Redcare Pharmacy NV (RDC) Earnings Call Transcript & Summary

Good day, and welcome to the SHOP APOTHEKE EUROPE Full Year 2021 Guidance Call. This call will be starting at 11:00 a.m. Eastern Time for the duration of 30 minutes. Today's conference is being recorded. At this time, I would like to turn the conference over to CEO, Stefan Feltens. Please go ahead, sir.

Well, thank you very much for the introduction. Well, good morning, everyone. Jasper, who is also on the call, and I will welcome you to SHOP APOTHEKE's conference call regarding our updated guidance for the current year for 2021. Following a short introduction, we will, of course, be available to answer any questions that you might have. I'm sure by now you've all read the APOTHEKE's statement that was released last night. But just to make sure that we're all on the same page, let me quickly walk you through the guidance changes. Originally, we have projected top line year-over-year growth of around 20%. Now we're guiding towards the year-over-year growth of 10% to 15%. In terms of our bottom line, we are now projecting an adjusted EBITDA margin at around breakeven level. This compares to our original guidance of 2.3% to 2.8% of sales. Lastly, we are now estimating a full year CapEx spending of around EUR 45 million. A key driver behind the revised guidance for full year 2021, are capacity constraints in our logistics processes, especially in light of very tight labor market in the greater Venlo area. You're following the news, so you are certainly aware that we are not the only company that is dealing with such issues. Lower sales result in a lower gross margin in absolute euros. But in addition, we will incur some additional labor costs to address our staffing needs. And furthermore, we will increase our investments to reaccelerate our growth and to get back on to the SHOP APOTHEKE growth trajectory. I want to emphasize and really in the name of SHOP APOTHEKE's management board that we are very confident that we will be able to debottleneck our logistics processes to be ready for the market opportunities in front of us. Our IT and our marketing are ready to date for the eRx mandate that will become effective in Germany next year, both with front and back at functionality, and we see ourselves in a pole position to leverage the eRx opportunity. With this short introduction, we would like to open the call for questions. To be fair to everybody, please limit yourself to 2 questions. If we have time left at the end, we will, of course, answer additional questions. So operator, please go ahead.

[Operator Instructions] We will now take our first question from Alexander Thiel from Jefferies.

My first question would be on the logistics issue. I mean, could you give us more insights since when this issue has basically started? What is the underlying problem with seasonal workers? I mean can you quantify the numbers of workers that you're meeting? And my second question would be on your profitability guidance, right? We have seen a 2% in Q1. So basically on track. What has basically changed? Is it the sales mix? Are you spending more on marketing? Because I think that the employee cost effects cannot be around EUR 20 million, right? Could you maybe talk about that a little bit?

Alex, thanks for the 2 questions. I'll start with the first question and Jasper, you'll address the second question. So the labor shortages, this started to materialize over the course of the second quarter. And again, to be transparent, that hasn't been resolved yet. So in July, we are still experiencing a shortage in staffing. Alexander, it's a combination of, number one, we are operating 2 facilities in parallel at this point of time, even though we're going to wind down the old facility towards the end of this quarter. And admittedly, that is something that we have not anticipated, there is indeed a labor shortage in the market, especially in the greater Venlo area, but not just in the greater Venlo area. There is a plethora of actions that we have and will continue to implement to address this labor shortage. Not all monetary in nature, but certainly, there's also a monetary a component that is to make sure that we remain competitive, and we can, again, address the capacity constraints that we have at this point of time. All of this is fully reflected in our updated guidance. And in terms of the change in the bottom line. Jasper, please add some color.

Yes. Okay. Thanks indeed. So we're saying now around breakeven, while to include in Q1, we were well on track of our guidance indeed. There are 3 main elements in that, Alexander. And first of all, it is -- and that's not the largest impact but it is the Q2 impact of the missed sales, the missed contributor margin we had in Q2. That's #1 of the 3. But #2 is the extra costs that we expect in our logistics in order to get as soon as possible in a robust way to our desired capacity levels. But #3 is also that as of that moment, we really want to, again, immediately take back our market-leading position. And so we will invest in stepping up our growth to the levels that you are used to see from us. And the cost of debt are also included in the 2021 guidance.

Okay. Understood. Maybe 1 follow-up. I keep it short. I mean, can you quantify the number of workers that you're needing is it like 50, 100, 150. Can you just give us a ballpark we can think about? And then on the marketing side, are you seeing now some pressure on marketing? I mean we know that Google and Facebook had changed some algorithms. I know that this marketing specifically on your side is like 15% of the marketing you're doing. But are you seeing any impact there as well? Or what the?

With the number of employees that you are referring to, you're in the right ballpark. I'll leave it at this. It's not too far off from what we're aiming for. Again, we're always looking at a net because there is also some fluctuation. We are losing some people. But in terms of the net workers that we're aiming for that we need to gain, that we need to attract to SHOP APOTHEKE, you are in the right ballpark with your assumption.

Yes. And then as to your marketing question, just in general, with the lower capacity, we reduced certain marketing means of us the past weeks, specifically on our website and also mentioning that it will take longer before products get delivered. But offshore, of course, we take into account to not lose our good positions, for example, at Google.

We will now take our next question from Benjamin Lacaille from Bank of America.

I've got 2. First of all, I was just wondering if you could give us a bit more detail in terms of the cadence of growth going through the second quarter, i.e., where was April versus May versus June? And in that context, what have you seen in July so far? Is it reasonable to assume July has basically been on the same pretty negative level as June? And then going forward, what kind of assumptions have you made in terms of the recovery for August, September and 4Q in terms of the new guidance, that would be very helpful. And then the second question is just on how you're thinking about the budget in terms of the profitability? I suppose you've already cut some A&P in the second quarter where you didn't have the ability to fulfill orders anyway. How are you thinking about spending the A&P going forward in the third and fourth quarter? And should we think of that as being the main drag in terms of the profitability downgrade today?

Okay. Well, again, I'll start and then to of profitability, Jasper will jump in again. Ben, you're right, July is not yet where we want it to be. So we -- as we mentioned that you've seen the preliminary numbers for the second quarter, in May and June the second quarter in total, but especially May and June, we experienced these capacity constraints, then it had an impact on the number of orders that we got a good process. As I mentioned a minute ago, that issue has not been resolved yet. So July will probably be at a similar level. All we can say at this point of time is that we have the plans in place to get to address these capacity constraints that's the reason because we cannot give a precise timing when will the additional staffing needs to be fully met that's why we're providing a range in terms of our top line guidance for this year from 10% to 15%. But at this point of time, again, I need to leave it at this. Jasper?

Yes. Only some additional color, then in June indeed, it was particularly certainly in June that our growth was minimized. The start of the second quarter was as positive as Q1 was where you saw some headwinds in the paper, Rx that we were able to fully offset with very strong non-Rx performance in all of our 7 countries and also in Germany specific. So that was the situation until the mid of the second quarter. And then specifically, in June, we had to reduce ourself and that continued into July. And as to your assumption that a big part of what we updated in our guidance is related to our total proposition and marketing, as you're saying, that is a correct assumption. Yes.

And can I -- sorry, can I just have 1 follow-up just on that. When you're thinking about the quarterly adjusted EBITDA contribution. Do you think that for the third and fourth quarter will be more negative than the second? Is that the sort of cadence we should expect going through the year?

Now first of all, yes, we give only guidance on a full year basis. But to give some color on what you're saying, there is not significant clarity on giving a precise answer to what you're saying. We gave our best estimates, but how the phasing is exactly that depends on the 3 elements we just discussed added the sales shortfall, then probably additional cost for the logistic capacity and then when we can step up our investments in growth again. So it depends on that phasing. So I cannot be more precise as to the course.

We will now take our next question from Gerhard Jorna from Bernberg.

It's Gerhard Orgonas from Bernberg. I will limit myself to 2 questions. First of all, maybe about the new logistics. Can you tell us what happened from a technical perspective? I mean I don't think the solution is still to hire more people, which you didn't find. I think the underlying problem is something that something went wrong in the automation, et cetera. And you successfully moved the international business last year and why has something happened with the DACH business now? And the second question is you said that you still have this problem is still ongoing in July. And how far do you have sufficient visibility that your current guidance is kind of the worst case that can happen? Do you have -- is there a little bit of improvement already that you've got visibility when these problems will be sorted out?

Well, yes, thanks for the questions. The issue that we are facing is a shortage of labor to be clear about this. If we didn't have the shortage of labor, there wouldn't have been a need to adjust our guidance. In terms of the automation, you're right, last year, we transferred the international business. But again, in terms of the magnitude, the number of orders that is, of course, a relatively small proportion of what we did now with the transfer of the DACH business in March and April. The automation, again, there are some normal hiccups that you would expect if you start up a new facility but this is not the major issue that we're facing. The major issue that we are facing is simply a shortage of labor. We are losing people or we have lost people. We have, at this point of time, we have problems attracting people. But again, without getting into the specifics, there is a plethora of actions that we have and will implement. And we are confident that over the coming months, we'll be able to debottleneck our logistics processes. The key issue is the shortage of labor.

And just to be clear, that Gerhard, as you all know, actually, this new facility, the automation part of it is running smoothly as of July, stepping up in February, et cetera. So that is on track and was designed already 2 years ago for the introduction of eRx. So that is actually the reason we want to have this capacity before the big change. Yes. But that's not impacted by. And there was a second half of your question, which I forgot at this moment. Can you please repeat?

Yes. So I mean do you see the light at the end of the tunnel? Is that why you're very confident that this is -- it's not going to get worse than breakeven on EBITDA and that your guidance now is you have the full visibility for the rest of this year?

Yes, Gerhard. Based on everything that we know today, this is the guidance that we want to provide to the market. We are confident, rest assured that there is no intent on our side that in a few months, we have to revise our guidance again. We are confident based on everything that we know today that the guidance is realistic and that we will be able to meet the guidance update that we're providing today.

We will now take our next question from Olivier Calvet from Kepler Cheuvreux.

Yes. I was just wondering if you could come back on the impact of your main competitors, current advertising campaign and general market trends on the OTC segment or, let's say, non-Rx generally speaking. Is this having an impact on your market share or what can you tell us on this?

Olivier. The reason for the call today is that we gave updated guidance and is only related to the capacity constraints, which is mainly manpower-related. So if any impact of what you're just saying then it's a not significant impact. In Q1 and Q2, there was in general, you could say, in Germany, but perhaps some increased competitive activity, but everything was in line with our guidance as to growth and also as to marketing. So no significant things happening there. Significance happening there, but not significant impact on our business.

Just to add one data point there. Through the end of June, our market share in Germany, our non-Rx market share in Germany developed very nicely and according to projection. Again, it is that changed, of course, in June when we were simply not able to meet the customer demand. But until then, our market share non-Rx in Germany developed really as anticipated.