Hello, ladies and gentlemen, welcome to the Zur Rose Group AG conference call regarding the 2022 full year results. At this time, all participants have been placed on a listen-only mode. The floor will be open for your questions following the presentation. You can register your question by pressing nine and star. Let me now hand the floor over to Walter Hess.
Yeah. Good morning, everybody, and welcome to today's webcast. We are pleased to inform you about our full year 2022 update and outlook on our business in 2023. Afterwards, we are looking forward to answering your questions. With me today are Marcel, our group CFO, and Madhu, our group CTO. Before we start with the key messages, I would like to recap our business context and current trading conditions. As you know, 2022 was a challenging year in many respects. Not only did the market mindset change from a growth to a profitability focus in the first months of 2022 as a result of the difficult economic environment, but in addition was the rollout of the electronic prescriptions in Germany delayed despite the law in force mandating their use since January 2022.
As a consequence, we have adapted and drastically changed our targets and priorities as of May 2022. We have started to successfully and rigorously define and implement measures in H2 2022 to achieve EBITDA breakeven in 2023 and get back to profitable growth as of 2024. The new prioritization we have defined follows the logic to, first of all, optimize and reduce loss-making and cost incentive structures and units with the downside of accepting a reduction of revenues in H2 2022 and H1 2023 due to brand integration and the consequent focus on profitable orders and customers with eRx potential. Further priorities are to increase margins and to improve performance in marketing and logistics. Of course, we always keep up the readiness of resources, know-how, and processes for the eRx rollout ahead of us, about which we will talk later on.
Let me move now to the key messages of today's call, shown on slide number 4. Despite the difficult market environment, we achieved all our targets for 2022 and delivered all milestones as we have announced in August last year. The signals for the eRx rollout to commence in Germany within the second half of 2023 are very convincing. With the sale of the Swiss business, we have significantly strengthened our balance sheet and secured the financing of our strategy. Following the sale of the Swiss business, we have to move the adjusted EBITDA breakeven target, always without eRx impacts, to 2024. Now we can fully focus on our B2C core business, which will consist of a profitable OTC and DTC business, a complementary marketplace business for long-tail products and same-day delivery, and the Rx business with eRx, for which we are fully ready and best positioned.
We are happy to report on slide number five that we have reached all our targets for 2022. With the revenue reducing by minus 5% versus previous year, we are within our communicated guidance and with an adjusted EBITDA of CHF 70 million, minus CHF 70 million, which improved by CHF 59 million on 2021 and is significantly better than planned. We have delivered all the milestones which we have set out, all of them with relevant impact on our P&L and balance sheet. The new distribution center in Heerlen is up and running since Q3 2022 and brings us to twice the capacity than we need today to be ready for eRx to come. We could integrate the medpex brand in the DocMorris successfully and reduce costs at the Ludwigshafen site.
We discontinued the Eurapon brand and offer the customers to directly order at DocMorris DE. Furthermore, we have closed the Bremen location. Importantly, we were able to significantly reduce complexity and simplify our structure and thus reduce overhead costs. Finally, as already mentioned, with the sale of the Swiss business, we could strengthen our balance sheet with proceeds of around CHF 360 million. Let's move now to the business update with an update on the latest developments around eRx and its rollout on slide 7. Two weeks ago, the Ministry of Health has presented their digitalization strategy. They announced that in the new Digitalgesetz, the digital law, electronic prescription will be anchored as the binding standard as of January 2024. With that, they reinforced and underlined their will to roll out a mandatory eRx now.
The start of the rollout is expected as of August 2023, together with the nationwide availability of the eGK solution in local pharmacies. The exact details of the rollout plan will be provided by the Health Ministry in Q2. As you see on the right side of the slide, as of today, the following transfer channels of the eRx token from the doctor to the patient are foreseeable in the near future. Besides the gematik app and the paper printouts, there is a channel via KIM, which stands for Communication Between Healthcare Providers. KIM is available for direct transfer of the token from doctors to pharmacies and used, for example, in cases of emergency. The use of the eGK in local pharmacies is planned to be available in August 2023, as stated before. In addition, there will be more channels to redeem eRx digitally.
A convenient solution to scan the eRx token directly in doctor's practices is supported by the Health Ministry. The date of availability has still to be confirmed. A digital identity for patients in combination with the digital eGK of the health insurers will be and has to be available from the beginning of 2024 and be the starting point for a seamless and convenient customer journey to redeem eRx fully digitally. To summarize, eRx will become reality in Germany now. There will be multiple channels to transfer the eRx token, and thus multiple options that these tokens will find their way to us as online pharmacy. Let me remind you on slide 8 why the introduction of eRx is the key digitalization enabler with significant value for all stakeholders.
It opens and digitalizes the EUR 50 billion market for prescribed medication with over 500 million prescriptions per year, with a today's market share of online pharmacies of less than 1%. With our existing customer base, we see a conversion potential of already about EUR 1 billion. The customer lifetime value of chronic patients redeeming eRx with us is about 10 times higher than the one of today's OTC customers. We, as DocMorris, as the leading online pharmacy brand, are in the pole position to capture this opportunity. With the sale of the Swiss business, we will not only focus on our B2C core business, but we will jointly become 1 strong company under 1 strong core brand, DocMorris. DocMorris will be the core brand for corporate and the B2C business.
We plan to rename the Zur Rose Group to DocMorris, which is subject to confirmation by our annual assembly on May 4th. Our headquarters will remain in Switzerland. Also, our listing will remain in our home on the SIX Swiss Exchange. Our organizational structure will be further optimized with a strong footprint in Germany and a lean corporate structure in the future. As part of our transformation program, next slide, please, we have analyzed today's and the future online pharmacy market and customer segments. We came to the conclusion that the hybrid brand architecture is the optimal strategic choice for us. With DocMorris as our core brand and medpex and Apotal as sub-brands, we will be able to cover all relevant customer segments.
DocMorris is and will remain our lead brand, under which we further develop our digital health ecosystem with a strong focus on persons with needs for prescribed medication and chronic care services. With medpex as feel good pharmacy, we cover the customer segment of well-being and families, with main demand on OTC and BPC products combined with best services and loyalty programs. With Apotal, we target the discount segment of smart shoppers looking for best price. Apotal also covers the segment of patients with chronic demand for diabetes, looking for best price for their supplementary products, such as blood sugar test strips. With this hybrid brand strategy, we will profit from a full coverage of all relevant customer segments, combined with highest efficiency due to our platform logic for marketing, tech, and operations, and optimized visibility on all online sales channels.
In 2022, we have significantly advanced our sustainability agenda across our four pillars that are shown on the slide number 9. Healthier people, sustainable planet, caring company, and reliable partnerships. In addition to an improved governance structure, the measurement of the CO2 footprint and the focus on diversity and inclusion, we have set clear and ambitious midterm sustainability targets, such as adding more services for chronic patients to our digital health ecosystem, reducing our CO2 emission by a minimum of 4.2% per year, and further closing the already very low gender pay gap in our company. Introducing our common culture of sharing ownership and seeking consensus group wide. Expanding partnerships as a strategic pillar to deliver even better health care to our patients and customers.
In order to further anchor the consciousness for our sustainability targets, they will become part of the yearly targets of every member of the management team. With that now, we will come to the next topic, which will cover how we focus on B2C with our core brand DocMorris and the digital health ecosystem platform. Turning to slide 13, you see that the German healthcare sector faces many challenges. Rising treatment needs and costs due to structural increasing numbers of chronic patients will lead already next year to a deficit of more than EUR 20 billion in Germany, which have to be covered somehow. Staff shortages in all care sectors and the lack of digitalization and coordination between healthcare providers lead to higher costs and poor health outcomes due to wrong or insufficient treatment and adherence. Also the pharmacy sector faces similar challenges.
The shortage of skilled staff and successors of pharmacy owners lead to closing of pharmacies, which often happens in rural areas. In local pharmacies, the digital scalability and convenience is limited, and the today's pharmacy structure is cost-intensive due to the fragmented landscape. We see DocMorris digital health ecosystem as the solution for many of these challenges and problems. What is our solution? Slide 14 shows that as DocMorris, we aim to deliver the most efficient and empathetic healthcare imaginable. Therefore, we continue to develop the digital health ecosystem around the needs and wishes of the patients and the customers. We want to make care personal and medication conveniently accessible for everyone, anywhere in one click. For the benefit of patients and customers, we combine competence, innovation, and use the latest knowledge and state-of-the-art skills.
By leveraging technology, we connect health partners and professionals and keep being agile and adaptive to always meet the changing needs and wishes of the patients. Technology and data science are core competencies to deliver what we promise. Therefore, I'm really very pleased to have our group CTO, Madhu, with us to showcase the critical steps that we are undertaking to create the preferred digital health ecosystem. Please, Madhu.
Thanks, Walter. First of all, thank you for invitation to participate in this important forum to share what we're doing on the product and the tech space. Over the next couple of slides, I'm gonna share some key points on how we're extending our pole position, as Walter already mentioned. I want to paint a picture of our transformation journey. It all starts with our goal of delighting the customer. How do we do that actually? The top layer that you see kind of a yellowish color on the top, that's kind of our engagement layer. We start from a position of strength with the DocMorris platform. As we move towards the right to continuously add new capabilities that focus on our patients, and we continue to deepen our services for chronic customers riding on top of the oncoming eRx wave.
As a platform, it's not only valuable when others using our platforms can create services. That's what we're doing with the marketplace, the ecosystem, and so on, so that other developers can start to build on top of our platforms and create more services. The middle part is our integration layer. The bluish color is our integration layer or the intelligence layer. Much better name. It is fundamental to how we innovate. It is the continuous improvement of our products using data as the fuel. We understand our customers the best when it comes to medications, and we are deepening our relationship with them by providing them apps and services that allow patients to manage their medications, consult their pharmacists when needed, and so much more. At the bottom is the advanced and the smart logistics into the whole distribution center.
One example of integration here is the work that we did last year with integrating medpex into the DocMorris brand, that we finished in 2022, as Walter already mentioned. In summary, the goal of this transformation is to delight the customer and make DocMorris the preferred destination for us and for our customers. We do that through rapid innovation and science-based product roadmaps. If you can go to the next slide. Kind of how do we actually achieve this, or how do we do this? What is the magic behind it? For us, the magic is in combining three key elements: the architecture, the organization, and tying a very strong culture of consensus and agility around it. We started with a silo tech and structure on the left side, as you can see, with the various brands independently doing great work.
There is so much more we could do if we combine them together and also scale them. Starting last year or late part of last year, we started to kind of think about the integrated platform, and we started to implement that integrated platform also last year. Now in 2023, we have an integrated platform that's all fueled by the same deep insights from the data and a product that is continuously updated. We're shifting to API-type services, which allow us more flexibility to bring new capabilities to market. We're also planning to opening up our developer API to the public so that we can have additional services later in this year and into next year.
Somebody smarter than me once said, "To be a successful company, you have to be learned to be both a pirate and a navy." I think that DocMorris has a rich history of over 20 years plus. Now the trick is to figure out a way to use that institutional knowledge and overlay that with the digital channels of engagement so that we can be more agile, but much more importantly, much more innovative. From a structure standpoint, the tech, the product, and the science now work as a single pod in a very integrated manner. Speaking of science, so what is it actually that we do in science? When you historically think about data and analytics and so on and so forth, it's what comes to mind is usually dashboards and signals and so on and so forth.
At our scale, it's literally humanly impossible to derive signals from the scale of our platforms. We have millions of active customers engaged on our platform. We have to use artificial intelligence extensively, and this gives us superpowers. We do not think about data analytics just as dashboards. We think of them as loops instead of lines. Whenever you think about something as a loop, it always continuously innovates and it always improves. Science is about continuously thinking about those loops and feeding it back into the product teams, and then the product teams bringing new capabilities to the marketplace. For us, that loop thinking actually allows us to be that much more innovative, but also that much more productive in how we leverage our capabilities.
Broadly, when we think about science, we look at decision science at the top as an example, which helps us understand what's happening on our platforms. You think about patient science as an example that allows us to improve services to our patients. The fundamental thing that we are doing new here is about behavior science. This is about how do we allow our patients to become much more better and healthier as they adhere to their medication protocols. We recently hosted an internal hackathon, a true and tested tactic from Silicon Valley to spur innovation. This happened in December. Across eight teams, we had a ton of ideas fueled by German beer, Berlin pizza, and not so great Indian food.
Some of the concepts that we tested there are already going to go live in production to our customers within the next month. That's kind of what I mean by agility and being able to innovate. From concept to production within a 6 months window using tactics like hackathons is what the culture is about. To summarize, if I can go to the next slide. To summarize, for any industry to transform, you need some kind of a trigger, a sort of event that influences customer behavior. When you look back at transportation maybe 5, 6, 7, 8 years ago, it was about the convenience of an app that allowed you to demand transportation and also pay for it kind of in a single transaction using a single app. You all know what I'm talking about.
Similar to that, in German healthcare, for me, eRx is the trigger, and more importantly, it is the digital convenience of eRx that will be the holy grail. By eliminating digital friction and creating the convenience and satisfaction, I believe that we can allow our chronic patients to become a transition from early adopters into the early majority. That is the journey that we're on, and the transformation that I'm speaking about hopefully will get us there. With that, let me close it out and give it to my dear friend and CFO, Marcel.
Thank you, Madhu.
I would like to start with an already known chart to remind you on the overall context of our path to profitability. Until 2021, growth was the main target. We achieved market leadership, eRx readiness, and an organization with clear tech orientation and best talents. In 2022, we accelerated our break-even program by reducing complexity and improve our operational excellence. At the same time, we focus on profitable customers and customer retention. Due to the sale of our Swiss business and the missing EBITDA contribution of more than CHF 20 million, we need now one more year to reach the EBITDA breakeven. Our path to the growth strategy remains unchanged and will start next year. The best way to see our progress is to look at the development of the half-yearly results, as we show on slide 21.
We started at an adjusted EBITDA of -EUR 86 million in H2 2021, and reached -EUR 21 million in H2 2022, an improvement of EUR 65 million. The measures taken are very clearly reflected in this development. The marketing measures like brand marketing reduction and focus on profitable customers, for example, the reduction of payback time for new customer acquisition, was implemented very quickly. Gross margin improvement and structural savings like reduction of overhead costs need some lead time. The impact of such measures on EBITDA is going to increase over time and will be evident also in our next reporting. We achieved several very important milestones, especially the go live of the new distribution center in Heerlen and the integrations of medpex and Eurapon. After the implementation, such projects must be optimized and ramped up to achieve the full savings in P&L.
The culmination of all these initiatives led to the improvement of the half-yearly results as shown on the chart, and will continue to have a significant savings impact in the coming quarters. Where do we stand in comparison to the communicated measures by the end of 2022? Slide 22 shows that we have already generated CHF 59 million of the targeted CHF 130 million improvements in our 2022 full year figures. The measures introduced already go far beyond that and will have an additional impact on 2023. You can see the progress of the implemented initiatives in the bars. The reduction, for example, of direct logistic costs and brand marketing are almost fully executed. Other initiatives, like the broadening of the product offering, has started but still needs additional effort.
Given that our level of execution of the target measures is higher than the savings generated, we are very confident to deliver on the remaining CHF 70 million improvement of the break-even program. On slide 23, we show in addition the half-yearly development on other key figures. Already communicated, the focus on profitable customers led to a decline of sales by 11.6%, but also to a significant improvement of cost margin by 180 basis points. We change from the half-yearly view to full-year results on slide 24. To increase transparency, for the first time, we show adjusted EBITDA not only on group levels but also per segment. Germany is obviously the largest contributor to the group numbers and in terms of improvement, also the break-even plan. You can clearly see the positive EBITDA contribution of the sustainable Swiss business.
This will be missing in the future. We also steered our Europe business by increasing of marketing efficiency and streamlining the organization on its path to profitability. In our underlying KPIs on slide 25, we can already see positive results of our focus on chronic customers. Site visits and number of active customers are a direct prerequisite for revenue development. Our steering towards sustainable customers with RX potential led to a reduction of these key figures. On the other hand, we see the positive development of the more earnings-oriented key figures like repeat order rates, basket size, and order frequency as proof that the strategy we have adopted is working. The integration of medpex and Eurapon were implemented in the last quarter of 2022. It means that the positive impact is not yet fully reflected in these 12-month figures.
In fact, in Q4, we saw a further significant increase in the basket sizes. We have already discussed the development of key figures such as revenue, cost margin, and EBITDA. I'd like to add some color on expense line items on slide 26. The increase in personal expenses is mainly due to the insourcing of medpex operations and temporary work costs in the implementation phase. All the other line items such as marketing, distribution, and other operating expenses have strongly improved due to our break-even program measures. As usual, we show an adjusted EBITDA to reflect our operating performance without extraordinary impact. In 2022, the adjustments include, in particular, a positive contribution from the valuation of the Apotal earn-out in shares, one time restructuring expenses, especially allocated to the medpex and Eurapon integration, and some provision for legal cases.
On slide 27, we see the balance sheet, obviously before the sale of the Swiss business. The cash position includes CHF 30 million for the full payback of our 2023 straight bond in July. The communicated CHF 360 million cash inflow from the sale of the Swiss business, excluding real estate, will massively strengthen our balance sheet, increase equity ratio, and secure the refinancing of the outstanding debt position. Let's now move to the outlook. On slide 29, we have some introductory remarks before jumping into the guidance. Including the Swiss business, we would confirm breakeven in 2023. Because of the missing EBITDA contribution of more than CHF 20 million, we have to move adjusted EBITDA breakeven for the new DocMorris group to 2024. All the figures and targets shown on the next slide are excluding the Swiss business.
Of course, also for the comparison data of the previous year. As shown earlier in this presentation, we have already executed most of our breakeven measures, and they are going to have impact on the further EBITDA improvement, but also on the revenue development. The graph shows indicative the quarterly revenues. On absolute numbers, these are reflected in the bars. We have currently reached the lowest point and are moving towards quarterly increase. On relative development, the line shows the quarterly comparison to previous year. The lowest point was already in the fourth quarter of last year. This leads me to our financial outlook on slide 13. Even though we have convincing signals for the nationwide eRx rollout, we exclude any eRx impact from the outlook for 2023.
Group external revenues in constant currencies are expected to decline for the full year of 2023 in the mid-single-digit % area compared to 2022. Current trading is in line with our expectations. Due to the missing contribution of the Swiss business and certain additional investments that make sense and show attractive payback, adjusted EBITDA in the range of minus CHF 20 million to minus CHF 40 million in 2023 is expected. As a result of this, we now plan to reach EBITDA breakeven in 2024, still excluding eRx impact from this guidance. The capital expenditure for 2023 are planned between CHF 30 million and CHF 40 million, and our medium-term EBITDA margin target is confirmed at around 8%. With that, I would like to open the Q&A session, and we look forward to your questions.
Ladies and gentlemen, if you would like to ask a question via the phone, please press nine and star on your telephone keypad. In case you would like to withdraw your question, please press nine and star again. Please press nine and star to register for a question. The first question comes from Sebastian Vogel from UBS. Over to you.
Perfect. Can you hear me?
Yes. Yes, we can.
Great. I've got three questions. I would ask them, one by one, if I may. The first one is, I mean, you mentioned it right already with the outlook for Switzerland, some CHF 20 million-CHF 25 million maybe in 2023. With your guidance of the -CHF 20 million to -CHF 40 million, if I would add the +CHF 25 million from Switzerland, so a pro forma on top of it, your range sounds like more like somewhere between +CHF 5 million and -CHF 15 million. The -CHF 15 million, of course, is the lower end of the range, but that sounds a bit less like the breakeven number, what you were suggesting before, but actually sounds really like loss-making. In that sense, what's the thought process behind, or did I mix up some numbers there?
Yeah. In addition to the missing Swiss business, as I said in the guidance, based on the new situation, we have now the financial flexibility to also make certain small investments in opportunity that make sense and show attractive payback times. This is also included in the CHF -20-CHF -40. Of course, on the lower and upper end, we have some comfort zone because of volatility in the markets and some uncertainties. We are very confident to deliver in this range of EBITDA for 2023, as we also have shown in 2022.
Got it. If a little bit more on the sort of a scenario pro or scenario backdrop there, if you assume like the electronic prescriptions getting sort of in full steam in the fourth quarter of 23, what would happen to your marketing spending in that regard? Would you really start then really firing in all cylinders to really make use of this opportunity? Or would you first say, "Okay, let's see how things work out, because the experience have shown us that potentially things can take longer than initially expected." In that regard, if you could sort of indicate what is your sort of expectation for marketing spending that you have in your current EBITDA guidance for 2023, that would be great if you can share your thoughts there.
Thank you, Sebastian. I think that's a very important point and question. As we have shown in the guidance, we completely excluded the electronic prescription, and we very carefully watch now the development, how the Ministry of Health announces and plans to roll out. We think in the second half of this year it will happen because all the technical basics are ready latest by then. With that, we continuously adapt our, let's say, our measures. We have prepared a full set of measures for every possible scenario, and depending on the speed and also the width of the rollout, we will be able to react immediately. I cannot give you a precise number because it's really open to which scenario will take place.
I can just assure you we are ready for all possible scenarios.
we also have the headroom in our guidance to invest in additional advertising in the case eRx is taking off.
Got it. The third question would be on the adjusted EBITDA by segments. As you have shown on the slide is minus CHF 48 for Germany, the plus CHF 22 for Switzerland, and the minus CHF 10 for the international side of things. If I add that up, I get to something like CHF 36 or so on the negative side. Overall, if I'm not mistaken, you were suggesting that something was like minus CHF 70 on a group level. Can you explain the gap there, or maybe I've mixed up the numbers as well?
The other, in the notes of the financial statements, there is also the corporate part mentioned with around minus CHF 30 million. The costs we do not allocate to the several segments are the group IT platform. This is around 40% of this number. Obviously we have the strategic management, group finance, legal communication, investor relation. All these topics are then in the corporate number included, and we expect to decline this over time.
Got it. That actually my two questions, just one follow-up with, I mean, I forgot. This corporate line on EBITDA in the past when you were still showing your split, that was way smaller than CHF 30 million, right? It was more like CHF 5, 6, 7 million, isn't it?
I don't know on which number you are referring. Maybe this was the elimination on the sales number. This was in this dimension.
Yeah, like in 15, 16, and 17 or so, there was, I thought there was something, but maybe I'm mixing it up.
Yeah.
Anyhow, then that's all my questions.
There we had CHF 5, 6 million of intercompany revenues, but I cannot refer on EBITDA this kind of number.
Got it. Many thanks. That have been all my questions.
Next up is Olivier Calvet from Credit Suisse.
Yes. Hi, good morning, gentlemen. I would also like to take my questions one by one. Follow up on Sebastian's question on EBITDA, you know, EBITDA margin in Germany. You know, for comparability with your main peer, I would personally be inclined to allocate central costs to your segment. Could you give us a sense of how much these central costs you would expect to stick post Swiss disposal, please? I think just back on Sebastian's point as well, I think it was CHF 10 million the last time you published in 2018 the EBITDA loss, I think including BlueCare AG, but yeah, and then PromoFarma. Just to get a better sense of what would stick.
We do not plan to have another segmentation for the future without the Swiss segment. We will have the same logic, and therefore do not more or less allocate to the segments.
Okay. Just to get a better idea, you know, you will have the German segment and the European segment. You know, going forward, roughly how much of the, you know, actual, you know, central costs are really going to be for the international segment and the German one?
The management for the segment is allocated in the segment. On the corporate side, we really have the group topics, there will be no significant reduction due to the sale of the Swiss business.
Okay. Thank you. On, you know, still on margin, thanks for disclosing the gross margin in Germany again. Could you give us a sense perhaps of the levels you would expect by brand? You mentioned these three brand strategy.
No, we do not disclose any targets on the single brands. We steer the business on the segment level and do not differentiate.
Okay, fair enough. On goodwill, I mean, obviously your balance sheet changes a lot post Medbase deal, I was quite surprised to see no impairment of goodwill given you increased the discount rate for Germany and, you know, decreased the EBITDA margin you use. Could you explain what's happened there?
In general, we could validate the goodwill we have. We still have enough headroom. This is no topic or not risk in our view in the balance sheet because most of the goodwill is allocated to the German segment overall. For the valuation, we have a more conservative planning.
Okay, thank you.
The next question comes from Gian Marco Werro from ZKB. Over to you.
Good day, everyone. Three questions from my side, if I may. The first one is just on personal costs. Can you give us a sense about what you're budgeting in relation to wage inflation, especially now for the German market? Second question is also based on your guidance for this year. There, as I understand correctly, you have set up this range based on the fact that you are also planning some further investments, for example, in TeleClinic or maybe also in your obesity business. Can you maybe give us a bit more there, some flesh to the bone about what you are planning to really, as you are writing here today in the presentation, to really transform DocMorris into a state-of-the-art technology company? The third question is just also from competition perspective in Germany.
Can you maybe give us a bit your sense about how you assess the competition from the stationary pharmacies that they are now also working together then with some delivery companies, especially in cities, similar like the Gorillas or so, that some patients can also just order them their products at their pharmacy that they are usually visiting. Thank you.
Maybe I'll start with the first question about the personal costs. We have especially the wage inflation in our logistics center, on the low wage part, there we increased. The impact on the overall P&L is not that significant, we did it really on a specific and selected way and not overall increase wages because of inflation. The second question was about the guidance of our further investments. You already mentioned some of the parts. These are important ones. We cannot give you quantitative numbers for single additional investments.
Yeah, with the actual situation, we will use the flexibility we have really to assess opportunities and decide on additional spendings for projects with a positive impact on value in the future.
Maybe if I may quickly, just as a follow-up on this one, sorry. Can you elaborate then maybe more on like, is this more like a marketing investments or technology investments, service expansions? This would be interesting.
It can be both. It really depends on the project. It can be development more on the tech side towards our ecosystem platform, can be marketing if we see that we have a good conversion rates and response rates. It really can be on several parts of the line items.
To add to that, to Marcel's comment there, our roadmaps continuously evaluate and evolve through the year as we learn kind of how the customers are accepting of the new services and so on. I think to Marcel's point, it's hard to predict exactly where we'll invest, but the platforms allow us to be much more dynamic in where we invest, how we invest, and when we do. Our goal at the end is to kind of get to the point where we can delight our customers on every transaction that they interact with us. Whatever gets us to that goal and gives the most flexibility to prepare for eRx, that's where the investments go, especially on the tech side.
Thank you.
Yeah, Gian Marco, I can take the third question about.
Mm-hmm
the competition with the stationary or the local pharmacies mainly. On one hand, the landscape is really fragmented and there is lower efficiency and lower convenience for the customer and patients. This is where we think we have clear advantages. We have our, let's say, delivery promise and more and more coverage we will have with fulfilling a next day delivery promise and to compete with the so-called Botendienst. Set up our marketplace partnerships with more than 200 pharmacies and can cover already a large part of the metropolitan areas also for same day deliveries. I can tell you the demand for this kind of delivery is not really significant at all.
If I can add to that, I think delivery is obviously one aspect of this service. When you think about kind of the DocMorris promise, it's not only about the product delivery, but it's also about the pharmacist consultation. It's about the pharmacy services. It's about the expert knowledge that our pharmacists provide on top of the medication. Those are the things that you couldn't naturally get from a local pharmacy. Because of the way the tech works within the DocMorris platforms, we can actually add those services as default for every interaction that we have with our customers. For me, it's delivery is one aspect, but add-on services on the top that, I think customers and patients really would like, is kind of, you get it for free in quotes.
Clear. Thank you. Then just, maybe on the two other pharmacies and the partnership you have with them, what is your target for this year in relation to the expansion?
Our focus with the marketplace at the moment is mainly on acquiring sellers for our long tail marketplace which we are going to launch in summer. There we have already signed contracts with more than 100 new partners. With the pharmacies itself, for the moment we see the coverage is enough and we will see and grow the number of partners with the demand of the customers once eRx really starts to ramp.
Very clear. Thank you.
The next question comes from Alexander Thiel from Jefferies.
Hi. Good morning, gentlemen. I have a couple of questions. I would like to take them one by one. I got kicked off before. If this has been answered before, let me know. My first one is on your Swiss disposal. Could you provide an update when you expect this deal to close?
We expect to close in the second quarter. The condition which is open is the approval of the regulatory authorities.
Would it be at the beginning or end of the second quarter?
We cannot specify more because we depend really on the answer of the authorities.
Okay. The second one is on your guidance. I mean, the top line guidance is no surprise with the negative base effects, how should we read the EBITDA guidance? As you state, the guidance is excluding the Swiss business, the deal will only close now in the second quarter. I assume you consolidate at least four months, meaning four months of revenue, gross margin, EBITDA. Is that conceptually correct, that the reported EBITDA will be basically better than your guidance, which on the low end implies no Swiss contribution?
On the IFRS, we have to show the Swiss business as discontinued operations in one line item below EBITDA. We will clearly show the numbers we have just guided on.
Okay. Very clear. The next one is on your marketing budget, which you cut in half in 2022. How should we think about 2023 level? Based on my calculations, starting at a gross margin of roughly 19%-20% with slightly better employee costs, you have an operating cost block of around 14% available, of which around 50% could be used for marketing. Yeah, I'm speaking basically about a level of around EUR 80 million to be at zero net debt end of 2023 post-Swiss disposal. Would that be a right way to think about it? From a seasoning perspective, I assume it's more H2 weighted.
We do not give guidance on single line items of the P&L. We are convinced that we will deliver on our EBITDA target, but we cannot split it up in single line items.
Okay. You gave us a CAPEX guidance. Could you also share ballpark for D&A? How should we think about your reporting currency? You're now getting paid 100% in EUR. Do you plan to change that from CHF to EUR?
In terms of functional currency, we are analyzing the topic, and we'll decide later on if and when we would change. There's no immediate need to change. The other question was about D&A. There we now show CHF 62 million. This will be reduced in the future because around CHF 7 million of the CHF 62 is because of the integration. There we had to write off some trademark and integration topics. Of course, also the Swiss business will or is part of the CHF 62 and will not be in the future. For the future it will be below CHF 50 million.
Okay. Thank you.
The next question comes from Jan Koch from Deutsche Bank.
Hi, thanks for taking my questions. I also have three. The first one is on your marketing expenses in 2022. Out of the EUR 60 million spending, how much of that did you spend for the German market? I would like to pick your brain on the eRx again. Obviously encouraging to see that the German Health Minister plans to make the eRx now really mandatory at beginning of 2024. Do you know how he plans to make sure that all doctors eventually use eRx? Will there be any sanctions or something like that? My final question is on your Swiss business, more precisely on the earn-out component. Given that we are now 3 months into the year, could you update us on the likelihood that you will achieve the required targets?
Yeah, I take the financial questions. On the marketing expenses 2022, the significant part goes to Germany because in Switzerland we have the B2B business and we have kind of another business models more acquiring new customers via multiplier of insurance companies, doctors, with a very low marketing ratio. Really the good part is for Germany. To the third question of the state of the Swiss business and the confidence about the earn-out, we feel very confident it's related to the EBITDA of the Swiss business, and this is very sustainable. Yeah, we are convinced that we will achieve 100% of earn-out.
Yeah. On the eRx what you just said, this is also what we see is that the Health Ministry, differently than last year, is really highly committed now to bring it to bring it live and to put eRx a second time in a law. That's kind of special. Nevertheless, apparently the first time did not was not enough, and now they do the second time. For us, it is of highest importance that there are multiple options, how a patient can get, first of all, the token and then can redeem the prescription. That he really gets the choice to choose the right channel out of all pharmacies.
There we clearly see the direction of the Health Ministry, that they want now to lower the barriers also for seamless digital channels to redeem. Therefore, we think in the future, with the whole mix of options and channels, the share of the online pharmacies being today below 1%, probably around 0.6% overall, definitely will start to increase as soon as the Rx rollout starts on a nationwide base.
Okay, great. Thank you.
We now have time for one last questioner, and it is Urs Kunz from Research Partners. Over to you.
Good morning, all together. I have, again, just to clarify the question about the marketing expense. I saw that they were in second half 2022, only about CHF 20 million. Am I right to assume that at least that was the low point? If you can't give clear figures for the running year, I have a second question about the external revenue guidance. It is mid-single digit decline. Is that on the assumption that for OTC, B2C, this mid-single digit decline that all the way said Rx will be more or less stable on this assumption? The second to last question I have on adjustments to EBITDA, what can we expect in 2023? Is there a lot of adjustments still to be expected, be it from restructuring or others?
The final question on free cash flow. You earlier said you wanted to have a break-even free cash flow in 2024, it was. Is that now different after you changed the they also dilute, so we can expect it in 2025, or what's your best guess for that?
Thank you for the question. Starting at the marketing, as I said, we do not give guidance on single line items of the P&L. Your assumption is true that this was probably the lowest point also in terms of marketing spendings the second half of last year. The second was about the Rx development.
It was for the question, is this external sales guidance of mid-single digit decline-
Oh, yeah.
-that assume kind of, also Rx is mid-single digit decline, or?
Yeah. This is the assumption that also the paper prescription business will continue to slightly decrease, so in a similar dimension than the OTC business. It's both included without growth from electronic prescription. The adjustments for 2023, there, we expect this to be smaller because in 2022 we had the restructuring and the integration of medpex and Eurapon. For 2023, there will be the costs for the sale of the Swiss business. We expect adjustments to be in the single-digit CHF million amount. In terms of free cash flow, of course, there will be a time after achieving EBITDA break even to achieve free cash flow break even. I would say this could be one, two years later.
Okay, thanks a lot.
Thank you. Now I hand the floor back to Walter Hess.
Yeah, thank you very much. Thank you to all of you for joining and taking the time today for us. For us, it was really important to deliver what we promised in 2022. As you have seen, we have delivered. We also are convinced that all the measures we have set up for 2023, with that and what is going on right at the moment, we will also deliver on the guidance for this year. You can be assured we will do anything to really reach these targets. I also can assure you that we have fully dedicated and highly committed management team, and we have really great talents and very, very motivated employees in our company. With that, I thank you again and hope to see you soon.
Thank you.
The conference is no longer being recorded.