Apotea AB (publ) (APOTEA) Earnings Call Transcript & Summary

Hello, and welcome to Apotea's Q2 presentation. The results will be presented by Par Svardson, CEO and Co-Founder of Apotea; and myself, Johan Marild, CFO.

So hello. We have had a good quarter with stable growth and increased profitability, and all our projects are on track. And now, Johan, we look forward to hear about the figures.

Yes. We had revenues in the quarter of SEK 1.826 billion and a growth of 9.9% in the quarter. As Par mentioned, we increased the profitability and reached an adjusted EBIT margin in Q2 of 5.4%.

And if we look a little bit at what happened during the quarter, we can see that, as we said, the growth was mainly driven by Rx demand. We improved the profitability. I think we mentioned that in the last quarter, Q1 that we had uncertainty in the world with -- I mean, we have a full-scale war in Europe and trade war in the world and more conflicts. But we haven't seen any problems in our business. And I think our business is probably one of the most stable of all industries, but we will continue to look at this because the world is a little bit problematic at the moment. We also launched a new Rx hub in south of Stockholm. We launched it in May and moved pharmacists from the other hubs in Stockholm. So we haven't really increased the capacity, but we have like built the infrastructure for building Rx capacity this autumn. So in the following quarters, we will probably see how we can improve the capacity with this hub. And we also had the inauguration of our fulfillment center in Varberg. So within a few weeks, we will start delivering our first orders from Varberg. So that's a very big project, and it's very exciting for us, and it's going very good. And now they have user acceptance tests. And I think today, they have performance tests. So we see that we can reach all targets. So it's an amazing facility, and we really look forward to start producing.

Absolutely. And with the growth in the quarter, we are now approaching SEK 7 billion in rolling net revenues -- rolling 12 months net revenues, and we have, for the same period, an adjusted EBIT margin of 4.9%. If we look closer into the numbers to the left, you see our revenue development. We had, as mentioned, a revenue increase in the quarter of 9.9% and the growth was driven by an increased Rx demand. We have a continued underlying trend of more and more people wanting to buy the prescription products online. That trend continues. And we had a growth in OTC and traded goods of 5.1% in the quarter, and the growth was negatively impacted by the fact that the Easter this year took place in Q2 and last year was in Q1 as well we had a cold spring in Sweden.

But now it's sunny.

And to the right, you can see the gross margin development. We had a stable gross margin in the quarter compared to the same period last year with a gross margin of 28%. And the gross margin was also stable if you look in comparison to the previous quarter. We had good cost control, continued high capacity utilization in the quarter. And in combination with a stable gross margin, we managed to increase our profitability. As you can see on the left-hand side of this slide, we had an adjusted EBIT margin in the quarter of 5.4% and the adjustments of SEK 6.2 million related to the revaluation of the shareholding in Apomera, where we have a minority stake, and that's an e-commerce company focused on the Finnish market. We had an EBIT margin in Q2 of 5.1%. And as we state in the report and in line with previous communication, we expect to increase our costs related to the Varberg facility as we start production there and initially can expect a somewhat lower capacity utilization. These factors will, like-for-like, then have initially somewhat negative impact on our margins. However, we expect to stay well within our financial target. And over time, as we scale up production in Varberg, we can expect an increased impact on our efficiency and our customer offering enable us faster deliveries to the Southern and Western parts of Sweden. To the right, you can see a breakdown of our operating costs. And as you can see, personnel costs in relation to net revenue came down in Q2 compared to a year ago. That is also partly impacted by the fact that we today use more external staffing. We had a strong operating cash flow in Q2. We have a strong cash flow conversion or cash flow model, supported by our profitability and high inventory turnover. We had operating cash flow in Q2 of SEK 165 million. We had relatively low investments in Q2. As of today, we have invested -- we have paid just over SEK 300 million related to the Varberg investments and the remaining part will be paid this autumn.

That's approximately SEK 80 million, isn't it?

Yes. And to the right, you can see a breakdown of our net working capital. As you can see, it fluctuates somewhat from quarter-to-quarter due to natural variations. And as of last June, we had somewhat lower inventory compared to March. We have a stable inventory turnover and the inventory turnover was 8.9, and that was in line with the same period last year and also previous quarters. We increased the return on capital employed compared to Q2 '24 and achieved a return on capital employed of close to 34%, which is then in line with the previous quarters reported and the increase was due to the uplift in our margins. To the right, we present the net debt. We had a net -- negative net debt end of June, i.e., a net cash position of SEK 69 million, and that was due to our strong operating cash flow and also relatively low investments in the quarter. So we continue to have a solid balance sheet. If we sum up the first half year of '25, we can conclude that we have had a solid growth year-to-date June, of 12.5%. The growth was driven by a strong Rx growth of 16%. And as you can see, Rx now account for approximately 38% of our net revenue. And historically, Rx has had a stronger growth than non-Rx, and we expect this trend to continue and meaning that Rx over time will gradually increase its share of net revenue. To the right, we present the adjusted EBIT development for the first 6 months. And we had an adjusted EBIT margin of 5.4% and the adjustment for the first half year is then related to the revaluation of the shareholding in Apomera, and we had an EBIT margin for the first 6 months of 5.2%. And the EBIT is then slightly above our financial target.

And if we look a little bit ahead, we want to continue to build the pharmacy of tomorrow. And what does it mean? When we say we want to build the pharmacy of tomorrow, we want to strive to make a little bit better for our customers, in the automation, in the financials, everything a little bit better, but we can never reach that goal because tomorrow, we will have another tomorrow. So we will continue to strive and that's our main focus, and we will continue to do that forever. But if we should pick 2 focus areas for the next quarter, it will absolutely be to start production in Varberg. And now they are testing, and in a few weeks, we will start delivering orders. And after that, we will ramp up the production as soon as it's safe and we can see that we have a very high quality. And then we will start delivering more and more shipping method, more and more areas on the West Coast and continue to build. And as Johan mentioned, to reach all these high efficiency goals we have for Varberg. And so that's our main focus. The other focus going forward is AI. I think at least that AI is going to change the e-commerce business big time. So now we're going from 7 developers in the AI team to 14. So we can like have twice as many projects in parallel. And I think that's very important because we have a lot of use cases. We have a lot of projects we want to build, and we can see that it's very good projects and very good for our customers, for our sales, for our efficiency and so on. But now we have to deliver and we can see that it's a very important area. So that will be our main focus. And with that, I think we...

Yes, we will open up for questions.

The next question comes from Johan Fred from SEB.

First one on the sales development, if I may. So you reported 5% growth in OTC, which is, of course, against a tough comp and the cold weather backdrop. However, I've noticed many of your peers having sort of reported improved sales towards the end of the quarter. Did you see something similar? Or sort of any color on the sales development in OTC throughout the quarter would be much helpful.

I think this -- with the cool weather, it was quite stable over the quarter.

The impact of -- I mean, of course, the Easter was in April. And as mentioned, Easter then has like-for-like negative impact. So yes.

Yes. And Rx was a little bit higher demand in the end of the quarter compared to the beginning. So -- but no big changes, I would say.

Okay. Got it. And on that topic of the strong sales growth in Rx, are there sort of any strategic initiatives from your side, such as marketing, et cetera, behind the strong sales development in the quarter?

I think Rx is mainly driven by capacity, and we have opened a new hub, and we will continue to hire more pharmacists to the hubs in Stockholm, and that will continue. So I think we have a lot of initiatives to increase growth, both these AI projects, to Varberg project and so on. So we will continue with that.

So just to clarify then, you didn't sort of expand marketing or push sort of your Rx offering more than usual during the quarter?

No, not really.

And if I may continue here on your sort of gross margin development, roughly flat, but improved slightly year-over-year despite what I assume is a negative mix effect from higher Rx sales. Could you elaborate on the drivers behind the -- or slight increase in gross margin that helped offset the negative mix?

I think it's both contribution from suppliers. It's -- I mean, we negotiate and we -- with our suppliers, we have better prices from them and better terms. But also we sell more of our own products with higher margins. So it's a combination. So -- but I mean, from my perspective, we have a stable margin. It's not increasing that much. It's more -- it can go a little bit up and a little bit down.

Okay. Got it. Very clear. And a final one, if I may, on your operating margin trajectory. You mentioned that you expect cost to increase as you ramp up Varberg, but still staying well within your guidance range. However, sort of given your current margin of 5.4%, the lower end of your guidance range is some 2.4 percentage points lower than that. So quite a spread here. Could you help us sort of give any color or indication of what we can expect in terms of the margin development in the coming, say, 2 quarters besides sort of the quite wide margin range of 3% to 5%, please?

I think we will -- we have said that we want to stay to guide in this 3% to 5%. And -- but we will -- I think we will decrease a little bit, but not that much. But we will still guide you with this 3% to 5% to be sure. But that's why we say we will stay well within.

And as mentioned, over time, we expect the increased efficiency and improvement in customer offering coming from Varberg as we scale up will then kind of be a positive impact and outweigh the initial lower capacity utilization from the facility.

Got it. Got it. But when you say not that much, is that sort of less of a percentage point? Or how should we think about it?

Hard questions. I think we shall stay with the guide near 3% to 5% because we will try to make it as small as possible, but we don't want to promise something that we might not be able to deliver.

Yes. Got it. Got it. Got it. And if I may, a final one then, perhaps an easier one. You mentioned the timeline on ramping up Varberg briefly in the presentation. But could you sort of delve into the details on your timeline for your ramp-up in Q3, please?

I think within a few weeks, we will start delivering orders. And as soon as possible, as soon as we can see it stable and so on, we will ramp up. And I think especially in the -- when we see, okay, now it's stable, then we can probably ramp up quite fast. And that will probably be in like late August, beginning of September. But I mean, again, it's -- we don't know. So I mean, for us, it's a long-time project, and it's more important that it's stable and it's very good if it's 2 weeks more or less, it's...

The next question comes from Benjamin Wahlstedt from ABG Sundal Collier.

Sorry for dwelling on the Varberg expansion, but a follow-up on previous questions. Could you clarify when you will start depreciating the Varberg warehouse, please? Is that when you sort of fire away the initial orders? Or is that when orders ramp up, so to speak?

The -- I mean, from an accounting perspective, we'll start depreciating the asset when they are complete and finalized. And that means that it will be during -- I mean, in conjunction to starting the production. However -- yes.

We sign up with the supplier.

So during Q3, we expect that to start.

Right. In a couple of weeks then, is how we...

Yes, probably.

So halfway through Q3 is a decent estimate. All right. And then I was wondering, could you say anything more like qualitatively about your progress in Varberg? Any hiccups so far or anything like that?

I think you have like 20 or 30 every day, but no major ones. And I mean testing is -- the reason for testing is to find all these small errors and we have the supplier and they are fixing small issues every day, but no major things and everything is going according to plan. So I think it's a very big project, and it's quite rare that it's going according to plan, but it's going according to plan. So we're very happy about that.

Perfect. Turning to your top line. You outlined a number of factors that negatively impacted your top line growth in the quarter. I was wondering if you could sort of be more specific on what you estimate the impact to be from Easter and/or cold spring, maybe in terms of -- I know it's a difficult question, but maybe in terms of percentage point impact or SEK million impact.

It's hard to say a specific number for Easter and also for the cold spring. Of course, we can see that we have had a clearly negative impact, and we highlight in the report some of the product categories that are especially impacted. And also these -- if you don't buy sunscreen, you maybe not buy pain killers, et cetera. So it's -- the effect then becomes bigger than just for the sunscreen, so to say.

And I think if you aggregate several quarters, it's not an effect, but we will always have one quarter effects the next one and so on. So I think if you look at top line, you need to look a little bit for more than 1 quarter.

Yes. Loud and clear. And then you also speak about doubling your AI capacity. And I was wondering if you could give us an idea of the costs that this will entail and perhaps a bit more like in concrete terms, why is this? Is it added headcount, new licenses? Or what is it?

Yes. I mean you have the cost for salary. And I mean it's quite low cost. I mean it's more -- you need to find the right person and you -- so the problem is maybe not the cost, the problem is to find the right person and find the right project for that person and train them. So I think if we are like 800 plus and hire 7 people it's not a big cost compared to the rest, but it's very important that we find the right person.

Perfect. Are sort of AI skilled people also significantly more expensive to hire than the other 800?

Of course, a little bit, but not that significant. So it's not a big cost, but it's a very important project.

The next question comes from Victor Hansen from Carnegie.

A couple of follow-up questions. I'll start with -- so you lowered the valuation of your Finnish enterprise in Q2 here. Could you tell us a bit more about that?

Well, it's -- we had -- we have a small minority stake in Apomera, an e-commerce company, where we invested in 2022. And the shares were revalued in Q2 and now valued to SEK 1.5 million from SEK 7.7 million. So it's -- yes, a small investment and a fairly low number on the balance sheet remaining.

Okay. But the revaluation was due to worse financial performance or FX or what drove that revaluation?

I mean, yes, I mean, we do a revaluation and value the -- our assets every quarter. And now we decided to revaluate the shareholding as a result of a communication regarding a capital raise in the company and also, I guess, underlying that it's part of the performance of Apomera.

Okay. Understood. And then what about Norway?

What about it?

Going according to plan. Yes. Is it going according to plan, like growing faster than the group? Is it approaching breakeven?

It continues to grow. I mean, it is growing faster than the group and are balancing on a kind of breakeven level year-to-date. And we are also, I mean, focusing hard to improve the customer offering in Norway, so kind of accelerate that growth even further.

And implement new technology for the Norwegian company, so we can continue to grow and grow much faster. So it's a very interesting market, and I think huge opportunities, but we still need some more time before we can see it in the figures, I think.

Okay. Then there was a previous question on the Service segment and your gross margins. But you have this relatively small service segment in terms of sales, at least, but very high gross margins. I'm wondering, is there anything particularly boosting it this quarter? Or would you consider this your new run rate for the Service segment?

The overall growth in the Service segment is driven by our efforts to increase our purchasing terms. And part of that is the -- I mean, our increased marketing contribution from our suppliers, and that has been kind of visible in the figures for the past couple of quarters, I would say, and also in Q2. So I mean -- and the efforts to have better purchasing terms, that is something we do every day, but also have a long-term objective to -- and working according to strategic themes to improve that even further long term.

Okay. Great. So it seems like these levels are sustainable then. My next question is on your SKUs. They continue to increase. Is this an important goal for you in itself? And how do you choose which products to add? Because there seems to be a lot of new products, especially within beauty. Do you see any particular price competition in this segment also?

For us, it's very important to be a pharmacy. So we want to stay within the pharmacy area, but we want to grow the number of SKUs within the pharmacy area. And -- it's a lot of products in the beauty area. So we will absolutely continue to grow, but we want to stay in the pharmacy area. And price competition, I think it's quite tough competition in all areas. So I don't think it's bigger competition in that area, but -- and we want to be the competitors. We want to compete with everyone. So absolutely.

Okay. Perfect. Perfect. And then next question, a follow-up on your private label. There was a previous question on -- were you -- in one of your answers, you spoke about private label. And I was curious, out of your OTC and TG sales currently, how much is private label now? And how has it developed year-to-date?

It's -- I mean, it's -- last year, it had -- I think we mentioned it was 1% of total sales roughly. And I mean, it's a small number, even though it's growing, the share of total sales is likely to more gradually increase over time we expect, rather than a large increase in short term. So I mean it remains in that range, even though it's growing faster than the overall group. And we're also about to launch and continue to launch new products in this area. And in order to get up a larger scale in our own products, you first need to invent the products or come up with the products and then market them and get the customer to buy them, of course. So it's...

Yes. And a final question for me on AI and marketing. So now we have AI operators summarizing all the info from the web pages, so you don't even have to visit them. This is reshaping SEO. And I'm curious how you think this will impact you for the future?

Probably everything from ChatGPT to SEO and so on will probably be affected quite a lot. And that's why we scale up our team so we can be in the front line, and then we can be ahead of our competitors because I think it's a very interesting area. And I think the AI team want to have a meeting with me to discuss how to -- what use cases you can find in that area. They wanted to have the meeting today, but some other things to do today. But I think we will absolutely take a look on that and see how we can improve our customer offering through AI agents and so on. So we can come back to that in later quarterly updates, but it will absolutely be a focus area for us.

Okay. That was the final question. And with that, we thank you for participating, and we wish you all a pleasant summer and yes.

Thank you very much.

Goodbye.