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

Good morning, and welcome, everyone, to the presentation of Apotea's third quarter report. We are presenting, as always, here in our office in Stockholm, and we will start with the presentation and update. And by the end of the session, we will open up for Q&A. So today's presenters are Par Svardson, our CEO and Co-Founder; Johan Marild, our CFO; and myself, Sarah Ahnstrom, COO. Let's start with the update.

Yes. Hello. We have had a good quarter with solid growth and a good profitability and a successful launch of our warehouse in Varberg. So Johan?

We had revenue growth of 8.9% in the quarter and revenues amounted to SEK 1.769 billion and an EBIT margin of 5% in Q3.

Yes. And so late July, we launched our warehouse in Varberg and started to deliver orders to our customers. And since then, we have ramped up the production. So now we deliver approximately 10,000 orders a day, and the launch has been very successful. We are on time and on budget. So we're very happy with that. We can also see a solid increase of Rx demand, and we are building capacity to meet that demand. So now we are approximately 200 pharmacists working at Apotea. And we can also, as Johan said, see a good profitability during the quarter. And despite that we have added a lot of start-up costs in Barber. And that's because we have increased our efficiency and have a good cost control during the quarter. And I think that's very good because, I mean, the start-up cost is temporary. And -- but the efficiency improvements and the cost control is like forever. So it's very good.

Perfect. And during the quarter, we also took the next step in our quite ambitious sustainability efforts by becoming the first online pharmacy to provide completely emission-free deliveries from our warehouse to the customer's doorstep. So we have ensured a completely electrified delivery chain by -- actually by expanding the collaboration with PostNord. So we're super happy about that next step. We're also very proud to have been recognized as the strongest pharmacy brand once again in Sweden by Evimetrix brand survey.

And to the right, you can see our revenue and EBIT or adjusted EBIT margin development over time. During Q3, we exceeded the SEK 7 billion milestone as our revenue amounted to SEK 7.82 billion rolling 12 months. And during the same period, adjusted EBIT margin was 4.9%, so in the upper end of the financial targets or the corridor of 3% to 5%. Yes. To the left, you can see a breakdown of our sales in Q3. We had a growth of 8.9% in the quarter. And the growth was driven by strong Rx sales of 13.6%, while OTC and traded goods grew by 6.3%. And as Par mentioned, we have expanded the capacity in Rx, and we see a continued increase in the demand to buy prescription medicines online. To the right, you see a breakdown or you see the gross margin development in Q3, and we had a stable gross margin in Q3 of 27.2%. We have a strong operating margin in Q3. We're very happy with that, and we managed to offset the cost increases in Varberg related to the production launch there and the scale-up of production with efficiencies elsewhere in our logistics and a continued good cost control. The adjusted EBIT margin in Q3 was 5%. We didn't have any items affecting comparability in the quarter. To the right, we have a breakdown of our operating costs in percentage of our sales. As you can see, we increased the depreciation in percentage increased somewhat in Q3 as we started to depreciate a smaller part of the fixed assets related to Varberg. However, the majority of the assets in Varberg, the fixed assets will start to depreciate in Q4. So we've not seen that effect in Q3, but we expect that in Q4. We had strong operating cash flow in Q3. We had an operating cash flow of SEK 109 million, up from SEK 55 million a year ago. The operating cash flow was supported or driven by an increased earnings as well as changes in the working capital. We had CapEx of SEK 68 million in Q3, and that's related to the Varberg expansion or the launching of production in Varberg. We have now completed the CapEx related to Varberg, total investment of SEK 380 million. I also note that part of the SEK 68 million in CapEx in Q3 will be paid in Q4. And as mentioned, we'll expect a full depreciation of the assets in the current quarter. To the right, you see our net working capital development. We had an inventory turnover rate of 7.6% at the end of September, and that was affected by the buildup of inventory in Varberg. As we scale up production, we can also begin to optimize the inventory levels, and we expect to -- between the different warehouses, and we expect long term to have a stable operating cash flow model and a high inventory turnover rate. We had a continued solid return on capital employed of 34.4%, which is shown to the left here on the slide. The earnings by and large, compensated for the increase in net assets or capital employed. We had a solid net cash position of SEK 98 million at the end of September, and that was -- the increase in cash position was due to the strong operating cash flow and partly affected by changes in net working capital. Net working capital will vary from quarter-to-quarter. But over time, we expect us to have a stable and high operating cash flow generation. Yes. Finally, let's look at the year-to-date numbers, growth and profitability we had -- and to the left, you see our growth year-to-date September, we had a growth of 11.2%. That was driven also by strong Rx growth. year-to-date September. And to the right, you can see our -- that we managed to increase the adjusted EBIT margin year-to-date September from 4.6% to 5.2%. And the adjustments year-to-date relate to the revaluation of shareholding in Q2 -- of revaluation of shareholding in Apomera that was communicated in the Q2 report, and the adjustment was SEK 6.2 million. The EBIT for January to September was 5.1%.

We have had quite strong internal focus for quite a long time. I mean, started with the pre-IPO, the IPO building the new warehouse in Varberg and the launch of the warehouse. Now we're like shifting focus a little bit from internal to external. And use our capacity -- the new capacity in Varberg to scale up the production and use that for improve the customer journey, especially on the West Coast with same-day deliveries, but also a lot of other sales initiatives like assortment, our site deliveries, customer acquisition, marketing and so on. So I think in the coming year, we will see a lot of improvements in that area.

But as always, we will also continue to focus on efficiency improvements. As we have said before, we see a lot of possibilities with using technology and AI to have efficiency gains. We will also continue to have a quite tight cost control. And that's part of our DNA. We try and continue to work to improve our business every day in small, small steps every day. That was also the end of the presentation. So now let's open up for Q&A. So please go ahead.

The next question comes from Victor Hansen from Carnegie Investment Bank.

Victor here. A couple of questions from my side. If we could start with, Par, in your presentation, you mentioned the start-up costs in Warburg, but I can't find this in the report. Would it be possible to quantify this as good as possible?

Yes. I think -- I mean we have costs related to personnel in Varberg. And today, we have like 60, 70 people working there. And especially in the beginning of the quarter, they didn't deliver anything. They just had a lot of people working there. So it was cost related to that. That's the major cost.

A large part of the time there is taking out to kind of fill the automation with products rather than kind of shipping them out.

Yes. Because I had another question on this topic and the strong margin surprised me here in Q3 because your personnel costs came out at SEK 118 million, and this can be compared to SEK 140 million in Q2 and SEK 123 million last year. So they seem to be down despite opening Varberg. So how can they be down this much? Are there any one-offs? Or how do you explain this?

I think overall, we've seen an increased efficiency in -- not only due to kind of ramping up the production and launching the production in Varberg, but mainly as we are just about to start Varberg, mainly related to continued improvements in Morgongava. However, looking at the personnel numbers, you should also bear in mind that we have increased external staffing during this period that you mentioned. So the personnel costs are also impacted by that.

Okay. Got it. Then on Warburg, about 10,000 orders daily now, which seems really promising. But I'm wondering how many of these are new incremental orders versus moved from Morgongava?

I mean in the, like all of them are moved because, I mean, if we grew like 10% -- of course, then you have a 10% increase of orders. And if you move like 20%. But over time, we will use our growth to move to Varberg. But in the short run, of course, you move orders.

Yes. Got it. And you mentioned here that low inventories in Warburg is negatively affecting your sales growth. When do you believe Warburg's inventories will be at okay levels to start to meaningfully contribute to profitable growth?

Yes. And I think it's a process from like July until it ends. But I think we will continue to improve assortment in Varberg for several months. But one of our sales initiative is to add new assortment to the site. So that's both to Morgongava and Varberg because I mean, find new interesting brands, a lot of customer focus and listen to our customer, what kind of assortment do they want.

Yes. Yes. And I can see you had a lot in beauty, for instance. Yes. Two more questions. I hope that's okay. Easy to grab legislation, that started the 1st of November. How has the first days or week even been? And what do you expect ahead?

So far, so good. I think like the changes in legislation is somewhat part of our business. We're working in a regulatory market. But I think so far, so good. We have been working hard to make sure that we follow the legislation thoroughly. And we have a quite well-functioning delivery shipping part since before. So it's not that big of a change for us. And I think we stick to what we have communicated before that we might see a bit changes on the freight costs, but it will not affect us that much. I think -- I mean, it can affect individuals living on the country side negatively in their customer experience. But I think for their whole business for our business, it will not affect us that much. We might see a slight higher freight costs.

Okay. Sounds very promising. A final question from my side, and thank you for answering all of them. This one is on capital allocation. Now that the Warburg investment is done, your underlying cash flows are strong and you have nearly SEK 100 million in net cash. How will you allocate it going forward? Are there any future investments you can do in your business?

It's, of course, a lot of investments you can do, but we have to look at them and see if it's profitable and come back if we want to do them. But we are looking at profitable investments all the time, and I think we have to come back on that.

The next question comes from Frederick Iverson from ABG.

I have 3 questions. I'll take them one by one. First one on Varberg, you're operating the new warehouse at 20% capacity utilization. How much of -- I appreciate it might be difficult to sort of quantify the drag on earnings, but let's put it like this. When do you expect to be fully efficient in terms of capacity utilization?

Probably never. I mean it's an improvement over time. And we can see from Morgongava that we still improve in Morgongava. So it's a continuous process. But I think we -- I mean, the steepest curve is probably until Christmas or something like that. So the rest of the year. But of course, we will continue '28 as well.

I think in Morgongava, we're working 24/7 all days a week. And I think in Varberg, we have started working only daily shift only working days so far. So I think you can also improve kind of the capacity by using more hours during the week.

Right. And you say the full capacity is around 50,000 per day in terms of number of orders, and you're now at 10. So how should we view this ramp-up looking ahead? Where do you think you will be in the end of the year, for instance?

A little bit higher, but I mean we are just, as Sarah said, using daytime now, 1 shift. And so the maximum capacity is then probably around 20. And we might probably go above 15 this year, I would guess, but something like that.

I think that's quite important to keep in mind that we kind of need some spare capacity for the real, like Black Week and so on demands a higher capacity than a regular Tuesday. So you kind of need to be able to have a higher capacity when needed as well and try to balance that between Morgongava and Varberg.

Yes, of course. And then a follow-up on the FTE count. You're at 726 persons now versus 722 last quarter, and you mentioned 60 to 70 people in the new warehouse in Varberg. Are those incremental employees or have they sort of been moved within the organization?

I think looking at the FTE numbers, also coming back to Victor's question regarding the employee cost, I mean, both of them are affected by the usage of external staffing, which is something that we use in Morgongava as well as in Varberg. So the absolute majority of the employees working in Varberg are, I mean, hired consultants or external -- from external staffing agency.

Okay. Good. That's clear. And last one, more of a housekeeping question, I guess, to Johan. How should we view this additional D&A from Varberg as we look ahead?

So as I mentioned, we had a small increase in the depreciation in Q3. We're now completed the investments in Varberg and expect full depreciation of these assets in Q4. And the amount of the Varberg assets is SEK 380 million approximately and will be depreciated fixed assets then over 5 years' time or 6 months. So that's kind of -- you can see by and large, that will be added even though a small portion has already begun in Q3.

The next question comes from Johan Fred from SEB.

Just a follow-up question on Victor's earlier here on the changes in delivery regulations. You stated so far so good, but have you seen any sort of early customer behavioral effects so far? One could speculate that potentially customers choosing to shop at peers with a physical store network as a pickup point, for example. Any sort of flavor on that would be much appreciated.

We haven't seen any trends yet. I mean it's just a few days. And I don't think we will see any major changes as well, maybe some shift between different shipping methods.

I think also as we have said, the ones being most affected by the change are the ones living in the countryside and not in the city centers. So I think they might have a far -- a bit to go to a physical store as well.

Got it. Got it. And you mentioned that following the Varberg launch, the focus is now shifting towards growth. And while you briefly touched upon this during the presentation, could you please elaborate on what this means in practice operationally and commercially?

Practically, I mean it's a change that we focus more, spend more hours. And then if you look at purchasing, instead of looking at purchasing for Warby, we look at new brands, new assortment, new categories. And for marketing thing is the same or for me and so on. And commercially, I think we will see the coming years -- the coming year, a shift, and we see a lot of improvements in that area. And our goal to double our business in 4 to 5 years is still there. So that's what we can say about the commercial effect of it.

And the final one on Rx sales, which continue to grow faster than the other categories. And given the lower margin profile of Rx, but I assume higher battle value, how should we think about the mix impact on gross margins going forward if this trend continues?

I think we can have a stable gross margin over time. And I think we will grow the Rx business a little bit faster than compared to the rest over time. And I think the split will end up 50-50 or something. So we will probably see that continues going forward. But I think the gross margin, we can keep it steady.

And that was also the last question of today. Thank you, everyone, who has watched the presentation of the third quarter report for Apotea, and we wish you all a pleasant day.

Thank you.