Silmäasema Oyj's half-year report 1 January - 30 June 2018

Silmäasema Oyj's half-year report 1 January - 30 June 2018

Silmäasema Oyj                           
Stock Exchange Release                                         
17 August 2018 at 9:00 EEST

Net sales growth missed target, focus on improving profitability

April-June 2018 in brief:

• Net sales increased by 4.2% compared to April-June 2017, amounting to EUR 32.8 million (31.4).
• Comparable net sales decreased by 0.9%.
• The adjusted EBITDA decreased by 17.1% and was EUR 3.3 million (4.0), or 10.0% of net sales (12.6%).
• The adjusted operating result decreased by 33.6% to EUR 1.8 million (2.7).
• Published on 12 April 2018, Silmäasema's outlook for 2018 remain unchanged: Silmäasema's net sales are estimated to grow compared to the previous year. Silmäasema's adjusted EBITDA is estimated to be 9-13% of net sales.

January-June 2018 in brief:

• Net sales increased by 4.2% compared to January-June 2017, amounting to EUR 63.6 million (61.1).
• Comparable net sales decreased by 1.6%.
• The adjusted EBITDA decreased by 9.8% and was EUR 6.1 million (6.7), or 9.6% of net sales (11.0%).
• The adjusted operating result decreased by 24.9% to EUR 3.2 million (4.3).
• Cash flow from business operations amounted to EUR 4.0 million (2.7).
• The net debt to adjusted EBITDA ratio on 30 June 2018 was 3.2 (2.6).

The figures in parenthesis represent comparable data from 2017, unless otherwise stated.

Key figures

* Silmäasema presents both its adjusted EBITDA and adjusted operating result, which have been adjusted for significant extraordinary items. It is the company's view that adjusted EBITDA best illustrates the profitability development of its business operations.

CEO Pasi Kohmo:

The development of Silmäasema's net sales did not meet expectations during the first half of 2018. Our total net sales increased due to the opening of new stores and the eye clinic in Oulu, but our comparable net sales decreased. Our sales were lower than expected in both reporting segments, particularly in the second quarter, even though changes in the level of sales are part of the nature of the industry.

The slow development of net sales was also reflected in profitability. With the expansion of our network, our expenses have increased as planned, but our net sales have not grown at a sufficient rate in relation to the expenses, even though our new stores continue to develop in the right direction. This is the main reason for the decrease in our adjusted EBITDA and profitability. The decrease is enhanced by the fact that the second quarter of 2017 was very strong, particularly in terms of profitability. In the second quarter of 2018, profitability was also burdened by a weaker campaign structure in optical retail, as well as a higher proportion of cataract surgeries at our eye clinics and lower prices in comparison with the corresponding period last year, due to campaigns.

This year, we have opened a new eye clinic in Oulu and have expanded our optical retail store network with six stores in Finland and one store in Estonia. In line with our growth strategy, we continue to seek suitable new store locations for Silmäasema, but we estimate that our growth in Finland will be markedly slower than it has been in recent years. Now our focus is more strongly on improving the net sales and profitability of our existing network.

In June, the Finnish Government further specified its proposal for the Freedom of Choice Act for social and health services. The amendments were related to a longer transition period for the implementation of freedom of choice, among other aspects. The final content and implementation of the act will determine its effects on freedom of choice with regard to cataract surgeries. However, with the population ageing and the need for cataract surgeries continuously increasing, we believe that the number of cataract surgeries carried out in the private sector will continue to grow before the finalised law comes into effect. This is due to the service vouchers that have already been taken into use and the pilot projects related to the Freedom of Choice Act.

We announced earlier this year that we are in the process of starting a development program that will last for about two years. The program includes changes to operating models and the renewal of information systems. It focuses on improving existing operating models and increasing profitability with new operating methods and information system solutions that support these methods. During the second quarter, we started planning the information system renewals related to the development program. To accelerate our profitability development, we have decided to find out whether it is possible to implement the development program earlier than planned with regard to changes in operating models that are not dependent on information system renewals. We intend to focus on changes that could accelerate productivity and profitability.

Silmäasema's outlook for 2018 remain unchanged. We estimate that our net sales will grow compared to the previous year and that our adjusted EBITDA will be 9-13% of net sales. However, after the first half of the year it seems that our adjusted EBITDA for the full year is more likely to be closer to the lower end than the higher end of the range.

Outlook for 2018 (unchanged)

Outlook provided on 12 April 2018

Silmäasema's net sales are estimated to grow compared to the previous year. In 2017, the company's net sales were EUR 118.3 million.

Silmäasema's adjusted EBITDA is estimated to be 9-13% of net sales.

Basis for the outlook

The competitive situation in optical retail continues to be tough. However, Silmäasema's net sales are expected to increase, mainly due to new optical retail stores to be opened or acquired in 2018, as well as sales growth with regard to stores opened in 2016 and 2017. Markedly fewer new stores will be opened or acquired in 2018 than over the past two years. In addition, the good general economic situation and the favourable development of private consumption are expected to support demand in optical retail.

The ageing population and Finns' increased investment in health and well-being are factors that are expected to increase the demand for optical retail and eye healthcare services. This trend is expected to support the development of the net sales of Silmäasema's Eye Clinics segment in 2018. Its net sales are also expected to increase because of sales growth as a result of opening the eye clinic in Oulu in February 2018.

Due to the high sales margin, the level of adjusted EBITDA is highly dependent on the performance of net sales. Over the short term, variation in net sales of the established network is the only significant factor affecting the EBITDA level. Over the longer term, the increase in productivity resulting from changes in operating models will change this level but will not remove the variation.

Expenses are also expected to increase as a result of the expansion of business operations and growth in net sales. The most significant expenses are related to salaries, rents and marketing. These expenses can be predicted relatively accurately for the full year. The development program initiated in 2018 will generate costs while it is ongoing but the timing of these expenses is yet difficult to predict. Procurements related to the program are likely to be booked as capital expenditure.

Near-term business risks and uncertainties

Silmäasema's strong growth strategy carried out by the company increases its business risks. Opening new stores and finding the most suitable business locations, as well as company acquisitions, require careful preparation and strong expertise in integration. The growth strategy will continue to require skilled personnel and investment in organisational development and key persons. Learning new things and managing profitable growth require special attention to motivating and target-oriented leadership, and to the development and controlled implementation of new operating models. In 2018, the company will be starting a significant development program that involves changes to operating models and the renewal of information systems. The development program involves uncertainty in terms of the amount and timing of costs and investments. The project will tie up resources, which may have temporary effects on the company's business operations.

Silmäasema has strongly expanded its network of stores in recent years. In the early stages, the profitability of new stores is burdened by investments in the start-up of operations and the achievement of a strong market position. Earlier new stores have reached their normal level of profitability in one or two years, but this involves uncertainty.

The profitability level of optical retail may vary between quarters within the year and in relation to the comparative period, due to variations in the structure of sales. The factors affecting the structure of sales, such as the effectiveness of Silmäasema's and its competitors' sales promotion measures, may be difficult to predict.

The competition in health care has moved closer to regular consumer markets. Silmäasema must be able to adapt its business models in a more demand- and consumer-oriented direction. Silmäasema monitors the changes in the market and continuously observes its competition, among other measures. Highly competent healthcare professionals lay the foundation for the operations of Silmäasema's Eye Clinics segment. Its growth and success depend on the company's ability to recruit and keep the best experts in the field.

Silmäasema participates in competitive bidding processes organised by public hospital districts looking to partner with private service providers in the treatment of eye diseases. The competitive bidding processes and their results always involve uncertainty. However, the results of individual bidding processes are not expected to have a significant effect on the Group as a whole.

Silmäasema uses various information systems in its business operations. The critical role of the systems is analysed, and risks are minimised as part of risk management. In addition, Silmäasema is currently carrying out and planning several significant information system projects. The risks involved in information system projects are minimised by meticulous project management, among other measures. The company is in the process of starting a development program to renew most of its information systems over the next two years. The project concerns at least cash register, patient information and reporting systems, as well as category management and digital services for customers.

Healthcare involves patient liabilities, which are mainly borne by doctors. The company has prepared for these risks with appropriate liability insurance policies. The company protects itself against other damage risks with statutory insurance policies and with optional insurance policies related to property, disruption of business and certain responsibilities, among other aspects.

Structural changes in the public sector and changes in healthcare regulation may impact Silmäasema's business operations. The total impact of the planned health and social services reform and other changes in the organisation of social and healthcare services in Finland are difficult to predict. Policy alignments may affect Silmäasema's profitability and growth prospects. However, more than 90 per cent of Silmäasema's net sales come from operations such as the sales of spectacles, contact lenses and refractive surgeries, which are already provided through free competition. These activities are not directly dependent on the health and social services reform that is currently being planned. The reform is estimated to impact this portion of net sales only slightly.

Audiocast and conference call for investment analysts and press

A briefing for investment analysts and the press will be arranged on Friday 17 August 2018 at 10:30 a.m. EEST through a live audiocast combined with a conference call. The briefing will be hosted by CEO Pasi Kohmo and CFO Anu Kankkunen. Link to the audiocast is available at: https://company.silmaasema.fi/en/reports-and-presentations

Conference call numbers:

Recording of the audiocast and conference call as well as Finnish audiocast presentations will be later available on the company's website.

Calendar for 2018

Interim Report January-September 2018              9 November 2018

Additional information

Pasi Kohmo, CEO, tel. +358 50 331 7015

Anu Kankkunen, CFO, tel. +358 50 669 69

Tuukka Hirvonen, Head of Communications and Investor Relations, tel. +358 50 416 7700

SILMÄASEMA OYJ

Pasi Kohmo

CEO

Tuukka Hirvonen

Head of Communications and Investor Relations

Silmäasema is a Finnish company, which offers all products and services for optical retail and eye healthcare nationwide. Silmäasema is the largest private eye clinic provider offering eye surgeries and the second largest optical retail chain in Finland. The Silmäasema chain has over 150 stores and 14 eye clinics in Finland as well as ten stores in Estonia. The Silmäasema chain employs close to 1,000 eye healthcare professionals. Silmäasema's Group net sales were EUR 118.3 million in 2017 and adjusted EBITDA was EUR 11.8 million.