Zur Rose Group AG (ZRSEF) Q4 2022 Earnings Call Transcript

Call Start: 06:00 January 1, 0000 7:03 AM ET

Zur Rose Group AG (OTCPK:ZRSEF)

Q4 2022 Earnings Conference Call

March 23, 2023 06:00 ET

Company Participants

Walter Hess - Chief Executive Officer

Marcel Ziwica - Chief Financial Officer

Madhu Nutakki - Chief Technology Officer

Conference Call Participants

Sebastian Vogel - UBS

Olivier Calvet - Credit Suisse

Gian Marco Werro - Zürcher KB

Alexander Thiel - Jefferies

Jan Koch - Deutsche Bank

Urs Kunz - Research Partners

Operator

Hello, ladies and gentlemen and welcome to the Zur Rose Group AG Conference Call regarding the 2022 Full Year Results. [Operator Instructions] Let me now hand over to Walter Hess.

Walter Hess

Yes. Good morning, everybody and welcome to today’s webcast. We are pleased to inform you about our full year 2022 update and outlook from 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.

But 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 economical environment but in addition was the rollout of the electronic prescriptions in Germany delayed despite the law enforced, mandating their use since January 2022. And 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 ‘23 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 ‘23, Q2 brand integration and the consequent focus on profitable orders and customers with eRx potential. The other priorities are to increase margins and to improve performance in marketing and logistics. But 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 #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 B2C 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 #5 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 CHF70 million – minus CHF70 million, which improved by CHF59 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 pharmacy successfully and reduce cost 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. And finally, as already mentioned, with the sale of the Swiss business, we could strengthen our balance sheet with proceeds of around CHF360 million.

Let’s move now to the business update with an update on the latest developments around eRx and its roll-out on Slide 7. Two weeks ago, the Ministry of Health has presented their digitalization strategy. They announced that in the new digital gazette, the digital law, the electronic prescription will be anchored as the binding standard as of January 2024. And with that, they reinforced and underlined their will to roll-out the mandatory eRx now. The start of the rollout is expected as of August ‘23, together with the nationwide availability of the eGK solution in local pharmacies. The exact details of the roll-out 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 print out, 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 read the eRx digitally. A convenient solution to scan the eRx token directly in doctors’ practices is supported by the Health Ministry. The date of availability has still to be confirmed. And finally, but very important, 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 our stakeholders. It opens and digitalizes the EUR 50 billion market for prescribed medication with over 500 million prescriptions per year with 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 10x higher than the one of today’s OTC customers. And we, at 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 one strong company under one 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 4. Our headquarters will remain in Switzerland. Also, our listing will remain in our home on the Swiss Stock 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. And 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 under which we further develop our digital health ecosystem with a strong focus on persons with needs for prescribed medication and chronic care of services.

With Medpex as the feel-good pharmacy, we cover the customer segment of well-being and families with main demand on OTC and B2C products combined with best services and loyalty programs. And with Apotal, we target the discount segment for 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 are significantly advanced our sustainability agenda across our four pillars that are shown on the Slide #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 mid-term 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 current culture of sharing ownership and seeking consensus group-wide and expanding partnerships as a strategic pillar to deliver even better healthcare to our patients and customers. In order to further anchor the consciousness for our sustainability targets, they will become part of the yearly target of every member of the management team.

And 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. So 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 €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 cost and poor health outcomes due to wrong or insufficient treatments and adherence. But 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.

So what is our solution? Slide 14 shows that at 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 competent innovation and used 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.

Madhu Nutakki

Thanks, Walter. First of all, thank you for invitation to participate in this important forum to share what we are doing on the product and the tech space. So over the next couple of slides, I’m going to 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. So how do we do that actually? So the top layer that you see kind of yellowish color on the top, that’s kind of our engagement layer. And we start from a position of strength with the DocMorris platform and 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 way.

As a platform, it’s not only valuable when others using our platforms can create services. So 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. And 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. And at the bottom, it’s the advanced and the smart logistics into the Heerlen 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. And we do that through rapid innovation and science-based product roadmaps. If you can go to the next slide, so kind of how do we actually achieve this or how do we do this? What is the magic behind it? So 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. So we started with a silo tech and structure on the left side, as you can see, with the various brands independently doing great work, but there is so much more we could do if we combine them together and also scale them.

So 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 are shifting to API-type services, which allow us more flexibility to bring new capabilities to the market. We are also planning to opening up our dollar per 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. And I think the 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. And from a structural standpoint, the tech, the product and the science now work as a single pod in a very integrated manner. So speaking of science, so what is it actually that we do in science? So 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. So we have to use artificial intelligence extensively, and this gives super powers. We do not think about data and analytics just as dashboards. We think of them as loops instead of line. So whenever you think about something as a loop, it’s always continuously innovates and you always improves. So science is about continuously thinking about those loops and feeding it back into the product teams, and then the product teams bring new capabilities to the marketplace. So 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.

So 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. When you think about patient science as an example, that allows us to improve services to our patients. And then the fundamental thing that we are doing new here is about behavioral science. And this is about how do we allow our patients to become much more better and healthier as they adhere to their medication protocol.

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. So that’s kind of what I mean by agility and being able to innovate, some concept to production within a 6 months window using tactics like hackathon is what the culture is about.

So to summarize – we can go to the next slide, to summarize, for any industry to transform, you need some kind of a trigger, the sort of even 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 would be the Holy Grail. So 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. And that is the journey that we’re on. And the transformation that I’m speaking about, hopefully, will get us there.

So with that, let me close it out and give it to my dear friend and CFO, Marcel.

Marcel Ziwica

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 talent. In 2022, we accelerated our breakeven 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 CHF20 million, we need now one more year to reach EBITDA breakeven. Our profitable growth strategy remains unchanged and is down 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 minus CHF86 million in H2 2021 and reached minus CHF21 million in H2 2022, an improvement of CHF65 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 already generated CHF59 million of the targeted CHF130 million improvement in our 2022 full year figures. But 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 past. The reduction, for example, of direct logistic costs and brand market deals are almost fully executed. Our 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 CHF70 million improvement of the breakeven program.

On Slide 23, we show in addition the half yearly development on other key figures. As already communicated, the focus on profitable customers led to a decline of sales by 11.6%, but also to a significant improvement of gross margin by 180 basis points.

Now we changed from the half year review to full year results on Slide 24. To increase transparency, for the first time, we show adjusted EBITDA not only on group level, but also per segment. Germany is obviously the largest contributor to the group numbers, and in terms of improvement, also the breakeven 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 our marketing efficiency and streamlining the organization on its path to profitability.

In our underlying KPIs on Slide 25, you can already see positive results of our focus on chronic customers. Site visits and number of active customers are direct prerequisite for revenue development. Our steering toward 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 this 12 month’s figures. In fact, in Q4, we saw a further significant increase in basket sizes.

We have already discussed the development of key figures such as revenue, gross margin and EBITDA. I’d like to add some color on expenses line items on Slide 26. The increase in personnel expenses is mainly due to the in-sourcing of Medpex operations and temporary workers in the implementation phase. All the overlying items such as marketing, distribution and other operating expenses have strongly improved due to our breakeven 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 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 CHF30 million for the full payback of our 2023 straight bond in July. The communicated CHF360 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. But because of the missing EBITDA contribution of more than CHF20 million, we have to move adjusted EBITDA breakeven for the new DocMorris Group to 2024.

All the figures and targets shown on the next slides 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 graph. 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 30. Even though we have convincing signals for nationwide eRx roll-out, we exclude any eRx impact from the outlook for 2023. Group external revenues in constant currencies are expected to decline for the full year 2023 in the mid-single-digit percentage 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 CHF20 million to minus CHF40 million in 2023, as 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 CHF30 million and CHF40 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.

Question-and-Answer Session

Operator

[Operator Instructions] And the first question comes from Sebastian Vogel from UBS. Over to you.

Sebastian Vogel

Can you hear me?

Marcel Ziwica

Yes. Yes, we can.

Sebastian Vogel

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 CHF20 million, CHF25 million maybe in 2023. With your guidance of the minus CHF20 million to minus CHF40 million, if I would add the plus CHF25 million from Switzerland, so pro forma on top of it, your range sounds like more like somewhere between plus CHF5 million and minus CHF15 million. The minus CHF15 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, thought it loss making. So in that sense, what’s the thought process behind that? Did I mix up some numbers there?

Marcel Ziwica

Yes, in addition to the 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 makes sense and show attractive payback times. And this is also included in the minus CHF20 million to minus CHF40 million. And of course, on the lower and upper end, we have some comfort zone because of the volatility in the markets and some uncertainties. But we are very confident to deliver in this range of EBITDA for 2023 as we also have shown in 2022.

Sebastian Vogel

Got it. And a little bit more on sort of a scenario process or scenario backdrop there. If we assume like 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 them and really firing all cylinders to really make use of this opportunity? Or would you say – 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? And 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.

Walter Hess

Yes. 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 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. And 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 weight of the roll-out, we will to react immediately. So 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.

Marcel Ziwica

And we also have the headroom in our guidance to invest in additional advertising in the case eRx is taking off.

Sebastian Vogel

Got it. And the third question would be on the adjusted EBITDA by segments. What you have shown on the slide is minus CHF48 million for Germany, the plus CHF22 million for Switzerland and the minus CHF10 million for the international side of things. If I add that up, I get to something like CHF36 million or so on the negative side. But overall, if I’m not mistaken, you were suggesting that something was like minus CHF70 million on a group level. Can you explain the gap there or maybe I have mixed up the numbers as well?

Marcel Ziwica

Yes, in the notes of the financial statements, there is also the corporate power mentioned with – around minus CHF30 million. And the costs, we do not allocate to the several segments. The group IT platform, this is around 40% of this number. And then obviously, we have the strategic management group finance, legal, communication, investor relations, all these topics are then in the corporate number included, and we expect to decline this over time.

Sebastian Vogel

Got it. That was my three questions, but just one follow-up, if I may, in that regard. But this corporate line on EBITDA in the past when you were still showing the split, that was way smaller than CHF30 million, right? It was more like CHF5 million, CHF6 million, CHF7 million, isn’t it?

Marcel Ziwica

I don’t know on which number you are referring. Maybe this was the elimination on the sales number which was in this dimension.

Sebastian Vogel

Yes, like in ‘15, ‘16 and ‘17 or so, there was – I thought it was on – but maybe I’m mixing it up.

Marcel Ziwica

There, we had CHF5 million, CHF6 million of intercompany revenues. But I cannot refer on EBITDA, this kind of number.

Sebastian Vogel

Got it. Many thanks for having all my questions.

Operator

Next up is Olivier Calvet from Credit Suisse.

Olivier Calvet

Yes. Hi, good morning, gentlemen. I would also like to take my questions one by one. A follow-up on Sebastian’s question on EBITDA. EBITDA margin in Germany, for comparability with your main peer, I would personally be inclined to allocate central cost to your segment. But could you give us a sense of how much these central costs you would expect to stick post Swiss disposal, please? And I think just back on the Sebastian’s point as well, I think it was CHF10 million, the last time you published in 2018, the – maybe the loss, I think, including BlueCare, but yes, an – pharma, but just to get a better sense of what would stick.

Marcel Ziwica

We do not plan to have another segmentation for the future without that Swiss segment. We will have the same logic and therefore, do not, more or less, allocate to the segments.

Olivier Calvet

Okay. But just to get a better idea, you will have the Swiss segment – sorry, the German segment and the European segments. Going forward, roughly how much of the actual central costs are really going to be for the international segment and the German one?

Marcel Ziwica

So, the management for the segment is allocated in the segments. On the corporate side, we really have to go OpEx, and there will be no significant reduction due to the sale of the Swiss business.

Olivier Calvet

Okay. Thank you. And then on – 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 because you mentioned these sort of three brand strategy?

Marcel Ziwica

No, we do not disclose any targets on the single brands. We see the business on the segment level and do not differentiate.

Olivier Calvet

Okay. Fair enough. And on goodwill, I mean obviously, your balance sheet changes a lot, post medpex deal, but I was quite surprised to see no impairment of goodwill given you increased the discount rate for Germany and decreased the EBITDA margin you use. So, could you explain what’s happened there?

Marcel Ziwica

In general, we could validate the goodwill we have. We still have enough headroom. And so, 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. And for the valuation, we have a more conservative planning.

Olivier Calvet

Okay. Thank you.

Operator

And the next question comes from Gian Marco Werro from Zürcher KB, over to you.

Gian Marco Werro

Good day everyone. Three questions from my side, if I may. The first one is just on personnel costs. Can you give us a sense about what you are budgeting in relation to wage inflation, especially 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 for 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? And then the third question is just also from a 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.

Marcel Ziwica

Yes. Maybe I will start with the first question about personnel cost. We have especially, the wage inflation in our logistics center. So, on the low-wage part, there, we increased. And the impact on the overall P&L is not that significant. But we did it really on a specific and selective way and not overall increased 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 a quantitative number for a single additional investments. But with the actual situation, we will use the flexibility we have really to assess opportunities and decide on additional spending for projects with a positive impact on value in the future.

Gian Marco Werro

Maybe if I may quickly just as a follow-up on this one, sorry, but can you elaborate and maybe more like is this more like a marketing investment or technology investments, service expansions? This will be interesting.

Marcel Ziwica

It can be both. It really depends on the project and the development more on the tech side towards our ecosystem platform and the marketing, if we see that we have good conversion rates and response rates. And it really can be on several parts of the line items.

Madhu Nutakki

And 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. So, I think to Marcel’s point, it’s hard to predict exactly where we will invest, but the platforms allow us to be much more dynamic in where we invest, how we invest and when we do. But our goal at the end is to kind of get to the point where we can delight our customers on every transaction that interact with us. So, whatever gets us to that goal and gives us the most flexibility to prepare for eRx, that’s where the investments go, especially on the tech side.

Gian Marco Werro

Thank you.

Walter Hess

Yes. Gian Marco, I can take the third question about the competition with the stationary or the local pharmacies mainly. So, on one hand, the landscape is really fragmented and there is low revisions and low convenience for the customer and patients. And this is where we think we have clear advantages. And 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 voting deals, we have our – 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. But I can tell you the demand for this kind of delivery is not really significant at all.

Madhu Nutakki

And if I can add to that, I think delivery is obviously one aspect of this service. But 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. So, those are the things that you couldn’t naturally get from a local pharmacy. But 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. So, for me, it’s – delivery is one aspect. But our add-on services on the top that I think customers and patients really would like is kind of “you get it for free”.

Gian Marco Werro

Clear. Thank you. And then just maybe on the 200 pharmacies and the partnership you have with them. What is your target for this year in relation to the expansion?

Walter Hess

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. And there, we have already signed contracts with more than 100 new partners. And 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.

Gian Marco Werro

Very clear. Thank you.

Operator

The next question comes from Alexander Thiel from Jefferies.

Alexander Thiel

Hi. Good morning gentlemen. I have a couple of questions and I would like to take them one by one, have been kicked off before. So, 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?

Marcel Ziwica

Yes. We expect to close in the second quarter. The condition, which is open is the approval of the regulatory authorities.

Alexander Thiel

Would it be at the beginning or end of the second quarter?

Marcel Ziwica

We cannot specify more because it depends really on these regulatory [ph] authorities.

Alexander Thiel

Okay. The second one is on your guidance. I mean the top line guidance is no surprise with the negative base effects, but how should we read the EBITDA guidance? As you state, the guidance is excluding the Swiss business, but the deal would only close now in the second quarter. So, 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?

Marcel Ziwica

On the IFRS, we have to show the Swiss business as discontinued operations in one line item below EBITDA. So, we will clearly show the numbers we have just guided on.

Alexander Thiel

Okay. Very clear. The next one is on your marketing budget, which you cut in half in ‘22. How should we think about ‘23 level based on my calculation starting at a gross margin of roughly 19% to 20% was slightly better than the cost. You have an operating cost block of around 14% available, of which around 50% could be used for marketing, speaking basically about a level of around CHF80 million to be at zero net debt end of ‘23 post its disposal. Would that be the right way to think about it? And from a phasing perspective, I assume it’s more H2 weighted?

Marcel Ziwica

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.

Alexander Thiel

Okay. You gave us the CapEx guidance. Could you also share a ballpark for D&A? And how should we think about your reporting currency? You are now getting paid 100% in euro. Do you plan to change that from the Swiss franc to euro?

Marcel Ziwica

In terms of functional currency, we are analyzing the topic, and we will decide later on when we would change. There is no immediate need to change. And the other question was about D&A. There, we now show CHF62 million. This will be reduced in the future because around CHF7 million of the CHF62 million is because of the integration. There, we had to write-off some trademark integration topics. And then of course, also the Swiss business will – is part of the CHF62 million and will not be in the future. So, for the future, we will be below CHF50 million.

Alexander Thiel

Okay. Thank you.

Operator

And the next question comes from Jan Koch from Deutsche Bank.

Jan Koch

Alright. Thanks for taking my questions. I also have three. The first one is on your marketing expenses in 2022. Out of the CHF60 million spending, how much of that did you spend for the German market? And then 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 the beginning of 2024. But do you know how he plans to make sure that all doctors eventually use eRx? Will there be any sanctions or something like that? And my final question is on your Swiss business, more precisely on the earn-out component. Given that we are now three months into the year, could you update us on the likelihood that you achieve the required targets?

Marcel Ziwica

I will take the financial question. So, 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. And so we need to build out for Germany. And to the third question of the Swiss – the sale 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. So, now we are convinced that we will achieve around 100% of earn out.

Walter Hess

Yes. And Jan 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 live and to put eRx the second time in a law. So, that’s kind of special. But nevertheless, apparently, the first time did not – was not enough and now, 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. And that he really gets the choice to choose the right channel with – out of all pharmacies. And 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. And 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, we will start to increase as soon as the eRx rollout starts on a nationwide basis.

Jan Koch

Okay. Great. Thank you.

Operator

We now have time for one last questioner, and it is Urs Kunz from Research Partners, over to you.

Urs Kunz

Good morning. I have again, just to clarify the question about the marketing expense. And I saw that they were in second half ‘22 only about CHF20 million. So, am I right to assume that, at least that was the low point? If you can’t give clear figures for the running year, then I have the 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 that Rx will be more or less stable on this assumption? And the last question I have on – the second to last question I have on adjustments to EBITDA. What can we expect in ‘23? Is there a lot of adjustments still to be expected for, be it from restructuring or others? And then the final question on free cash flow. You earlier said you wanted to have a breakeven free cash flow in ‘24, it was. Is that now different after you changed a year later, so we have – can expect that in ‘25, or what’s your best guess for that?

Marcel Ziwica

Thank you for the question. So, starting with the marketing, as I have said, we do not give guidance on single line items of the P&L. But your assumption is true that this was probably the lowest point also in terms of marketing spend in the second half of last year. Then the second was about – that Rx development.

Urs Kunz

Yes. It was for the question, did the external sales guidance of mid-single digit decline that assume kind of also Rx is mid-single digit decline, or...?

Marcel Ziwica

Yes. The assumption that also the paper prescription business will continue to slightly decrease, so in a similar dimension than the OTC business, so it’s both included without growth from electronic prescription. The adjustments for 2023, there, we expect this to be smaller because in ‘22, we had the restructuring and the integration of net base – net backs and Eurapon. And for ‘23, there will be the cost for the sale of the Swiss business, we expect adjustments to be in the single-digit million amount. And in terms of free cash flow, of course, there will be a time, after achieving EBITDA breakeven, to achieve free cash flow break even, I would say this could be 1 year, 2 years later.

Urs Kunz

Okay. Thanks.

Operator

Thank you. I will now hand the floor back to Walter Hess.

Walter Hess

Yes. Thank you very much and 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. And as you have seen, we have delivered. And we also are convinced that all the measures we have set up for 2023 with that, and then what is going on, right, at the moment, we will also deliver on the guidance for this year. And you can be assured we will do anything to really reach these targets. And 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. And with that, I thank you again and hope to see you soon. Thank you.