Redcare Phamacy Unsp/Adr

Good day and welcome to the SHOP about the earnings release Q2 2021 call. At this time, I would like to turn the conference over to Stefan Feltens. Please go ahead, sir.

Okay. Well, thank you for the introduction. And hello and good morning from Jasper and from me. We have the privilege to welcome you one more time once again to our earnings release from our headquarters here in Severnum. The last quarter, as you already know, of course, had its challenges for shop apotheker. But we can say with confidence that we have and we are making progress with putting these issues behind us. But more about this in a moment. So, what do we want to cover today? We're going to start with what I was just referring to. You know, where are we with the situation in logistics with the temporary capacity constraints? We have experience. We're going to start with this. Then Jasper and I are going to walk you through the financial performance. Phamacy Unsp Phamacy Unsp&Adr Phamacy Unsp&Adr Let me walk you through some of the milestones of moving our business, our activities from the old facility to the new facility. This actually started last year in October when we transferred all the orders from customers in our international segment to our new facility by using some of the capacity here in our new facility and still operating the old facility full steam We were able, this allowed us to post record sales in Q4 last year and again in Q1 2021. In January, we started using our new automated equipment and our automated processes. And then the most important milestone happened in April and in May when we transferred all of the non-prescription orders from customers in the Duff region Phamacy Unsp & Adr Phamacy Unsp in the greater Venlo area, but this is not of course limited to this part of the Netherlands. You know, admittedly, that is something that we had not anticipated, at least not to the full extent. So where do we stand today? We have taken a number of actions in order to address our Manpower shortage. We have enhanced and changed some of our internal processes. We have enhanced and improved our compensation packages. Again, there is a different competitive environment. That is something that has just taken place over the last few days. With this measure, we are confident that we will be able to attract additional talent. to Shop Apotheke, and it will also help us to retain the people that are already working for Shop Apotheke. So it will help us to reduce fluctuation. In addition, we have strengthened our recruiting processes. We have strengthened and increased our recruiting resources. We are, of course, we are doing all of this to get us back onto the Shop Apotheke growth track. And equally, or one might say even more important, we want to have the capacity in place by the end of this year to be able to take advantage of the ERX mandate as of January next year, but also other opportunities that present themselves beyond the boundaries of Germany. Our move to the new facility will actually be concluded by the end of September. when we will have transferred also all the RX orders from the old to the new facility and any or all the orders containing any cold chain products. So shifting gears, Jasper and I are going to walk you through the financial performance in the first half of the year in the second quarter. So what were some of the key facts of the first six months? Our sales increased in the first six months of the year by 15% to 534 million euros. In the second quarter, our sales increased by 8% to exactly a quarter of a billion euros. In Q2, we posted for the six consecutive quarter, for the six quarter in a row, a positive adjusted EBITDA of around a million euros. For the first six months, we generated an adjusted EBITDA of 7 million euros and 1.3% of net sales. of our active customer base continued to increase significantly compared to a year ago. Our active customer base increased by 1.6 million. Our strong operational performance allowed us to generate a positive operating cash flow and Jasper is going to share more details in a couple of minutes. You of course are all familiar with the guidance update that we provided on the 22nd of July. We are now projecting a sales growth, a top line growth of 10 to 15% with an adjusted EBITDA margin at around break even level. So quick look at our two reporting segments, the DAF region and the international segment. Both segments were, of course, impacted by the capacity constraints we experienced in the second half of the second quarter, starting with the international segment. The international segment still, for the first six months of the year, posted a, I can say, solid year-over-year growth of 44%, and of course, for a six-month period, for the first time, They exceeded the 100 million euro threshold. Our DAF business expanded over the first six months by 10% and generated sales of close to 430 million euros. Going back to our active customer base, by the end of June, so as of the 30th of June this year, we had exceeded the 7 million mark of active customers. I know you all are familiar with the definition of an active customer, somebody who has placed at least one order over the last 12 months. The 1.6 million increase is an increase by almost 30%. Moving to the right hand side of the chart, starting with the customer satisfaction measured by the Net Promoter Score, the NPS. Not surprisingly, we experienced in the second quarter some extended delivery times because of the capacity constraints we had. So after an NPS of 70 in the first half, excuse me, an NPS of 70 in the first half of last year, There's a typo on the chart. The NPS in the first half of this year dropped to 68. On the next chart, we're going to share some new and additional insights into the evolution of our Net Promoter Score. Our average basket value came in at 62 euros and 57 cents after it had been a bit above 65 euros in the first six months of 2020. The key driver was the lower share of our RX business, which generates higher average basket values. You know, this is, of course, not what we want and what we had planned for. But again, comparing this to other companies, comparing this to other industries, you know, anything about 60 would still be considered as a reasonably good NPS. But of course, you know, it's not good enough for a shop apotheke. Very encouraging. And I was referring to this earlier. is that we see a recovery of our NPS. The last data point with a score of 71 is again, once again, within our target range. I acknowledge three data points don't necessarily make a trend, but at least the early signs are encouraging that the measures that we have that we have taken are taking hold and helping us to get out of this, out of the valley that we experienced again in the first half of July and in June. So switching to our web traffic, the red line shows the weekly Total visits to all of our websites in all of our markets. You see a peak towards in late February and in March. Then you see a couple of weeks where the web traffic was pretty steady on the right hand side here. And then you see a sharp decline that started in early June. Of course, this is directly related to the capacity constraints we experience and triggered by the capacity constraints, of course, we reduced our marketing investment because we didn't want to generate additional orders that we would have had problems to process. When you look at the blue bars, which show the weekly year-over-year growth, so the growth of our web traffic or the change of our web traffic was the same week a year ago, Phamacy Unsp & Adr has to be seen in the context of the start of the Corona pandemic last year in March and April, when we saw a significant jump in our web traffic. And with this, I'll hand it over to Jasper to walk you through the financials.

Yeah, thank you very much, Stefan. Very clear and good morning to everybody on the call. On this slide, we see the orders per quarter Phamacy Unsp&Adr Phamacy Unsp&Adr Let there be no in clarity, we were aiming for more than the 4.7 million orders that we processed in the current quarter. Another key message on this slide is in the green circles where you are seeing that also in the past quarter, we had more than 80% from our total volume coming from returning existing customers. And we also at the same time had an healthy inflow of new customers continuing. And the last thing I would like to highlight here Of course, the 4.7, we wished it would have been a little bit higher, but it's also clearly our second highest quarter ever, even higher than our very strong fourth quarter of the past year, which was the 4.4. And this is showing the strength with which we entered the second quarter. To the next slide, what did those 10 million orders we did in total in the first half of 2021 bring us in from a number perspective? On this slide, in the customary format, all the key P&L items. And before I start discussing the sales tool, including the adjusted EBITDA, a word on the adjustments. Of course, we had a quarter with turbulence in quarter two, but we continued to apply the same definition of our adjustments. That is mainly the accounting treatment of our ESO program, and the remainder is from one of project related costs. So in the second quarter, this was 2.6 million. The total adjustments exactly the same number as we had in the first quarter of this year. Then go into the sales. Stefan mentioned already the above half a billion of sales that we achieved over the first six months. And this has also given me the opportunity to tell you that the numbers improved slightly versus the preliminary numbers that we released on July 5. Phamacy Unsp. Also, on the 27th of July, we got a question about our Rx developments in Germany. Stefan then responded that the preliminary number was a decline of 26%. The final numbers are is that there Profit margin was around 25.5%, both in the first half and in the second quarter, which was well up year over year. A little bit later, I have a bridge on that. Selling and distribution, it was a bit over 21% of sales. It was up over the first half 3.7% this point versus last year. And in the second quarter, it was up three point, and now I cannot read the number, 3.6%, to be precise. The adjusted administrative costs were around 3%, both in the first and in the second quarter. And all the numbers I just mentioned, if you add them up, you get to the adjusted EBITDA, year-to-date 6.9 million positive, but also in the second quarter, we reported a 1.2 million The gross margin. So it increased from 22.5 by 3 percentage points to 25.5. And if I start with the first building block, it is also the sixth consecutive quarter that we disclose to you that we achieved year-over-year improvements in our sourcing. Half year this year compared to last year, an improvement of 0.1%. which includes vouchers related to RX. The other one of 1.2, also a benefit, but that's mainly mixed. It is mixed in countries and mixed from RX and OTC. And then a more fundamental important building block here of 0.9% is other. There is in part the fact that we had last year higher write downs of COVID related assortment. But the main element in this improvement is a higher media and monetization income. So in this slide, everything related to the gross profit margin fell to the positive. Then the next one, please, Carmen. This is the expenses as a percentage of sales from 17.5%. It increased by 3.7% this point. Clearly, the increase came from higher marketing. On one hand, we had last year a very and this year we invested really in our marketing position. Shipping packaging increase because of the very strong growth we achieved 44% year to date in our international business. The slight increase in operational labor should not come as a surprise. At the moment we are operating two facilities and last year it was just one and the other is mainly reflective of our increase in IT. Next slide, please. And then the cash flow slides. The good thing about cash is that you can talk about EBIT, net income, about adjusted EBIT or non-adjusted EBIT, but cash is what it is. And if I start with the building blocks, then you see that despite some headwinds we experienced in the first half of the year, and we started with an absence of cold and flu, and there was a lower elegy season, the bonus ban on In addition to that, the favorable working capital movements resulted in an inflow of 20 million. So the sum of the two, the operating cash flow, was at 25 million over the first six months of 2020. Investments at 61 million were at an elevated level. It includes the two business acquisitions of the first quarter, Meta and Smart Patient. It includes our investments in the new automated warehouse. and it includes our regular PP&E and IT. And of course, IT, because after all, we are this tech and digital front-runner company. Also this year, we had in quarter one a very successful placement of convertible bonds at a zero coupon, and this is the main reason for the inflow of well above 200 million. On this slide, you see cash, which is defined as cash and cash equivalents, including our short-term financial assets, So we started the year well above 100 million, and we ended the second quarter in a cash position of well above 300 million, a solid cash position. And with that, I hand it over back to you, Stefan. Okay.

Thank you, Jasper. Well, quick update on two key strategic initiatives. But before we go there, you know, despite some hiccups that we have and probably will continue Phamacy Unsp & Adr on track to develop Shop Apotheke to become Europe's leading customer centric e-pharmacy platform. But now switching to the two initiatives. The first one is our same day service. You might remember that we had aimed to cover all of the metropolitan areas in Germany by the end of this year. Actually, we achieved this ahead of schedule by the end of June. You know, you see here all the red dots. We are able to serve All of the metro areas in Germany with our same day service under the shop apotheke now label. We have now the opportunity to reach more than 20 million potential customers and of course the same day service is especially relevant customers have acute medication needs and cannot and don't want to wait until the next day or the following day to receive their package. By the way, that is also something that we closely monitor. The NPS or the customer satisfaction of the people that use our same day service is very, very strong. So that's a very encouraging sign for us. The other topic that's probably on our minds is the ongoing ERX pilot that was launched by the Gematik on the 1st of July, according to their schedule, so they were on time with this. Since the 1st of July, the Gematik has processed many electronic prescriptions, and the main objective is to ensure that all the e-prescription related processes and the systems are working properly. So July 1st actually marks the start, the launch of electronic prescriptions in Germany. It's our understanding that in the initial phases of the pilot, the emphasis was on the claims processing aspects of the electronic prescription of the ERX processes. So to ensure that electronic prescriptions flow properly and smoothly from the pharmacy through the claims processing center to the statutory health insurer. As far as we as Shop Apotheke are concerned, I dare to say with a healthy dose of pride that we are ready. We are ready to receive electronic prescriptions. We have not yet received a prescription from the pilot. If this is the case at a later point in time, we will certainly be ready to properly process this first electronic prescription for Shop Apotheke. I can only also in front of you now express my appreciation also on behalf certainly of Jasper to the task force that had been put in place Phamacy Unsp at the pilot that was started by the Gematik, as I said, on the 1st of July. The Gematik talked about, you know, three phases, a hyper-care phase, an extended care phase, and an enhanced care phase. Based on what we have heard, it looks as if the Gematik has moved, has progressed towards or into the enhanced care phase. The enhanced care phase, of course, is important because that's when the pilot that's limited to the Berlin-Brandenburg region will be scaled up towards around 100 pharmacies at the end of September and around 50 physicians. Once the pilot is concluded around the end of Q3, then the nationwide rollout of electronic prescriptions in Germany is actually going to happen, meaning Once the pilot has been concluded, then all the physicians in Germany and, of course, then pharmacies as the next part in the process chain will be able to issue and to process electronic prescriptions. They don't have to, but they can if they want to. This is, of course, all in preparation for the ERX mandate, meaning that physicians in Germany starting on the 1st of January next year will be obliged to issue electronic prescriptions in the vast majority of instances. So again, in conclusion, based on everything that we are hearing, based on everything that we are seeing, it seems as if the Gematik remains on track to conclude the pilot air schedule and then to move towards the nationwide rollout of electronic prescriptions across not just the Berlin-Brandenburg region, but all regions in Germany. So the last chart, we just want to show you again the guidance, but you're very familiar with this 10 to 15% top line growth is what we're projecting for the year. I don't think we need to walk you through the details. because we want to move to your questions and we want to make sure that we have enough time. Well, as I said, this concludes the presentation by Jasper and by me, and we now move to your questions. I just want to reiterate, please use the dialing numbers that you see on the screen. And the last point from my side, please don't forget while you ask your question, please mute your webcast because otherwise we get the ugly echo. So with this operator, do we already have a question?

Yes, we do. But as a reminder, if you do wish to queue for a question, please signal by pressing star 1 on your telephone keypad. Again, that is star 1 to queue for a question. And we'll now take our first question from Alexander Thiel of Jefferies. Please go ahead.

Hi Stefan and Jasper, I hope you can hear me. Thank you for the update. Despite most points being pre-released, a couple of questions from my side. I would like to take them one by one. Firstly, I would like to understand your underlying growth assumptions for the rest of the year. You said that you are back on stable operating performance again. So I'm assuming correctly that Q3 will most likely be in the same magnitude such as the second quarter with July and part of August fully impacted and potentially a return to higher growth in Q4, ultimately depending on when you fix your labor issue. And what could be the upside of the current guidance if you fix the issue already in August and basically have the flexibility on the marketing side to really scale up growth going forward?

Thanks, Alex. And once again, good morning. Your summary is exactly correct. That's exactly how it is. So indeed, we expect in Q4 a higher growth than in Q3 because in July our performance was comparable from a customer satisfaction perspective, much better because our delivery times are back to normal. Yeah.

Okay, thank you. The second question would be on your pure German underlying performance. Could you clarify how many of your 7 million active customers are German-based?

Well, Alex, again, we don't disclose this. You know, what we disclose is the total number of our active customers. Germany, of course, is, you know, by a wide margin, our biggest market.

Okay. And lastly, on your same day delivery service, could you provide more insight how many pharmacies are on board and how the incentive structure is built up for brick and mortar pharmacies and on the shopper boutique side? That would be interesting. Thank you.

We decided to roll out our now service master, and that was because of the very good and promising results we had in our first test under the radar screen and then the live test, both from a financial The exact numbers, we don't disclose. In the total P&L, they are not significant yet, but from a business case perspective, they are very positive. And as to the margin structure, I think you will understand that we will not share what the exact margin structure is, but it's the classical win-win-win where you will see that the for the additional sales and a customer is paying to us and we handle the last mile and we handle the payment process. So that's the basic structure. Do you have a follow up on that?

Yeah, definitely. Maybe a follow up. Is it structured on a subscription fee or is it take rate based? Will you extend the same day delivery for our X as well in the future?

There is no subscription, but We might do a subscription. What you are now seeing is that our Red Care Loyalty Program patients, customers, they pay a lower delivery fee than our other customers. And your second question was? It was the subscription and it's absolutely our intention. There are some challenges there still. to make that possible. But with the introduction of ERX, it's absolutely our intention that that's also possible through this marketplace same-day delivery now service. Yeah.

Okay, perfect. Thank you.

Yeah, thank you. Yeah.

We will now take our next question from Olivier Calvet of Kepler. Please go ahead.

Yeah, hi, good morning again. Couple of questions. We'll take them also one by one. First one, I appreciate the call on netpromos.score. I was just wondering if you could help us understand how much your delivery times increased by on average over these times. Looking at the last calendar weeks of Q2, maybe weeks 23, 24 or 227, can you shed some light on how much more time it took for you to deliver packages on average?

I don't have the data in front of me. Olivia, I can share my own story. I placed an order in late June and it took over a week to get the package. And I placed an order when I returned from vacation around the middle of July and I got the package the next day. I don't have the data, the precise numbers in front of me. Jasper, do you have any color there?

Yeah, that is fully correct that you asked the question, Olivier, because indeed, sometimes the world is very simple. One of the main reasons for an MPS, whether it's high or low, is do I get it delivered on the time that is promised to me? So this is indeed the main reason for the decline we had there. And indeed, normally we have a certain percentage Phamacy Unsp & Adr

Okay, and so maybe a related question would be perhaps your average time usually or where you want to be currently in terms of the delivery time between the order and the delivery to the end customer. Can you maybe give us a rough idea of where you want to be?

We want to have a significant part delivered the next day after you order. that they will receive in one to two days.

Okay. Okay. And then second question.

It depends per country. We are activists. It depends per country what we promise.

Yeah, that's a perfect transition. Just among these logistic problems, have you prioritized the German or the international market? Is there anything there or was this hitting both?

Now, the prioritization that we did, as Jasper just mentioned, is based on medical necessity. We prioritized RX orders, and that means because we

Okay, fair enough. And then you said during the presentation that you moved the non-prescription part to the new facility in May. Is the prescription business still in the old facility currently?

That's correct. Again, the prescription orders and the cold chain orders will have been moved by the end of September. And these are the last orders that are currently processed in our old facility.

Okay, fair enough. And then I was just wondering if you could come back to, you know, there were reports that you received a letter from the EU Commission explaining they would stop the infringement procedure against Germany concerning the RX pricing and the issue with the for all tapotec and Sterkungsgesetz. Are you now going to take legal steps on your own against this German law or no?

Olivier, you're right. We received a letter from the European Commission. Now there's an opportunity for us to reply to this letter. I don't know whether you have access to this letter, but at great length, the European Commission outlines and explains why the bonus ban is a violation of European law. But then, as they point it, because of opportunity reasons, they propose the decision hasn't been made yet, but they are considering to stop the infringement proceedings. And again, that's what you are alluding to. They're encouraging us to pursue this topic through other means. And that is what we have been considering for quite some time. At the same time, again, since the beginning of the year, this is nothing fundamentally new. We have been dealing with the bonus prohibition. But again, that is what we're doing right now. We are drafting the reply to the European Commission. Of course, our position is, and that's what the Commission, what they have stated is, it's their responsibility to ensure the enforcement of European law. They might make a different decision in this specific instance, but then we need to consider the other legal options that are available to us.

Okay, yeah, on your own, okay. Okay, and finally two questions, sorry for that, but just on the adjustments to EBITDA, I understand it's primarily, I mean, so it's primarily the employee stock option plan, but can you work out the expected number over the full year, or maybe, you know, we saw the total adjustment, I think the number was roughly the same in Q1 and Q2, so I'm just wondering if that should also be the case for Q3, Q4?

Yeah, the exact numbers and also the table with the exact details are also all split out in the interim report. We started doing that, giving a full transparency. What you will see there is that close to 70% of the total adjustments is related to the ESOP program. And the ESOP program is based upon the accounting treatment of the BlackSense calls and is reflecting the fact that our share price increased so much the past year. That's a non-cash item. because you determine this value at the moment of granting, that means that you can expect the same number for the coming quarters.

Okay, and final one, sorry again, but on finance expenses, I just wanted to confirm, you know, the online payment expense is part of your financial cost. Would that be fair to assume that it's roughly 60% of those financial expense?

No, no, no, no, no, no, no, absolutely not. It works lower. The main elements there is, as you know, because we discussed it before, there is the financing expenses related to our new convertible bond, but we pay a zero coupon. So that's the accounting treatment. Cash wise, we don't pay interest, but it's in there. So it's the convertible bond. It's negative interest that we're paying. Importantly, it's the operating lease financing element that we're paying. So it's our lease of our building. And then there's a smaller part related to payments. Yeah.

Okay, fair enough. Thanks a lot.

Yeah, thank you. Welcome. Thank you for the questions.

And as a reminder, if you wish to queue for a question, please signal by pressing star one on your telephone keypad. It appears there are no further questions at this time. I'd like to hand the call back to you.

Okay. Well, you know, we're not surprised that there are not too many questions because, again, we've been in contact with you over the last few weeks. You know, we just want to conclude with, again, acknowledging the hiccups, you know, that we have talked about, and I think we were transparent. It looks like we are. on our road towards recovery as far as our operational performance is concerned. More important is the readiness that we have achieved in terms of being able to process electronic prescriptions with front and back-end processes and by the end of the year, and that's what we're focusing on now, is we want to have the capacity in place to be ready to take advantage of the opportunities that will present themselves in 2022. We want to thank you for your time and for your interest in Shop Apotheke. And you know how to reach us if you have additional questions. So please, we know you're not shy to reach out to us. Thank you. Have a great day. Thank you. Bye.