Guidance

Jul 23, 2021

Good day, and welcome to the SHOP Apotheca Europe Full Year twenty twenty one Guidance Call. This call will be starting at 11AM Eastern Time for the duration of thirty minutes. Today's conference is being recorded. At this time, I would like to turn the conference over to CEO, Stefan Fultzyns. Please go ahead, sir. Well, thank you very much for the introduction. Well, good morning, everyone. Jasper, who is also on the call, and I, we welcome you to ShopHapotec's conference call regarding our updated guidance for the current year for 2021. Following the short introduction, we will, of course, be available to answer any questions that you might have. I'm sure by now you've all read the ad hoc statement that was released last night. But just to make sure that we're all on the same page, let me quickly walk you through the guidance changes. Originally, we had projected top line year over year growth of around 20%. Now we are guiding towards a year over year growth of 10 to 15%. In terms of our bottom line, we are now projecting an adjusted EBITDA margin at around breakeven level. This compares to our original guidance of 2.3% to 2.8% of sales. Lastly, we are now estimating a full year CapEx spending of around €45,000,000 The key driver behind the revised guidance for full year 2021 are capacity constraints in our logistics processes, especially in light of a very tight labor market in the Greater Venlo area. You're following the news, so you are certainly aware that we are not the only company that is dealing with such issues. Lower sales result in a lower gross margin in absolute euros. But in addition, we will incur some additional labor costs to address our staffing needs. And furthermore, we will increase our investments to reaccelerate our growth and to get back onto the shop a boutique growth trajectory. I want to emphasize really in the name of ShopHupperTiger management board that we are very confident that we will be able to debottleneck our logistics processes to be ready for the market opportunities in front of us. Our IT and our marketing are ready today for the ERX mandate that will become effective in Germany next year, both with front and back as functionality, and we see ourselves in a pole position to leverage the Eareck opportunity. With this short introduction, we would like to open the call sir. We will now take our first question from Alexander Theil from Jefferies. Please go ahead. Hi, good morning. Can you hear me? Yes, you're very well. Thank you. Yes, yes. Perfect. Stefan and Jasper. Thank you for doing your call. My first question would be on the logistic issue. I mean, could you give us more insight since when this issue has basically started? What is the underlying problem with seasonal workers? I mean, you quantify the numbers of workers that you're needing? And my second question would be on your profitability guidance, right? We have seen a 2% in Q1, so basically on track. What has basically changed? Is it the sales mix? Are you spending more on marketing? Because I think that the employee cost effects cannot be around €20,000,000 right? Could you maybe talk about that a little bit? Alex, thanks for the two questions. I'll start with the first question and Jesper, you'll address the second question. So the labor shortages, they started to materialize over the course of the second quarter. And again, to be transparent, that hasn't been resolved yet. So in July, we are still experiencing a shortage in staffing. Alexander, it's a combination of number one, we are operating two facilities in parallel at this point of time, even though we're going to wind down the old facility towards the end of this quarter. And admittedly, that is something that we have not anticipated. There is indeed a labor shortage in the market, especially in the Greater Benelux area, but not just in the Greater Benelux area. There is a plethora of actions that we have and will continue to implement to address this labor shortage. Not all monetary in nature, but certainly there's also a monetary component to this to make sure that we remain competitive and we can again address the capacity constraints that we have at this point of time. All of this is fully reflected in our updated guidance. And in terms of the change in the bottom line, Jasper, please add some color. Yes. Okay. Thanks, indeed. So we're saying now around breakeven, while up to including Q1, we were well on track of our guidance indeed. There are three main elements in that, Alexander. And the first of all, it is and that's not the largest impact, but it is the Q2 impact of the missed sales, the missed contribution margin we had in Q2. That's number one of the three. But number two is the extra costs that we expect in our logistics in order to get as soon as possible on a robust way to our desired capacity levels. But number three is also that as of that moment, we really want to again immediately take back our market leading position. And so we will invest in stepping up our growth to the levels that you are used to see from us. And the cost of debt are also included in the 2021 guidance. Okay, understood. Maybe one follow-up. I'll keep it short. Mean, you quantify the number of workers you're needing? Is it is it, like, 5,100, one hundred 50? Can you just give us a a ballpark we can think about? And then on the marketing side, are you seeing now some pressure on marketing? I mean, we know that Google and Facebook, they changed some algorithms. I know that this marketing, specifically on your side, is like 15% of what the marketing you're doing. But are you seeing an impact there as well? What's the Alex, with the number of employees that you are referring to, you are in the right ballpark. I'll leave it at this. It's not too far off from what we're aiming for. Again, we are always looking at the net because there is also some fluctuation. We're losing some people. But in terms of the net workers that we're aiming for that we need to gain, that we need to attract to shop up a ticket, you're in the right ballpark with your assumption. Yeah. And then as of to marketing question, just in general, with the lower capacity, we reduced a certain marketing means of us the past weeks, specifically on our website and also mentioning that it will take longer before products get delivered. But of course, we take into account to not lose our good positions, for example, at Google. Yeah. Okay. Understood. Thank you very much. We will now take our next question from Benjamin Netany from Bank of America. Please go ahead. Hi. Thanks very much for taking my question. I've got two. First of all, I was just wondering if you could give us a bit more detail in terms of the cadence of growth going through the second quarter, I. E, where was April versus May versus June? And in that context, what have you seen in July so far? Is it reasonable to assume July has basically been on the same pretty negative level as June? And then going forward, what kind of assumptions have you made in terms of the recovery for August, September and 4Q in terms of the new guidance? That would be very helpful. And then the second question is just on how you're thinking about the budget in terms of the profitability. I suppose you've already cut some A and P in the second quarter where you didn't have the ability to fulfill orders anyway. How are you thinking about spending the A and P going forward in the third and fourth quarter? And should we think of that as being the main drag in terms of the profitability down rate today? Okay. Well, again, I'll start and then in terms of profitability, Jafar will jump in again. Ben, you're right. July is not yet where we want it to be. So we as we mentioned, as you've seen the preliminary numbers for the second quarter, May and June, the second quarter in total, but especially May and June, we experienced these capacity constraints that had an impact on the number of orders that we could process. As I mentioned a minute ago, this issue has not been resolved yet. So July will probably be at a similar level. All we can say at this point of time is that we have some plans in place to get to address these capacity constraints. That's the reason because we cannot give a precise timing when will the additional staffing needs to be fully met. That's why we are providing a range in terms of our top line guidance for this year from 10 to 15%. But at this point of time, again, I need to leave it at this. Yes, Bob? Yes. Thanks. Only some additional color, Ben. Indeed, it was particularly certainly in June that our growth was minimized. The start of the second quarter was as positive as Q1 was, where you saw some headwinds in the paper Rx that we were able to fully offset with very strong non Rx performance in all of our seven countries and also in Germany specific. So that was the situation until the mid of the second quarter. And then specifically in June, we had to reduce ourselves and that continued into July. And as to your assumption that a big part of what we updated in our guidance is related to our total proposition in marketing as you're saying that is a correct assumption. And can I sorry, can I just have one follow-up just on that? When you're thinking about the quarterly adjusted EBITDA contribution, do you think therefore that the third and fourth quarter will be more negative than the second? Is that the sort of cadence we should expect going through the year? First of all, yeah, we give only guidance on a full year base. But to give some color on what you're saying, there is not significant clarity on giving a precise answer to what you're saying. We gave our best estimates, but how the phasing is exactly, that depends on the three elements we just discussed. That is the sales shortfall, the probably additional cost of logistic capacity and then when we can step up our investments in growth again. So it depends on that phasing. Yes, so I cannot be more precise as to the quarters. Brilliant. Thank you very much for that. No, thank you very much. Thanks for your question again. We will now take our next question from Yes, hello. Gerhard Goranaz from Berenberg. I have two questions. First of all, maybe about the new logistics. Can you tell us what happened from a technical perspective? I mean, I don't think the solution is to just hire more people, which you didn't find. I think the underlying problem is something that something went wrong in the automation, etcetera, you successfully moved the international business last year. Why has something happened with the Gundag business now? And the second question is you said that you still have this problem is still ongoing in July. And how far do you have sufficient visibility that your current guidance is kind of the worst case that can happen? Do you have is there a little bit of improvement already that you've got visibility when these problems will be sorted out? Well, yes, thanks for the questions. The issue that we are facing is a shortage of labor. To be clear about this, If we didn't have the shortage of labor, we wouldn't have wouldn't have been a need to adjust our guidance. In terms of the automation, you're right. Last year, we transferred the international business. But again, in terms of the magnitude, the number of orders that is of course a relatively small proportion of what we did now with the transfer of the DAC business in March and April. The automation, again, are some normal hiccups that you would expect if you start up a new facility. But this is not the major issue that we're facing. The major issue that we're facing is simply a shortage of labor. We are losing people or we have lost people. We have at this point of time, we have problems attracting people. But again, without getting into the specifics, there is a plethora of actions that we have and will implement, and we are confident that over the coming months we'll be able to debottleneck our logistics processes. The key issue is the shortage of labor. And just to be clear that, Gareth, as you will know, actually this new facility, the automation part of it is running smoothly as of July, stepping up in February, etcetera. So that is on track and was designed already two years ago for the introduction of ERx. That is actually the reason we want to have this capacity before the big change. Yeah. Yeah. But that's not impact our price. And there was a second half of your question, which I forgot at this moment. Can you please repeat? Yeah. So I mean, do you see the light at the end of the tunnel? Is that why you're very confident that it's not going to get worse than breakeven on EBITDA? And is that your guidance now is you have the full visibility for the rest of this year? Yes. Based on everything that we know today, this is the guidance that we want to provide to the market. We are confident, rest assured that there's no intent on our side that in a few months we have to revise our guidance again. We are confident based on everything that we know today that the guidance is realistic and that we will be able to meet the guidance update that we're providing today. Thank you. We will now take our next question from Olivier Kelves from Kepler Cheuvreux. Please go ahead. Yes, thanks. Hi, good morning. I was just wondering if you could come back on the impact of your main competitors' current advertising campaign and general market trends on the OTC segment or let's say non Rx, generally speaking. Is this having an impact on your market share? Or what can you tell us on this? Olivier, good morning. The reason for the call today is that we gave updated guidance and it's only related to the capacity constraints, which is mainly manpower related. So if any impact of what you're just saying, then it's a not significant impact. In Q1 and Q2, there was in general, you could say in Germany, perhaps some increased competitive activity, but everything was in line with our guidance as to growth and also as to marketing. No significant things happening there, but not significant impact on our business. Second question we Just to add one data point there. Through the June, our market share in Germany, our non RIC market share in Germany developed very nicely and according to projection. Again, it is there's a change of course in June when we were simply not able to meet the customer demand. But until then, our market share non Rx in Germany develop really as anticipated. Okay, fair enough. And then second question, could you give us a number on the Rx developments in Q2? I mean, you published a number as part of the Q1 pre release, so I would expect to have it. Yes. You remember that already in Q1, we saw a decline in our Rx business. When we look at the half year number, the decline came in at 26% across the first six months of the year. After the 19% decline in the first quarter, we saw an additional decline, a stronger decline of our Rx business in the second quarter. Sorry. Just to clarify, the number I have in mind is 17% for Q1. Maybe it's my memory, right? But can you clarify this? Minus 17.7% for Q1. Minus 17 point Okay. Yes. So 18% and now for the full year, we're looking at a decline for the first half of the year, we're looking at a decline of 26%. Okay. Okay. Thanks a lot. We will now take our next question from Mikael Heider from Warburg Research. Please go ahead. Yes. Good morning and thanks for taking my questions. Since most of the questions have been answered on the short term issue, I would like to raise a question more generally on your view on the ERX introduction in Germany next year. So there has been a lot of talk on the delay of the app and the ramp up of the test period for Gemartic. But at the same time, I think there was news that you will be able to simply scan the QR code, which is given on an ERX, which most of the time will be printed out when you go to see a physician. So can you confirm this, that you still believe that it will be a very easy access to the Rx business from your side by simply scanning the QR code, which I think would be a very positive news? Michael, that is our understanding and certain level of confidence that goes along with our understanding based on everything. And some of these are public statements, what we're hearing from the decision makers in Berlin. We will have again, I have to acknowledge, we will only have certainty once the ordinance from the health ministry on this topic, on this specific topic will have been published. We are expecting this any day because this ordinance will have to be notified to the European Commission. That hasn't happened yet. But again, based on everything that we know is our understanding that the ERx token can be scanned by third party apps, and that means it could be easily transmitted to your pharmacy of choice. Now it gets a little bit technical. The token is not the e prescription. Because sometimes also in the media, there's some confusion. The token will simply allow the pharmacy to access the e prescription data set on the server of the Gamatic in the cloud. But again, what you outlined, that is our understanding based on everything. And again, there were some reconfirmations just recently from Berlin. That is our understanding, yes. But I mean since you are a pharmacy in Germany, clearly, there should be it should be possible also for you to access the ERX via the token, in my understanding. Absolutely. That is a given. That is a given. The question and again, there have been test run. That is a given. The question that sometimes is being asked is how can the token be transmitted to your pharmacy of choice? And again, there statements, but again, we're waiting for the ordinance that third party asset will be able and will be permissible to transfer the eRx token through third party apps. And that would make that is our assumption also going forward. We will now take our next question from Miro Zuzak from JMS Investments. Please go ahead. Hello, gentlemen. Thank you for taking my question. You basically blame the problems to the labor market in Wenlow. I mean, that basically means that you as the CEO and the top management have forgotten to recruit necessary people for your logistics hardware that you have in place. Now I appreciate that that you take responsibility for that and blame yourself, basically. But if I compare the development with you guys to other online pharmacies who do not experience the same problems at all, then I have to ask my my myself whether this is the full truth, basically, or whether there are some there must be, from my point of view, some other issues going on because you delivered 284,000,000 of of revenues in q one, much less in q two. So there must be, like, a huge exodus of people with your with your facilities. And please clarify what really has happened there. I've also heard that delivery times basically went up massively in connection with that. And the second question then would be how much of the the damage of the 20,000,000, basically, the additional cost is dedicated to vouchers for customers who experienced a very bad UX in the sense of delivery times? You. Again, the situation that we're on is not a desirable situation. As I mentioned before, we had not anticipated the tightening of the labor market over such a short period of time. But again, I'm repeating myself, this is the key issue. The shortage of labor that we have experienced in connection again with operating two facilities in parallel at least through the end of Q3 and an increase in customer demand that we simply could not satisfy. As Jasper already mentioned, in the later part of the second quarter, we actually reduced our marketing investments in order to reduce the number of incoming orders. So that we did not in the second quarter compensate by issuing vouchers or not. The extended delivery times that you are referring to, they are also a result simply of the bottlenecks, the capacity constraints that we are experiencing today in our logistics processes. Besides the shortage of labor markets, I think you have some normal issues that we had anticipated in terms of starting up a new facility, transferring the bulk of our orders, meaning the dust business from the old to the new facility and starting up the automation. But again, that is something that we had anticipated. That has been part of our original guidance. The reason for changing the guidance today is really is the shortage of labor that we have experienced. If I can add some color to that, Jasper here. At the start of the year, in Q1, there was still a rather good flexibility on the labor market. The other things I'm saying now, the statements are not all factual, but I mean, it is our belief. It was also a very bad timing in hindsight from us to do a second part of the move because the moment we did it, it was beautiful weather for the first time in Europe, and there was a lot of loosening of corona measures. So you saw some of our staff for the first time since a year, staff that's coming from other parts of Europe, they could go back to their families at that moment. You saw some other businesses like restaurants, hotels, etcetera, looking for people because of the loosening of COVID measures and people also for the first time being able to travel again. So that all came together at the moment we get to move when it was a holiday season in in in Germany with holiday seasons like Corpus Christi, etcetera. So there was a lot of things at the same time that led to the situation where our customer demand continued. We were doing the move. We were needing more people. And at that moment, it turned out that we were not the only more people, and there was less availability and more demand. So that was the situation that we faced in the second quarter. I have a follow-up, if I may, on this. Thank you very much. But then why do you write in your e mail that the situation is ongoing? Because I think there is like we are now three months later or almost in the quarter or, let's say, two months later in the next quarter. So why aren't why haven't you still resolved the issue when this was due to holiday season and and and, you know, people returning to their families at home? I think that I will be back now by now, right, after two months. Why do you still think the issue is ongoing? Again, the issue is ongoing. Again, July will be at a similar level as June. We are in the middle of the holiday season right now. We had a higher fluctuation as a result of this. And again, combine this with looking at the broader labor market with a larger demand, restaurants are opening up, other businesses are opening up, all this is a perfect storm in terms of having a tight labor market. Again, what we need to do is we need to put some monetary measures in place, some non monetary measures in place in order to ensure that we attract the resources that we need in order to get back on our growth trajectory. Okay. Thank you. Thank you. We will now take our next question from Ulfi Chop from Deutsche Bank. Please go ahead. Yes. Good morning, gentlemen. Sorry, I was slightly late on the call, so apologies if you already answered some of my questions. Firstly, I guess, it would make life also all as much easier if you could kind of provide an order intake figure. I know it's a figure that you usually do not provide. But I guess just in terms of additional color, it would be rather helpful if you could give us the order intake growth so that we can put it in comparison and give some context to the revenue number that you already provided. How did that trend over the last couple of months would be rather helpful. And then Jasper, you mentioned in your earlier answer to the question what was the reason for the weaker margin. You get a third point, if I recall correctly, where you say that you want to defend your leading market position. What do I read into that? Is that really an increase in marketing spending in the first place or what does it really mean? Thank you. Yes, thank you. The curious question to your first one is actually if we would not have had a logistic constraint, then our growth in the second quarter would have been 10 percentage points higher, nine to 10 percentage points higher. So we published a 7% growth, and it would have been a 17% growth. And that's only based upon the backlog we had in processing orders. So not like intangibles, what if we would have had more marketing or less marketing, etcetera. So I think that's the best answer to your question. So that means a continuation of Q1 slightly lower because Q1 was 22%. So that's the first question. And then number three, indeed delivery, your question on my remark number three, delivery, I left it a little bit open, but indeed it means that we will there do what it takes in order to get back on the customer growth levels. And that will be an example of that could be marketing, yes. Appreciate the color, Jasper. But isn't that slightly contradictory given where you are currently with regards to the hiring? Or should we read into that that it's really more a Q4 thing when basically you look to be back in shape as regards the logistics issue? Totally correct. This we will do at the moment. We have the robust desired levels of capacity again. Yeah. Absolutely. And that was not the case yesterday. Yeah. So we Got it. So when we we have the desired level again, now already you see that the the promised times to our customers, they have returned to good levels. Yeah? So there we are now. There we are in a better shape than we were a couple of weeks ago. So the customers gets the parcels generally on time again. So that's much better this week than it was before, but we still limit the capacity orders in as you say, until the moment that we can produce more orders again. Understood. Thank you very much. Thank you. That concludes today's question and answer session. Mr. Feltz, at this time, I will turn the conference back to you for any additional or closing remarks. Okay. So again, thanks for your attendance. Again, there are more fun calls to have than a call when you need to reduce your guidance. But again, it is what it is. Again, our intent was to provide some color in terms of the drivers and what's going to happen until the end of the year. We'll be able to provide more color at our Q2 earnings release call on the August 5. And of course, you always know how to find Jasper and me if you have any further questions in the meantime. So at this point of time, on behalf of Jasper and me, I want to thank you again for your time. And I'm looking forward to talking to you in the not too distant future. Thank you very much. Bye bye. Have a great weekend. This concludes today's call. Thank you for your participation. You may now disconnect.