Swedencare AB (publ) (SECARE) Earnings Call Transcript & Summary

Welcome to Swedencare's pre-quarter update, where Jenny and Hakan will provide a short presentation, followed by a Q&A. So please raise your hand if you have any questions. Over to you, Jenny and Hakan.

Thank you so much, Emma, Hakan and Jenny here, and welcome to our Q2 update. And I'd like to remind you, this is a short update of the business right now. We still have a month to go, financial-wise, at least and a couple of weeks left operationally. Highlights for the quarter. The biggest pet show in the world that's biannual took place in Nuremberg like always, it's called Interzoo, very busy show for us, and we had our, let's say, biggest booth ever showing more brands than we have done before. A very busy show, strong interest and several new markets will be launched in H2 already with -- due to this show. And it's, of course, some smaller, more fast-moving markets, but still markets where we haven't been present as of yet. And some big opportunities have started negotiations with that. Naturevet by Swedencare launched online in Europe and will be in retail stores by second half. several retailers on board, among them the largest, the U.K. player, and we are also in discussions with a couple of other really big European retailers. We focus on the big opportunities, but of course, have also demand from more local and smaller players, but we'll start focusing on the big opportunities. And -- as some of you may remember, we sold NaturVet exclusively with Zooplus for 2 years, and now we have expanded to other online channels with NaturVet by Sweden Care with the new brand. So we have started now in June with the launch on Amazon as well in rest of Europe and on the U.K. shop where we have been present. We had our first Capital Market Day ever up in Stockholm, fully booked with all of the group managers present, and it was more of an in-depth session seeing the different brands, different entities, how we work. And -- and it was very nice to meet retail investors, professional investors and also all of our analysts covering us were there. So a very good day, and we have had great feedback. So we will definitely have it another time in 1 to 2 years. We had our AGM in May, and the main decisions there was we now have an authorization for share buybacks that we may choose to do when we feel it's prudent. And we also had, as most of you know, we had some change in the Board. We had a new Board member representing Symrise. And we also have a new Chairman, Thomas Eklund that has been on our Board since 2016. So he knows the business very well, but now he's in the new position as Chairman. Following up just about the last reminder of the profitability hit that we had in Q4 and why we're showing this is that we predicted that we would have one of the issues would have an effect on first half year 2026, and that is correct. We see a, let's say, improvement month-on-month when it comes to the problems we've had on Amazon. And we stand by our, let's say, forecast saying that from Q3, we won't have those kind of issues affecting our sales. So we are happy with the development, but it's been really hard work from the team, and I congratulate them and looking forward going into Q3 with a clean shape. The different segments, pretty much, let's say, same story as in Q1 that we have, let's say, 2 segments doing really strong, Europe and production and North America still at a bit lower pace than we want to be. But looking at the different channels, online is, as I said, improving a lot in North America, so a strong quarter for online. We had a bit of a dip in May -- or April -- May, sorry, May. And that was not only us. It was overall, let's say, sales on Amazon, at least in our sector and also in the pet retail store, a bit lower demand from consumers, probably due to the geopolitical issues and which has had an effect on gas prices in the U.S. And as you all know, gas prices in the U.S. is a sensitive issue. However, we saw already early in June, a strong pickup. And after the potential deal was announced, seen even better results. So happy to say that of the quarter, we will have 2 strong months and one that was a bit softer. Still lower ROI on HVS and Amazon, but improving, as I said, month by month. So Q3 should be back to normal. Pet retail and big box, solid, but also there, we felt a bit of a geo impact as above. One new major big box private label contract was signed in Q1, and we already in Q2 is shipping the first delivery. So we're very glad about that. Veterinary side, still a bit soft. Also from another perspective is that the 2 largest distributors in the U.S. has announced a merger. So they sell actually plus 60% of the distribution goes through these 2 players. And that merger work has had an effect on us and others shipping into them since there have been some constraints on their inventory levels when they make the discovery phases, et cetera. So a bit of turmoil in the market there, but soft to solid, I would say, about the veterinary side. Looking at Europe, really strong market for us. Online, the biggest and most important for us, increasing month-on-month in all markets. EU8, Amazon, all transitioned for our internal brands. Innovet, our Italian veterinarian brand was the last brand to transition. It started now in June. So it will be exciting to see about that. Pet Retail, solid to good demand and veterinary solid to good. Main markets, as you know, Italy, U.K., fairly stable markets, not fantastic growth market-wise, but strong and solid demand. Looking at production manufacturing, as we have communicated, pharma is continuing to grow, and we are ramping up for a lot more manufacturing. So all year will be an exciting year and going into 2027, where even higher volumes will be manufactured. And we also, as we communicated in Q1, still lots of activities when it comes to RFPs more than ever. So there is definitely a shift in the market or more demand for CDMO services when it comes to animal health. EU and U.K. has continued to have very high demand externally. So it's more about expanding the team and planning the manufacturing, so have had a bit longer lead times for deliveries, but we have perhaps been a bit too quick to the market. So we just need to have a bit longer lead times, but still want to be fast and agile to develop projects. U.S. supplements, I would say, solid, a couple of new projects starting. U.S. dermal liquids still soft. However, now we're going into the warmer season, then it normally picks up. So see Hopefully, it will improve. But this is a big part of our business, it is also affected by this merger proposal of the 2 largest distributors. But all in all, a very high activity quarter and looking forward to getting the final results. Over to you, Jenny.

Yes. Some expected financial information based on today and what we are expecting for the rest of the quarter. We are still expecting to have a double-digit organic growth for the quarter. The gross margin is expected to be in the same corridor as we have talked about for the last at least year that we would like to be in 58%, 59%. So same as 25% and also since last quarter, where we had 59.7% EBITDA, we are expecting to improve profitability compared to last year when we had 19%, and we are expecting a similar profitability compared to what we had last quarter in Q1 where we had 19.6%. There is no material one-offs that we are expecting. However, there is still a lower return on investments for the big box and the Amazon nature as Hakan spoke about. And also this Interzoo, this big expo, it's biannual expo. So we did not have the cost in '25. Net debt to EBITDA, we were at 2.8 when we closed Q1. And as you know, we normally decrease this. We are expecting to have a similar net debt to EBITDA in Q2 due to the fact that we are now including the Summit earnout because it's less than 12 months until the expected payout. So we have to include it from this quarter. And also, we had a dividend payout in the quarter. With that said, we are done with our update. So back to Emma.

Yes, we are open for questions. And your first one comes from Adrian

I hope you can hear me. I just have one question really. Kind of going back to North America here with the merger of the 2 largest distributors. Could you kind of explain a bit more regarding this? Like how structural do you think this will hit your business regarding your veterinary sales? And how should we think about the implications for kind of the overall market?

It's hard to say. As I said, those 2 together, plus 60% of the market, how they will organize, we don't know as of yet. They haven't really presented that. But the biggest one, MWI is -- the biggest one is also the biggest customer of ours. So -- and Covetrus is a smaller customer for us, but they are a big player. And then we have Patterson that is a second customer of ours. So how that will play out is difficult to say. But there will definitely be some changes in, let's say, how they distribute over the market, but how quick that will be. And also, I would like to remind everyone that you never know about these kind of projects. I mean, from a from a, let's say, antitrust perspective and all of that. I don't know if it will go through, but the 2 players are convinced that it will be accepted. And I have read some articles about others saying that it's questionable, but I don't know. So let's see what happens. But they are definitely preparing for the merger and have put some constraints on their inventory levels going forward during this process.

OOkay. Can I have just a quick follow-up on that one? Can you give us any sort of ballpark range for the sales exposure that you have to these distributors?

It's difficult to say because we also sell products to -- we manufacture products to brands that sell to them. So it's a very complex lots -- I mean, we have many products ending up in these sales channels. But direct sales for us on a yearly basis, I would say that it's between 20 million to -- I don't have the exact number, so USD 20 million, USD 30 million. That's my best guess, but don't hold me to it.

It's one of our top 10 customers for the group.

Thank you next question comes from Adela.

You mentioned here not that much of a move to gross margins, I believe. Could we dive maybe a bit deeper into this? How are you able to offset any sort of inflationary pressures? Or maybe start with, do you see inflationary pressures? And if so, on which components or I guess, on what sides of the pie do you see the inflationary pressures?

No, we haven't received any big reports on inflation pressure. So basically, what I wanted to communicate is that we have been in the range of 58%, 59% for the last 1 or 2 years, and we expect to stay there for this quarter.

Okay. That's really good news. And then maybe also on Amazon. I mean, you continue to say that cost levels will remain elevated for quite some time or additional quarters. Is that reasoning still true? Or do you see opportunities for more upside or I guess, for the operating leverage to come through towards H2?

No, yes. I can just answer by saying that, that's one of the things that we communicated that we are expecting pressure on the profitability still in this H1, and we are expecting it to improve more in the second half of the year.

Your next question comes from Johan. Please go ahead.

A question on the NaturVet Amazon sales. You talked about this extensively, but you previously indicated that the transparency rollout would be largely completed by the end of Q2 with normalization targets for Q3, as you state today. Where are you now in the transition? Are we talking normalization in the beginning of Q3 or end of the quarter? How should we think about the impact?

I would say it's -- normalization should definitely be in the beginning to mid happening, but that's normal with Amazon. But the actual challenge we've had, we definitely see an improvement on that with, as you said, the transparency programs. But then it's always that we will continue to have is like third-party sellers online having different types of prices. But that we're used to working with that. So I would say that expected from early to mid-Q3, we will definitely be out of the issues that we've had during 2025 and first half '26.

Good. And a question on the U.S. derma Liquid business. had a softer Q1, but you then indicated that Q2 orders were already in hand and that the business should recover in Q2. Now from the call today, I get the impression that this is still somewhat soft. What...

That's what I tried to explain in that we ourselves and have lots of sales going into the 2 biggest distributors merging. But of course, we manufacture a lot into them as well. So there are always -- there's always a possibility to change the orders a bit or push them on a yearly basis. So that that's good is that we see the move out from the distributors. So that has definitely improved for the derma products, but that's common for the issue right now is more those affecting the whole sector a lot when it comes to bringing in products. But since the move-out is that -- so we are expecting the whole fairly good had orders and it looks good for Q2, but there were some drawdowns. So it's a better quarter than Q1. it's not as good as we...

And the final one on pharma. You also described pharma as Q1 as a good start, but not the biggest quarter of the year, so to speak. Is -- are you seeing any acceleration here in Q2 in pharma?

I mean, I would say a lot of acceleration when it comes to hard work and preparing and the development projects, not so much more when it comes to manufacturing, but I mean, lots of projects preparation. And we, of course, invoice that type of business as well. So I would say it's a good quarter, and that will continue all year.

Thank you, Johan. That concludes our Q&A session. So back to you guys for any closing comments

Thank you for your interest, and happy mid-summer to all of you, and we look forward to seeing you on the 22nd of July when we have the final results.

Thank you.