Redcare Pharmacy NV (RDC) Earnings Call Transcript & Summary

Yes. Thank you very much, and good morning to everybody, and a warm welcome from my side. Before we get into the Rx topic, which is the, let's say, majority of the meeting of today, I would like to hand this over to Jasper to give us some insights into the highlights of Q3.

Yes. Thank you, Olaf, and hi, and good morning and a warm welcome from Sevenum from my side, too. Thanks for joining today and showing your interest in Redcare. Though it is indeed clear that the major piece of our update at this moment is the acceleration of the Rx performance in Germany and, as the next slide, Olaf will address that and share a lot of interesting and important major achievements in that area, but nevertheless, the overall performance that you're seeing here with the update that we shared with the markets last night deserve some attention, too. Our total sales in quarter 3 were 21% higher than the same quarter last year, and that's a fully organic growth. And this is a continuation of the double digit, around 20% growth that we achieved as a company already for many consecutive quarters. And with this growth, which [indiscernible] after 9 months into the year 2024 at EUR 1.7 billion net sales. Everything with Rx, our non-Rx continued to grow at the midpoint of our guidance, 20% fully organic year-over-year in quarter 3. And also year-to-date, we stand at 20% now. And later at the end of the presentation, you actually will see that we even expect a slight increase of the momentum in the fourth quarter of the 20%. Then the Rx sales. The Rx sales in Germany were 81% higher than last year, EUR 69 million instead of EUR 38 million in the quarter ended September with a year-over-year growth of above 100%. This all is only possible if we have the right product and an active customer base that is happy. And this active customer base increased in quarter 3 alone by 0.4 million customers, and we are rapidly approaching the EUR 12 million active customers. And with that, Olaf, to you.

Thank you very much, Jasper. So we have a very simple message for today. Our initial e-Rx results are that convincing that we decided to further accelerate our investments into Rx, that's the message of the day. And If we look into this slide, I would like to highlight 3 topics. The first is we already see today a strong inflow from new customers buying e-Rx with us, and we have to differentiate. On the one hand, we have first-time buyers at Redcare, so they place their first order with us being an e-Rx order. And then on the other hand, we have also converting non-Rx customers for customers who has already -- who have already been with Redcare for quite a long time, and now they are placing an Rx order with us. Second bullet, we took this decision because of very positive metrics on Rx. And there are 2 metrics, and I would like to elaborate a little bit more on them later in the presentation, which is on the one hand, the basket, AOV. And on the other hand, the customer repeat order rate. Taking the third bullet point, yes, we want to increase marketing, but the way we have always done in it the past, so very agile and data-driven. So that means we might adjust the level of investment, we might adjust the messages or the channels. This is the process we have established for the company, and we will continue to do so. If we go to the next slide, let's talk a little bit about marketing because we have to say one of the initial earnings is, yes, at this point in time, we need marketing. And I would like to give a little bit more insight into this one. On the one hand, it's about raising awareness. On the other hand, it's about educating our customer. And this all together, we are pretty much convinced will lead to a change of mindset and a change of behavior. If you look into the awareness, I think it's pretty obvious what happens out there. So the Germans, they have not been prepared for the e-Rx at all. So they are now at the doctor side and instead of getting a paper script like they did always in the past, the doctor gives them now just the card or actually tells them, "Hey, use your health care card, the eGK card and go to a brick-and-mortar pharmacy and just redeem your script. You don't get [indiscernible] any longer. So this is what the customers see. And now it's our job to really bring up the awareness that there is a second way to do so. The doctor is not doing the job. We have to do the job. So that's the second way that you can use the same eGK card and instead of going to the brick-and-mortar pharmacy, you can simply attach it to the phone and use the online pharmacy. So that is what we have to do. This is our job. We have to bring up the unaided awareness of the card [indiscernible]. And then on the other hand, we have to educate the reason why. Why should we do that? We all know it's pretty obvious. But nevertheless, we have to tell our future customers. And it's about 24/7, opening hours. It is about availability information, so you don't have to go twice to the pharmacy to get your product. You can finish the job all in one step. And at the same time, you can also save money. You can have -- you can add OTC, BPC from a very broad assortment and had savings on that compared to the brick-and-mortar pharmacy. Nevertheless, we do not need to get into the details. We love the product, you know the product, but it's about education. And once the 2 things come together, we are pretty much convinced that there will be a change of mindset and behavior. And that will open up for this business for a significantly larger audience. So it's about this first time introduction of change of mindset and behavior. And we have seen this also in other areas in Germany. Even the Germans, they love their money very much. But even the Germans at one point in time, they learned about the contactless payment, and now everybody is using it. And we see the same pattern here. So we first have to do the job, and then there will be a significantly larger audience. And we are also convinced that then, the cost per new customer will come down once this technology has been adopted, and it becomes more commodity rather than an innovation. At the same time, it's important that we link this message and this change of behavior and education to the SHOP APOTHEKE brand because with this, we become top of mindset, not only on OTC, BPC, but also on Rx, and that is our main target here. Can you please go to the next slide? This slide also is important to us because we strongly believe online pharmacies will play an increasingly pivotal role in the supply of medication. We have this role already today on OTC and BPC, not only in Germany, but also in a lot of European countries. And the same thing is now going to happen on Rx. It is about accessibility, affordability and availability. And especially for chronically ill patients, immobile patients, patients living in rural areas, online pharmacies will become well-established alternative to brick-and-mortar pharmacies. And this, on the one hand, having [ by ] choice. So in Germany, there's a freedom of choice on pharmacies, and customers are making their choice. We see it already today. And on the other hand, and that is the development we have seen over the last couple of years already, the number of pharmacies is declining in Germany, and there's a gap. And online pharmacies will fill this gap and ensure supply of medication. If you can go to the next slide. Let's get back into the numbers. This picture, I think you're all aware, but I would like -- simply like to reiterate it. When at the beginning of the e-Rx became, let's say, a mandatory nationwide tool, and since then, we saw that there was a slight increase already in Q1. But at this point in time, we had to educate our customers also about the change from paper to e-Rx, and you only have the QR code available. So we saw already a slight increase. And then after the go-live of CardLink in the second quarter, we saw a steep increase to 37%. And now in Q3, we had. 81%. And as Jasper pointed out, the month of September already is on the 108% [indiscernible]. One thing I would like to point out is in Q3, we also had the summer break. Traditionally, there is a summer break, and we know this from -- also from the paper business, it's not a good time to acquire new customers. So usually, we don't get so many scripts during the summer. And that's the reason why we also know what the marketing invest. Nevertheless, in total, it's a growth of 81% in Q3. So overall, I think it's fair to say that we are in a very dynamic growth situation on our e-Rx business in Germany. Let's go to the next slide. We are also enthusiastic about the e-Rx opportunity. But at the end of the day, we took our decision to further step up marketing based on compelling e-Rx metrics and some of the facts, and let's talk about some of the facts. Number one, customers love the product. They really love the product, and we see this, when we look into the way how they redeem the scripts with us, a very high-percentage NFC for the CardLink solution and only a very minor place with the gematik app of payers and the QR printout. So it is about a digital journey. That is what the customers love. Also our app is clearly the #1 app in Germany in terms of downloads, but also in terms of rating, 4.8 on iOS, 4.7 on Android tells us it's a great product, and we get that feedback from the customer. Also our NPS is already comparable to the level we have in Germany. We only released the overall NPS on a group level, but it's already on a comparable level in Germany. And that's an achievement because some of the steps are different than in OTC and BPC. And some of the steps on Rx are additional. So we had to learn, but now we are on a level where we feel very, very comfortable. But the most -- the KPIs, which are the most relevant to us to take -- or took our decision are really the bullet point #4 and 5. So on the one hand, it's the basket, the AOV, but also the composition of the basket because we know what is in the basket. And so we can see we are reaching exactly the customers we would like to have. So we can see based on the products, we're talking about chronically ill patients, and we also see that they do not only order Rx, but also to a very good share already OTC and BPC with us in the same order. Even more important from a business model perspective is the repeat -- is the customer repeat order rate. And here we see just great numbers, and that's the reason why we have introduced here also a new slide, which we will see on the next page, and I would like to talk about this now. Before we get into the details, the overall message is pretty clear. It's -- customers love the product, and they are placing follow-up orders with us. After 5 months, this rate is almost double compared to what it has been on the paper script. And you know, paper script also in terms of unit economics and model was already a great model. But we can see 5 months into the business that the percentage of returning customers is almost double. So what do you see on this slide in detail? Let's look into, let's say, the May cohort. So on the upper end, you see the 2024 numbers. On the lower end, you see the 2023 numbers. On -- the May cohort is the red one in the upper -- on the right-hand side in the upper area. So the way how this works is we look into the number of customers we acquired in the month of May. So whatever the number looks like, it doesn't matter. We call that the cohort May. And then we look into what happens month after month, are they returning or are they not returning, because if they are not returning, it doesn't make any sense to spend marketing on those customers. So then it is great to have new customers, but doesn't mean anything. The model needs the returning customers. So what you can see is already in the month 0, which is the month of May, a couple of those customers already placed a second order. And then month after month, this is increasing. And the gap compared to the same cohort from last year where we still had the paper out there is widening and widening. So what we can see, they really love the product, it's almost double. And of course, what does this mean? It means the lifetime value and the lifetime sales of the customers will also double. So you can expect, based on what we see today in the next quarters, in the next year and in a lifetime perspective, this becomes significantly more valuable because of that number. And that has been the main reason for us to decide already now to step up our investments. So if you look into the numbers of Q3, but also of Q4, and if you only look into the EBITDA, you can do that, but what you have to do is you have to look into what happens here. And we are generating high values by investing now. And you will see this going forward in the next quarters and years, you will see a fast growth because of this ratio and also very attractive profitability of the eRx business. Having said this, I would like to hand this over to Jasper, who will then give you some insights what this mean to our P&L and guidance.

Thank you, thank you, Olaf. Very clear. Yes, the last time, we updated our guidance because of our decision to accelerate in the e-Rx opportunity in Germany. And we do it out of strength, and we do it based on very convincing facts as we just showed a couple of them. We also took the opportunity because it's now already the first week of October to also narrow down some of the ranges of our full year guidance at the same time. And I think this probably not needed to say, but still, I want to reiterate that excluding this decision, we are and would have been fully on track of the track record of the past years and also of our guidance, meaning that we are growing double digit, around 20%, solidly around 20% quarter after quarter. While the sector is dynamic, the world is dynamic, and economy is dynamic, we have this double-digit organic growth rates already for many consecutive years and quarters. And at the same time, underlying, you also see the continuation of our margin reflective of efficiencies, digitization, benefits of market leadership and scale in general. All is based on the increasing base of active customers. But now going from the left, which is our old guidance and our new guidance since last night, we expect for the full year 2024 that our sales will end up slightly higher than we predicted at the start of the year, and our new guidance is total sales between EUR 2.35 billion and EUR 2.5 billion. Our non-Rx, which was growing year-to-date, as I said on the first slide, 20%, we expect for the full year that the low point is at 20%, and it could also be somewhat higher. MediService continues to grow, but we think by the lower half of single digits instead of the mid-single digits. And specifically reflective of our increased marketing, the adjusted EBITDA margin, we lowered from 2% to 4% to a positive between 1.2% and 2.2%. And I think you will understand that we will not give exact guidance as to what we will do on Rx in the coming months in the fourth quarter. It's too dynamic to give exact guidance up. Well, all in all, this is our guidance for the remainder of the year. We are very happy that we were able to share this with you last night and also now in the call. And I think we are looking forward to the questions at this moment, if any. Thank you.

[Operator Instructions] The first question is from Christopher Johnen with HSBC.

First, coming back to the guidance and the indication, is there any sort of color you can maybe give us on the margin in Q3? I know it's only a trading update, I get that. You also flagged that during the summer break, you did a little bit less marketing. But is there any sort of color you can maybe give us about Q3 profitability, knowing that the numbers are not ready just to get a bit of an idea? I guess, what I'm trying to get at is a better understanding of how much of the guidance cut on the EBITDA side is related to Q4 performance. Yes. And I guess, a similar question. I -- what I struggle a little bit with, the guidance are precise, right, 1.2% to 2.2% on the EBITDA side. It's not 1% to 2%, it's not 1.5% to 2.5%. So maybe there is a bit more color you can give on, let's say, the EBITDA contribution or the marketing spend that you will expect in the fourth quarter where I'm coming from.

Yes, of course, in our business, growing as fast as we are doing, we always reemphasize, we give full year guidance and not quarterly guidance. But still, I can give you some color. At the same time, we don't know even our September numbers. So we are wrapping up September, and we publish our results on the November 5 in total, but it is continuing, as it was continuing. So it is just that I feel very comfortable that after 9 months, we stand into the range of the 2% to 4% that we gave to the market. What we announced today is our decision related to a continuation of the intensified marketing into the fourth quarter. So there is still some color there in total. That is the only reason for the update, and it has nothing to do with our year-to-date performance. But still, we need to wait until we have counted all the numbers, but there's not any triggering event there. As to the 1.2% to 2.2%, yes, that sounds a bit precise. Why not 1.32%, et cetera? But this is really the result of our careful estimation of all kinds of scenarios that we run, how much Rx fills do we expect, how much marketing do we -- et cetera, et cetera. It's at the moment our best estimate. We're taking the best decision for the value creation midterm, longer term, short term for the company with the level that we want to do. We think this is, in the end, the outcome of our full year margin for the full year. And that's why we actually gave it that precise because that is actually all our scenarios run into that -- into the -- that range.

The next question is from Aisyah Noor with Morgan Stanley.

My first one is on the EBITDA margin, bigger picture question. You previously said you would be or were committing to be profitable in 2024, regardless of the e-Rx trends. Does this mean you could have spent more, but you wanted to keep to this commitment? And how is this shaping your thinking about margins for next year? Would you be more willing to sacrifice on the margin to -- so go to breakeven or even a bit of a loss in order to get, say, 50% to 100% Germany Rx growth? Just some thoughts on the midterm -- or near term, next 12 months cost spend. And then the second question is also similar to the first -- earlier question on the marketing spend. Maybe another way to ask what was asked was what was the -- if your growth in September was 108% on your existing marketing investments, why just -- why do you need to spend more? And if the demand is driven by repeat orders, i.e., existing customers, then, arguably, those are already your acquired customers and not new customers. So yes, just some thoughts around your desire to spend more here.

Yes, you will give it a try on the first question? I will try to do it on a second.

Thanks, Aisyah. The updated guidance is the consequence of our decision to do what we believe is best for the company. So we did not take into account or it needs to be minimally above 1%. That is the consequence and the mix of actually our underlying strong business, nonorigin Germany and all our other countries, a continuation of that. And on top of that, the investments we want to do now because of the momentum, but you will get back to a little more, I think, in quarter 4 for the remaining year. So that is the reason we do what we think is best and best interest of all stakeholders, including shareholders there. As to the 2025 margin you're asking the question, we have a clear guidance to the mid- and longer term for the company of an adjusted EBITDA margin in excess of 8%. And we feel very comfortable, always have felt and increasingly so, perhaps very comfortable about the adjusted EBITDA in excess of 8%. But how exactly 2025 will look like, yes, we are not knowing at the moment, and we are not disclosing at the moment. So that's -- we have 2024, and then later we get into the new year.

So can I try -- give it a try on the second one? I like the question a lot. And the question is always, how much do you want to invest into, let's say -- into cohorts? And the question is always about lifetime value of those cohorts and payback periods. So that is a decision you always have to make. And of course, we can also adjust those decisions based on the learnings we have. So far, we have seen great earnings, especially on the customer repeat order rate. We could -- I think we could even stop marketing in Q4 and would see an increase based on the model. So because we have now all of the new customers in, and as I pointed out earlier, we will see the repeat orders. And therefore, additional orders will come in. But this is -- this can be the end of the story. As long as we have a great -- as long as we can generate great customer lifetime values, we will continue to grow, and that is what we -- that is the strategy. So the strategy is to really grow into this business as we have done on the OTC and BPC. And because of that, we will always need new customers to come in as long as we have good breakeven periods and great customer lifetime values, and that is the case. And therefore, we, of course, will continue to do so in December. And we will also continue to do the same thing next year, but we haven't determined the level for next year.

The next question is from Christian Salis with ck Aufhäuser.

I've got 2. The first one is on the Rx business. Could you maybe talk a little bit about the PRx business and provide an indication about the growth year-over-year in this segment? And maybe also how much is this at the moment in percent of total Rx sales? Would it be fair to assume that it's around maybe 10% of Rx sales at the moment? And also could you share what's your thought on your current market share in the online Rx market in Germany? And the second question is on marketing. Could you maybe provide an indication how much incremental marketing you have spent in the first half or in the first 9 months, please, this year on e-Rx? And would it be fair to assume this number was around maybe EUR 20 million in the first half? And could you also maybe talk a little bit about the marketing mix, so how much is television in percent of total marketing, how much is out of home, performance marketing, et cetera?

A lot of questions, and we will try to give some of the answers. Maybe I start first and then you take this over, yes, Jasper. So the PRx that was the first question, the way I interpret this question is it about [indiscernible]? Or was it about e-Rx or PRx? So I think it's a combination of both. So for all of you, we are not so much aware that there are 2 segments on the Rx business. The one is the [indiscernible] business. This is where the e-script has been introduced. And then there's the [indiscernible], which is the privately insured business. And there is still no e-script, which has been introduced. So therefore, at this point in time, we still receive paper scripts from this -- from the privately insured and, to a very, very small extent, still also from the [indiscernible] business because, as you all know, let's say, the share of e-Rx is not 100% on the [indiscernible] business. It has surpassed, I think, 85%, 90%. So there are still also some paper scripts out there in the [indiscernible] business. But if you add those 2 things up, then we still have our paper scripts, and we do not really give any details into the share. But I think the background of the question is, yes, there is a share, and it's higher than 10%. So that means our growth on the [indiscernible] was even better than what we showed here as a total growth. But we do not want to get too much into the details because, over time, this will phase out anyway. Therefore, we think we should keep it on that level. But yes, if there is a paper script, which is part -- which is not growing, and therefore, the e-script part has to have a higher growth rate. On the second part, I think there was a little bit more about how much marketing we spend on the channels. On the channels, of course, as you can imagine, we do not really want to give any insights because we consider marketing as one of our core competencies and don't want to share that with competition because, again, we strongly believe that our marketing is exactly the right marketing, and that's also the reason why we are growing. So there will be no further insights and details on our marketing strategy. In terms of volume, we invested mainly, Jasper I can hand this over to you, but I think the answer will be exactly the same.

Yes. No, I have nothing to add, yes.

Sorry for that. No details in the marketing strategy.

And on your market share in online Rx at the moment, any indications you can give?

Yes. Last time in Q2, we introduced first-hand the market share. And if I recall it right, it was 0.45 end of Q2. And of course, this has increased significantly because of the growth you saw. And we will give this update in our Q3 earnings release, which will take place on the 5th of November. But yes, of course, it went up.

The next question is from Olivier Calvet with UBS.

A couple of questions. The first one, it's a little bit unclear to me for some reason, consensus, German Rx consensus for next year came down from about EUR 500 million in early September to below EUR 400 million this year. Yet if I look at your implied guidance for the fourth quarter now this year, it's around EUR 120 million to EUR 130 million in German Rx. We have to guess a bit because we don't have the base number in Swiss Rx. But annualized, you would basically come back to that EUR 500 million. So I'm just wondering if you're comfortable with that EUR 500 million number for next year. And another way to ask this question, if you don't want to comment on the specific number is, are you confident that you will keep the patients whose business you captured in the fourth quarter? And then the second question would be on MediService. I was just wondering what are some of the main drivers for the MediService growth to be below expectations. And is that including both Rx and non-Rx in Switzerland? And maybe just a follow-up, if I may. I was just -- I just wasn't clear in the speech, you talked about marketing spend with existing customers. Can you clarify what you meant by that? If you -- what do you spend on marketing with existing repeat customers?

Olivier, thanks for your question again there. I think your first question is implying that you feel significantly more bullish about 2025. Then you are referring to a certain consensus that seems to be at the low end, I think that is your question. Yes, I leave it at what we disclosed today, what our growth is that we think in Q3, and we cannot talk about 2025 yet. We know the huge market that we have in total, and we know our current momentum, I would say, yes, that's we have there.