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

Good morning, everyone, and welcome to the presentation of Apotea's second quarter report. As usual, we will start with a presentation. And after the presentation is done, we will move on to a Q&A with spoken questions. Today's presenters are Par Svardson, CEO and Co-Founder; Johan Marild, CFO; and myself, Sarah Ahnstrom, COO. And we will begin with some highlights of the quarterly years.

Yes. Hello. I think we have had a good quarter with good profitability and stable growth. So, Johan, please show us the figures.

Yes. We had revenues of SEK 2.026 billion in the quarter and a growth of 10.9%. We had a strong profitability in the quarter. We increased adjusted EBIT and had an adjusted EBIT margin of 5.2%.

Yes. And if we look at the second quarter, I think we have had a good progress on our growth initiatives. I mean it consists of a lot of small projects from everything from like assortment, stock levels, the customer journey and so on. But I think we have a good speed. It takes some time, but we will absolutely see effect on that in the coming year. So please, Sarah, show a little bit more about them.

Perfect. Exactly. Some examples of these sales initiatives. One is, of course, the launch of apotea.no. At the end of May, we did the soft launch of the site, and we are now selling our Beauty and Health assortment into the Norwegian market. And during this quarter, we have also begun with some marketing activities, still in a small scale and started to scale up the sales. We have went from a few orders each day to a couple of hundreds. And the ambition is, of course, to continue to strengthening our position in the Norwegian market. We have also continued to develop the -- or to scale up, I should say, the production in our new fulfillment center in Varberg. We are working quite a lot with optimizing the operations, and we will continue to do so. We are quite pleased to see that the higher share of the larger orders are now being handled by this automated facility, which we are very pleased about. And we also had a new high score during the quarter, and we are now producing more than 30,000 orders in a day. At the end of May, we also rolled out a company-wide share program of these shares, enabling our colleagues from the office prescription hubs and also the fulfillment center to participate, which we are very happy about.

We had with the revenue in the quarter approaching now rolling 12 months revenue of SEK 7.6 billion and an adjusted EBIT margin for the same period of 4.2%, which was in line with the rolling 12 months number in Q1. Let's take a look on the numbers in more details. We had revenues exceeding SEK 2 billion in the quarter. And as mentioned, a stable growth of 10.9%. We had a slightly higher growth rate in Rx, but we had stable growth in both OTC and traded goods as well as in Rx. Rx continued to increase its share of the revenues in the quarter. To the right, you can see our gross margin development, and we had a stable gross margin in the quarter. We had a strong profitability in the quarter. We increased adjusted EBIT to SEK 105 million despite increased depreciation of more than SEK 17 million. And we had an adjusted EBIT margin of 5.2%. If you look to the right, you can see a selected our operating cost in percentage of revenue. And as expected, the depreciations and amortizations increased and that is a result of the -- I shouldn't say new fulfillment center in Varberg, but the fulfillment center in Varberg established last year. And at the same time, we had an improved efficiency as you can see in decline of personnel and other external expenses in percentage of revenues. And the improved efficiency is the result of continuing good cost control, but also we get better cost leverage as we increase the capacity utilization. If you look on year-to-date, we for the first half year had a stable growth of 10.7%. And also looking at the first half year, Rx grew slightly higher than OTC and traded goods and increased its share of revenues. Adjusted EBIT increased to SEK 206 million, and we had -- and that corresponds to an adjusted EBIT margin of 5.2%. And also for the first half year, where there was a high increase as expected in depreciation, depreciation and amortizations for the first half year increased roughly SEK 35 million. We had lower operating cash flow in Q2 as well as in year-to-date. The operating cash flow was impacted by inventory and the inventory has increased in part due to inventory buildup in Varberg, but also temporary measures to ensure robustness in the supply chain as we have highlighted before. To the right, you can see our CapEx. We have, following the completion of the fulfillment center in Varberg had a significantly lower investment pace. And half year, we have very limited investments. And as we now are scaling up the production in Varberg and at the same time, also evaluating and figuring out what new investments that are best suited for these operations, investments are likely to remain low this year. However, if you look on the longer period between investments related to new fulfillment centers, we're still expecting a yearly average of CapEx of SEK 50 million to SEK 70 million. We had inventory of slightly above SEK 850 million at the end of June. Over the course of the last year, we have increased the inventory, mainly due to the buildup of inventory in Varberg. And as a consequence of the increased inventory, inventory turnover has also declined. We expect to gradually increase the inventory turnover as capacity utilization increases, but also by further optimization. Let's take a look on the return on capital employed. We have a high return on capital employed of SEK 27 million (sic) [27%] although it has declined over the past year. As a result of the fulfillment center in Varberg. And to the right, you can see our net debt and net cash position. And at the end of June, we had -- continue to have a very strong balance sheet and a cash position of SEK 104 million. And this is despite an increased inventory and also dividend paid out in Q2 of roughly SEK 62 million.

Yes. And if we look on our focus ahead, we will continue to focus on growth initiatives, but also to build the pharmacy of tomorrow. And when we say building the pharmacy of tomorrow, it means that have a continuous journey to improve everything, to make it better for the customers. So a lot of these small everyday steps and you can never succeed with them. It's forever travel. And I think to have a goal that says that you want to change all the time is very important in our business, and we will continue to focus on that. And Sarah will give us some examples.

Exactly. Growth remains our main focus also going forward. I think we have to look through all parts of the customer journey to make sure that we are excellent in every step, and that includes, as Par mentioned in the beginning, it includes the assortment, the pricing, features on the site, the information regarding the deliveries and so on. We have to be excellent in all aspects and improve even further. We will, of course, also focus on apotea.no. As I said in the beginning, we have just started with the marketing activities. So we will start to -- continue to increase the marketing activities and step-by-step also increase the sales. And we want to make sure that we still have -- or that we continue to develop the customer offering also in Norway to make sure that, that's a good offering also on the Norwegian market. We also want to continue to focus and continue to improve the Rx offering, the offering of prescribed medicine. We want to make it even easier for the customers to order online. We have before said examples such as expanding the assortment of prescribed medicine that demand Coldspan, also expanding the deliveries of Coldspan. We also mentioned digital inhalation guidance as a pharmaceutical service and those types of initiatives, we will continue to launch to make sure that we are a pharmacy of tomorrow also going forward. That was the end of the presentation. So we will move on to a Q&A with spoken questions.

The next question comes from Benjamin Wahlstedt from ABGSC.

I was wondering, firstly, if you could elaborate on the organic growth trajectory a bit. You've previously commented that you expect a gradually higher growth rate throughout the year, but also that it takes some time. So I was wondering just how should we weigh these statements against each other, please?

Yes, I can start a little bit discussing it. I mean a lot of these initiatives are like small steps and you -- first, you need to build it or first, you design it and you build it and then the customer realize that it's easier and then -- so it takes some time. And I think we can increase the growth with like single digits of percentage every quarter or something like that, but it takes time. But over like 1 year or something, I think you can see a bigger difference, but it takes some time. I think it takes too much time sometimes, but it does. Do you have any more comments on that, Sarah and Johan?

No, I think -- and as mentioned, our growth initiatives is our main focus, and we're not satisfied with the growth rate.

Second of all, you comment on a gradual ramping up in marketing spend related to Norway. And I was just wondering what sort of magnitudes are you talking about here? Is this something that you expect to move company profits?

Just a short, we are still in the very beginning of it. And I think the marketing activities are so far in a small scale, and we will ramp it up very gradually and step by step to just make that clear.

And compared to Sweden, it's almost 0. So I mean if you take it from a result perspective, it's nothing. But for Norway, it's a big step.

Yes. Perfect. And then I was wondering about the incentive program structure. And I understand this is not something you decide all by yourself. It's a shareholder decision. But then again, you also own quite a large part of total shares, both directly and indirectly. You start receiving EBIT-related shares already at a 3% margin all the way until 2028. And I was just -- I mean, a 3% margin in 2028 looks like a fairly guaranteed payday. On the other hand, your growth targets look more forward leaning, growth incentive shares start kicking in at growth of 15%. So should we sort of expect you to dig a bit deeper into the margins to ramp up growth near term? Is that how we should interpret the incentive program? Or what are we missing?

We tried to correlate the incentive program with the financial targets because if we -- I think it's important to have financial or incentive programs that correlates to what we tell the market because we want them to be correlated. Otherwise, it sounds very strange. So that's what we have tried to do. And I mean, this D-share program that we also launched was just normal shares, but with some kind of technical construction, so it's easier to buy them. But we -- I think it's important that our employees have shares as well and share the same goal that the market does because then we can have the same targets. Johan and Sarah, do you want to add something to that?

No, just as mentioned, the shares following the kind of -- is a hurdle share construction and following this more or less the same structure that we have had before with the C-shares, and they were also offered then company-wide as we've done in the past.

All right. So we should not take the levels of the targets as suggesting a change in the strategy from here on out?

No, they just follow the financial targets.

The next question comes from Amina Ashraf from Danske Bank.