Galenica AG (GALE) Earnings Call Transcript & Summary

Ladies and gentlemen, I cordially welcome you to the presentation of the half year results 2023. Exactly five months ago at the Annual Media Conference I summarized the 2022 results with this picture. A picture with the message, we continue our path and are far away from having reached our destination. And of course, the past only goes in one direction: Upwards. As a follow-up and to illustrate the half year results 2023, I have chosen the following image. The message we continue our path and are far away from having reached our destination remains unchanged. In the first half of 2023, however, we had to accept a short a decent decline in results, which is due to one-off special factors. However, we are convinced that after this small step backwards, our path will continue to go in only 1 direction: Upwards. Before I present the results in detail. Marc will now share with you the highlights and strategic progress we have made in the first half of the year. At the end of our presentations, you will have the opportunity to ask your questions. With that, I would like to hand over to our CEO, Marc Werner.

Thank you, Felix. Ladies and gentlemen, also from my side, I would like to welcome you to our half year call. We already communicated in advance some information on the 2023 half year results at the end of July. Any composed strong sales growth in the first half of the year, a plus of 5.5% is really remarkable in the current market environment. This puts us at the upper end of our guidance of 3% to 6%, and we are sticking to this statement. I would say the Galenica engine continues to rotate at a high speed. It is, of course, very pleasing and makes us proud. Unfortunately, and we already communicated this in July, Special factors are affecting our results, so we had to adjust our EBIT outlook for the year downwards. Yes, that helps, and yes, we are taking it very seriously, and yes, you can be assured that we will review the situation carefully in detail and are taking the necessary measures and consequences of it. Nevertheless, the negative impact of the special factors in the first half of the year should not hide the fact that we have made good progress and achieved sustainable growth, excluding the impact of special factors, adjusted EBIT would have increased by 5.2%, means fully in line with our previous guidance. With the new joint venture with Redcare pharmacy as the former shopper protector Europe is now called, we have reached a strategic milestone. Following approval by the competition authorities in May, we were able to finalize the transaction. This complements and refine our distribution network or in other words, in addition to our physical pharmacies and our [ webshops ], are specializing even more for a very specific target group that we're not able to address so specifically with our usual channels, means on those who only want to order online. And we are doing this together with a strong partner who is an international leader in the pure online business, a great step former in our omnichannel strategy. Of course, we also continue to work on the already existing distribution channels. The optimization of our pharmacy network also includes efficiency improvements. For example, we have decided to rebrand the few 10 Sun store pharmacies in German-speaking Switzerland in [ De Mavita ] pharmacies. Nine of these are already operating under the new name and with an adapted store layout. In addition, we have further optimized our pharmacy network also with new locations. Demand for consultations and services in pharmacy rose again in the first half year of 2023, more than 70,000 patients or an increase of 34% strengthen our conviction that the role of the physical pharmacy in health consultation will become more and more important in the future. Additionally, more and more health [ in tours ] are offering their customers supplementary insurance models and remunerating the qualified services of the pharmacy. Accordingly, we are also working intensively on our projects on how we can implement consultation in a professional and patient-oriented manner in the pharmacy. The first pilot will be launched this fall at the Marita and [ Tonior ] in the Canton of Bern under the name [ ConsultationPlus ]. And you, the viewers and listeners here in the con call, you will also be able to test the consultation concepts in the [ Bonava Potain ] fill, which will be reopened at the beginning of November after finalization of the major construction. And while we are on the subject of pharmacies, according to a study by [ Adecco ] published at the end of last year, the top five ranking of missing specialists is topped by health care professions followed by developers and analysts of software and IT applications. If you want to compete in the war of talent in health care, you have to invest in people, in the working environment, in working conditions and last but not least, also in salaries. This is not the Galenica wisdom, which concerns all of us, including you, not only as investors, but also as a customer or a patient. For example, if you want to continue to promote the pharmacy as the first point of contact for health issues. If you want to further develop our ideas for consultation and health care services, then we also need employees who can and want to do this. Expanding the scope of duties and competencies, giving them more responsibility, on the one hand, this means that the content of work in the pharmacy will become much more varied, diverse and interesting. And this will also make Galenica more attractive as an employer. However, it also means that we will compensate for additional work and large responsibility. Salary measures training at further location and so on. We see all of this as an investment in our employees and by that, an investment in our future, not only the pharmacies but also in other businesses areas where we want to grow and where we also need more people from different professional groups for development setup and operations. In early 2020, we formed a skills shortage task force with a focus on pharmacies. The task force was in place for four months and exploring to various topics such as recruitment, assignment planning or compensation and proposed measures to address them. As a result, we invested a total of around CHF 15 million in salary adjustments for lower salaries in 2023, including CHF 9 million for pharmacy employees. However, the task force also provided us with many more far-reaching insights, and this has led to further ideas and measures. Today, we can measure the first successes of all these initiatives. For example, we have been able to reduce staff shortage in the meantime. And that personally receives a lot of blind applications because people are interested in Galenica and want to work with us. That's a great signal, people want to join us, we are an attractive employer. Let's continue with our customers. The range of our own products is also becoming steadily more attractive. Here too, we are investing in a targeted manner in new growth markets. Just last fall, we took over the distribution of [ Huaron ] products in Switzerland, the world's leading manufacturer and distributor [ homeopathic ] medicines. This was shortly followed by the acquisition of [ Boiron peeking ] and we start the acquisition of Cannaplant, the leading provider of formulation for medicinal cannabis preparations. And this January, we integrated pharma at PADMA into Galenica network. PADMA specializes in the production and distribution of herbal formulations from Tibetan medicine. This allows us to offer even more rarity in complementary medicine products. And at the same time, we have increased our portfolio of three [ embarrassments ]. A few weeks ago, we had an extraordinary guest visiting us. His Holiness Sakya Trizin, the #3 in succession of [ Tibetan lamas ], which is headed by the Dalai Lama, a great honor and the privilege for the company and also gains honor for the work done there, namely to combine the tradition of typical medicine with modern elements. Thanks to the various acquisitions in the past and the impressive growth of its own products, where for has developed the rent over the past years and is today, by far, the market leader in the Swiss OTC market with a market share of over 10% for the first time. [indiscernible] achieving by the entire [ fora ] team and the entire Galenica Group which has contributed to this impressive successful way. Let's take not only to the wholesale business. The logistics and IT segment grew strongly in terms of sales in the first half of the year and in line with the market. We even gained market share with pharmacies. As I already mentioned, unfortunately had to make extraordinary allowance to customer receivables, especially in the wholesale business with doctors. As part of our growth strategy for positions we have supported the establishment and further development of various medical centers in recent years. In this way, we are making an active contribution to ensuring basic medical care in Switzerland. Access to general medicine is becoming increasingly difficult, especially in rural areas. More and more medical packages are closing because they cannot find success. Recently, Philippe Luchsinger, the President of the Association of Family doctors and Paediatricians describe the situation aggressively in the media. He wants that already in the next two to four years, there will no longer be enough doctors available to care for the population. In the future, this leads to a waiting time of several months for an appointment with a family doctor or clarification with a specialist. On this map, you can see in yellow and red, those regions that are undersupplied or even severely undersupplied. Severely undersupplied means that there are fewer than 0.7 physicians per 1,000 inhabitants. This is in comparison to the light blue and blue-collared regions which are well to oversupply with just on the one to more than one physician by 1,000 inhabitants. And the structural change among physicians will continue, in [ real ] practice as we close and at the same time, there is a trend toward group practices, medical centers and change. We are continuing our strategy. We want to grow further in the physician market, and we'll continue to support [ remissing ] projects in the area of medical centers and make our contribution to basic medical care. However, we will also act more cautiously and risk consciously and focus very deliberately on high-quality and sustainable growth. With these words, I will conclude my remarks and now hand over to our CFO, Felix. The floor is yours.

We are proud to announce the successful completion of the strategic partnership and joint venture with Redcare pharmacy. Thanks to this transaction, we realized a high extraordinary profit of CHF 112.8 million. Most of this, CHF 86.5 million resulted from a technical accounting effect, in particular, from the revaluation of the MediService joint venture. The remaining CHF 26.3 million is the part of the increase in value of our 8% stake in Redcare Pharmacy, which was realized until the completion of the transaction on the 16th of May. By the end of June, the total increase in value amounted to CHF 35.8 million, calculated with the share price of EUR 94.8 at the closing date. Yesterday, the Redcare Pharmacy share was already trading at a price of EUR 111. The total increase in value therefore rose to CHF 60 million. The future change in value of this strategic investment will not be recognized in the profit and loss statement but directly in equity. Due to the transaction with Redcare Pharmacy, we have restated the figures for the comparison period of the previous year. MediService was deconsolidated and net profit is presented as profit from discontinued operations below EBIT. For the group and the Product Care segment, we will compare all figures with these restated prior year figures. Before I present Galenica's result, let's take a brief look at the market development. The entire pharmaceutical market, meaning the market with mathematic registered medicines from the list A, B, and D developed very strongly with a plus of 6%. I look at the volume growth of only 2.3% shows that the growth was once again realized in particular with high-priced medicines. The strongest growth was achieved by the doctors channel with a plus of 8.1%. The local pharmacy channel also grew strongly with 6.4%. The trends towards high-priced medicines is best visible in the mail order pharmacies. The growth in value of 3.7% and was achieved with a decline in volume of 6.8%. In contrast to the medicines market, the non-medicine assortments in pharmacies and truck stores declined. This slide shows the development of the Swiss consumer health care market. This corresponds to the average assortment of Swiss pharmacies without prescription medicines. Thanks to a growth of 5.2% of OTC medicines, the overall market grew by 3.3%. These market figures do not include the COVID-19 health tests which were still sold in large numbers in the first half of 2022. How did our business perform in this market environment? With a growth of 5.5% in consolidated sales, very good. Adjusted for the extraordinary sales related to COVID-19 growth of 6.6% even exceeded the growth of the entire pharmaceutical market of 6%. The Products & Care segment grew by 4.2% or adjusted for COVID-19 sales with growth of 5.8% adjusted for COVID-19 healthcare sales at 6.8%, the logistics and IT segment developed quite dynamically. Accordingly, the wholesale business grew strongly by 5.6%. In the wholesale business with pharmacies, by far, the largest customer segment, new customers and staff market shares were gained. The growth of 7.9% adjusted for COVID-19 self-tests was clearly above the pharmaceutical market growth of 6.4% in the local pharmacy channel. Leasing growth of 4.8% was also achieved with physicians. However, this was below the market growth of 8.1% in the doctor's channel. Some doctor customers are struggling with financial problems, which is why we had to book allowances on the receivables. Mark has shown you that we want to continue to grow in the doctor segment, which is undergoing fundamental transformation. However, based on this experience, we want to consciously take fewer risks, which may have a dampening effect on sales growth. The retail business area continued to grow solidly at 2.1%, Particularly pleasing was the growth of 4.6% in the pharmacies at home sector thanks to a strong development of Pixel Home Care in the area of clinical nutrition at home. Due to the deconsolidation of MediService, the share of pharmacies at home and total retail sales decreased from 29% at the end of 2022 to 6% in the first half of 2023. With three acquisitions, one new opening and three restructurings. We have further expanded and at the same time, optimized our network of local pharmacies. The net expansion contributed 0.4% to the sales growth of local pharmacies. Adjusted for the extraordinary sales related to COVID-19 local pharmacy sales grew 3.7%. On the one hand, this growth is above the growth of the consumer health care market of 3.3%. On the other hand, the pharmaceutical market in the local pharmacy channel grew stronger at 6.4%. In these market comparisons, it must be taken into account that at Amavita and Sun Store, we have an above average share of sales with non-medication products, which were stagnating or declining in the market in the first half of the year. In addition, for efficiency reasons, high-priced medicines, which have driven market growth are mainly not dispensed in our pharmacies, but through MediService. Overall, we estimate that we have developed more or less in line with the market in local pharmacies with 19.8%, we again grew very strongly in the Products & Brands sector. On the one hand, thanks to the successful further expansion of the product portfolio with [ Boiron ] and PADMA. Furthermore, Organic growth is also very pleasing. In exports, with an organic growth of high 40%, Perskindol and Anti-brumm grew strongly. This exceptional growth is the result, on the one hand, of distributors building up their stocks and on the other hand, of a catch-up effect of the corona-related decline. In the Swiss market, we grew organically by 6%. Part of the growth is due to a stock buildup at retailers and wholesalers. [ Buy on stat ], with 3.6%, the market sales growth of our products in pharmacies and drug stores is above the consumer health care market growth of 3.3%. The market share of our products in the Swiss consumer health care market increased from 9.8% at the end of 2022 to 10.2%. Let us now move from sales to the operating result. Due to one-off special factors of CHF 9.8 million, the adjusted EBIT decreased by 5.1% to CHF 90.2 million. Firstly, HCI Solutions had to recognize an extraordinary expense of CHF 3.8 million for a ruling issued by the Swiss Competition Commission in 2017. This, although the case is still pending, and we are confident that we will win in the federal Supreme Court. In addition, there were extraordinary allowances on customer receivables in the amount of CHF 6 million in the first half of the year. Adjusted for these one-off special factors, the adjusted EBIT would have increased by 5.2% to CHF 100 million. The logistics and IT segment, in particular, would have performed very well without these special factors with EBIT growth of 13.4% and an increase in the EBIT margin to 1.9%. With EBIT growth of 3.2%, the Products & Care segment showed a slight decline in the EBIT margin from 9.2% to 9.1%. The reason for this development are higher costs, especially personnel costs with an increase of 10.5%. Mark elaborated in detail about our initial successes in the combat against the shortage of skilled staff. These successes have their price. Of the additional CHF 17 million in personnel costs compared to the previous first half year, about CHF 10 million come from local pharmacies. About half of this is due to wage increases and the other half to staff expansion. The remaining CHF 7 million in additional personnel costs relates to wage increases and in particular, to expansion through new business activities such as PADMA, [ Boiron and Medinol ]. We continue with our activities in the Board for talent, but we assume that we will be able to compensate for possible additional costs from personnel expansion with a reduction in third-party costs for temporary staff. As already mentioned, we succeeded in improving the EBIT margin in the logistics and IT segment to 1.9%, adjusted for the special factors. The additional personnel other costs mainly come from the strategic digitalization projects and higher general IT costs. The strategic digitalization projects are also reflected in higher investments in tangible assets. In terms of total investments, we expect the comparable volume in the second half of the year as in the first so that investments at the end of the year are expected to be roughly at the level of the previous year. Several developments, which I would like to explain in more detail, leads to a lower free cash flow than in the comparison period of the previous year at minus CHF 81.7 million. In addition to the lower result due to the special factors, the operating cash flow before net working capital changes, is burdened by higher payments of tax liabilities in the first half of 2023. Of the important increase in net working capital of CHF 109.4 million, Around CHF 40 million is due to a normal seasonal increase in accounts receivable. This effect will be offset by the end of the year. Around CHF 30 million were invested in building up the inventory. This has improved the ability of our pharmacies, wholesalers and before to supply our customers, particularly with the safety stock initiative, together with Santo. Investments were also made in the security of supply of medicines in Switzerland. The remaining approximately CHF 40 million increase in net working capital is mainly due to temporarily lower accounts payable with a stronger focus on the payment terms. We also want to compensate for this cash outflow as far as possible in the second half of the year. Together with the seasonal effect on accounts receivable, it would, therefore, be possible to reduce the cash outflow from the increase in net working capital from CHF 109 million to at least below CHF 50 million at the end of the year. Of the CHF 30.5 million investments in participations, CHF 28.5 million related to the acquisition of the additional 2% stake in Redcare pharmacy as part of the completion of the strategic partnership. The positive cash flow from financial assets of CHF 29.3 million comes from a repayment of loans from associated companies, [ copitality ] and MediService. CHF 28.3 million was invested in M&A with the acquisition of three pharmacies and [ Altima ]. Despite the negative free cash flow, our balance sheet remains strong. Equity increased significantly to CHF 1.3 billion, thanks in particular to the completion of the strategic partnership with Redcare Pharmacy. Compared to the same period last year, leverage increased from 1.6% to 2.1%. The temporarily higher net debt of CHF [ 500 million ], and the EBITDA burdened with one-off special factors lead to this increase in leverage. Before I conclude with the outlook, a short update on the developments in the regulatory environment. Short because we have no real news to present, expect that the most important regulatory initiatives continue to be delayed. We are still waiting for a decision on the adjusted distribution margin. We do not consider a possible implementation to be realistic before mid-2024 at earliest. The draft law mail order sales of OTC medication, which was promised for mid-2023 has not yet been published. We expect a possible introduction of a new law in 2027 at the earliest. As already announced, at the end of July, we have lowered the EBIT outlook for 2023 to be roughly at prior year level due to the one-off special factors. Without the CHF 9.8 million extraordinary expenses, we would have confirmed our EBIT guidance with a growth between 4% and 7%. I believe the outlook for consolidated sales unchanged at plus 3% to plus 6%. We also confirm the outlook for the dividend at least at previous year's level. After our short decent in the first half of 2023, we continue unchanged and steadily on our way up. Thank you for your attention and your continued trust in Galenica. Now we are happy to answer your questions.

[Operator Instructions] The first question is from Christoph Gretler, Credit Suisse.

Hello Marc and Felix. First of all, I just wanted to ask, we have known this strong growth of our GLP drugs kind of -- does this have any impact on your business? And was that visible in your wholesale business in particular and how you're coping with that at all. So that will be my first question.

Chris, for this question. Could you explain us what do you mean with GLP drugs?

This authentic in particular, Trulicity, this kind of diabetes/obesity trucks, where obviously, kind of now though there is a strong demand out there. It's a big topic for example, in the U.S. distributor companies, for example.

To be very honest, this was not a special impact or a special issue. We were even not aware in our business. So we believe it really didn't affect our business. as far as we know.

I guess kind of it would have come to your attention now. Okay. And then maybe just to come back on the personnel expenses. So essentially, for the second half, we should assume kind of this level going forward? Is this a good guide? Or is there no kind of incremental investment that you expect to come, as mentioned by Marc.

It's clear, as Marc mentioned and as I explained, we had an increase in the first half with personal expansions or staff expansion and salary increase. And it's clear in the second half, we will again see the salary increase compared to the second half of 2022. What we plan is to compensate for possible further tough expansion with the reduction of third-party soft costs. That's the plan for the second half.

Okay. And that would basically be lowering your other operating expenses?

No, these third-party personal costs are also integrated into staff costs in the personnel cost. It's in this plus 10%. That's including the cost for temporary [ soft ].

Got it. And then just basically on your top line growth guidance for this year, this 3% to 6%, and you're running at 5.5%. It doesn't look like there is not that much change in dynamic kind of what basically would kind of lead to you getting towards the lower end of that range because that it was essentially require no growth pretty much over the second half.

So perhaps two remarks from my side. You have to take into account that last year, December was extraordinarily strong months with an early and strong flu season, that's one element, and we expect for the second half, let's say, a normal December. So that's the first point. The second one I mentioned in Products & Brands. With this 19.8%, the strong growth in the first half. Then we had included some stock buildup at our customers. So there, we can't expect, let's say, the same extraordinary high growth in the second half. But overall, it's clear we assume that we can continue our positive growth and dynamic in the second half and we are confident that we will reach our guidance.

Okay. I guess it's not the biggest business sales-wise products and brands, but.

No. It's more important for the EBIT margin than for sales. You are right.

So next question from Gian-Marco Werro at KB.

[indiscernible] from my three questions from my side. Sorry, First, also on personnel costs. In the beginning of this year, you just guided for an increase of around CHF 15 million or around a 3% increase year-over-year. So I just want to get a bit more detail here. I mean you explained already wage inflation, staff extension but wasn't that already visible by the beginning of the year. So that's just the first part of the personal cost question. The other thing is what do we need to expect for 2024. Do you think that wage inflation will also continue to increase as especially the services pharmacies are increasing significantly. I expect that there might be some trend of ongoing wage costs for you. Then second question is also about the write-offs for the doctor centers that you just announced recently, those CHF 6 million. Maybe can you give a bit more detail about the potential risk of further write-downs do some of your partner doctor centers also facing potentially economic challenges and then just the last question is on your acquired [ PADMA ] [indiscernible] and Cannaplant. I think the purchase price is quite a sturdy one, I would put it like this. Can you give us more detail about how excited you are about this acquisition and also potentially you see about potential rollout products in Switzerland. Therefore, also big synergies behind this big add-on for your company from a financial perspective.

Thank you, Gian-Marco. I'll start with entering the questions, Marc, and then complement or correct. I start with the staff costs. We announced already in late 2022, that we will increase salaries over drop by around 3%, which was presented for the whole group, CHF 15 million for the whole year. So that was not at all a surprise. And we are fully on track these sale increases I mentioned the impact of the salary increase for the first half in the first [indiscernible] CHF [ 5 million ]. Marc mentioned of the CHF 50 million increase for all group, about CHF [ 1 million ] was planned for the pharmacy segment. And let's say, the CHF [ 5 million ] mentioned was that for the half, [indiscernible] the second another CHF 5 million impact of salary increases. So that there we are in line with what we announced last year and are on track in plan. No. What will happen in 2024 it's too early to answer your question. As Marc [indiscernible], it's clear that we continue to really take measures to remain and becoming more an attractive employer. And it's also clear that we will have a salary policy, which corresponds, let's say, to this ambition. But it's too early to give you an indication or a number you ask for further potential risks regarding the disallowance we booked on accounts receivables, mainly in the doctor segment. We really looked carefully in all our larger receivables, and we believe that we don't have material further risk. You never know what happens in the future, but we believe that this CHF 6 million, let's say, provision on accounts receivable should be enough. The last question, if you are happy with the acquisition of the [ Boiron ] [indiscernible] of Cannaplant. We are very happy. It was a very interesting acquisition and integration so far passed very well, and we see important growth potential for the future in this interesting niche of medical [ come ] plant. And on top of that, we have interesting margins in this business.

And maybe just in addition to this point, one of the synergies you asked to Marc is, of course, the sales organization for physicians when we acquired and I guess it was two years ago, [ Vitamin D B3 from Dr. Build ], then we have started a sales organization for physicians. That means it's just about 18 months ago that we have this organization and we are building up this organization and sales [ agitation ] for physicians and especially the cannabis business, because it's a prescription ordering business for physicians to start for the business always with a physician, we have to increase, we have to professionalize the sales organization propositions. And that's, of course, one of the synergies we will see in the fuel Chinese business.

Next question from Jan Koch of Deutsche Bank. I guess you're still on mute.

Sorry, can you hear me now?

Yes.

I also have three, if I may. You mentioned in your prepared remarks that you don't expect an approval for OTC products and online channel before 2027. Why has this been delayed and does it have any implications on your strategy going forward? Secondly, on your primary care offering, great to see that you are that more customers are taking advantage of your offering. Have you been able to convince more insurances to cover the costs? And finally, on your products and brands business. Given that your international business is gaining further importance, could you elaborate on the margin profile of this business? So that's defer from the Swiss market? Or do you have the same prices?

Maybe the first one, OTC online business. Why is he late? In fact, we would have asked the authorities and not myself, they promise that they're going to launch the discussion in the parliament in summer 2023. And a couple of months ago or a couple of weeks ago, they announced that there will be a delay they're going to start next year. And if we know a little bit the process -- the political process in Switzerland, I guess they're not so different in other countries, then we know that it takes a couple of years til any new loss are implemented over there, and that's why we assume that it will not before 2027. The influence of our business, honestly is not huge, it's not so big because we are of course, we are investing in digitalization of the customer experience also for prescription drugs. The OTC I would say, the OTC sales business is a small part of a digitalization business. And that's why our investment goes further on. We have launched a couple of months ago, the first experience for a customer with prescription drugs online with e-prescription, all this business is going on and the OTC is just a part of this path. And if it comes later and comes later, it's not in our hands anyway.

Your second question was regarding the primary care offerings if they are reimbursed. So -- or financed by the health insurers. So first of all, in terms of regulation, we are convinced that somewhere in the future, it will be clear that these services will be reimbursed by the mandatory health insurance. But as for -- as you see for the OTC online distribution, this will take years, so we are prudent there. This come after 2027. It needs -- it's too [ clear ] as a change in law and this will take time. But somewhere in the future, we are convinced it will be normal that these costs are reimbursed. Now we -- nevertheless, even if it's not reimbursed by the mandatory health insurers, we work with insurance is four alternative insurance models and for supplementary insurances. And more, we find possibilities and agreements with insurance companies to integrate these attractive offering in their alternative or and supplementary insurances. Your third question was regarding the margin profile of products and brands export?

Yes.

In Switzerland, we sell our product with our own sales for our own sales organization. In the export, we only work with local strong local distribution partners outside Switzerland. And it's clear they take a part of the margin. And that means on the export we have a lower margin than in the Swiss market in the Products & Brands Business sector. It makes sense.

One quick follow-up, if I may. Could you provide a sneak peak of your Investor Day in October. What can we expect here?

A little bit earlier, it will be very interesting and an update on all the strategic progress and strategic initiatives. We will also give its clear more, let's say, deep dive in our exciting new strategic partnership and joint venture with Redcare Pharmacy. Perhaps Marc, you have other ideas?

Again, as we've been investing there, I hope you will be there.

Yes, it sounds good. Thank you.

Next question from Sebastian Vogel with UBS. Sebastian, you're still on mute.

I hope you can hear me now.

Yes.

Great. My first question is on the pharmacy customers in the wholesale business where you mentioned the decent growth that you have seen there. I was wondering how sustainable you see that going forward? I would ask my three questions one by one, if I may.

In the pharmacy wholesale business, we won the new customers, mainly in the western part of Switzerland and we believe that we will do a good job and keep these customers. So we believe that, yes, we should continue to grow. We can't expect every half year or every year market share gains, it's clear, but we don't see any reason that we should lose market shares in the future.

Got it. The second question is on the net working capital side of things. You mentioned there are a lot of details. However, I assume overall, given a particular focus on inventory. You're in your net working capital sensitivity as a percentage of sales will be a fair share higher still by the end of 2023 compared to 2022? Is that fair to say?

Well, especially regarding the buildup of inventory I don't believe that we can reduce this in short term, let's say, that we really think that this should be now enough in terms of increase so we really work on optimizing this new, let's say, level of inventory. There was a certain buildup to really guarantee the supply. And this was important also for our businesses. It was important. Let's say, for Switzerland, the initiative we did with [ Santo ], but we think this level shouldn't further increase.

Got it. The third question is on the COVID initiatives in that regard and the reference you made there in your slide deck. I assume or is it fair to assume that H1 was the last time where the comparable base is materially impacted. So the second half will, therefore, have less of a correlated driven base in that regard, and therefore, there will be less headwinds in that context?

Yes. It's clearly the vast majority of last year's COVID related sales was realized in the first half. And in the first half '23, this was more or less zero.

And one follow-up to the question. Does that mean sort of the less headwinds from the core side is then sufficient to sort of offset the higher base from the flu season in the second half, if there's a sort of an ordinary or normal flu season as you have expected or as you're expecting?

As I mentioned, in the second half of 2022, our sales of COVID initiatives were already at a very, very low level. So then we really compare the comparison second half '23 with second half '22 is not materially impacted by COVID-19 related sales.

Next question from Urs Kunz, Research Partners.

Yes. I have three questions. Maybe I also placed them one by one. Maybe on local pharmacies, you had organic growth of 1.5%, when you state that with all these special effects in the end, you were in line with the market growth. Are you happy with this question? Because I feel like your growth there is maybe not to a degree that the market growth is, you have also this high-frequency places where you should have some backwind, you have the services that you sell in your local pharmacies that grow by 8%. Can you elaborate a little bit on that?

As I mentioned, the market comparison is quite difficult. I tried to explain it. We believe, more or less, we were in line we developed in line with market. It's clear, it's always our ambition to outgrow the market organically. And we didn't, we weren't able in the first half, and it's clear. we try to do better in the future to outgrow the market, but it's not so easy also with our market share to outgrow the really the market. That's my part of the answer. Perhaps, Marc?

No, of course, as you mentioned it, of course, if you have the same growth as the whole market, then we're not really satisfied, and that's our ambition to go more. But if you look in detail at the market growth at the market figures, which is the high price medicine and stuff like that, and we really believe that we go about as the market is coming but that's not our ambition. And of course, we're going to we're going to do more in the second half of the year. That's for sure.

Okay. Then maybe another question on growth. now at the home care pharmacies. You have an organic growth of 2.3%. In past, you had set much higher growth rates mean it's a growing market. Is that just a onetime low growth rate?

In pharmacies at home. We had in the last year's extraordinary high growth rates because of the strong market growth of high-priced medications in the market with MediService. In the first half of this year, MediService grew between 3% and 4%. So not more than we grew with the remaining pharmacies at home sector. So I always said these growth rates with the very, very high-priced medicines the volatility is very high. And we can't expect every year double-digit growth rate, which was the fact over the last, let's say, two years. So it normalized growth was 4%. And in the remaining pharmacies at home sector, mainly with Pixel Home Care, we're really very happy with the growth. And also the Cannaplant business there, as I mentioned, we are very happy with the development, and we look forward to further growth in this sector.

And the final question would be on the midterm margin target on Products & Care that you stated was over 8% before this [ meeting ] service transaction. Now I expect that you would maybe give us some new figure? Can we expect that Investors Day or?

We already restated or adjusted the midterm guidance figure in the investor presentation. So we stick to our midterm guidance. But we, let's say, restated or adjusted the 8% margin target for Products & Care with the new situation after the deconsolidation of media service and this 8% corresponds, let's say, in the new world to 9.5%. So we stick to our guidance. It's just now target for product and care and not 8% anymore. But that's just this, let's say, restatement after the deconsolidation of MediService.

One additional question from Christoph Gretler, Credit Suisse. Please unmute yourself.

I have now two questions. First, with respect to the guidance, the EBIT guidance, you mentioned kind of this approximately past years prior year level. Is this kind of in your view, equivalent to the 4% to 7% earlier, adjusted for the one-off effects because depending on how I calculate, I get to a slight downgrade, but just wanted to hear your level of confidence that -- this is no unchanged adjusted or not?

So if my calculations were the same right -- and if you take the average of the former EBIT guidance. You reduced by CHF 9.8 million for the special factors, you should result more or less on the restated prior year EBIT more or less.

Or less Okay. I'm more or less -- the probably more.

For us it's a confirmation, that's what I said. We reduced the EBIT guidance because of these one-off special factors, otherwise, we would have confirmed it.

Okay. Good. Clear. So then the second question is just in our kind of offer on these [ fishes ] in segment. Maybe could you talk a bit about the competitive environment. And now you've taken a debate provision is this basically an indication that there has been an intensification of competition, especially, again, obviously, with [ Micro ] coming in. Is this basically becoming a more aggressive environment. And I think you also mentioned that it could potentially impact your growth outlook. Maybe could you go a bit more into detail about the significance of that comment, too.

We don't see any changes in the market environment until today. The competition was already quite tough before. since many, many years because the company mentioned was already there, as we were already there, and we don't see any changes in the market environment. But of course, it's a tough market. And we gained market share in the last couple of years. And of course, we mean the strategy is also to regain market share next couple of years. But as we mentioned before, we -- I would say we found a better view on sustainable market growth and sustainable business, it's sustaining customers than maybe in the last couple of years. But the market environment hasn't changed really since the transaction you mentioned.

Are there any additional questions? If there are no additional questions, I hand back to Felix.

So thank you very much for your participation and interest in our conference call. We look forward to welcoming you at our upcoming investor Day on October 24 in [ Zurich ]. See you there. Goodbye. Have a good afternoon.