 Excellence program, where as you know we have said, our objective is to save -- to reach EUR 20 million of annualized savings by the end of the year 2020. Then in addition to that, we have a systematic approach through a program to address customer experience where we are building, to some extent regaining the trust that we have lost during the difficult ERP startup in Finland, and then also -- but also otherwise to change the mindset and culture to become a more -- much more customer-oriented company. I mentioned already briefly that Enköping DC was -- went live in February. I just want to sort of set the scene a little bit here, so to manage your expectations. So we started the ramp-up at the end of February. We are in a ramp-up phase, which will -- sort of a key ramp-up phase, which will take until the end of quarter 2. In the second half -- where we are running the old process and the new process in parallel. In the second half, we will more and more have the pure go from 2 processes to 1 process, which is fully automated. And by the end of the year, we expect to reach the efficiencies that we are hoping for. Then moving over to business areas, and those who are following us know, consumer, there is very little change compared to what we've said before. It's Kronans Apotek, we're #3, the #3 pharmacy chain in Sweden and with 327 pharmacies and 2.6 million consumer -- customers -- members in our loyalty program. We are in close cooperation with our partly-owned medical -- online Doktor -- medical Doktor -- center Doktor.se, where we have during quarter 1 actually started up the first drop in clinics together where the Doktor.se is providing the sort of medical advice, and we are supporting people in our brick-and-mortar pharmacies.What also happened during quarter 1 is that we closed the last Hehku store. So now we are basically the consumer business area or reporting segment is at the moment purely the Kronans operations in Sweden. The consumer market -- pharmacy market in Sweden -- or Kronans operations in Sweden, sorry, grew by 3.6% to close to EUR 200 million, and this growth was in constant currency. I mentioned that we grew faster in online at 59%. We grew faster in the market, which grew at 34%. And our market share in online as such is a bit over 6% versus 5% a year ago. So we are a fairly small player still, and the market is dominated by Apotea with over 50% market share in online. We are catching up, but it's a stretch, it's a long way to go. We talked about the fact that the OTC and traded goods are naturally moving to online, which leaves the physical pharmacies with a higher proportion of Rx medicines where the margins are typically much lower. And to address the situation, we are -- and to make sure that we are competitive, we are investing in online, we are investing in marketing, in demand creation for -- to attract people to join our pharmacies. Looking at the EBIT development, year-ago quarter 1 last year, we had reported EUR 4 million that included -- that was when we still had Hehku in the numbers, and it's now down to EUR 3 million. The main difference is, in addition to Hehku, we have had an interesting situation with the market for parallel import products, which are typically where we are making good margins. The parallel import business has, I would say, what would be correct, halted. The reason why it's halted is, on one hand, the Falsified Medicines Directive, which is putting much more pressure on the sort of the free moving of medical products. Brexit has actually had an impact where products are -- to some extent, people are not allowing to grow to flow freely, but they are being kept as a security measure. And then the fact that now the Swedish krona has deteriorated for such a long time becomes -- it becomes -- it takes away part of the arbitrage, which is sort of the motivation for parallel import. So all in all, it's been a tough market now for a couple of quarters. And again, our response to this is that we're looking at all the means we have to improve profitability, including price increases and cost reductions, and also renewing some of our competencies, some of our team to be more -- better tuned into this reality. Then Pharma. Again, Pharma is a business area, is pharmacy wholesale and expert services for pharmaceutical products. Our customers are -- on one hand, the principals, the pharmaceutical companies, but on the other hand, you could say that the pharmacies and the hospital pharmacies, veterinarians are indirectly our customers as well. We have the widest range in our markets of expert services from research -- clinical research where there is collaborations with the pharma companies to patient support. The Pharma results for quarter 1, quite good, EUR 200 million net sales, increasing in constant currency by 11.6%. It's driven, to a large extent, by high-priced medicines, but also by volume growth. And here in the past, we had been -- last year -- most of last year, we had big challenges in our Mankkaa distribution center. I can now, I think, safely conclude that we are back on track, we are in good shape and we are delivering good results in Mankkaa. The challenge has now moved over to Enköping, where on the other hand I have to say that I'm much more confident than any of the quarters more or less that I have stand -- stood before, while at least in the 2 or 3 last quarters where I stood before you in the corresponding event. We are now up and running. We are ramping up. The ramp-up is going according to plan. It will bring results, and we will have a much more efficient facility at the end of this ramp-up period. Looking at the numbers, you can already see now the slight positive impact here from -- on a year-on-year comparison is all coming from Mankkaa, whereas it's mostly neutralized by the negative development during quarter 1 in Enköping. If you then -- for those who don't remember what happened in quarter 3 last year, this EUR 10.5 million includes EUR 7.2 million of the EUR 9 million ERP compensation. Let's move over then to Retail. Retail, as you can already see from kind of the length of the description, is a combination of many businesses. We do, on one hand, the health and wellbeing products, where I said, among other customers, we have in Finland Kesko and S-market, for instance -- or S Group, for instance; in Sweden, Apotekgruppen, Apotea, Lloyds, et cetera. We do dose dispensing as has been said. We have the pharmacy staffing. We have special licensed medicines and parallel import products. So it's a wide portfolio of products and services.And the main customer groups are the pharmacies and to some extent the big retailers like the Keskos and S Groups of this world. Retail is the sole interface towards the retail customers. So regardless of what question -- what product or the question is about, if a customer calls us, it's the Retail organization that answers all the questions. Pharma will then be involved if needed on a needed basis. We have, I think I have said, wide portfolio. We have many brands that we own, but also many well-known, both national and international brands, like Lysi, Gefilus. Louis Widmer and Eucerin are products that we ramped up at the end of last year. We've been investing in them now during the first quarter of the year, and we hope that we will see a payoff on those investments in the near future. A total of over 10,000 articles that we manage within Retail. And dose dispensing, I mentioned it already, we have become now the market leader with over 110,000 patients. This is a clear leadership over our next competitor. The Retail numbers are not looking that good, and I'll sort of comment on the reasons for that. But I mean, first of all, we've seen moderate growth in constant currency. There've been ups and downs. I think in the subsequent quarter, we will see a more clear cut. A year ago, we had the Hehku sell-in kind of the buildup of the Hehku chain was going through the retail business area that influenced the quarter 1 results. And among other things, we're seeing the growth -- so that's negative now for this year, and the growth is coming from -- mainly from dose growth. I talked sort of indirectly already about portfolio renewal. We've had quite a big starting in the -- at the end of last year in quarter 4. Renewal of the portfolio, we had products and suppliers going out and new coming in that is affecting the quarter result. We were planning for a weak quarter 1 and we are more or less with the negative -- minus EUR 0.6 million. We are not far from -- actually from our plan. So we expect to see improvements in this area and are not so worried about this, although the trend looks ugly if you look at the table here. And here again, the quarter 3 results include EUR 1.8 million of SAP-related ERP compensation. And again, also yes, so the big deviations also the Swedish Enköping inefficiencies are hitting the traded goods very severely. If we have a challenge, we will prioritize medicines -- Rx medicines and we will subprioritize the traded goods. And that's partly also when we've had to make some priorities, and that has hit maybe the Retail portfolio even more. So a few more words about the financials. I think I commented on the invoicing and net sales, but maybe to -- what I didn't say is that in constant currency, this EUR 894 million becomes EUR 922 million, so EUR 922 million compared to EUR 848 million is kind of an apples-to-apples comparison. At the same time, the EUR 397 million becomes EUR 411 million. So EUR 411 million to EUR 388 million. And I repeat myself, but I'm sort of restating, we are satisfied with these numbers. And the challenges are much more in the area of converting the profitability into -- converting the revenue and profitability into growth in the current situation. Last year, we were sort of between EUR 5 million and EUR 17.5 million. The EUR 17.5 million includes EUR 9 million, so the sort of apples-to-apples comparison becomes EUR 8.5 million. We had a not so good strong quarter 4, and we've had -- in quarter 1 this year, I kind of have explained the effects already, but I'll try to summarize them. Consumer down by EUR 1 million, mainly related to the investments in online and marketing; the effect of the parallel import medicines and in cost -- inflation cost increases; and then as negatives and then actually as a positive deviation the fact that we don't have Hehku in there. Pharma, slightly positive. The positive of Mankkaa Monka outweighing the negative of Enköping at the moment. Retail, I mentioned already the main deviations are related to Enköping, and then last year, we had the sell-in of the Hehku assortment. And then we've saved in group -- items group operations a fair amount of money. Cash flow, this is looking worse than it is in reality. At the end of last year, we were taking positively -- positive surprise between Christmas and New Year's when we got big payments a little bit unexpectedly coming in. And our quarter 4 cash flow actually then -- money that we had expected to coming in quarter 1 came in already early. In addition to that, this quarter 1, we've had EUR 43 million, if I remember correctly, increase in inventory, which is mainly due to a change in our customer contracts where a number of customers have gone from consignment stock to owned stock, i.e., we own the stock whether it has been consignment. So this is also a -- the other reason for the ugly quarterly result. I would say that as such, I'm not concerned -- overly concerned about the cash flow situation. It will improve. And then last, but not least, our guidance. We are keeping it unchanged where we say that the adjusted EBIT on constant currency basis is estimated to increase from the 2018 level. And then last to summarize, I've just said I'm going through, we are happy, we are pleased and we are confident in the strong growth of net sales, particularly in constant currency. We have implemented the new organization. It is fully operational. It is starting to deliver based on the new segments of Consumer, Pharma and Retail. The Consumer market is challenging for us, and we've had a couple of quarters where we are not satisfied. We are taking action. We are addressing our challenges, and we believe that there is a brighter future for us. And then we've had actually not just 1, but 2 significant ramp-ups where we are in the middle of the ramp-ups now, Enköping DC, I talked about a lot, but also the Stockholms läns landsting is actually a huge undertaking for us where we are overnight taking over 32,600 patients in a portfolio where we had 52,000, I think, or 50,000-plus patients before. So there's been a -- it's been a challenging quarter for us. I think we are quite confident in saying that it will get better. And as a consequence of that, we are reiterating our guidance. Thank you. That's what I wanted to say, and I'm open to take questions. And Helena also here, CFO, also has -- is obviously prepared to talk in more detail about detailed numbers related questions that you may have.We have Katja at the back with a mic. And do we have questions from the line? No. I'll give you some time to think about questions you might have, and here comes the first one. Thank you for being brave.

[Unknown Analyst]

[ Mila Milinev ] from Danske. Would you kindly elaborate a little more about the profitability topic and your plans and where you stand with your 20by20 program and so forth? And then are there still kind of major topics or challenges with the program, for example?

[Robert Wilhelm Andersson, President & CEO]

No, thank you. I think that's a very -- I was hoping to get that question. We have established the program. So this program was actually really established in connection with the full year 2018 reporting a couple of months ago. We have now established the program. We have identified -- we have assigned responsibilities. We have identified a significant share of that saving that we have committed to. We have assigned responsibility for each of the savings kind of lines or items that is first name, last name, millions of euros next to it, and there is a time line. I would say with the results that we present now, it's pretty obvious that we also have to look at how we can speed up the activities. That's something we haven't fully sort of gone through and committed to, but we will definitely include, for instance, Consumer more into the 20by20 activities than we were originally planning based on the development of the Swedish market.

[Tuula Lehto, Group Communications Director]

Okay. Now, Robert, I have quite a few. I'll start with the first one. Given weak start for the year, how would you assess risk related to your full year guidance?

[Robert Wilhelm Andersson, President & CEO]

So I mean, we have maintained our guidance, which means that we are confident that we can reach the result, which we say is then an improvement compared to 2018. Just to reiterate, 2018, we made EUR 36.9 million, if I can remember correctly. The year is young. We have 1 quarter behind us. We have 3 quarters ahead of us. We have only just started our 20by20 activities. Some of the sort of phenomena in the Swedish market are not necessarily of a permanent nature. I'm talking about the parallel import situation, where the FMD hit us in February and sort of Brexit is anybody's guess where we will end up. So I think we have reason to be confident and optimistic that the first quarter is not an indication of the 3 quarters to come.

[Tuula Lehto, Group Communications Director]

Thank you for that. And here comes the second one. Should one be concerned about goodwill positions at some of the nonperforming areas?

[Robert Wilhelm Andersson, President & CEO]

I would -- I don't know, Helena, if you -- I mean, we've done obviously -- in connection with the year-end 2018, we did goodwill assessments and impairment testing of all business units. But Helena, maybe you can comment more on that.

[Helena Kukkonen, Chief Financial Officer]

Yes. I don’t see currently any risk. So we have done the impairment testings in Q4, and currently, we don't see any risk levels there. Of course, we will follow it up and follow up the performance and therefore then see that if there would be something to report. But currently, we don't see any high risks there.

[Tuula Lehto, Group Communications Director]

Thank you for that answer. And then we can continue with the questions. When should we expect to see an improvement in profitability within Consumer and Retail?

[Robert Wilhelm Andersson, President & CEO]

In quarter 2.

[Tuula Lehto, Group Communications Director]

That's what we have had currently online questions ongoing. Please continue if you have something that you would like to have clarified a bit better or if you have any new questions.

[Robert Wilhelm Andersson, President & CEO]

Okay. If no more questions, I thank all the participants, both in the room here in Helsinki as well as on online. And wish you all a nice April weekend, the last one in April. Thank you very much.