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

Hi, and welcome to the presentation of Swedencare's Q4 Report led by our CEO, Hakan Lagerberg; and CFO, Jenny Graflind. [Operator Instructions] Jenny and Hakan, the stage is yours.

Hello. Good morning, Hakan Lagerberg and Jenny Graflind here. We will start with a short presentation with some slides and then afterward, you can pose your questions about the report. Q4 2022 highlights, a strong quarter despite challenges. We had record sales for the quarter and profitability and cash flow was strong and especially compared to Q4, but a disappointing growth. I had guided previously that Q4 would be our strongest when it comes to organic growth and that was the plan. But we have some unexpected delays on some negotiations that will materialize in 2023 and also a tougher manufacturing situation in Vetio South that happened. And I will explain that a bit later in the presentation. So the organic growth came to minus 5%. And that is, of course, very disappointing, but still, we feel that we are in a good position to come out in 2023 with a completely different setting when it comes to growth. We had record quarters for several of our smaller group companies. Unfortunately, they don't have the same impact on the total group as they had for a couple of years ago, but I will come back to that as well. So there's lots of positive things in the quarter despite the growth situation. As I said, ongoing major agreements impacted sales. They were scheduled to launch in Q4 and would have come with significant orders. However, they are pushed into Q -- in Q1 and Q2 for 2023. So they will come and I will be very happy when I can present those to you. We made one acquisition in the quarter, Custom Vet Products, a highly specialized and unique company for the European Continent, very skilled in manufacturing soft chews. And as you know, that is a important -- or the most important product that we have in the U.S., and we have been planning to really launch it in Europe. And to be able to do that in a timely manner, we really needed to add and skip some, let's say, buildup time for the launch in Europe. So Custom Vet Product is an ideal candidate for our group. And in 2023, they will be a very significant part of our growth in Europe. Looking at some market outlook. Continued growth numbers of pets, both in Europe and in U.S., 3% to 5% when it comes to dogs and cats. And that has surprised some of the experts and the analysts due to the fact that people were expecting perhaps a small decline due to the boost that came in '20 and '21 due to COVID. Let's see now in 2023, what happens, but still the initial reports for the monthly reports when it comes to new pets has been strong both in Europe and in U.S. for January. Average spend continue to rise. I mean, it's, of course, partly due to the inflationary terms that happened in 2022. So this sector is not different than others. So we and other players in the market have been forced to raise the prices to the end consumer. And we have not seen that it has affected the demand from the market as such. Food supplements and treats continue to grow, where there has been a bit more caution from the pet owners has been on, let's say, more -- not consumable products. So there, you can see that there has been a decline in sales, but not in the 3 categories I mentioned. Looking further ahead, as you know, we have one entity in our group that works with the drug side of the animal health sector. And we have noticed not only we, but also the market as a whole, as I have also presented previously that there is a strong interest for a lot of new generic projects for animal health. It has been a fairly stable market previously and not so many players going after patent expirations when it comes to blockbuster products. But that scene has completely changed. So there is a lot of demand for development work when it comes to this side and we will continue to work on that with external players, but -- and we will also take into discussions in the years to come if Swedencare should enter the marketing and sell generic products to the market. We don't do that as such today.

Okay. Some numbers. We start looking by revenue. We had revenue for this quarter of SEK 497 million. That's a 95% increase from last year, fourth quarter of SEK 255 million. This quarter, we had the strongest quarterly revenue in our history. In addition to that, we increased by 2% from Q3 and 4% since Q2 and that's with the same structure since we have only acquired CVP this quarter, which had minimum impact. nutravet contributed with SEK 184 million this quarter and Innovet with SEK 41 million. CVP, which just joined in November, joined with SEK 1.3 million. If we look at our operating EBITDA, it was a very nice improvement from the fourth quarter last year. We improved by 149% from 18.9% to 24.1%. And it's nice to see not only did we improve from Q3 when we had a margin of 20.1%, we have also, this quarter, delivered higher profitability than our average for 2022. The average for this year is the 23.5%. Some other KPIs, I mentioned revenue. If we go to gross margin, our gross margin is at 59.3%, quite big improvement from last year of 52.1%. This quarter, it was positively impacted by some inventory adjustments that we did. If I remove these, let's say, one-off adjustments, we had operating gross margin of about 58.5%, which is in line with our average. Our external cost is about 20% of sales, a higher proportion of online sales means that we have higher corporation cost as it's directly linked to revenue. Operating EBITDA SEK 120 million, 24% margin. We talked about cash. We have cash of SEK 245 million and positive operating cash flow of SEK 96 million for the quarter. We were able to reduce our working capital of about SEK 15 million due to that we have less capital tie-up with both inventory and receivables for this quarter. A couple of other things that impacted cash for the quarter is that we acquired CVP. That acquisition was completed. We had a purchase price of SEK 135 million. Part of that was paid with the issues in kind to the seller, but we also had a cash portion, which we financed with SEK 100 million loan. And in addition to that, we have also amortized SEK 25 million on our current loan debt. One other event that happened during Q4 was that we have a warranty program for key employees in the group. These awards were acquired at market value. There is 33 people participating in this program, which had an impact of SEK 1.1 million on the cash as well during the quarter.

North America, looking at the different regions. 80% of our total sales. So of course, the most important market we're in. Wide difference among group companies when it comes to growth, as I spoke about previously. For the quarter, Vetio South had a very weak quarter due to customer demand, complexity, some staffing and supply issues. Action plan is in place and Q1 will be at least 30% stronger in sales. And we -- the good thing from this lesson is that we really run through everything and the customer situation is really good. We had to push some several projects, but no issues with the customers there. We are still the leading partner and many, many customers and new, new potential projects wanting to work with Vetio South. So the quality-wise is excellent and that has been our pride to deliver top-notch products. So that's why we didn't want to let through anything that's not according to our standards. And we have a really good plan in place. We have made some new additions to the team, really skilled people that will take care of the 2023 operations going forward. So we are on it. As I said, we're as disappointed as you, but the good thing is that we have a immediate action plan and the year has started well in the operations. Online still very strong for us and that's why we're also very sure of the end customer demand. That has not weakened for our products. So plus 20% online growth and being the strongest channel for us definitely. ProDen PlaqueOff continues being a really success story. We have now started using the skilled NaturVet's team for distributing ProDen PlaqueOff in a wider range. They have done that with lots of new distributors, but the thrilling fact is that for their biggest customers, there's a very long time frame for introducing new products. So none of their biggest customers have yet launched ProDen PlaqueOff, but that is to come over the year where we're in right now. So we're excited for 2023. And the new ProDen PlaqueOff soft chews that's been launched has had an excellent start. So really excited about ProDen PlaqueOff continued growth in 2023. NaturVet that was affected by these big retailers over the years -- this year, with inventory shrinkage, had single-digit growth this quarter, steady improvement. And as I wrote in the report, a different sentiment from the buyers right now. So at the end of the quarter, December was really strong. And we expect that NaturVet also will come back to double-digit growth for the year. We launched a big cost-cutting project and that's due to the fact that we have a completely different setting now in the U.S. with several entities. So there's lots of low-hanging fruits when it comes to getting cost down and just collaborating between the different group companies looking at transportation, at the insurance, you name it. And we will see effect of this project for many years to come. But starting, I would say, half year 2023, we will see an effect on our numbers. And then lastly, Jenny, one point for you?

Yes. This is about -- I should have put a positive tax cost impact because what we have done is that the beginning of the year, we have reorganized all our U.S. entities under one holding companies. This, together with the fact that we have applied for something called 338, which allows tax depreciation on excess value of acquisition. So for 2022, this resulted in tax that we could do this tax depreciation of SEK 222 million, which makes us pay 0 tax expense in the U.S. If we wouldn't have done this, we would have had a tax cost of about SEK 52 million, SEK 5 million at an average tax rate. This application cost us about SEK 92 million, which we have paid during -- in the beginning of January, which will impact the cash flow for Q1. But again, we will use this for the next 14 years as well. So it's going to have a very positive effect.

Yes. And at no further cost.

Yes.

That was a one-off.

Yes.

Europe had a strong quarterly growth. The only company in the group was nutravet still affected by their biggest customers' inventory shrinkage. But that is definitely panning out now and we have had a success start from our DTC web shop. And also, we are adding new geographies to the collaboration with this biggest customer that we have. So 2023 is an exciting year. We have also made a managerial change. Chris Jones, the former CEO, took over as new Managing Director as of January 1. And Matthew Shaw, the founder and previous Managing Director, will continue working as an adviser to nutravet. He is crucial -- has been crucial for the growth of nutravet and he will still be supporting us this year. Swedencare U.K. and Spain, just to mention a couple of our smaller group companies, but still had a fantastic quarter, a 30% sales growth, primarily ProDen PlaqueOff, France grew with 60%, including European orders to Zooplus who we have started collaborating more with and looking forward to that. Innovet Italy, our new addition from February last year or 1st of March really had ended really strong, have a strong pipeline of new products and lots of R&D. So exciting times for Innovet, been really strong sales in Italy. And we are also having interesting discussions of launching the Innovet line in new geographies. Starting off with our own group companies in Greece and also looking at Spain as an interesting market for Innovet. Custom Vet Products, as I said, will be crucial for group launch of soft chews starting off with both external customers that we have a relationship from the U.S., but also completely European entities. And also, of course, for our internal brands, both NutriScience and ProDen PlaqueOff from starts and also Pet MD Europe will be launching Custom Vet Products. Rest of the world, small percentage of the total. But finally, as I wrote about in Q3, export sales are picking up again after COVID. The quarterly growth year-on-year was down due to China orders, which are down 70% by full year, but I would like to say now that China is out of COVID restrictions and our distributor has indicated a strong ordering from us in 2023. So looking forward to that. South Korea, Australia, Poland, Switzerland, among the top markets for the group, not only ProDen PlaqueOff, South Korea is really an interesting market for several of our group companies. First Pet Expo in Asia since 2019 in Bangkok, which we participated in with our international sales group and lots of interest and good meetings there that has developed into some interesting discussions. So hopefully, we will have some new markets for some of our group companies. And the outlook, as I said, 2023 good, both new and growing current partners. So looking forward to '23 when it comes to export sales as well.

Okay. With Q4, we have actually also closed the year. So let me give you a recap of some of the key figures for the year. We reached for 2022 net revenue of SEK 1.8 billion compared to SEK 770 million last year, 2% organic growth. During the year, we acquired the 3 companies, NaturVet, Innovet and CVP. If we would have had those companies from January 1, we would have had a pro forma revenue of SEK 1.923 billion this year. Our gross margin has increased from last year of 55.9% to 57.6%. This is mainly due to that we have higher gross margin in the companies that we have acquired this year. Our operating EBITDA went from SEK 190 million to SEK 430 million and our margin went from 24.6% to 23.5%. A few things to mention when it comes to cash again. During the year, we have invested in companies of SEK 4.6 billion. SEK 3.5 billion of this we have financed with the new share issues and SEK 1.1 billion we have financed with loans. During the year, we have invested SEK 67.2 million in intangible and tangible assets. That is about 3.6% of our total revenue. And the investment has mainly been in the manufacturing facilities that we have in California, Florida and Canada. And we expect that investment will go down a little bit for the next year as a percentage of sales. This is our rolling 4 quarters since January 2020. As you can see, it has a nice trend, ending at the SEK 1.8 billion with SEK 431 million adjusted or operating EBITDA for rolling 12 months.

Looking forward to '23 and '24, focus areas for us. Of course, once again, growth, a key factor for us to get back to showing growth, strong profitability and using excess cash to lowering our debt level. That's the focus going forward. Deliver on a strong pipeline. As I said, we have -- all of our group companies has a strong pipeline of new customers and some of them are more transformational than others, but we will work hard with that. We have really focused on taking care of the interesting pipeline that we have. Continued move from external to internal manufacturing. That has been a key part for many of our acquisitions that we want to control and also get the full margin for the products that we sell. So we did a lot in 2022 when it came to that. But that will continue in '23. So expect us to have more internal -- higher percentage for internal manufacturing for products sold. Product launches and development, not only product launches as we say, what we focus when it comes to the group, taking different products from the different group companies, launching it under another brand, but also launching completely new products. There's a lot of activities in the different group companies and we have also started having group R&D discussions and identifying interesting projects. So that will be one key theme going forward is, of course, that we look how to -- we can optimize R&D going forward as a group. Solidifying relationship with major customers. We do both as a partner, as a supplier, have lots of good relationship with the major players in the sector. And that will continue. We are really looking where win-to-win projects where we can either buy exclusivity or buy agreeing on then development projects together, really getting closer to the key players in the market, which we would like to collaborate with. So lots of activities here. Looking forward to the -- as I said, cooperations, lots of new cooperations will happen over the years to come. M&A opportunities are always there. We're looking to add interesting niche companies to our group. The market is, of course, a lot different right now. And looking at our balance sheet right now we are not actively pursuing any major targets and we don't really think that we need to. We have a really good setting right now. But of course, when there is an opportunity and if it's really attractive, then we will act on that. Thank you. And now Q&A.

Our first question comes from Christian.

I was wondering about your financial objective to achieve revenues of SEK 4 billion in 2026 through primarily organic growth. And so starting from 2022, this objective implies a CAGR of 22% until 2026. Do you still believe this is achievable?

It has always, as you said, primarily through organic growth. So I would say it won't be solidly organic growth. But as we've shown in the past and also, as I said, in this quarter that had disappointing growth really, we had many of the group companies growing between 20% and 30%. So absolutely that we can grow a lot faster than the market and we will do that. So we won't change any long-term goals. That's definitely a key target that the whole organization is working for. But as I said, it won't be 100% organic. We will be active in the M&A sector as well. But we will have a lot stronger growth, of course, than we had this year going forward.

Our next question comes from Rickard Anderkrans.

All right. A couple, if I may. So how quickly do you expect to deleverage the balance sheet? And do you have any target leverage level, so to speak, that we could look at? That would be my first question.

I am planning to amortize every quarter. And we have a target to get below 3 EBITDA compared to net debt within the next year.

That's very clear. You mentioned price increases. Can you quantify price increases in 2022 and the raise you conducted here in January 2023 as well? And if you saw any boost in sales in Q4 ahead of that price increase as well?

In the average for 2022, I don't -- do you have that, Jenny?

No. We haven't split out the average.

No. But my guess would be in '22, if you take average as a group, we probably raised our prices around 5% to 6%. In 2023, the main entity raising prices in January, most of our group companies perhaps raised their prices with a couple of percentages. But the main group company when it comes to price increases was that I wrote in the report. It's actually for the dermatology liquid products from Vetio South. There we had price increases up nearly 10%. And since we had the issues at the Vetio South plant, we didn't have any major orders that went out to the old price in Q4. Those will go out now in Q1 and Q2.

Super helpful. And just a final one from me, if I may. So should we expect the gross margin to be around the 58% level in 2023? And if you also you could quantify what share of production is in-house in 2022? And if you can say anything about where we're heading in '23 as well?

When it comes to the gross margin, I would say yes, because the average gross margin for the last 9 -- or at least the last 6 months with the current setup is at 58%. So yes, I expect that to be similar going forward. And the second question, I already forgot it. That was...

The share of sales in-house.

[indiscernible] manufacturing.

I haven't done it exact, but I would say it's about probably 65%, 60%, 65% in-house.

Great. And for '23, do you have a target you're aiming for? Just it would be interesting too to hear.

Not an exact target, but I would expect us to -- if it's 65% now, it would go up to around 75%.

That concludes our Q&A session. So I hand the word back to you, Hakan and Jenny for any closing comments.

Thank you so much for listening.

We have one more question.

Oh, sorry.

From Johan.

I wonder if you could elaborate a little bit about the normalization of the retailers' inventory that you talked about in the report.

Yes. No, we've seen improvement for some of our group companies that orders are picking up. And as I've said during the year previously, the out-the-door sales from these retailers have been a lot higher than the ordering from us. So we do see that most of the big retailers, they ordered more in Q4, especially end of Q4. And so we think we are over that, let's say, hurdle with the inventory buildup. The only company really affected by that in -- now is nutravet and that's their biggest customer. And they are also getting closer to, let's say, normalizations of levels. And when it comes to the issue with Stratford, it's more of a big negotiation when it comes to pricing and collaborations, so -- and the customer being a bit cautious until everything is finalized.

Okay. Super clear. So for example, in terms of NaturVet, for example, in the U.S., you would say that the inventory situation has normalized going into 2023?

Yes, will be at least in Q1 because we saw, as I said, improvement first in December. So let's see now in Q1, but I expect that. Absolutely.

Okay. Perfect. And the final one for me. I wonder if you could quantify your sales split for the full year 2022 in terms of retail sales, online sales and veterinary sales?

I would say that normally previous years, it's been around 40% online and 30%-30%, the other 2. I would say that it's closer to 45% online. Our online has been the strongest growing. And I would say that the pet retail has been a bit weaker than the veterinary side due to inventory buildup.

Next question is from Adela.

Adela Dashian from Jefferies. My first question just relates to, if you could, please, on the nutravet and the inventory situation, should we expect already in Q1 that, that business will go back to organic growth? Or do you think that there will still be a lag even though the inventory trimming situation is improving gradually?

I would say that there will -- I would say that it has panned out. And due to that particular customer perhaps will be a bit slower than Q1 because Q1 was the strongest quarter from that customer in 2022. But other parts of nutravet is growing really fast. So I expect some organic growth from nutravet in Q1, but there it will definitely be stronger in Q2 and Q3 and going forward.

Got it. And then also on the cost-saving initiatives that you've mentioned in the report and also earlier here in the presentation, are these part of a new strategy? Or are they ongoing actions to drive margins higher? And if they are a new strategy, if you could just give some more color what type of cost-saving initiatives are we looking at here?

Well, I would say it's a new initiative. First of all, we have started cooperation with a company in the U.S. to drive -- basically to look at the spending throughout all our U.S. entities to see where we have the more significant savings. So it's a new initiative which I think will bear fruit at the second half of '23 and going forward.

And Jenny, that's at -- yes, sorry.

And the most important areas.

Well, the most important areas. I mean, like Hakan mentioned in the report, I mean, it's going to be freight ingredients. Insurance is going to be some of the first areas that we're going to look at.

And is that global or more North American?

No, it's U.S.-based because those companies have the most cooperations between the entities.

We have 2 questions in the chat as well. The first one, is how much did NaturVet grow in Q4 and full year 2022?

In Q4, 5%, full year...

Full and 6%.

Yes. Yes, 4.5%.

And the last question, how much of your growth in 2022 have been due to price increases?

We haven't done that split of the growth. It's very, very difficult to do because our products are -- have a specific cost and they have different sales points. So it's difficult to measure that.

Okay. Thank you. That concludes our Q&A session.

Thank you so much for your interest.

Bye-bye. Have a great day.