Redcare Pharmacy NV (RDC) Earnings Call Transcript & Summary

Good day, and welcome to the SHOP APOTHEKE Q1 2022 Earnings Release Presentation. This conference is being recorded. At this time, I would like to turn the conference over to Stefan Feltens. Please go ahead.

Thank you very much, operator, and good morning to everybody. Jasper and I, we welcome you to SHOP APOTHEKE's Q1 2022 earnings release call. Before we get into the details, we want to take a moment to recognize and to remember that while we are having the earnings call a little bit further east, a terrible war is continuing to ravage Ukraine. At this point of time, our thoughts and prayers are with all the people that are suffering from this terrible war. Well, what are we going to share with you today, Jasper and I are going to start with an overview of our financial performance, operational performance over the first 3 months of this year. Then just on a couple of strategic topics, we're going to give you an update. And at the end, Jasper is going to talk about the outlook for the remainder of the year. I can already tell you that we are going to confirm the guidance that we just provided a couple of months ago to you. At the end of our presentation -- after our presentation, rest assured, we're going to have enough time for your questions. Well, what were some of the highlights of the first quarter. Our non-Rx growth amounted to 15%, and this needs to be seen in comparison or on top of the strong growth in Q1 2021, when our top line expanded by 22%. In all of our markets, at least in the markets for which we have reliable and valid market data, we are seeing a normal increase of SHOP APOTHEKE's market shares. Our Rx sales have stabilized or as we sometimes refer to it, they have bottomed out at around EUR 10 million per quarter. In terms of our bottom line, our adjusted operating results came in at minus EUR 4 million or minus 1.4% of net sales. This is an improvement versus Q4 last year, but it's a little bit of a deterioration compared to a year ago, and Jasper is going to talk more about this. Most importantly, our Q1 EBITDA is fully in line with our guidance for the full year. Our operating cash flow added up to a positive EUR 24 million, driven by continued favorable development in our working capital, most notably a reduction of our inventory levels and an increase of our payables combined with a bit of seasonality. The highlight of the first quarter was a record customer satisfaction level with an NPS of 73%. This speaks well or reflects well on the smooth operations in our new pharmacy and distribution facility here in Sevenum. By the way, in the first quarter, we also set another record in the number of orders -- customer orders processed in a single day, which exceeded 110,000. In terms of our customers, our active customer count went up in the first quarter by around 400,000 to EUR 8.3 million. [ At Europe ], of course, all following the eRX test phase in Germany. We have all seen an acceleration in the number of daily or weekly prescriptions and we are happy that we are finally reaching the midpoint of the 30,000 e-script target which had been set out as one of the success criteria by the shareholders of the gematik. Last but certainly not least, we have an important acquisition with acquiring First A, one of the leading quick commerce players in the pharmacy space. First A will be an important cornerstone for us to ensure that we will continue to be able to address all of the relevant use cases, current use cases and future use cases of our customers, of course, especially in the context of the introduction of electronic prescriptions. Well, let's take a closer look at our sales development. You're looking here at both of our reporting segments. Our total sales went up by 7.3%, reaching EUR 305 million. When we look at the 2 reporting segments, the DACH segment went up by 2%. This is, of course, a blend of solid non-Rx growth of 10% and a decline of our Rx business of around 33% Even though the Rx bonus ban came into effect on the 15th of December 2020, we all remember that we didn't see the full effect of the Rx bonus ban until later in 2021. So again, the Rx bonus ban is the driver behind the drop of our Rx decline of around 33%. Looking at our International segment, International is comprised of Italy, France, Belgium and the Netherlands continued to grow at a rapid pace of 31%. And also here, let's keep in mind that this comes on top of a 71% growth in Q1 last year. So quarterly sales of our International segment are now at around EUR 70 million. Looking at some of our KPIs. I already mentioned the active customer base went up compared to a year ago by EUR 1.5 million. So that's, of course, purely organic growth, EUR 1.5 million or 22%. I think I already referred to the highlight of the first quarter. It was a record and all-time high customer satisfaction level with an NPS of 73. We all understand the most important driver behind the NPS are the customer delivery times that need to meet or exceed our customers' expectations. This was certainly the case in the first quarter. And as we -- as I already mentioned, the pharmacy and the distribution facility is now really working smoothly here in Sevenum. High IPS -- or high NPS, of course, translates right into our P&L. Happy customers are returning customers, resulting in a more efficient use of our company and marketing resources. Looking at our average basket value, the average basket value dropped from around EUR 63.5 a year ago to around EUR 57. The main driver -- but not the only driver, but the main driver behind the reduction of our AOV was the decline of our Rx business and the Rx basket is significantly higher than an average non-Rx basket. Beyond the Rx decline in most, not in all, but in most of our other markets, we also saw a little bit of a decline of our non-Rx baskets that points to a little bit of a softening of customer demand and probably some limitations of discretionary spending that's available to some of our customers. Well, web traffic, the green line shows the consolidated web traffic, all the visits to SHOP APOTHEKE's website in Germany and all of the other markets, you see here with the green line on the right-hand side, throughout Q1 it was between 7 and 8 million visitors or visits, that is a notable increase compared to even Q4 last year, which was already a strong quarter in terms of our web traffic. When you look at the year-over-year growth in comparison to the exact same week a year ago, here indicated with the blue bar, you saw that throughout Q1 our growth -- year-over-year growth was at or above 30%. According to similar web, in March, SHOP APOTHEKE's website in Germany was the most frequently visited e-pharmacy website. That is probably not a surprise. We have mentioned this before. But more important, when you look at all the healthcare-related website in Germany, SHOP APOTHEKE was the third most frequently visited healthcare-related website in all of Germany. Well, with this, Jasper, let's have a closer look at the numbers.

Yes, Stefan, thank you very much, and good morning to everybody. Before I start about this slide, just to avoid any confusion. As the highlights, you mentioned Rx stabilized at EUR 10 million per quarter, that's EUR 10 million. But I think to the audience in the sense that any misunderstanding. Okay, yes, this slide then. Yes, we did it. We have an internal plan to try to exceed more than 6 million orders for the first time in the past quarter, and we achieved a 6.155, so around 6.2 million orders in the past quarter. If you look at this slide, then you see that in 2019, we, for the first time we achieved 3 million orders per quarter. In 2020, 4 million. Last year it was around 5 million orders. And in this quarter we crossed the 6 million customer orders for the first time. You mentioned already Stefan that we achieved a lot of new customers in total, 0.4 million in quarter 1 alone, but still -- and that's something that we are very happy with. More than 80% of all the orders that you see here came from returning customers. Next slide, please, Gavin. Thank you. And then once the financials did we produce with most 6 million orders. On this slide, the customary P&L financials on one page, from sales up to and including the EBITDA. The sales ended up at EUR 35 million and the adjusted EBITDA margin was a minus 1.4%. If I start with top line sales, they increased by EUR 21 million to EUR 305 million, which was a 7.3% increase. But also compared to quarter 4, we increased by 5.8%, and that absorbs the impact of, for example, that February has fewer days than an average month. The gross profit margin in S&D, in a minute I will show you in the variance bridge the year-over-year change, but now already on a high level on the total company perspective, the gross profit margin was 26.6% in the past quarter. There was an improvement of 1 full percentage points compared to the same quarter last year and a positive improvement of 2 percentage points compared to the most recent past quarter, quarter 4 of 2021. S&D as a percentage of sales was 25%. That was a significant increase compared to last year. Please remember that last year was the full lockdown order and also included significantly more Rx sales than we had this year. If you look at it compared to past quarter, we actually improved slightly -- so stabilized, improved slightly from 25.1% to 25% in the current quarter. Administrative expenses as a percentage of sales at 2.9% were stable year-over-year and slightly improved compared to the past quarter. And if you add up all the numbers I just quoted, then the adjusted EBITDA in absolute millions of euros was minus EUR 4 million. It was EUR 10 million lower than last year, and it was a increase an improvement of EUR 6 million compared to quarter 4. Margin, minus 1.4% as per the EBITDA as a percentage of sales. If you look at the adjustments, the adjusted EBITDA last year was EUR 6 million and EBITDA was EUR 3 million. So adjustments were EUR 3 million this year from minus EUR 4 million to minus EUR 11 million is EUR 7 million. This is not an increase because we want to show a nice adjusted EBITDA number, no, we continue to be very conservative in the use of adjustments. The only reason for the increase, namely the EUR 4 million increase is the IFRS accounting for business combinations of the 2021 business acquisitions. This is a noncash item, just like the employee stock option costs that are also and it is also noncash, and that's why we adjust for it. So on an underlying basis, in both years around EUR 3 million, more than 90% of that only related to the pre-stock option program. With this set of numbers in total, we are fully on track for our full year guidance. The gross profit margin improved by 1% compared to last year. In the second building block you see that in total, there was a lowering impact from the net pricing of our assortment, including the mix of our assortment with this lowering impact of 1.1% was more than offset by specifically better sourcing conditions that you're seeing here, direct sourcing conditions, more direct deliveries, and there was an important element in order where we see a continuation of our success with media income, the data and media monetization increasing not only in millions, but also as a percentage of sales. All in all, 26.6%, a 1 percentage point improvement. S&D as a percentage of sales was 25%. Again, as I said already, the number of last year that was the full lockdown quarter in Germany, which is impacting the numbers. If we start with marketing this year, we decided to continue our momentum and we did successfully so with the numbers you quoted. We decided to use more marketing, than more over looking at the minus 2.4%. That is, of course, an impact of having lost paper or in sales. But this is also and that's number 3, the total company perspective and international is growing even faster at 30%. Then that DACH is growing and in the mix in total, you also see because of that there's an increase on the cost as a percentage of sales. If we take a helicopter view here, explaining the rest, then there is an impact of the segment just mentioned, a lower average order value in part from less Rx, but also some softness in customer spending in the majority of our countries, that's impacting shipping, packaging, payments, marketing, operational, labor as a percentage of sales. In shipping, there's also some inflation on energy costs, but you see you don't see that. I tell you that we have been able to get also better contracts. So in our case, there is an offset largely from inflationary energy prices in our last mile and overall better conditions in shipping. Labor as a percentage of sales, we had an increase of the minimum wage rate in September last year, and we are here comparing year-over-year to the past quarter. All in all, S&D as a percentage of sales 25%, a slight improvement versus the prior quarter and with that we go to the next slide because what this is doing to our cash position. We started quarter 1 with EUR 282 million of cash and cash equivalents and ended the quarter at a EUR 9 million higher level of EUR 291 million of cash and cash equivalents. Then as the operating cash flow, the investing cash flow and the financing cash flow, operating cash flow from EBIT was minus [ EUR 6 million ] Working capital seasonality, but also underlying improvements in inventories and payables resulted in an increase of EUR 30 million, the net of the 2 operating cash flow, a positive EUR 24 million. Investments in quarter 1 amounted to EUR 12 million, that was mainly in IT, and the remainder was in our logistics facility here at [ Sevenum ] but also the start in Milan in Italy and the financing cash flows of EUR 3 million also includes our lease payments. All in all, slight increase of our already roust cash position in the quarter. Back to you, Stefan.

Thank you, Jasper. So just briefly look at a couple of key strategic topics. Top of mind, of course, for all of us is the progress of the eRX test phase in Germany. But before we go it, please let me take the opportunity to remind ourselves of the big opportunity that lies ahead of us. Of course, I'm referring to the introduction of e-prescriptions. You see this here on the lower right-hand side, the total Rx market in Germany amounts to around EUR 50 billion. Right now, the online share, and I'm not just referring to SHOP APOTHEKE, but to SHOP APOTHEKE and all our direct competitors amounts to less than 1%. To be precise, 0.7% of the EUR 50 billion Rx market is currently served by e-pharmacies. When you refer to an independent market observers, everybody agrees even after the introduction of e-prescriptions, the vast majority of prescriptions will continue to be filled by local pharmacies, but everybody also seems to agree we're going to see a multiplication, a multiple of the online share that we have today. You heard us say this -- mentioned this before, Sweden is a good reference market because the market characteristics are not too different from Germany. At this point of time, the eRX share in the online share in Sweden stand at 11% to 12%. With the red donut on this chart, you also see the non-Rx market in Germany. The non-Rx market in the non-Rx segment, the online share has exceeded 20%. But again, we are not -- we don't want to imply that this is a good reference point for the Rx segment. We're dealing with very different dynamics. So getting back to the eRX test phase. Over the last few weeks, we've all seen that the number of daily and weekly prescriptions, e-prescriptions that have gone through the telematics infrastructure has steadily increased at this point of time based on everything that we are seeing, we are assuming that the eRX test phase will be concluded sometime in the third quarter. Probably in July we're going to see the -- we're going to reach the 30,000 e-prescription mark in terms of e-prescriptions having been dispensed by pharmacists. A few weeks later, these e-prescriptions will have been reimbursed by the health insurers. Again, that leads us to the conclusion that sometime in the third quarter, the Rx test phase will be concluded successfully. The next obvious question, of course, is, okay, once the test phase has been concluded, what is the rollout going to look like. And at this point of time, the best witness or the best source that we can point to is the German Health Minister, who over the last couple of weeks and as recently as yesterday mentioned that the eRX introduction is going to start, is going to commence right after the successful conclusion of the eRX pilot. And yesterday, he mentioned that the nationwide rollout of e-prescriptions is going to happen in 2022. As far as SHOP APOTHEKE is concerned, we have been and we are ready. All of our systems and processes are working smoothly. We continue to stress test our systems and processes. We are very eager for e-prescriptions to start, and we can't wait to receive a much higher number of electronic prescriptions after the conclusion of the eRX test phase. So again, putting everything together, I'm referring to the Health Minister, but also to everything that we are seeing at SHOP APOTHEKE, we remain confident that e-prescriptions in Germany are going to start in earnest in 2022. An important step, of course, along our strategic journey was the acquisition of First A, a leading quick commerce players in the German pharmacy space. We concluded the deal in early April. Both sides, we, but also the management team and the founders of First A, we're really excited. We're really happy about the marriage of these 2 organizations. First A is now going to have the backing to realize their ambitions. And we at SHOP APOTHEKE, we have added another important component to make sure that our ambition will come true, that we'll be able to continue to address all of the current and future relevant use cases in the German e-pharmacy market. The acquisition of First A is, of course, directly linked to our preparations for the introduction of e-prescriptions in Germany. First A will continue to operate separately and under their own brand. But in parallel, of course, we have already and will continue to identify opportunities where it makes sense to cooperate to make sure that 1 plus 1 equals 3 or more. And in April, we did not just conclude or close the deal with First A, but we also launched a brand new TV campaign in Germany with the aim to further increase the trust of our existing and future customers have in SHOP APOTHEKE proposition. If you live in Germany, you have probably already seen the release spots. If you haven't or if you don't live in Germany, let's have a look. [Presentation]

Well, I hope you like this spot as much as we all do. Of course, there's probably not a surprise. Ideally, at least some of you are already using the SHOP APOTHEKE app to place your next order with SHOP APOTHEKE by the way -- by the weekends time to order some sunscreen. Jasper, what about the outlook for the year?

Thank you. Yes, thank you. Well, on slide. In a world where clearly several e-commerce or in general digital companies have some challenges to continue to grow in a post-dynamic time and also facing the weakest quarter 1 last year, on top of that an overall declining customer confidence, more in security in the world and in addition, inflation up to significant levels, I think that our Q1 results actually show according to me that we as a leading e-pharmacy in Europe have been able to continue our growth that we on all levels increased also versus the hits we had in quarter 1 last year. We increased our active customer base in the quarter significantly with 0.4% and perhaps even more important is the fact that we recorded record levels of customer satisfaction at a 73% across all our 7 countries and also in Germany, specifically. And with this set of results in our pocket of quarter 1, we feel comfortable in reiterating our full year guidance for 2022 in all elements. And that means that we expect a continuation of our many years consecutive track record of growing everything that are double digit. So that's in the range of 50% to 25% in our case. On Rx in total, we cannot give guidance. It's too much depending on news that we will receive from the government. But on paper Rx, we were aiming for a stabilization of the paper Rx volumes and we achieved that fully. We had a stable volume in quarter 1, the same level as we had in quarter 3 and quarter 4 2021. Debt for the sales, the adjusted EBITDA margin in a range from minus 2 plus 1.5%. And I would say, of course, the mid- to long-term guidance, as we explained in more detail just a couple of weeks ago with the full year results, unchanged, with an ambition of an adjusted EBITDA margin in excess of 8%. Our guidance, we confirmed. With that, we have more than sufficient time for questions. So operator, can we please move to the page with all the details here. And may I remind, those who want to ask a question, please mute your webcast where you are and dial in. So again, operator, would you have the first question, please?

[Operator Instructions] We will take the first question from Christopher Johnen from HSBC.

Three, please, and I would like to do them one by one, if possible. So first, on First A. So the guidance wasn't touched yet I think the guidance was set when or before First A was acquired, the asset is probably burning some cash. Maybe you can talk -- give us a couple of numbers on the assets, maybe the consolidation impact for 2022 or sort of any view on the impact for 2023, basically how much you guys want to ramp this up? When international expansion is likely next year, all the things that would help us model this a little bit better.

Chris, indeed, we get the guidance before the acquisition of First A, is our ongoing business. So it's not that suddenly we're going to deliver our non-Rx sales growth just because of the acquisition, it is the guidance before and that's for bottom and top line. No we don't have any specifics on the First A transaction. It is on all levels, albeit whether it is sales or adjusted EBITDA or EBITDA or cash, it is not relevant in 2021 from a total company perspective. we report the 2 segments, that's international and DACH and First A is part of that. First A is not big enough at this moment to have a significant impact on total SHOP APOTHEKE. So there's everything there. Then you were asking something about the future, international expansion, 2023. Yes, it depends a lot on what -- how big the use phase is, how fast eRX is going, but it's absolutely our idea where we now focus with First A on Germany, as we announced already, actually for the reason that we expect eRX to happen very soon, but very quickly after that we envision very well that First A is a very good addition to our propositions in the other countries where we are. In modeling at the moment, yes, we don't give any guidance there at the moment. We have, of course, our several scenarios for the coming years, but it will all depend on how big this opportunity and the relevance for those specific customers is. I don't know if you have anything to add on that on the outlook.

I think you covered it all.

Yes. Okay.

Okay, perfect. That's helpful. Then second question on eRX. I mean, you chose not to disclose the number of scripts that you processed this quarter. I think that was delivered. I would assume why is that the case? I hope it's not because the percentage of scripts process was lower than your main competitor, I would assume?

Yes, I can quickly answer this, Chris. The reason why we disclosed this in the past, I think we did it twice. It was simply to indicate that all of our systems and processes are working. We are continuing to receive prescriptions through the gematik eRX test phase -- it's not a significant number, but we're also not out promoting anything. So I know there is a tendency to take the number of e-scripts that we have received and to divide this by the total number of e-scripts to draw some conclusions in terms of market share. I don't -- as the sample base is simply too small. And again, we are not out talking actively about e-prescriptions. But what I can tell you is today, we -- the number of e-prescriptions that we have received is significantly higher than what we reported the last time, but we want to leave it at this -- again, it's not relevant. The key is that our systems and processes are working smoothly, we are ready, and we are eager for the test phase to be concluded and to get started.

Okay, that's clear. And the last question on Q2, the current quarter, April is over, 1st week of May almost as well. Is there any sort of comment or color you can give on the current quarter, please?

Yes, in the past -- the past many years of SHOP APOTHEKE has actually proven that mostly there's happening -- dynamics of a full year in the quarter already. So it's too volatile for us. And it's also not how we look at our company that we give quarterly guidance. So I refer to our full year guidance. And overall, we see a continuation. That's the only thing I can say. With all the color we gave already in quarter 1, we see some impact on a lower average basket, which is not likely probably related to some customer confidence, a decline that you see across the markets, but we see all kinds of dynamics and continuing to the same extent as the positive ones also to the same extent as we saw in quarter 1. I think that's all we want to say on quarter 2. So it's in line with our full year guidance.

[Operator Instructions] We now take the next question from Alexander Thiel from Jefferies.

Good positive year and some weak comps coming. 3 questions from my side. I would also like to take them one by one. First, a high-level question on your average profit value. And I assume we all understand the negative correlation between high Rx AOV and lower gross margin. But first, could you give us an indication on the current paper Rx AOV? And how stable this has been over the last quarter?

Yes. Alex, we have seen really a marginal decline of the paper of the average paper Rx basket, nothing of any significance. But again, we are not using the paper Rx basket to project the future eRX basket. So it's too early for this. But again, no drastic change in terms of the average paper Rx basket value.

On the group level, right, if I account for the shift in sales mix by 4% less Rx in Q1, the average inflight OTC and AOV, excluding the VAT, is actually increasing. So I was just wondering what was the driver behind that the gross margin of international was actually slightly declined. So can you confirm that the OTC basket is actually slightly increasing? Or is this not the case?

Yes, we were doing also a little deeper than we normally do. We see it in most of our countries, we see -- in most of our countries, we're selling non-Rx. And in the majority of our countries, we saw in Q1 that the average basket was lower than it was in Q1 last year, not in all of our countries. So as I just said, there could be an indication that in discretionary spend there is some slowdown for our customers. In part, it also relates to our success of acquiring a lot of new customers, and we have a lot of ways how we can always impact. That's one of the fun things we're doing in our business that we try to, of course, it's helping a lot to increase the average baskets by getting good customer baskets. But just to be sure that I understand what you are saying, what Stefan was saying, and I was saying in prior quarters, we said it was only because of Rx. In this case, we say it's [ NRx ] and non-Rx. No we also have positive exception in certain countries, but that's what it's an end in this quarter. Is that what you were looking for, Alex?

Yes, I think we can take this offline. Maybe my second question is more a suggestion as I would like to see a pure German reporting in the future, right, to calculate the future customer conversion from the existing OTC customer base to eRX in the future. I think we are now at some point where this is definitely very good for analysts to have a better visibility for the future to make some very good estimates going forward? And my last question would be on your marketing spending. I mean, you commented on a very difficult market in Germany. Could you provide a ballpark figure for Q1 and break it out of the SG&A?

Your first remark on reporting Germany separately, that's not possible. We see our business on a international level, and there are requirements, and that's why you report external segments the way how we see our business. On the marketing spending -- can you be a little bit more specific what your question is exactly?

Could you break it out of the SG&A? What you roughly spend on marketing for Q1?

No, we have S&D and roughly 1/3rd of S&D is our internal pharmacy fulfillment activities. Roughly 1/3rd is our last mile and roughly 1/3rd is our marketing. That has always been the case. That's also another case. And -- but if you compare it to last year, you see that our marketing as a percentage of sales increased compared to quarter 1 last year. So it's somewhat higher than the 1/3rd which it normally is.