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

Welcome to the presentation of Swedencare's half year report, led by our CEO, Hakan Lagerberg, and CFO, Jenny Graflind. And we are pleased to have NaturVet's CEO, Geoff Granger, joining us with the presentation during today's webinar. And as usual, we will have a Q&A after the presentation. So please raise your hand if you have any questions. Over to you, Jenny and Hakan.

Thank you, Emma. Good morning, and welcome to the Q2 presentation of Swedencare. Jenny and I are in Malmö, Sweden, a bit cloudy today, and Geoff is out in California joining us later. Q2, we had a solid quarter that showed resilient growth and strong cash generation despite a volatile market. Europe and Production segments delivered standout organic growth, while North America was disappointing, but is expected to, as previously communicated, strengthen in H2 and as delayed launches, online and big box initiatives scale up. Organic growth was 7% under our goal and as we communicated, what we expected, but still better than market. Operational EBITDA, same as ordinary EBITDA, was SEK 129.4 million with a 19.3% margin and operating cash flow improved to SEK 78 million. Looking at our 3 segments, the growth profile is clearly mixed. Europe and production were really strong with organic growth of 19% and 25%, respectively, while North America was down 3% organically due mainly to delayed FDMC or big box launch deliveries and temporary effects in the U.S. veterinary channel. However, the North American segment would have been around middle single digit without this, and that is still not where we should be. So improvements to come. Export markets delivered their strongest quarter to date with China rebounding sharply. End of quarter, I visited China, and we are planning to widen the production offering of ProDen PlaqueOff and are also looking at the opportunities to launch more brands there. The interest is high, but the regulatory framework for imports is complicated, and we are now in discussions with potential manufacturing partners to facilitate new brand launches. ProDen PlaqueOff had another exceptional quarter and delivered more than 30% growth. Pharma delivers as expected, high growth numbers, both in manufacturing and in development, and the activity level is high for the years to come. Strategically, the quarter also moved the business forward with new offerings, product offerings under many of our brands and cooperations and product launches. Interzoo was also an important event, of course, it's every second year, the biggest trade show in the world. So new market is opening up for ProDen PlaqueOff. Of course, new smaller markets since we're already present in plus 60 countries, but really nice to see new opportunities there. And for other group brands, some big opportunities are in discussions with the relevant distributors. We also had the first Capital Markets Day and strengthened the visibility around the group's priorities in the coming years, and we are grateful that the event was fully attended and lots of interesting discussions with participants. We had a new Board elected at the AGM, including Thomas Eklund as new Chairman, providing continuity with refreshed governance. The message is that the group is still growing organically above market, 9% first half year. Cash generation is improving, and we have been working hard to prepare for a better and stronger second half year. Over to you, Jenny.

Yes, some financial highlights. So revenue amounted to SEK 670 million for the quarter. This represents 4% growth. 7% was organic growth, and we had a negative 3% of currency impact. It's the first quarter since 2019, where we don't have any acquired growth because the most recent acquisition, Summit Vet has been part of the group now since Q2 last year, so it's included in the organic growth. The currency impact is coming from the dollar, euro and pound, which has all weakened against the crown compared to the second quarter of this year. As Hakan said, we did expect another quarter with double-digit growth, and this is also what we communicated on our pre-close call on the June 17. And that was based on the information we had at that point. However, some unexpected things happened in the last month and mainly in the second half of that month, including a delayed order from the new big box customers. And that resulted in that we came in at 7%, and that's the same level as we were in Q2 last year. As Hakan mentioned, the year-to-date organic growth is 9%. Our reported gross margin is 61%. There is no adjustments this quarter between operating and reported gross margin or EBITDA. This is the strongest gross margin we have had since 2020. It came in stronger than expected, driven by continued stronger growth in Europe, where margins are higher compared to the other segments as well as some inventory buildup. And of course, Summit Vet also contributed with a record quarter and also strong margins. The external costs have increased compared to last quarter. We continue to have strong growth on Amazon, both in the U.S. and in Europe, and that contributed to higher sales-related costs. In addition to that, it's been an enhanced marketing initiatives this quarter, mainly online with Prime Day, for example, which occurred in June this year. Last year, it was in July. But also we have had product launches and intensified efforts to grow the NaturVet Amazon account and also win back some bestseller badges on Amazon. Personnel cost is stable. However, it did include SEK 3 million of severance costs for the quarter, mainly for the final step of the reorganization that we had at NaturVet. Operational EBITDA, same as the reported EBITDA as there's no adjustments, amounted to SEK 129 million for the quarter. This is an increase of 5% compared to last year and a margin of 19.3%. Again, this is below the expectations, and that's mainly impacted by the lower sales. However, it's a small increase compared to last year when the margin was 19.0%. And net debt to EBITDA has increased to 3.1. This increase is due to the expected earn-out payment that we are planning for Summit Vet, which is included in the calculation from this quarter because this payment is now due within the next 12 months. It also is impacted by the dividend payout that we did this quarter of SEK 44 million. Our cash conversion increased to 60% for the quarter. It's mainly higher inventory value at the close, which impacted the operating cash flow for the quarter. During the quarter, we have also started the Vetio South expansion. Hence, CapEx was 4% of sales for the quarter and year-to-date, it still remains at 3%. Regarding our loans, we repaid SEK 5 million on our external loans this quarter. And in total, we have paid -- repaid SEK 55 million year-to-date. Rolling 4 quarters. On the left, you can see the rolling 12 months trend for which you can see revenues up slightly, but impacted by the negative currency impact and also an improvement of the reporting EBITDA. On the right-hand side, you can see the trend of the Q2. So you can see that there's no change between the reported and operating EBITDA this quarter.

Turning to North America. This remains the group's largest segment, representing 55% of total net revenue and had a minus 3% organic growth. The key point is that the decline is not a broad loss of competitiveness. We knew that North America would be our weakest segment this quarter. In May, we noted basically for the first time in many months, a softer consumer demand. It was both in pet retail and online affecting all brands. However, June bounced back nicely. And even though the turmoil in the Middle East is back and gas prices rising, we have not seen any new weakness in early July. So hopefully, May was a bump in the road and not coming back. The major factor why we came in, minus territory was, as we said, the private label launch delivery to a new big box customer was delayed because of substantially -- substantial quality controls implemented by the customer, but performed by a third party just before ship out. Production was approved and by the end of the quarter, but the shipment couldn't move out in current quarter. Second, the merger of the 2 largest U.S. veterinary distributors led to lower inventory levels during the discovery process. We knew about that, but we still had and expected some bigger POs than was delivered in the quarter. Hopefully, that process will end soon. As said, we are expecting a stronger second half year and when it comes to both sales growth and profitability for North America. There are important positives also. ProDen PlaqueOff remained very strong even with a weaker May also for ProDen. New private label veterinary delivery started to leading partners, albeit with smaller shipments than expected. These are expected to continue to grow month by month going forward. The NaturVet sales reorganization was completed and Amazon sales badges have been restored for a couple of NaturVet products and also Pet MD took back some lost badges. This has been a very hard work for our online team in the U.S. And from now on, we should be able to focus on more cost-efficient and growth-oriented marketing programs online, primarily on Amazon, where we have worked hard to claw back market share. So the interpretation is that Q2 was a weak North American quarter, but the underlying channel work is in place for a stronger second half, especially online. All the new big box partners, they continue -- the ones we started last year, continue to grow, and we take market share from others and veterinary partnerships, together with a bounce back in the traditional pet retail with a partly new sales team at NaturVet. Europe was one of the clear strengths in the quarter, as said, 90% (sic) [ 19% ] organic growth, and the region now represents 25% of group net external revenue and, of course, handles more than 90% of the group's internal manufacturing. The growth was broad-based. The majority of companies in the European segment delivered double-digit growth. Dental was the fastest-growing product group, fueled by Amazon mainly, while export sales to distributor market also contributed strongly. China was an important highlight, as said, sales during the quarter exceeded last year's full year level. Operationally, this was also a high activity quarter. NaturVet by Swedencare was launched in Europe with online just started and deliveries to pet retailers will start in Q3. Worth noting is that we are very happy to announce that the leading pet retailer in the U.K. will be launching the full line in Q3. The Amazon transition was completed across all European markets, and that has also had an effect on our profitability with the buildup of this operation. And going forward, we expect it to contribute at the same level as the group. Veterinary brands continue expanding our present and into new markets. Looking at the different regions, U.K., Italy and Nordics and export markets were the champions this quarter. The main takeaway for Europe is momentum. Europe is combining strong demand, channel execution, digital expansion and pharma growth with Summit Vet. And with Summit Vet, we are also expecting second half year to be able to launch soft chews with pharma products. And that will be completely unique to the market. So we're expecting a nice demand for that. And also, Europe will continue to lead the group's organic growth profile going forward. The Production segment delivered the highest organic growth in Q2, 25%, and the segment accounted for 20% of group net revenue. Growth was mainly driven by contract manufacturing in Europe and strong pharma manufacturing and development in Vetio North. This performance is particularly impressive because demand in dermatology remains softer than expected. In other words, the segment is growing strongly despite some weakness in one major area. As said, the demand picture is strongest in the EU and North America pharma, supported by both existing customers and new customer inquiries. That is why we are investing in additional capacity and organization. The pipeline also supports the outlook with coming quarters and years, new go-lives are expected to contribute to the ramp-up. Lastly, the AniVatio-Vetio U.K. partnership is another example of how the production platform is becoming more strategically relevant. The takeaway is that production is moving from a mere support function to a growth engine and could also lead to new branded partnership, providing a strong foundation for the coming years. Over to you, Geoff.

There we go. Sorry about that. All right. You can hear me -- go to the next slide. Perfect. All right. So evolving in a hypercompetitive space. Good morning. I'm Geoff Granger, CEO of NaturVet. I've segmented today's overview into 3 sections. First, I'll share an overview of our key accomplishments over the past year. Second, I'll provide an overview of our key learnings from the latest U.S. pet supplements market and category insights. And lastly, I'll walk you through how we are actively integrating these key learnings into our go-forward strategic approach. Go to the next slide. That all starts with culture. So starting with our key accomplishments over the last 12 months. Of course, it all starts with culture. Our core strategic framework is comprised of 4 pillars: culture, revenue growth, EBITDA growth and cash flow discipline. But it's no accident that we lead with culture as we know that unless we have a talented and engaged team, we'll never achieve our financial aspirations. So Swedencare conducted a global employee survey the month before I started back in middle of '23. And the results for those survey happened to come through the week -- my first week, and I was able to review it. And the results at that point were not quite what we want them to be. They were at a 33 employee Net Promoter Score compared to total Swedencare at about 41 -- we quickly identified the biggest opportunities that came out of the survey, and we implemented new standards and processes aimed at addressing these opportunities over the following year. And in early 2025, a new survey was conducted and our employee Net Promoter Score improved by 20 points to a 53 from a 33 to 53 with anything 50 or above, especially in a manufacturing environment considered to be excellent. And our current employee Net Promoter Score ambition is now 70, which is considered to be world-class. So that's our aim. Additionally, over the last year, we've significantly improved our executive leadership. About a year ago, we hired a new Chief Operations Officer with 25-plus years of experience across the manufacturing, aerospace and industrial sectors. Erik Thomas is our first operations lead, who is Lean Six Sigma certified. -- key efficiency certification, bringing with him years of proven expertise driving efficiency through systematic process improvements and waste reduction. And in March of this year, just a few months back, we recruited Kristy Murphy, our new Chief Revenue Officer, with 30-plus years of pet industry expertise across sales and marketing. So she leads all things sales and marketing for us. Kristy extensive leadership experience across large and midsized and start-up organizations, specifically in the pet space. And she's -- what's really exciting is she's built enduring pet retailer partnerships, relationships over the last 30-plus years, which we will, of course, leverage. Go to the next slide. Next, we needed to make some significant pivots to position the NaturVet brand for meaningful and sustained future growth. About a year ago, we launched a completely refreshed NaturVet brand, all new packaging informed by exhaustive consumer insights and key retailer input. And we did this in around 6 months, something that's really traditionally a 12- to 18-month undertaking. And the rebrand really was table stakes for not only maintaining our brand in legacy accounts, but it was a must for expanding into new channels of retailers. And on that note, we significantly expanded the NaturVet distribution in the back half of last year. We launched Natur-Vet Supplements in the #1 U.S. pet retailer, PetSmart, approximately 1,500 locations. We had some other categories in NaturVet -- excuse me, PetSmart but we never had core supplements, and we do now and continue to expand. We expanded -- we expanded into the #1 U.S. pharmacy chain, CVS, in approximately 1,100 stores. And we introduced our brand in the #1 overall U.S. retailer, Walmart, in approximately 1,700-plus locations. And starting around that same time in Q3 of last year, we launched really our first ever 360-degree NaturVet marketing campaign, supported by celebrity influencer and veterinarian endorsements and activating across social, digital and influencer media. Up to that point, we really did not have a marketing organization. We are not actively marketing. So you really could say within the past year is the first time we've truly marketed the brand. If you go to the next slide. And lastly, within key accomplishments, so through the implementation of our first fully integrated ERP system in Q4 of last year and our recent completion of SQF facility certification, we're ensuring that our operation is efficient, competitive and prepared to support increased scale. The implementation of Acumatica, our ERP system last October, it's going to increase our efficiency. It's going to reduce costs, and it's going to enable us to make real-time data-driven decisions and have visibility we had not had up to that point. And our recent SQF certification, Safe Quality Food is allowing facility certifications, allowing us to expand into a major club retailer, which Hakan had alluded to a number of times, which is happening this month with a private label program. And that sets us up for further expanded market access across both private label and of course, NaturVet brand as well. So go to the next slide. So we did a lot over the last 12 months. However, while we've been making significant strides to drive meaningful and sustained growth in the NaturVet brand, the U.S. Pet Supplements category has become increasingly competitive and fragmented. And as we look to evolve our approach, we're pivoting our strategic direction to address the biggest opportunities that we've identified through the latest insights. Total category came in shy of $3 billion last year and is forecasted to grow around 6% to 8% over the next couple of years. This is a category that was up double digits in '24 and '25. It's still up, but it's tightening, and there's a lot of competition. And I know we alluded earlier just a hypercompetitive category environment. So a lot of work to do. E-commerce remains the dominant channel with over 80% of total market volume with Amazon alone, about 70% of that total channel. The food, drug, mass, club channel is driving the highest year-over-year growth rate, approaching over -- approaching 20% growth with Walmart growing even faster and approaching around 50% of the total channel share. The Pet Specialty channel, over time, is the most mature channel. And over time, it's generally flat to down versus prior year with a lot of brand expansion and a finite amount of shelf space within the brick-and-mortar space. The brands that are growing are focusing marketing spend on fewer SKUs. -- higher conversion content and leveraging Amazon as a primary marketing channel, which is kind of a consistent theme. I'll touch on it in a few times. The consumer is looking for new products that mirror human trends, the cat consumer specifically -- and cat is disproportionately growing versus dog -- much smaller volume, but the growth rate is higher. Cat consumer is looking for an expanded assortment of cat-specific solutions. And it's imperative that legacy products are being regularly updated to address consumer demand for key factors like trending ingredients, higher active levels, natural preservatives and high palatability. So while the innovation is often the fun and exciting part of it, the core assortment is where the meat of the volume is, right? So we got to continue to make that part of the assortment relevant. So lots of learnings. So what do we do about it? So if we go to the next slide, let's start with the e-commerce channel. We're going to specifically focus on what we're doing around Amazon. Amazon is the biggest portion of our business. So it's essential that we're maximizing the platform as we continue our push for meaningful and sustained growth. We transitioned the management of our Amazon business to PetMD about a year ago, a U.S.-based Swedencare subsidiary with a lot of proven success scaling brands on Amazon. They're great partners. However, as a result of our distribution expansion, bringing in folks that weren't quite abiding by our map, we got them under control now, but distribution expansion, and map pricing change at the beginning of this year and rogue seller proliferation, we did experience a significant decline in MAP compliance across the market, which did directly impact Amazon performance. Additionally, the rebranding and the repackaging push resulted in temporary inconsistent site experience. Resulting in a combination of old and new packaging. So some growing pains coming from the big changes that we made. But over the last quarter, we've put a number of processes in place to get our Amazon business back on track through renewed discipline around MAP enforcement enenrolling key SKUs in the Amazon Transparency program to effectively address rogue sellers and a storefront refresh with a focus on ensuring that we're leading with our new packaging and messaging. These actions have resulted in a significant reduction in MAP violations, allowing us to consistently secure the buy box and bestseller badges. We were talking about that earlier on our key products. And as we've seen over the last 60 days or so, we're now seeing steady consumption growth on Amazon. Our priorities moving forward to further fortify MAP enforcement, continued expansion of transparency across the portfolio, but we have transparency on around 80% of the volume already, which is great. And then creating a best-in-class site experience to leverage Amazon as that primary marketing channel and ultimately driving performance improvement, not only in Amazon, but across all channels. So as I always say, as goes Amazon kind of goes your total business. So that's really where we're focusing on e-commerce. If you go to the next slide. Walmart is our primary focus as we push to gain a foothold in the food, drug, mass club channel. As noted earlier, we launched an approximately 1,700 Walmart locations in the second half of last year and even secured a temporary 2,000 location end cap for Q1 of this year. So they believe in us, and they're giving us access. However, despite the significant distribution expansion, the weekly consumption for Walmart continues to lag our original targets, right? We're seeing growth, obviously, but it's not quite where we need it to be. And it's imperative that we get on a steady path of regular week-over-week improvements and making meaningful inroads in a growing Food, Drug, Mass & Club channel. So we're currently hyper-focused on Walmart marketing activation to drive short- to midterm performance improvement. We recently turned on full funnel top to bottom marketing for Walmart with the objective to increase not only awareness, but to drive consideration and ultimately usage purchase, right? To date, the tactics we've deployed kind of overall focused on driving general awareness, not always include the necessary calls to action and haven't always been focused on a handful of hero items, keeping the message simple. And that's all required to improve consideration and ultimately that usage. And we're doing that now specifically with Walmart We've been doing in the last couple of months. So for the first half to date, we've delivered 80 million-plus targeted impressions around Walmart activation with the most success coming from targeted digital display, Walmart Connect and then over-the-top streaming content. And now we're also able to benchmark our performance across the different marketing funnel segments. And since initiating the latest round of Walmart-focused activations, we've gone from lagging our competition across the key benchmark across the different parts of the funnel, awareness, consideration and usage. And now we're exceeding competitor average awareness and consideration by 100 basis points and usage by 200 basis points. So where we've chosen to focus and alter our strategy, we're seeing a win. And you'll see in a moment, I'll kind of talk about how we're going to then kind of blow that out in a larger way. Now a tangible sales impact that can take 6 months, give or take, to materialize in a meaningful way, but we've already seen significant run rate improvement in those -- in 3 of the 4 featured hero items because, again, a big part of this is also what we're doing is focusing on that handful of items and not just focusing on general categories. So we're seeing movement. The data is telling us we're doing the right things. Ultimately, the volume needs to come. Go to the next slide. So now that we're starting to see success with how we're activating at Walmart, we're looking to scale the approach to other key accounts with a focus on, again, driving brand clarity with a single unified message, focused on a handful of hero items, reducing the friction from awareness to usage through that full funnel top to bottom approach. continuing to transform our Amazon footprint into a best-in-class experience, leveraging the platform as that primary marketing channel and again, driving brand growth beyond just Amazon by doing that because a lot of people start on Amazon, right? Holding ourselves accountable to measurable KPIs that have met will deliver our growth aspiration. I'll be honest with you, when we launched marketing in the last year, we had KPIs, we're hitting those KPIs, but it wasn't translating into the levels of revenue growth that we were -- that we needed. And so anything we do going forward, if we achieve a KPI that directly connects to -- is going to directly connect to us achieving our growth aspiration. And then lastly, filling the void as a partner of influence for the categories -- the category continues to be confusing and difficult to navigate. And we still have an opportunity to partner with key retailers to improve the consumer experience while also preserving and growing our brand. So it's really this idea of thought leadership, which we've been doing for the last couple of years, and I think we've been winning there, and we have an opportunity to continue that. If you go to the next slide. Here we go. Okay. Talk about pet specialty. So as noted earlier, pet specialty has been, again, the most mature channel, and it's really the weakest performing channel over time in the pet supplements category. However, the category remains disproportionately meaningful to us, to NaturVet. Because it drives just shy of 40% of our volume. Again, that's where we grew. That's where we started, versus only around 13% of the total market. So we're underpenetrating the other channels, right? So while we push to capture share across e-commerce and Food, Drug, Mass & Club, it's also imperative that we're protecting our position in pet specialties as well and being extremely surgical around where we choose to invest in the channel. So our focus here is to reestablish ourselves as a category authority through revitalized assortments, category thought leadership and private label partnerships. And I include private label here, even though this is a NaturVet conversation, I include private label in the conversation here as we see it as a natural path to strengthening our current partnerships and opening the door for the NaturVet brand with new partners. And ultimately, we need to determine which pet specialty retailers we can scale and disproportionately invest in and where we need to reduce investments because of retailers making decisions that are driving down their share and their overall importance to the channel. Next slide. All right, products. So when it comes to our product portfolio, everything we're doing is directly informed by consumer insights. The two new platforms that we're launching this year, dual action and targeted care supplementation are directly inspired by key human space trends with dual action featuring combined solutions that address relevant need states like immunity, longevity, inflammation, gut health and allergy. And targeted care is positioned as a more humanized approach to addressing core need states, featuring relevant solutions focused on muscle health. So it's not hip and joint, it's muscle health, right? Beauty care -- it's not skin and coat, it's beauty care -- and then expanding where we're playing in dental health. And our new expanded cat-specific solutions offering was developed in response to the disproportionate growth we're seeing in the cat segment. and direct insights that tell us that cat supplement continue to tell us. This is not a revelation, but cat supplement consumers are looking for solutions that are uniquely formulated for cats. And these are actually solutions that were dog and cat combined solutions we've had in the assortment for a while. We basically took those formulas and created cat-specific formulas and reformulated them and made them more appropriate for felines. And beyond new products, our core assortment revitalization initiative ensures we're staying ahead of our competition through ongoing formulation and palatability enhancements. As I said earlier, the innovation part is the fun part, the exciting part, but you've got to make sure you're appropriately evolving your core assortment along the way to remain relevant and to remain competitive as that is where the meat of the volume is. And unlike years past, where we are managing our assortment updates 1 year at a time, we're currently in the process of fortifying our long-term product strategy leveraging new third-party insights resources and mapping out our vision for the next 5 years and beyond. And lastly -- last slide, lastly, but certainly not least, we're continuing to transform our operations to support our growth journey. Starting this year, we're piloting automation on our production lines, and that's going to improve efficiency, increase capacity and ultimately reduce costs. And based on the success of this year's pilot program, we'll be looking to expand automation deployment in '27 and beyond. And as noted at the top of the presentation, our new Chief Operations Officer is certified in lean manufacturing processes and has to date completed lean training for his entire manufacturing team. This has driven transformations in our production planning and manufacturing processes, reducing excess inventory and improving cash flow. Additionally, and last, we've rolled out -- we've rolled our purchasing group into our operations team. They were -- so the folks purchasing the raw materials and packaging on, they really weren't directly tied to our operations team, which is odd. So we rolled them into our ops team. We did that last year, and we transitioned them to a centralized supply chain function with a focus on strategic raw material sourcing and long-term supplier agreements. It's going to drive cost savings. already is driving cost savings, improved payment terms, optimizing working capital and probably just as important or maybe most important, driving supply predictability, which is key. And we're doing all this within a stringent supplier governance framework so that we can ensure we're building partnerships with best-in-class resources and exiting transactional relationships that do not support our financial and operational imperatives. So -- this concludes my segment for today's presentation. Thank you for giving me the opportunity to provide all of you with an update on our growth journey. And now I will pass it back to Hakan and Jenny for questions.

Thank you, Geoff. And by that, we are open for questions. And your first one comes from Adela.

Firstly, on the development in North America. I believe, Hakan, you mentioned earlier there that you would have been somewhere closer to mid-single-digit organic growth had you not had this big delay. Can we confirm that, that is the case? And if that was the case, then I would assume that your organic growth would have been closer to 12% versus 7% in Q2?

Yes, I would -- yes, low to mid. I wouldn't -- so it would have been double digit.

Okay. I see. And also, I guess, your visibility as we move forward here, you say that this specific order will be delivered in Q3. But at the same time, I mean, we do have to be cognizant of the fact that there has been some volatile quarters, and this isn't the first time where revenues is being -- are being delayed into -- further into the year. So I guess, are you doing anything specifically from a group level to have better control over [ to post ]? Or yes, what's your view on that?

Yes, absolutely. It's very frustrating, of course. And we've been working hard with forecasting and have monthly updates, but probably need to have even more frequent updates when it comes to this and perhaps have a bit more margin when we present our expectations.

Okay. And then lastly, on margins, gross margins did perform well in Q2. You saw expansion also in the operational EBITDA, but it was slightly below expectations. Now in Q3 and -- yes, let's say, starting with Q3, you were above 20%. And I guess, how do you feel about managing that level, especially with maybe your Amazon-related costs being a tad higher in Q2 than implied?

Yes, I can start. Yes, we definitely expect margin going up Q3 going forward, and it's absolutely related to our Amazon costs. Actually, both in Europe and the U.S. As I said, we've been building up for the transition in Europe. That's a smaller part of the margin contribution, but that has also been at a lower level than what we expect going forward. And primarily for the U.S., we definitely have invested in the clawbacks of the bestseller badges, et cetera. And we do see improvements -- have seen improvements over the quarter, but we really had to push to get those in. And now that we have them, we can transform the investments to more, let's say, campaigns that we know are more connected to ROI and improvement in margins. So I would say Amazon is the biggest contributor to the margin uptake Q3 and going forward. But also -- but we've also had, I mean, a couple of -- as I said, as we said under the production segment, the softness of the dermatology sector has been complicated for us when it's kind of hitting our margin as well. And we are working very hard and have connections with all of our customers and our own internal brands. The summer is a good year for those kind of products. So with our new veterinary partnerships, market picking up and the inventory level as low, we do expect the dermatology sector to improve going forward as well. And that will be also a main contributor for us improving our margins.

No, I think you covered it.

Okay. I see. But -- okay. So I guess then we should think of this expanded other external costs profile to be the result of maybe front-loading investments in H1 and those shouldn't be recurring in H2?

Exactly.

Your next question comes from Adrian.

Yes, perfect. I think I have 3 questions. Just firstly, like touching again here on the revenue visibility going in the second half of the year. My question is basically, like do you have any larger orders now scheduled for Q3 and Q4 that have a similar risk of delay that might be supposed to be in the back end of Q3 that could be pushed into Q4 or similar?

No, not the scale like this one. And we are actively working with both partners and our internal organization to push, let's say, the -- to have a more equal delivery schedule going into a quarter. So we are actively working with that. So no, we don't have a major order that is scheduled for the last month of the quarter in Q3.

Okay. Perfect. Very clear. Second question is basically on the rogue sellers on Amazon. Could we have any update on that?

Yes. As Geoff said, that has improved a lot, and that's a combination of the -- our products going into having transparency. That means that we are the only one that can ship in those unique SKUs. And also what Geoff alluded to, perhaps I should clarify that a bit because the Europeans are not that used to the map pricing. That's actually sort of a recommended price that sellers are not allowed to go under when selling our products on the market. And there has been a couple of especially some new collaborations with bigger partners undercutting specifically on their own online web shops. And even though that's very small in volume, that make conflicts and problems with the algorithms of Chewy and more importantly, Amazon. So that really makes it problematic with keeping the MAP pricing on Amazon and Chewy. So that's really a hard work from the -- specifically the new team that has come on board on [ NaturVet ]. They have really had great success with our major partners in following our map pricing, and we've seen improvements last part of this quarter. So going forward, we don't expect any major problems with the rogue sellers or -- but MAP pricing is a constant, let's say, issue that we're working with. So better communication with our partners, we can avoid those kind of conflicts.

Okay. Finally, my final question, I think, is for you, Geoff. Regarding here the sort of flagged or the increased competition on Amazon, if you will. I think you touched on this in your presentation, but perhaps I missed some of it, but could you be more specific about where the competition is increasing? Like are you losing ground? Is it primarily volumes or pricing pressure? And kind of what are you doing here to address this? Are you...

Yes, sorry. Go ahead. No, I'm sorry. Please finish.

Are you risking being in a pricing war against competitors? Is this like you need to outspend them on marketing or anything?

No, it's not a pricing war. And you noticed a lot of what I concentrated on was marketing. And I'll clarify, it's not just an Amazon thing. It's an overall thing. And the reason I emphasize Amazon a lot is as goes Amazon, goes everything. Because people use Amazon as a primary marketing channel to go on there and research the brand. So if we're losing buy boxes and bestseller badges, that puts us at a disadvantage as people are researching our brand. It is not a price war. We have an opportunity -- so again, a lot of the brands that are doing success are digital native brands that launched over the last, let's say, 10 to 12 years. And they went heavy on social media and they went heavy on the dot-com pure-play sites. And honestly, it's a bit of a catch-up exercise with them. And as I said, we really have not truly marketed within our organization until around a year ago or so, and we're fine-tuning that. And so I think it is an awareness and it is not only an awareness factor, but it's going to that next level and getting compelling call to actions out there and telling tighter stories. So I think a lot of it is marketing. And that's part of why we brought our new Chief Revenue Officer in because she has a significant background in marketing. She's already brought in some folks who have worked with her multiple tours of duty to help turn businesses around. And so our focus is on driving awareness and relevance and driving people to usage and purchase. So I believe it is a marketing challenge, and that's what we're all over right now. Hopefully that helps.

And also worth noting is the brand change. I mean that's a major impact when transforming the brand when it comes to Amazon sales with different look and feel of products. That's really a project that we probably underestimated the complexity and the impact it would have.

Your next question comes from Johan.

A follow-up on the FDMC order. Does the delay have any impact on -- or any potential impact on your pipeline, potentially delaying further projects, pushing them further out, et cetera?

No, no. The whole order was more or less done by, I mean, third week of June. So it was waiting to be shipped out. So it doesn't affect our manufacturing schedule.

Very clear. And then a question on the merger -- or the U.S. veterinary distributor merger here. At what point do you expect these 2 distributors to sort of normalize inventory levels? And what's your revenue exposure to these 2 accounts?

We expect to have a decision or they expect to have a decision on approval, I think, the second half-year. I don't know exact month when they need to get that decision. But I think it -- I mean, the inventory levels are expected to pick up already in Q3 due to the fact that we see the sell-out numbers of the product that we are supplying. So -- but it's -- but of course, our -- let's say, our agreements with those partners is that they should at least have, let's say, 90 days of inventory at hand, and they were down to like 30 days. So it's, of course, different kind of setup if we need to ship small orders all the time compared to shipping larger orders. So we expect both from the, let's say, inventory rebuild up, but also that the partnerships for all of the -- for these programs is actually -- it's replacing another supplier for these kind of products. So of course, they are selling out the old inventory and resupplying with ours. So it's a gradual process, but I wouldn't like to say numbers, but it's significant volumes definitely from 2027 going forward. But it's already this second half year will be a lot higher volumes than we've had this first half year. So I would say it's -- we're not talking about hundreds of thousands of dollars. It's a $1 million range and upwards.

Got it. Very clear. And then a final one, maybe on the Amazon Prime Day, which fell in June this quarter versus July last year. What was the sort of incremental cost impact of that timing shift here in Q2?

You mean how much it was? I can't say how much it was, but it's two things that impact it. First of all, you have the cost in June instead of July, but you also have the result of the Prime Day because you kind of invest in 1 month and then the sales will follow in the future as well. So we expect the investment that we did for Prime Day in June to also have a positive effect in July.

Yes. So essentially lower cost than in Q3 as you took them in Q2, but also better sales contribution given your marketing spend...

Yes, that's the expectations. Yes.