Redcare Pharmacy NV (RDC) Earnings Call Transcript & Summary

At this time, it's my pleasure to hand over to Olaf Heinrich, CEO. Please go ahead, sir.

Good. Thank you very much, and also a very warm welcome from my side. We are happy to have you today with us and to present the 2023 Redcare numbers. 2023 has been a great year for Redcare. Let's have a quick look into the agenda. First of all, we would like to look into some highlights of 2023. Then looking into the business performance of 2023, and afterwards, strategic update and outlook 2024, and then the financial outlook and guidance of 2024. Can you please go to the next slide? So I think we need to start with the guidance. I mean, you know it has already been a revised guidance, and we fully achieved the guidance across all elements with record sales and major margin improvement. So we're really happy about that. We also surpassed the 10 million active customers. I mean, this is not -- doesn't come by surprise because we already saw it toward the entire year. But nevertheless, I think it's worth mentioning it, more than 10 million active customers. And to me, it's really a result of putting the customer first always and having a great product available, including our marketplace and NOW! offering. We also successfully launched the new corporate brand and the vision of this was to reflect a more holistic view on health care and also a more international view. At the same time, we also relaunched some of the shops in Germany, Austria, France and Switzerland, and we even changed the main names in France and Switzerland. And I don't know if you remember, already in 2022, we did the same thing in Italy. So as a result of that, our brand now looks much broader and more consistent. Next page, please. Sustainable development is an integral part of the Redcare strategy, and it's reflected in our organizational structure and even more important, our processes. We have identified 12 topics as being relevant for us to track, one of them is circular packaging. And we are happy to report that our share of recycled packaging now has reached 93%. As a result of all of our efforts, we have been upgraded by 2 ESG rating agencies. We received a AAA rating from MSCI mid of last year, and at the beginning of this year from Sustainalytics, we became upgraded from medium risk to low risk, putting us in the upper quartile of all companies being covered. We also entered into the strategic partnership with Galenica, and this is really bringing together the best of both worlds. On the one hand, the specialty Rx know-how of Galenica and MediService and on the other hand, the online expertise of Redcare. And then, of course, e-Rx, also already 2023 has been a great year for e-Rx. We saw the introduction of the mandatory e-script beginning of 2024. But already in Q3 and in Q4 of last year, we saw a ramp-up of the number of e-scripts being issued. And in December, we reached a Milestone when gematik announced that they will release specifications for eGK NFC product, which allows fully digital access for our customers to online pharmacies. Can you please go to the next slide. Let's look into the business performance of 2023. Again, let's start with the guidance. We fully met the guidance. I mean, we had great sales, organic and nonorganic total sales were up 49% on a full year basis and 62% in Q4. And even if we take MediService out, it means we had 24% growth on a full year basis and 23% in Q4. Non-Rx even being a little bit more successful showing 23% in Q4 and 25% on a full year basis. But at the same time, Jasper, we also had a great, great record EBITDA.

Yes.

Yes. So it's not only about the sales is also about the EBITDA. We are really proud to report a 3.0 EBITDA ratio for the full year and showing even 3.1% in Q4. And that is 3.7 percentage points better than previous year. And I think Jasper will later talk a little bit about that. And those achievements were -- those achievements really are based on improvements across all components of the P&L and all 4 quarters of 2023 had a positive contribution. Full year free cash flow was positive EUR 8 million, and we ended up on a solid cash balance, around EUR 200 million by the end of last year. Next slide, please. If we look more in detail into the sales, we can see that it happens across all of our reporting segments. So if we look into the DACH region, I mean, we see a 54.6% increase. But even if we take MediService out, you can see on the non-Rx a 23% growth. And the non-Rx number on international is even higher with almost 31% in growth. Combined on the non-Rx it's clearly above 20%. It's a great success for 2023. Next slide, please. And this is also reflected in the number of active customers. As mentioned earlier, we surpassed the 10 million now ending up on 10.8 million by the end of last year. And as you can see, we added quarter-after-quarter more active customer to it. And at the same time, we were able to keep the NPS above 70, which we are very proud of, because it shows we clearly are in command of all of our processes and are able to deliver that high Net Promoter Score even if the volume goes up. Additionally, we also saw a slight increase in our average shopping basket value. Next slide, please. And the sales, of course, also in the number of customers is reflected in the number of orders, more than 29 million orders in 2023. And on average, 85% of those orders were repeat orders, which shows clearly how healthy the customer file is. And I think it also shows that the new customers we acquired in previous years, they have converted really into existing customers showing that the business model works. And that's pretty much from my side. And I would like to hand this over to Jasper.

Thanks a lot, Olaf, and I'm happy to do so. So all those orders and customers to what numbers did this lead? Well here, it's on one page. First, to start with the sales line. So the sales in the fourth quarter really increased from EUR 328 million last year to $531 million sales this quarter 4 and which was an increase of 62.1%. And on a full year base, we have expanded our sales from EUR 1.2 billion to EUR 1.8 billion, an increase of 49.4%. And actually, this also allows me to also actually thank all colleagues, who have been able to achieve those great results. And that's both if you look at the 62% from those that work on making the sales like marketing or category management, but also all the people that work in quality control, last-mile operations, in finance, paying the importers, enabling the company to really grow by 62%. If you look at the full year number of 49%, actually, a little bit less than half of that came from the inclusion of our strategic partnership with MediService, and it's also great to work together with the people of Galenica and the people of MediService in Zuchwil, as Olaf mentioned for that, also an achievement we're very proud of, of last year. So with this EUR 1.8 billion sales, let's immediately go to the adjusted EBITDA margin line because actually, the lines in-between are impacted by mix impact of the inclusion of MediService and the gross margin is lower, but that's fully offset by the lower, sort of, better S&D as a percentage of sales and on the adjusted EBITDA, there's virtually no impact of the inclusion of MediService. So the line, adjusted EBITDA last year, quarter 4, it was a positive -- slightly positive 0.3%, this year, the 3.1% that Olaf mentioned already, so an increase of 2.8 percentage points. And on the full year, last year, the fully loaded adjusted EBITDA was at minus 0.7%, and we increased it to 3 percentage points with the already mentioned positive adjusted EBITDA across each of the 4 quarters of the past year, an increase of 3.7 percentage points. And later on the next slide, I will shed a little bit light, but I can already reconfirm conclusion that you stated at the highlights that it is coming from a lot of elements across our P&L. The sales increase together with the margin expansion leads to the line adjusted EBITDA in euros. So for the full year, last year, it was a minus EUR 8 million. And this year, we achieved a positive EUR 53 million. That's an increase of EUR 61 million of adjusted EBITDA year-over-year. And for reference on this slide, also the fully loaded straightforward P&L EBITDA, and that one even increased by EUR 70 million. And the difference is explained by the significant reduction of adjustments and already making a forward-looking statement, it's likely that our adjustments this year will be again lower than last year because some of the adjustments related to past acquisitions have faded out. So all in all, sales growth in euros, better margin leading to significantly more adjusted EBITDA. If we then go into the segments. So on the left side, we see the 3.7% increase for the total group, but very important from our perspective to emphasize that this was actually driven by all countries and driven by the two reporting segments. So in DACH, also last year, we were positive 1.9%. But this year, we expanded to above 5% positive adjusted EBITDA while growing very fast. And the international segments had a similar improvement of almost 4 points from minus 10% to minus 6%. Then the bridges explaining why we increased our adjusted EBITDA margin by close to 4 percentage points. First, you see the 27.5% that's going to 24.5%, including everything, including MediService, but what is relevant is if we take the apples-and-apples comparison, then we see that in the comparable base, in the three building blocks, we increased in total by 0.6%. And block #2 and #3 basically show we are in control. There's no big mix impact. There are no other relevant items, and it's unrevealing the core of our improvement and that is an increase of the margin we achieved on the products that we are selling. And there are many reasons for that where we make improvements, whether it is sourcing, whether it's assortment optimalization and so on. So the total gross profit margin improved fundamentally with 0.6%. And then the next one, thank you. So the selling and distribution even improved by 3 percentage points. And here, if I immediately go to the bridge, which is also made on a comparable base, then actually I would like to start with the blocks 2, 3 and 4 that you're seeing there because shipping and packaging, so last mile, and packaging and operational labor despite the inflationary environment where we are all in, we were actually able to improve those costs as a percentage of sales. And that's clearly reflective of scale, of efficiency, and also with a little bit of help from an increased average basket, which is important for our business model. If we go to the first block, marketing as a percentage of sales benefited from the strength of our brands that we are having. It's not harming our growth, as you will see in the numbers that we published already and adding this all up, just leading to a 3% increase of our selling and distribution as a percentage of sales. And on the next slide, what does it mean for our cash. We are very happy with the free cash flow of a positive EUR 8 million, and we started the year with EUR 180 million. And for clarity sake, I always repeat, this, what we are showing here is the cash balances and what we call the short-term financial assets there, when we have some cash and we put in a fixed deposit to earn some interest income. So those two together were EUR 180 million, and we ended the year slightly above EUR 200 million. From left to right, so we start with the operating results close to the EBITDA of some EUR 50 million. We had EUR 48 million of operating income cash, then the positive impact from working capital movements, investments of around EUR 50 million and then financing actually -- some finance and these expenses were more than offset by a EUR 29 million capital raise leading to an end balance above EUR 200 million. And I think this is for now the last financial slides. I'll go back to you, Olaf. Thank you very much.

Yes. Thank you very much, yes. Okay, strategy update. So I think in a nutshell, it's pretty easy. We would like to strengthen our European online pharmacy leadership in 2024. How do we want to do this? First of all, also important to say we want to continue to grow our strong core business. This is the OTC, the BPC and own brand business. And we want to do this across all countries because we still have a huge market ahead of us in all of those countries. At the same time, we want to continue our success on the platform business. The platform business is marketplace and NOW! And you know we successfully introduced this in Germany and in Austria, and we would like to continue in those two countries, but also to roll this out on an international level. At the same time, we would like to realize the strategic rationale of our Swiss partnership. In 2023, we had a very smooth transition into the new setup. And now it's really about unlocking it. And here, we can bring to the table our online pharmacy expertise, especially when it comes down to growth and customer centricity. And on the other hand, we want to use the access to Swiss products, which we then can sell in our webstores and shops. At the same time, you saw the earlier, the 29 million orders we processed last year. So we have to maximize also our capacity in distribution at the same time. So we will work in Italy and also in Sevenum on our capacity. In Italy, we will simply add more warehouse space, but not really increasing the degree of automization. So more of the same, whereas in Sevenum, for the first time, we will install AI-based robots in our picking area. So 24 robots. And the overall idea is to, of course, increase the outcome per hour and to decrease the cost per order. And at the same time, we want to become the leading online player in the German e-Rx market. Can we please go to the next slide. Let's talk a little bit about e-Rx. I mean, this slide, you are familiar with. We presented this already in Q3 of last year, and the story is also pretty easy. The e-script finally has arrived in Germany. More than 70% of this national health insurance goods in Germany are e-scripts at this point in time and more than 75% of all doctors are issuing e-scripts. So it's a great success and the introduction of the mandatory e-scripts beginning of January of this year, and we have by far exceeded what most of the experts and also analysts have expected. Nevertheless, it looks great. And I think the e-scripts will not -- will continue to be a success in Germany. If we can now please go to the next slide. You are also familiar with this slide, at least to some extent, because we also presented it in Q3. I mean, we want to show how we are positioned as an online pharmacy to participate in that market. And the good news is, already today, we have two ways which our customers can use to redeem e-scripts. First of all in the gematik app, and then secondly, it's the paper print out. Yes, the market you know you need as a customer, you need the eGK card. So that's the German health care card plus the pin. And on the paper print, you simply need a paper print-out from the doctor, which is a very low barrier. And our customers are currently using both ways. Then you know there's this eGK plug-in solution, which does not work for online pharmacies because you physically have to present your card in a brick-and-mortar pharmacy. And therefore, we are really happy that gematik announced in December, as I mentioned earlier, to launch the eHealth-CardLink product. And with this product, we have a level playing field with brick-and-mortar pharmacies. So that means customers can decide to use their eGK card without a pin either in a brick-and-mortar pharmacy or they can use that to do business with online pharmacies. If we look into the status on the eHealth-CardLink, I think that is pretty easy to explain. Gematik decided that this becomes a product of gematik and because of that, they have initiated a standard process. And the standard process is releasing specs. They did this the first time in December. They also did a release of specs in January and then they will eventually end up with final specs. They will release the final specs. And then at the same time, we are building our product against those specs. We have started to do that already in 2023. And we are constantly adjusting our product based on new and updated releases of the specs. So that is actually the process. And now the tricky question or the open question is on timing. And here, we can say that we assume that in March, we will see the final release of the specs by gematik. But please keep in mind, the process is not in our hand, so we cannot guarantee this. At the same time, on the product side, we feel pretty comfortable because we have always aligned our product development to different specs releases. But also here, we need to see what the final specs are going to look like. So we might need to do some minor adjustments or not. And once we have done this, we will then ask for approval from gematik. That's all we can say today on the process. If we can go to the next slide, please, we can see once we have achieved all of this, we will have a great product available, very easy to use. You can see on the left-hand side, I mean you can either use the QR code, what you can already do today or you can use CardLink meaning you can use your eGK card you have. You simply attached this card to the smartphone, then all of the e-Rx data will be retrieved from the gematik server and then you're in the regular process of ordering like OTC, BPC, our own product means you can select delivery options, payment options, and that's pretty much it. So it's a great product already today with the QR code and then once we have the CardLink solution, an even greater product. That's it from my side. And I would like to hand over to Jasper.

Yes, I will do so. Okay, and the next one. Yes. So two slides on the guidance for the current year, the current year 2024. So basically, the header is saying continued very fast growth expected. It could also read put as very fast growth and solidly positive margins expected. But taking in the helicopter view, actually, we are really happy and content, I hope we were able to get that message across with you with the results that we achieved in 2023. And actually, we basically expect to continue doing so also in the current year. Starting with bullet #1, so we see strength. We see momentum. We see, from a helicopter view, from a total company perspective, no indications of a change. There's still a great opportunity in all of the 7 countries. So we see strength across all our countries and this is driving our sales growth at a solid margin. And as if that's not enough, already, there's also then the e-Rx opportunity on top of that. And it's the first year of the full e-Rx implementation in our DACH segment in Germany and now already more than 70% of all public scripts are digital at the moment. So it's the first full year that there is this is full available of electronic scripts. But I presume that you will understand that though we are very happy with the developments. Everything is too dynamic to, at this moment, give precise guidance on e-Rx. Nevertheless, if we go to the other slide, there are many things where we can give you guidance on. So our guidance, is always, for the full year, so for the full year 2024. We expect at this moment that we are able to increase our sales to a total sales of EUR 2.3 billion to EUR 2.5 billion, which is a growth of 30% to 40%. One of the drivers of the growth is non-Rx continuing to grow by -- at the midpoint of 20% in a range of 15% to 25% with growth in both segments. MediService, first of all, there is the full year impact, 12 months this year, 7.5 months last year, because we included it as of mid-May, but we expect that the core business of MediService will grow by mid-single digits in the current year. End of sales growth to achieve at solidly positive margins between 2% and 4%. That's the same range that we gave you last year also at the start of the year. It is including several scenarios also in relation to the e-Rx opportunity there is. But in all cases, we are at a positive margin is our expectation at the moment, 2% to 4%. And this also allows me to reiterate that we are confident with the mid- to longer-term guidance of an adjusted EBITDA of our business model in excess of 8%. So that's unchanged. That's what we can say for the year.

Yes.

And I think, operator, if you could please open it up for questions, if any.

First question from Christopher Johnen, HSBC.

First question, last year, you gave a free cash flow guidance, not this time around. Is there a reason for that? Or is there any color you can give? It would already be helpful if for some of the important items like CapEx, if there is any sort of color you could give us on that? And then second question on the EBITDA guidance. The range is, I think, quite wide. Just trying to understand your thinking here. What would have to happen for you to reach the low end of that range or the high end, just to get a better understanding on your thinking here?

Yes. I think that I...

Yes, you can take over.

Thanks, Chris, for your interest and thanks for your question. Yes, I think last year, we provided for the first time in the company history a guidance on cash, which was free cash flow, and we were happy that we delivered on that guidance. Each year, we look at what are the most important indicators, but also where do we have a large degree of certainty that we are able actually to predict upon that. As to the CapEx, I can already tell you nothing peculiar there. So assume the same level or perhaps a little bit of growth in line with the sales growth. So nothing special on the CapEx in 2024. So that's together with our positive EBITDA guidance, I should bring you already to the area where you want to be. The reason for us to not give guidance this year is actually just to do with the fact that there is quite some dynamics ongoing and potentially even more dynamics, also particularly related to e-Rx. And then at that moment, the guidance, which includes working capital, like we had last year, or total cash change that is just can be at certain occasions just because of timing, an unhealthy scenario where you would have a fast increase, for example, certainly in quarter 4. We work on a very solid balance sheet since 2021 already. So we are ready for everything, but it will be unhealthy, if we have a certain moment, say, in December, actually, we can grow a lot. But okay, we also have this guidance on working capital, that is just, so we want to have some flexibility there. It's not reflective of any other change that we expect compared to last year. It' just allowing us a bit more flexibility to the positive and to the negative of working capital. So that's the only reason. Rest assured we are fully focused on cash in all our decisions. EBITDA guidance, yes. I don't think it's a large range, 2% to 4%, but I hear what you're saying. I think it's reflective of the state where we are as a company. In 2022, it was still at minus 0.7. And now we're saying that the low end is 2%. Also here, there can be certain scenarios where perhaps our additional business also from Rx is immediately contributing perhaps in certain occasions, there's a certain investment, but we say it's all included in the 2% to 4%. And the midpoint of that is actually a continuation of last year. So yes, I think that's it, yes.

The next question is from Jan Koch, Deutsche Bank.

I also have two. I would also like to start with your margin guidance. What are your assumptions on incremental marketing spending for 2024? And then, I was positively surprised by the sales outlook for your non-Rx business. What gives you confidence that you can achieve such growth despite tough comps and an online penetration rate, that is already quite high in Germany?

Perhaps you want to give some color on the second one. I can also do that first question.

Yes. The marketing expectations from us, there are several scenarios possible. At the moment, the scenarios that we clearly mentioned are all included in this guidance. I think one of the strengths, of course, of former SHOP APOTHEKE, still our brand in certain countries and currently Redcare is actually our ability to have very good direct communications with marketing also to our direct customers. And at the moment, there's a opportunity like, for example, the Rx opportunity in Germany that will not be all on top. It also be in part, it will be a shift. But within this margin range, there's a lot of flexibility. I mean the numbers of sales have become larger for us, so the percentage is leading to more flexibility in absolute euros. So I think that certain scenarios that cross your mind, we feel, at this moment, comfortable that this is within this range. So there's nothing peculiar to -- for you, I would advise to take into account as to marketing.

Do you then want to give it a try on the second one or...

Yes.

And I can add to this then.