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

Hi, and welcome to the presentation of Swedencare's Half Year Report led by our CEO, Hakan Lagerberg; and CFO, Jenny Graflind. We will have a Q&A session after the presentation. So please raise your hand if you have any questions and we will answer them in the end. Jenny and Hakan, the stage is yours.

Hello, and good morning. Here is Hakan Lagerberg and Jenny Graflind, and we will present the Q2 2023 highlights. Sales record and 9% organic growth. Yes, we have as we predicted, had a strong Q2 when it comes to sales. Both the quarter and the month of June was actually our strongest quarter and month ever. We see continued strong growth in Pet Retail and Online and a bit softer Veterinary sales. As for the ones of you that follows the market, several veterinarian companies have released numbers and expectations that the 2023 year is a bit softer. But for us, we definitely see a change of interest and also which I will present a bit further down in the presentation. We have started to deliver on our major agreements with MWI and Patterson. So half year 2 will definitely be stronger for us when it comes to Veterinary channel. And we are also when it comes to the contract manufacturing side, we see increased orders for the second half year. So I do think that also the Veterinary sector as a whole will be stronger or second half year than the first. Our organic growth, 9%, almost 10%. So we're on track, not where we really want to be. And my expectations for second half year is definitely stronger. Both Q2 last year was a very strong quarter for us and also when it comes to the situation with the destocking that has definitely come to an end with this quarter. So I expect that all our major entities will have organic growth next quarter and going forward. This quarter, we still had a couple of entities with minus in growth. Lower margin and strong cash flow. Jenny will explain the reason for the lower margins. And the cash flow continues to be strong and we focus on that a lot of course since we are very dedicated to keep on paying down our debt that we have and also that we have -- we made last year, we made lots of, let's say, investments both in organization, processes and also some CapEx that affected our cash flow last year. The big event in Q2 was perhaps the Symrise public mandatory tender offer. That offer has ended today. And we will communicate when we get the information of how many shares was accepted through the offer. We will communicate that. But as I wrote in the report and also the Board has communicated previously is that myself and all other major shareholders that I know have not accepted the offer, and we'll continue to work very well together with Symrise to grow the company going forward. We made one small acquisition in the quarter, a concept with -- called Vet Buyers Direct. I wouldn't say -- not unique, but for us, a very interesting concept where we have agreements with individual clinics or animal hospitals or groups of -- with the subscription model. So the individual clinics pay a monthly subscription model. And in return, they will get special prices for lots of interesting products that we have, both under a completely unique brand called [indiscernible], but also some of our other group brands are offered in this concept. So it's very new way of thinking and also an attractive way for clinics to be able to get some sort of rebate on the byproducts that they sell in high volumes. So we have -- we started last year and we acquired the company this quarter. And now we have a bit over 600 clinics subscribing, and it grows a lot every month, I would say. Our sustainability work continues and the highlights for the quarter was definitely the -- for the first time, we made a group employee survey. And I'm very glad to be able to announce that we had excellent results with happy and motivated employees all over the world. And we will work with all of the results. Where there needs improvement, we will definitely do that. But overall, very good results for all of the group companies and as a group in total.

Okay. A few figures to explain the result of the quarter. We have grown from SEK 470 million to SEK 572 million in revenues, 21%. That is including 9% organic growth. It also includes 1% acquired growth, which was coming then from CVP and Vet Buyers Direct. It does not have a huge impact on revenue yet. And CVP, as I wrote in the report, will have a much more impact on the second half of the year. We also had 2% reclass effect and 9% currency impact on revenue. When it comes to EBITDA and profitability, in value, it's about the same as last year. But in margin, it's both lower than last year and a bit lower where compared to where we want to be. Q2 last year was the highest EBITDA that we had achieved in the past. And in margin, it was also the highest one that we have had since beginning of '21. So it's difficult comps, but I will also explain in the following slides why we were a bit lower margin than we want to be. So KPIs for the quarter. First of all, when it comes to revenue, again, we had a record quarter and we continued to grow quarter-on-quarter with revenue. Compared to last quarter, we still had a 9% increase with almost exactly the same structures as we had. Again, it was CVP and Vet Buyers which have not a big impact on revenue. When it comes to the gross margin, this is mainly affected by the challenges that we have to optimize the production as well as we have less and delayed development projects, which those projects of development have a higher margin than our average. In addition to that, we also have some costs associated with the launch of Scoopables, but it's -- the majority is coming from production and the delayed development projects. This of course has a direct impact on our EBITDA. In addition to that, our external cost is about the same percentage of sales that we have had in previous quarters and also last years. And one of the reasons why we don't see so much economy in scale on the external cost is that as we grow revenue with Amazon, we also acquire higher cost linked to that. When it comes to cash, despite the growth in revenue, and like Hakan said, a record June, we have an immaterial effect on our working capital, which is good. And during the quarter, we have paid both dividends of SEK 35 million. We have also done the acquisition of Vet Buyers Direct, that Hakan mentioned, and we have still been able to amortize SEK 50 million on our loans. And our net debt to EBITDA on a pro forma basis that we report to the bank is 3.4%, which is of course below our covenants. For the first half year, all markets have shown a strong growth in revenue, both organically and by acquisition. Again, as some of you probably know, we acquired NaturVet in February last year and also Innovet in March '22. Online continues to grow strong. One example is Amazon's 7 European markets, except for U.K., which we call EU 7, they have for the first 6 months exceeded the full year '22 sales. And also the U.K., which is the largest Amazon market, has the best 2 quarters in history this year. I can mention a couple of things on cash. For the first 6 months, we had a positive effect on our working capital of about SEK 15 million. And for the first 6 months, we have made investments of tangible and intangible assets of about SEK 20.9 million, which is about half of what we did for the same period last year and it corresponds to about 2% of our total revenue. Our rolling 4 quarters, as you can see, is growing well in terms of revenue. It's above SEK 2 billion right now. And it's a little bit a flat movement, I would say, when it comes to profitability. Product and brand split for the quarter. The biggest category is our nutraceutical. We have had growth of 32% in this category. This growth is coming from -- the main reason is that NaturVet had a record quarter and they are selling products in this category. And then of course we have also acquired CVP and also Vetio South has started with their soft chew production since Q2 last year. Another positive thing is the ProDen PlaqueOff. ProDen PlaqueOff had a 45% growth compared to last year. It grows in all sub-categories. And it's primarily the powder and that is growing very fast, which is well suited for the online trade. And also the soft chews, which is the latest addition to the product category has sales in the quarter, which is more than 50% higher than we had on the last year full year.

Okay. Looking at the different regions. 80% of our total revenue comes from North America, of course, the most important market for us. And glad to say that we showed a 25% growth quarter-on-quarter. As I mentioned in the beginning, Pet Retail and Online definitely the strongest, Veterinary side a bit softer. But worth to mention is that both the Patterson collaboration that started a bit prior to MWI, both of these projects had their strongest month for the year in June and the launches has started now. So it's really taking off now, and I expect an even stronger second half year. In Vetio South, we still -- we are fairly flat when it comes to sales and manufacturing, but not at the expected level in profitability. So we are working -- have been working very hard with that. The team in Vetio South has made lots of efforts for this. And we see some improvements, but definitely, we expect a higher profitability in the second half year. We also have a -- when it comes to manufacturing, economies of scale is of course important and we have a strong pipeline, both external and internal projects that will come to fruition in the second half year. So we do expect that Vetio South will start to deliver as we expected. Vetio North had growth in their sales. But as Jenny said, that was a bit challenging mix when it comes to the different projects. Not as much development as we had planned, more manufacturing and start-up in manufacturing also comes with a bit lower profitability. So Vetio North comes with the same expectations for second half year to have a stronger profitability. Worth mentioning is we have signed several new agreements. When it comes to Vetio North, we have an attractive set-up in Montreal, Canada with very skilled teams up there. And interesting to see, as I mentioned in the report, is that we now have customers from all of the 5 continents in Australia, South America, North America and Europe and the newest addition to that geographically wise is Asia, so our first Asian customer. And that just shows the attractiveness of the animal health in the pharma sector. So very glad to be able to present a new customer. And mentioning, let's say, unique concept that we have in Vetio North that we have as of now basically just used for our internal -- or customers that we develop products for, FlavorPal. It's a flavoring product line, a unique one that we have trademarked and patented. Not patented, sorry, but we have now started to have interest from different pharma companies to be able just to buy the actual ingredient, the flavoring ingredient, and have stability test out with many customers. So that would be interesting to see when we start to deliver that. Pet MD, our online specialist in the U.S., grew yet again over 30% of the quarter. And it's both counting in the Pet MD brand that grew very well and also Rx and ProDen PlaqueOff's Amazon sales. And ProDen PlaqueOff continues its success, 76% growth in North America. As Jenny said, it's the powder product. Still our first product ever in this product line that just continues to grow very strongly. And adding to that, the soft chews starting to come out in all of the, let's say, Pet Retail space. But still, we have ProDen PlaqueOff launches still this second half year with a couple of big retailers. So we expect a strong second half year as well. And NaturVet, as Jenny said, had a really strong best quarter ever with the Scoopables launch. And NaturVet, as you may remember, was hit last year by the big retailers destocking from the inventories. And we definitely have seen lots of improvements there. Of the big 3, I would say, 2 of them is definitely growing a lot and the third one is expected to grow in second half year. So there's more to come there. And the Scoopables launch has been over expectations. So we're very happy for that. Continuing with -- since it's our biggest geography, we of course focus a lot on intra-group synergies and sales projects. Lots of stuff happening all the time, everything from cost synergies, but predominantly, sales synergies. So one example I have to mention is that the VetClassics brand that comes from government/NaturVet has been taken over when it comes to distribution to the Veterinary channel for Stratford organization. So very excited to see that. We continue to move from external manufacturing to internal. We have a special fulfillment center. And we are collecting all of the different fulfillment customers that our group companies have to be transferred to FAV, our fulfillment specialist. And then also we have just launched a NaturVet liquid line from being supplied from Vetio under the NaturVet brand, and we're going to be excited to see how that delivers. Turning over to next region, Europe, 16% growth, 18% of our total revenue. And we see some of the Southern European markets that were started off a bit -- were slow last year and started off slow this year has come back. For example, I can mention Spain and Greece as good examples with strong growth. Online sales has been really good, as Jenny said. The EU7 has sold even more than full year last year. Amazon U.K., I think was up plus 40%. So it's very strong in the Online side. NutraVet, one of our group companies that has a very unique offering and a position on the -- specifically on the U.K. Veterinary side has been for the last year and the start of this year was affected by their biggest customer trimming down the inventories. And I'm glad to report, as I said in the Q1 report is that Q2 is definitely the last quarter where that will have any effect on the sales. So for the other channels where they're selling products, they have been growing really nicely. And nutravet will be an important part for our organic growth the second half of the year. CVP has been renamed to Vet UK and lots of collaboration between Vetio UK and Vetio South in the U.S. and also Vetio UK has now transferred the equipment to Swedencare Ireland. So in Q3, we will start manufacturing soft chews in Ireland. And as some of you remember, the soft chews under the ProDen PlaqueOff brand has not been launched in Europe yet. That will be manufactured both in the U.K. and Ireland. And the launch is, yes, Q4, Q1 next year, perhaps. And also, we have a new addition to the team, Laszlo Varga, new European Chief Commercial Officer. He will start mid-August, and we're very happy for that. And he has a vast experience from, let's say, international European business and he will be a great addition to the team. Looking at the rest of the world, a decrease by 19%, but not that uncoming when it comes to rest of the world sales because many of our customers, they order perhaps 2 times a year. And -- but one effect that we have seen is that for some of our U.S. brands, there has been a bit slower sales due to the strong dollar. So price points wise, it has been a bit difficult for some of the Asian markets. But also there we see increase going forward. So I expect that to bounce back. ProDen PlaqueOff had a very good quarter with both Asian markets and South America, East further in Australia and it had very tough comps when it comes to ProDen PlaqueOff last year. That was the best quarter last year when it comes to export markets, but we actually managed to beat that just so that we're very happy with that. ProDen PlaqueOff has an ingredient in pet food continues to grow, our best year ever as of now. We have exceeded full year sales last year already. And we have signed 2 new partners that we launch products probably next year, could be end of this year, but we still continue to grow those collaborations. Focus going forward, the same as we presented after last quarter. It's really growth and profitability and lowering our debt level. That's really the key focus. We knew that going into this first half year that we would be a bit lower in profitability since we had lots of things happening. So I absolutely expect us to bounce back profitability-wise and continue our growth. And so that will definitely continue over 2023 and '24. We have presented a couple of strong customer collaborations, but we still have a strong pipeline, lots of interest for what we can offer as a group. So stay tuned for that. We will continue to take the advantage of getting help from other great organizations in the world to grow ourselves. The continued move from external to internal, yes, that's absolutely continued project. And I'm happy to say that looking at, for example, Swedencare Ireland and also our small manufacturing site down in Texas that makes the powder product for ProDen PlaqueOff, they both have had a fantastic quarter with -- where you can see when we push the internal projects due to our own manufacturing sites, we have been able to show really strong profitability. Solidifying relationships with major customers, we just keep on being very active and trying to find new ways of collaborating with long-term customers and that will continue to be our focus. Looking at M&A, we made a small acquisition this quarter. And looking at the market as a whole, it's been a bit -- it's lower than compared to the last years. But I would say that starting to pick-up. You are probably aware about a couple of big acquisitions in the market. But we will focus on adding probably a bit smaller additions, bringing something unique to the group. And we have dialogues, but as we've said, this year will be a bit slower when it comes to acquisition definitely value-wise.

There was our presentation. So back to you, Eliona.

Yes. And by that, we are open for questions. We received the first question in the chat. So I will read it for you. Dear team, well done for the great results. I am very curious on your comments on the end of destocking in pets. How long has that been going on? And what gives you confidence we are at the bottom, especially in the context of huge demand for pets in 2020 and 2021 and fears that destocking might take a bit longer as we see normalization impact ownership over the next couple of years?

Yes, coming back to the demand from the market is that where we are active, 90% of the products that we sell are basically focused on nutraceuticals that you start using, let's say, middle age for the pets. So we haven't really gotten the -- the COVID boom has not really hit the nutraceutical market. So that's why we're fairly confident that we will -- our niche in the market will grow strongly in the coming years. And looking at the -- why we're confident, it's really that we've seen improvements in ordering going forward. And from the customers that we get reports when it comes to the stock levels, we definitely see that they are down to where they want to be and need to fill up regularly going forward. So we're fairly confident on that.

Yes. And I can just add, on Nutravet, for example, which was the major company that was affected by the stockings in this quarter. We saw orders start picking up now in May and June. So that also give us a good comfort lever on that.

Our next question is from Rickard Anderkrans, Handelsbanken.

Hello, can you hear me?

Yes, we hear you.

Perfect. I have a few. So first one, starting with the gross margin, you previously mentioned that you expect to return to around the 58% level during this year. Is that what you expect for H2 or how should we think about sort of the gross margin improvement trajectory just in the next few quarters and going forward?

We didn't expect -- we were expecting that the production optimization would have had a positive effect in this quarter, which it did not. Now I hope all those issues are behind us and I hope that we will see a good improvement next quarter. It's difficult to say. I hope absolutely we will be at 6% to 8% during the year, at least at the second half of the year. For the full year, due to the fact that this was a little bit lower, I'm not 100% sure yet, but we should absolutely improve our gross margin in the second half.

All right. That's very clear. Can you expand a little bit more on the challenges for Vetio in the quarter? How quickly do you expect the margins to rebound? And can you talk a little bit about the visibility that you have there and any data points that makes you very comfortable in that sort of recovery and rebound?

Yes, I would say, a bit different in the different Vetio sites. Looking at Vetio North, it's really the mix of manufacturing and development projects that has a huge impact. And when it comes to development projects, it's not in our hands always to -- when we can expect the work. It's lots of external factors when it comes to that. So this quarter, we had a lower development projects and that has a big impact on Vetio North and also linked with upstart with some manufacturing in Vetio North that wasn't -- even manufacturing is lower when it comes to gross margin, but it was lower than expected. And they have addressed those issues. And we feel confident that it will definitely be a lot stronger second half year. Looking at Vetio South, it improved end of the quarter. And together with the organizational changes we have made, focusing on, let's say, operators in the manufacturing together with, as I said, the scalability, we have lots in the pipeline. So the gross margin helps and overall also when we have more work and constant work in the same types of products. So I would say that we are confident that second half year will be stronger on those sites.

All right. And you talked a little bit about the margin pressure coming from the Online channel as well. Can you remind us of the share of Online channel in the quarter roughly as a percentage of sales? And do you expect the sort of additional increase in sales fees to continue from these channels or it is a flattening out or any commentary around the sales fee increase and the outlook would be helpful?

Yes. When it comes to the sales fee, it's a connection -- it's linked, sales fees and also some, let's say, marketing investments that we make in that channel. So I would say that the sales fees are -- we are addressing that a lot, being absolutely more focused and have a dialogue with Amazon about that because they have increased percentage-wise a lot more than we expected. And for some of this, we can address and improve and have already seen improvements. For some of the charges we can choose a different way of handling it. So we are in strict, let's say, dialogue with Amazon and also choose different strategies going forward. So it will improve, but it's been tough, because at the same time, we are very focused in growing the sales online. We have a huge success there. So it's -- but now I would say that we focus a lot more on coming down to the right level when it comes to the sales fees. So some we can't do anything about, but certain of the number of the fees we can do something about. And we also have a dialogue, as I said. They have been appreciative also on our position in the markets and perhaps change some of the fees that's been, say, favorable to us. And then...

When it comes to the percentage there, we usually say that it's about 40%. I would say, it's slightly higher this quarter. It's difficult, like we have mentioned in the past, to say the exact number due to the fact that some of our distributors are also selling online and we don't know the exact share, but say around 40%.

All right. And just a final quick one, if I could. So on the Vet Buyers Direct deal, can you kind of talk about the -- what's the annual sales of that business? What type of EBITDA margin does that business generate? And what do you expect for the mid-term organic growth profile for that company? It would be interesting with some more...