DocMorris AG (DOCM) Earnings Call Transcript

Good day, and welcome to the Zur Rose Group AG 2022 Half Year Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Walter Hess. Please go ahead, sir.

Good morning, and welcome to everybody. Marcel and I, we are very happy to present to you the half year results today. The world is facing many turbulences at the moment, resulting in uncertainties in the markets. Whereas our business with pharmaceuticals is hardly impacted by all of that. On the contrary, our key messages for you today are that we have set all our key priority on achieving EBITDA breakeven already in 2023. And as a result, there is no additional cash needed for operational business. Our highly efficient distribution center in Heerlen is live. And the medpex brands integration has started. And with the rollout of the eRx in Germany, the digitalization of a EUR 50 billion market with prescribed medication will take off now. So let's deep in these topics now by first giving you a business update followed by a deep dive in our breakeven program, which -- that we have announced, and then Marcel will give you a financial update and an outlook before we come and move to the Q&A sessions. Executing and delivering is of highest importance for us as a management team. Therefore we are very pleased that we can report today that we have achieved all our targets in the first half of this year. The slight revenue increase of 0.4% is within expectations. We have improved the gross margin, sorry, we have improved our EBITDA already by CHF 37 million by increasing gross margin by 0.6 percentage points, by realizing first cost reductions and by improving marketing performance. And we have CHF 200 million of cash on hand by end of June this year. One of the most important objectives was the go-live of the distribution center, the new distribution center in Heerlen. On the picture, the upper picture on the right-hand side, you see in front, the new distribution center, we call it DC2 and in the back, the previous existing distribution center DC1. This target we have successfully accomplished. For us, it is a strategic milestone as it is a precondition for the brand integrations. With that, the capacity increased from 12 million to 27 million parcels per year. And with this unique infrastructure, with highly efficient and secure processes, we will now be able to fulfill the eRx demand ahead of us. The improvement of logistic cost per parcel is higher, is more than 30%, which will lead to a cost reduction of CHF 10 million per year with first savings already in the course of this year. The next big milestone for us is the operational integration of the medpex brand into the new distribution center in Heerlen. Stifts-Apotheke, this is the pharmacy of medpex, will be closed by its owner by end of October this year. Yesterday evening, the 350 employees concerned have been informed about this step by the pharmacist. The location in Ludwigshafen will continue and operate in the future as a logistic hub of the Zur Rose Group for non-pharmaceuticals and add a capacity of 7 million parcels per year. Therefore we have offered shops to about 200 logistics and pharmaceutical employees from the Stifts-Apotheke in Ludwigshafen and in Heerlen. At Visionrunner, a Zur Rose Group company and a service provider to the Stifts-Apotheke, we will reduce 36 jobs. The employees concerned will get individual compensation packages out of our responsibility, social responsibility. And all in all, the leverage of the synergies out of that and the reduction of complexity will lead to a positive EBITDA impact of more than CHF 8 million per year. Let's go now to the eRx. As of yesterday, more than 154,000 eRx have been redeemed from the telematic infrastructure and all of them without any technical problems, and most of them could already be built without any problems. Our share within this test phase on eRx is 3x higher already than with the pRx, the paper prescriptions. This eRx test phase will now end successfully on August 31 this year. And then immediately the German-wide phased eRx rollout will start on 1st of September. All stakeholders, and that's very important, are committed to this step and to this rollout. And they have agreed commonly on success criteria for a mandatory rollout in the first 2 regions, which are Schleswig-Holstein and Westphalia-Lippe. This includes about 11 million inhabitants, which is equal to 14% of the German population and already relevant. The success criteria they have agreed on are that all the patients have to be informed by insurance companies, by doctors, by pharmacies. Second criteria is that 25% of all issued prescription, these prescriptions have to be issued electronically in a period -- in an invoicing period of 1 month and the rate of patients returning to the doctor and asking for an old paper prescription because they had the problem with the e-prescription has to be below 3%. Once these criteria are fulfilled, these 2 regions will turn into a mandatory rollout phase. And the next 6 federal states will start the rollout phase as these 2 regions will start on 1st of September. With regard to the retention channels from eRx, there is the gematik app, the paper printout and the scan of the tokens already in place and working without any problems. Further channels are under examination such as the use of the eGK, SMS, e-mail or [ third RDMs ]. We, on our side, we support every redemption channel, which helps to speed up the eRx rollout nationwide. With regard to the eGK, we are in close contact with the Ministry of Health, the BSI and the gematik, together with the EAEP, the European Association of the E-Pharmacies to define and find a common solution, which is convenient and nondiscriminatory for online pharmacies and for our customers. We are convinced, at the end of the day, there will be several redemption channels and the patients will decide and the patients will choose which channel fits best for them. And they certainly will choose the one with the highest convenience and the best value-added services. And that's in all other sectors, online will play a relevant and major role in that. Let me remind you, again, on why eRx is really a once-in-a-lifetime opportunity and is the game changer in Germany. As mentioned at the beginning, there is a EUR 50 billion market. It is a growing EUR 50 billion market, where now 500 million Rx per year are getting digitalized within the next quarters. 80% of this 500 million prescriptions is for chronic demand where we, as a pharmacy, as an online pharmacy, have most convenient processes and best value-added services. The online penetration as of today, Germany, for Rx is below 1%, whereas the OTC online share in Germany is already 23%, which means and shows that the Germans very online pharmacy sale. And to the most comparable market in Sweden, the online share there within 6 years went up to 13% already. We, on our side, have already an eRx potential of more than EUR 1 billion in our hands with our existing OTC active customer base. This comes out of studies, which say that in Germany potentially 26% of the population are chronic patients. This will bring us up the revenue potential that is already 4x higher than the pRx revenue we have on hand as of today. But also the unit economics and the KPIs of eRx are outstanding. An eRx customer, an eRx patient with chronic demand has a 10x higher customer lifetime value than a regular OTC customer. The basket of an eRx is EUR 110, whereas a basket of an OTC order is at EUR 40 only. And the contribution margin of an eRx order is EUR 14, whereas the OTC order is EUR 4 only. So you see eRx and OTC is 2 completely different businesses. And we as DocMorris are really best positioned with the largest active customer base and the best brand awareness with an aided brand awareness of 68% recently and already an eRx awareness of 22%. And this all sum up, explains and shows why and how much eRx will be the game changer in the German market. So let's come to our breakeven program now. Between 2017 and 2021, our focus was on growth, growth of revenue and growth on active customer base, a space or conversion of active OTC customers to eRx customers. We invested in best talents, in technology, in eRx readiness and in internationalization with the result of the revenue CAGR of 20% for this period of time. Now this year and next year, our clear focus is on achieving breakeven. Therefore we have defined an accelerated breakeven program, which includes reduction of complexity, operational excellence and a focus on core businesses and core markets with the clear target to get to breakeven EBITDA by next year. And then based on that, we will focus on eRx led profitable growth and the further expansion of our digital health ecosystem with our target to profitable double-digit growth and positive free cash flow. Already in Q1 this year, we have started to implement the transformation program, which would have led us to a breakeven in 2024. Now we have extended this program, and we have accelerated it to a breakeven program with a positive EBITDA impact of CHF 130 million compared to 2021, which will bring us to the EBITDA breakeven in 2023. In order to realize as many as possible, full year effects already in the whole year 2023, we have immediately started with executing the measures with an effect of a mid-single-digit percent negative revenue in 2022. The program includes also a significant reduction on OTC marketing spend, but also a relevant reallocation of the reduction to an eRx marketing budget. But very importantly, and we really would like to underline that, the EBITDA breakeven 2023 will be independent on the eRx scaling. We have setup a full measurement plan with actions behind and all the measures are backed with clearly defined actions. They are quantified, and there is a clear responsibility behind. We have defined 3 clusters of measures: Gross margin increase, performance improvements and structural synergies. In the cluster of gross margin increase, we have defined activities and actions for improving our purchasing conditions with the industry, but also with the wholesalers. We have defined actions for selected price increases and product mix. We have further defined actions to extend our assortment, but also to optimize our assortment and to go live with our advertising services now in Germany. In total, this will lead to a positive EBITDA impact of CHF 25 million. On the performance improvement cluster, we have defined activities and actions for productivity improvements, whereas the DC2, the realization now of the savings is of highest importance for productivity improvements. We have further defined actions to reduce direct logistic costs, for example, distribution costs. We have defined measures and actions to improve our marketing efficiency. And here, very clearly, we will focus much more in the future on profitable orders and profitable customers and customers with higher potential being converted from OTC customers to eRx customers. And we have defined actions to reduce brand marketing costs. All of that in total will contribute with CHF 60 million. Then in the third cluster of structural synergies, we have clear defined action for operational integration of brands. I've already shown to you before and explained to you before what we have started now with the medpex brand. We have further defined actions to consolidate and reduce brands, the number of brands, and we have defined more actions to reduce indirect costs, including overhead costs, contributing with CHF 45 million, and in total, contributing to this CHF 130 million EBITDA improvement, which we plan to achieve with EBITDA breakeven in 2023. And all of that will result that there is no external cash required for our operational business until breakeven based on the cash balance of CHF 200 million we have on hand by mid of this year. The external financing needs are limited to refinancing of our upcoming maturities plus some additional headroom. We have prepared various financing options. We are actively monitoring the markets for a suitable environment and for the right moment. And now I would like to hand over to Marcel to continue with the financial update and with an outlook.

Thank you, Walter, and welcome, everyone, to the financial update. In summary, we can say that the half year results are fully in line with our communicated targets. But let's just dive into it, starting with external revenue development. Zur Rose Group achieved a 0.4% growth in local currency. Converted at the current exchange rate, this results in a decrease in absolute numbers, as you can see on the yellow bars. In Switzerland, the acceleration of growth to 9.6% is mainly driven by the B2B development, which was extraordinary strong. This is based on the normalization of the Swiss market after the pandemic. In Germany, the external sales decreased by 3.9%. This includes the continued decrease of paper prescription business upfront to the launch of electronic prescription and also reflects the optimization of OTC marketing in a rather weak online market. And segment Europe achieved 2.9% growth. This already reflects the decided slowdown of the international expansion due to our stronger focus on earnings. As Walter said, we have already started to implement measures on marketing efficiency and focus on high-quality customer cohorts. The development of our KPIs reflects these first results of this program already. The number of active customers came slowly down from 12.4 million to 11.7 million, and is overall in line with H1 '21. On the other hand, the repeat order rate increased to 76%, reflecting the focus on existing customers with high loyalty and a certain reduction in new customer acquisition, for example, via price search engines. Our average basket for prescription drugs went up to EUR 128. The combination with the increase on order frequency shows the improvement out of our marketing measures. On the OTC side, the development of baskets and order frequency remains stable. In terms of site visits, we saw an increase from 234 million to 255 million from June '21 to June '22, but a slight decrease compared to full year '21. The impact on half yearly EBITDA development is shown on this slide. In the second half of '21, we increased our gross spending in reliance on the introduction of electronic prescription. Because of the delay, we have jumped back this again and started this dedicated program to improve earnings. The preparation and implementation started and will lead to EBITDA breakeven in '23. Nevertheless we are already seeing the first promising results from the measures that has been initiated. This leads to an improvement of CHF 37 million compared to the previous period to minus CHF 49.2 million adjusted EBITDA in the first half of 2022. In the PO value, we see a gross margin increase by 0.6 percentage points compared to the second half of '21. This upside trend will continue and even accelerate. The in-sourcing of specific functions started with an overall positive impact. The increase on personnel spending is overcompensated by reduction on other operating expenses. Marketing expenses still include one-off electronic prescription, TV campaign in the first quarter of 2022, which could not be stopped on short notice. Below EBITDA, we see a slight decline of depreciation and amortization, but an increase of net financial results impacted by foreign currency. The actual figures show negative adjustments from the reported EBITDA of minus CHF 43.1 million to adjusted EBITDA of minus CHF 49.2 million on the right graph on this chart. The CHF 12 million adjustments for M&A are mainly driven by an earn-out valuation related to the share price decrease of Zur Rose Group. The CHF 5 million integration cost of adjustments are in connection with the initiated breakeven program and especially the brand integration of medpex. Finally our balance sheet remains in good shape with a solid cash position of CHF 199.2 million. We could, again, successfully reduce the capital need for net working capital by CHF 13.6 million. The main impact came out of the reduction of inventories, where we have implemented additional tools to increase efficiency. The management of net working capital and inventory will stay in our focus. Other positions of the balance sheet remain broadly in line with previous year. With this, I would like to lead you to our outlook. Due to the strong focus on earlier EBITDA breakeven, including the concentration on more efficient sales channels and customer cohorts, group external revenues 2022 are expected to decline in the mid-single-digit percentage compared to previous year. The clear market leadership of Zur Rose remains untouched. The non-Rx growth rate of our main brand of Morris is also impacted by the short-term priority on overall earnings. We still expect a positive growth rate on the DocMorris brand. Despite these lower sales, we are pleased to confirm the outlook on adjusted EBITDA level in 2022 in the range of minus CHF 75 million to minus CHF 95 million. As explained, we now target the adjusted EBITDA breakeven already in the financial year 2023. According to our assessment, the inflationary impact will not be very significant. And we will be balanced out by throughout the whole income statement. Our midterm EBITDA margin target is confirmed at around 8%. Before we get into the Q&A session, Walter will conclude the presentation with a few final remarks.

Thank you, Marcel. So let me highlight again on the key takeaways of today's presentation. First, we fully focus on achieving EBITDA breakeven in 2023. Second, as a result, no additional cash is needed for our operational business. And third, the digitalization of EUR 50 billion Rx market in Germany takes off now. So before moving to the Q&A, I have the pleasure now to introduce to you our new Head of Investor Relations, Daniel Grigat. Some or probably most of you already know him, and you can address your question after the call already directly to Daniel. Christoph Herrmann, who did this job and function before, he will take on a new job within the Zur Rose Group. And now let's move to the Q&A. Thank you for your attention so far. And yes, please ask your questions.

[Operator Instructions] Our first question today comes from Alexander Thiel of Jefferies.

A few questions from my side, and I would like to take them one by one. First, on the new full year revenue guidance, which implies a potential double-digit decline in the second half, assuming a minus 5% of its impact. Could you provide more color on the different markets? I mean as I expect the Swiss market to perform strongly and paper Rx seems to be very stable based on the conversation we had in the morning. So the 2 levers are OTC Germany and rest of Europe, and I understand that Europe is not core at the moment. So what is your planning on OTC in the second half? And is part of the decline also driven by the medpex consolidation with potential customer churn?

Yes, in general, you're absolutely right. These are the 2 channels where we see the decline in Europe, as explained, to be slowed down actively because it's not in the short-term focus, and we have to prioritize on EBITDA. And then it's about OTC Germany, where we optimize our marketing spendings where we focus on high-quality customer cohorts and also reduce some of the sales channels as price search engines or Google Shopping in order to improve profitability. But all of that under the clear target of keeping our clear market leadership position.

My second question is on the e-script side. As we have heard from your competitor, eGK is a priority topic for the BMG. So my question is on your discussions with the BMG and BSI to find a nondiscriminatory solution for online pharmacies. Could you provide more color where you stand in your discussions and how likely you see an open solution for online pharmacies?

Sure. So the discussions are quite intensive. So we meet with quite large teams with all the 3 of them almost on a weekly basis. The discussions are very constructive. And we elaborate different options and work on different options. And at the moment, we are quite positive to find a common solution with them.

Lastly, on your marketplace strategy. We have seen a draft, which is not in favor of the potential outreach strategy. So could you provide an update if this is still important for you and how many partner pharmacies you have at the moment on the marketplace side.

Yes, sure. Yes. So first of all, the direction it goes now completely confirms the strategy we have chosen to build our ecosystem around our pharmacy and the pharmacy platform and not on a, let's call it, that third-party platform with no detachment to a pharmacy. So this is confirmed. And so we are very happy that this is now also going into law. Regarding the marketplace expansion, we have somewhat more than 200 pharmacies, between 200 and 250 already connected. And we can cover with the demand we have now on orders, roughly 15% of the regions where people type in their postal code and are looking for same-day delivery. Whereas this -- the number -- total number is already very low relative to the total number of orders. Even then the demand for a real same-day delivery is even much lower and in fact is below 1%. So therefore the importance and relevance is not that high, what we see at the moment. But nevertheless, for us, it's important to have it as a value-added service and is part of getting all of the share of wallet of the patient and the customer. With regards to eRx, so we have setup the processes in a way that it's never us as a platform or a pharmacy who would hand over or redeem an Rx and then forward it to a pharmacy. It is always the patient who decides and is always the patient who has the token and who has the prescription on hand. And then the patient decides in which pharmacy and when he would like to get his medication. So therefore, also there, the way we have chosen is confirmed by what we have seen so far in this draft. And yes, for us, it's a favorable development.

Maybe as a quick follow-up. Does this also impact your competitors on the platform side? So gesund.de and Euro Apotheke de, are they still -- or are they still possible? Or are they not possible with the current draft?

Well, we have a clear opinion on it. As it is said, pharmacies, clinics, doctors are allowed, so does health care providers have a direct connect to the gematik infrastructure and also applications with value-added services, the so-called [ digas ]. But to qualify their platform and their service, I think we are not the right ones. We have a clear opinion about it. But for us, it's important that our solution is exactly the right one, and we have chosen the right strategy.

We now move on to our next question, which comes from Christopher Johnen of HSBC.

I'd also like to do them one by one. First on your external financing needs. So you say no external financing needs except for refinancing plus some additional headroom. I mean what does additional headroom mean here? And how is that not external financing?

Yes. First of all, we still have this CHF 200 million on balance sheet, and so no immediate need and the focus is on refinancing of the maturity of next year of the 115 million bond. And the headroom for our operation business, we see somewhere in the range between 50 million and 75 million just to cover uncertainties. For the moment, we do not have any indication for this. But it's, as you know, the responsibility of the management to prepare also for such topics.

And on the various financing options, I mean, let's say, on the -- let's say on the rollover of the maturities, I mean, does that include a potential capital increase? Or would you rule it out?

We have a range of transactions available for a decision on timing and instrument, we will take into account the market environment and also the interest of shareholders, stakeholders and will decide at the relevant time.

And then on the eGK. I understand you are quite convinced that there will be a discrimination free possibility. But I mean discrimination free does not mean hassle-free, right? I mean we have the example with the paper script right now. It's free from discrimination, but it's still a major pain to send that via post to the Netherlands. So I mean, what kind of options are we realistically looking here? I mean we hear a lot of things about digital token. But I mean, the technicalities are not necessarily clear to me. So I'm kind of curious how hassle-free that will ultimately be. So is there any way for you to elaborate on what the, let's say, most relevant options are?

Well, we certainly hope that the hassle will not be as it is now for the paper prescript where you have to take an annual open walk to a postal box. It must be much more convenient. And as said, we are elaborating with them several options, and we have already looked at other sectors, how other sectors handle such kind of identification, not the video ident. This is not an option. It was not an option we were talking about with them. Therefore this has no impact on our proposals to them. But yes, I think it's not the right place to go into details now. But I can assure you, there will be much less or much more hassle-free than the process that we have in place today.

And one final, maybe if I may, on the 20% threshold for the eRx, that seems, I mean, at least to me like a very high threshold. I mean what's your view on that? Is that realistic between 1st of September and December to get such a high number done in the starting market, if you want to call them that?

Well, it's still in 25%. So first of all, when we have seen the criteria, our first reaction was great because they have agreed it together. So they are all committed and stand behind it. So this, in our opinion, is first, a very important fact to mention. Then the 25%, we said, that's good because it is ambitious. What would you have asked us if this number would have been 5%? So no critical mass, no ambitions in it. So we thought that's good because as everybody is on the radar now, mainly in these 2 regions, and we know that they are preparing intensively. Marketing materials are prepared by several participants in the market. And that the patients have to be, and this is important, that's why I highlighted it in my part as #1 criteria. So the patients have to be informed by the insurance companies, doctors and pharmacies about the eRx opportunity. And therefore going up to 25%, is it possible within 3 months? We don't know. I think it is ambitious. But frankly, if it takes 1 or 2 or even 3 months longer in the first 2 regions, so what? We talk about the 50 billion market, which is getting digitalized now in the next quarters. And if it takes 1, 2 or 3 months longer, I think this is really not the [ CC ] factor. And what we can do and we can say is we will do everything, and we will also focus on these 2 regions to make it known to the 11 million people in these 2 regions. We will do take our part of the information. And yes, for us, it's anyway, it's just a great move. And so let's start now with these 2 regions, let's learn. And if it is 3, 4 or 5 months, frankly, it doesn't matter for us at least.

We now move on to Gerhard Orgonas from Berenberg with our next question.

Also a couple of questions, please. In 2021 you spent around 120 million on marketing on an absolute level. By how much do you want to reduce the pure marketing spending by next year?

As you can see in the half year results, we are at about 38 million. And we will do savings on the OTC side in order to have enough power for the eRx site. So overall the marketing spending between 2022 and 2023, there we do not see a relevant difference on the absolute amount.

And H1 is a good run rate, even though there was an extra TV campaign?

Yes, that's a good run rate, yes.

And then second question is, are you giving up any of the brands that you've acquired over the past couple of years? Are you stopping any of it?

Well, I can answer it from a business, not the financial aspect, but the business aspect, we have acquired, on one hand, brands and customers in order to be ready and having as large as possible active customer base, then to convert them into eRx. And so our task now is to make this happen. And as I've said before, the precondition for all of that was the new distribution center tool in Heerlen. That's why for us, it's such a strategic milestone. And we are very glad to have delivered on time, and we can ramp up now this DC2. And so this will help now to continue the strategy we have had with all these merger acquisition activities on the pharmacy side. And then the other companies we have acquired, they have added value either to the technology platform or to added value services like telemedicine. And here we do not change the strategy. We stick with our strategy. We want to be and we will be the preferred health destination, digital health destination, our customers and patients. And therefore these services will be needed. The platform will be needed. And yes, therefore, they remain strategic for us. And therefore there is no plan whatsoever as you just mentioned.