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

Welcome to Swedencare's pre-quarter update, where Hakan will provide a short presentation followed by a Q&A. [Operator Instructions] Over to you, Hakan.

Thank you very much, Emma. Hakan Lagerberg is my name. And today, I will not be joined by Jenny, who has a nice week of sailing in Croatia and will be back next Monday. So today, I will walk you through the quarter's highlights that we know of today and go through different segments and also close with our expectations for the quarter's financials. Bear in mind, it is 2/3 of the quarter done when we have compiled this notice, but we will give our insights and also have time for questions at the end, as Emma said. So let me start with a governance item. We press released today after 12 years that I have decided to retire from Swedencare as CEO. I have informed the Board my decision this morning and I have 12 months' notice period. So there is ample time for an orderly transition, and I remain fully committed to the agenda we are executing. The decision has matured over the summer as it often does. And I have come to the conclusion that from a personal view, it's 100% right timing. And from the professional side, I think it's very advantageous to get some new leadership in for what's next for Swedencare in the next 3 to 5 years. We have a group that have a majority of pieces that consistently overdelivers and a couple where we have had and have some challenges. These challenges are about to be resolved, so I will be able to hand over the reins of a strong group in the animal health space. I do not envision any new operative roles for me, but will, of course, be open to Board and adviser positions when my role here has ended. I will not start thanking anyone at this moment that will have to wait for the actual end date of my term. So let's go over the highlights of the business. First, market trends overall. Europe and Rest of the World remain very strong or strong, while North America has been somewhat softer than expected for market as a whole and also for us. It's especially in the dermatology side and also in somewhat in supplements that it's been not close to double-digit growth for North America, more closer to mid-single-digit this year. Haven't had any market findings, what's the reason for this. But of course, there is lots of turmoil in the world and especially internal in the U.S. with rising gas prices, et cetera. Online continues to outperform the other channels, and it keeps on growing the percentage it has of the total supplement sales. So I've read some new findings that it has around 75% of all supplements being sold, and that was expected in 2028. But I can't confirm that's really the case. Second, high commercial activity. We participated in several trade shows across the globe, China, Europe, South America and the U.S., and we see this as very important for both existing partners and of course, finding new partners and new market entries. Third, our proprietary AI marketing solution for ProDen PlaqueOff is showing generally interesting results. It's proving very -- its value, and we plan to roll it out across multiple group brands from 2027 and onwards. And we are planning and building an internal team for this. So hopefully, we can start with that early next year. And finally, we're increasingly focused on larger projects with several partners, predominantly in markets where we're not present, but also in the U.S. where we have some new opportunities for very interesting collaborations with new partners. And this is also due to the 2 reasons that we have a unique group with manufacturing capabilities combined with strong online capabilities. And of course, that we are not so M&A focused as we have been in the past. We are now looking for more strategic collaborations compared to ride out the M&A activities. The different segments. North America is the one region still tracking below expectations. Demand has been softer than planned overall. NaturVet and Medicated Liquids business is the main drag for us. However, we do expect both will pick up end of the year. Most of the challenges we've had with NaturVet have now been overcome. We have shifted focus to ROI and profitability seen already this quarter rather than growth at a high cost. Growth is picking up but at a slower pace than I expected. However, the trend is positive. And from next quarter, we expect to be in line with expectations. The actions are clear. NaturVet is a legacy brand with high credibility, and we are seeing new customers being added and older returning. The new sales teams are having fruitful meetings with many major players in the sector, and I expect a very different 2027 with growth, increased shelf space and new outlets. The new big box private-label customer that was pushed into Q3 has now launched successfully in this quarter. High and steady sales out the door after just a couple of weeks. ProDen PlaqueOff continues its impressive growth journey, both online and in physical stores. The new cat cream will be launched early '27 in the U.S., and we already have many customers asking for it since we have launched in Europe. We expect the region to improve decisively in Q4, both due to comps being lower and also that we see continued clawback, and we expect that trend to continue, but we're not calling a turn yet. Europe and Rest of the World. Online, basically strong numbers for every region in Europe. U.K., Germany, Italy and Spain all delivered strong double-digit growth, and we keep building out the product catalog on Amazon, Zooplus and TikTok. TikTok has moved up as a very important channel for us this year in total. And especially Germany is interesting with very strong growth, but from a low base. Size-wise, Germany is basically the same market size as the U.K. And for us, we have less than 10% of our sales -- in 10% of the U.K. sales are delivered in Germany. And in the start of the year, it was under 5%. So it's been strong growth in Germany, and we see the trajectory increasing month-on-month. So it will be very interesting to see how the German figures will be in 2027. Pet Retail, we are launching NaturVet by Swedencare this fall, will not happen much in this quarter, but early Q4 in October, we are launching with the biggest pet retailer in the U.K. and then we expect to add other regions as opportunity arises end of this year and also all of 2027. Rest of the world continues to add new markets for ProDen PlaqueOff, and we're in dialogue on other brands in several additional markets, especially Asia. We have dialogues up and going from the trade show in China, but also other markets. For present markets, another strong export quarter for Swedencare, not as record that was in Q2, but probably the second best quarter ever in our group's history. Veterinary. Summit Vet, we made a press release about Summit Vet. It is first to market with soft chew specials in the U.K. veterinary channel with first sales orders already trickling in. And in the veterinary channel, otherwise, our U.K.-focused vet brand, nutravet have had a number of well-received product launches in the quarter, leading to double-digit growth also this quarter. Production momentum continues in pharma with 2 new MSAs signed and continued healthy flow of new RFPs, perhaps too healthy. The team in Montreal are working very long hours for all of these new RFPs, and we actually have to select a bit between them. But the momentum is very high for our CDMO activities in Montreal. In the U.K., we launched a new major pan-European contract manufacturing client in August at record speed, and many of the leading brands are now customers of ours with regards to especially soft chews in Europe. In the U.S., Vetio South had its SQF inspection last week with a verbal approval. And for those of you that remember, we got the SQF certification for NaturVet first half year. And why this is important is that SQF means that all of the, let's say, major retailers, not pet retailers, but major retailers, they demand the SQF inspection or grade, and that's a food grade inspection compared to feed grade. So it's even stricter regulatory rules, basically the same as manufacturing human food. So we're very proud of having 2 facilities approved with this certification. New capabilities come on stream from Q4 into Q1 2027. So lots of work with that in Q3, not giving us any revenue, but very, very interesting capabilities that we are building out at Vetio South facility in Florida. It's predominantly as, let's say, first half year, we will only manufacture internal demand, but that then it will be expanded with external customers second half of 2027. I will be able to inform you about this capability that we have launch the products in the market, probably Q1 2027. And during Q4, we will have transferred the last volume of extruded products in the U.S. previously made by external partners into our own facilities. It's good both for margin and control of the product and quality. So as you know, we have around 90% of all of the products that we sell out on the market under our brands being manufactured by ourselves, and that will probably -- when these 2 capabilities have been, or this new capability plus there is the return of the last extruded products, we will probably be close to 95% of internal manufacturing. Looking at the expected financials after 2/3 of the quarter, we expect a similar trend for segment as last quarter, strong European and production sales despite Vetio South being soft. North America still too weak. Organic growth, similar to Q2, single digit, not supporting our double-digit annual target. So we need to have a strong Q4 to reach that target. Gross margin, similar to Q2, 59% to 60%. EBITDA, here's the highlight of this quarter. I expect it to be the best quarter for the year, over 20% margin. And where it ends, we still have to wait and see. But I feel confident that it will be the strongest quarter for the year profitability-wise. And we have been working hard with also getting the profitability up. Much comes with volume, but also other things that we can control has improved. Net debt to EBITDA, lower than Q2, expected to be under 3. The Summit earn-out due within 12 months is still impacting, of course, and it remains to be seen how they perform the last quarters for that earn-out. So they -- we measure that earn-out up until end of last March. So that brings us to Q&A. Emma?

Your first question comes from Adrian.

I'll just first start off saying thanks for the cooperation over the years. It was very nice working with you. But I suppose that we'll see you for some time still, as you said yourself, we'll see when you actually leave the company. Just a few questions from my side. Like firstly, can we have any update on the distribution merger in the U.S. of the distributors? Has this had any effect yet here in Q3? And is this partially why you have seen some softer performance in the U.S.?

Yes. Good question. I could have mentioned that. Yes, that merger has been -- at least -- as I heard at least, was that it is going to go through no impediments with the actual merger. And we have seen from that merger that the orders that we expected in Q2 and the launches, those will -- those products -- the main products will be launched -- several products will be launched in Q4. So we will have some uptake in this quarter, but the majority of those deliveries from our side will be early Q4.

Okay. Very clear. And another status update, I suppose, regarding the rogue sellers on Amazon. And the follow-up question to that is, are you starting to see your marketing spending yielding growth yet?

Yes. Yes, exactly. So we -- rogue sellers are definitely, I would say, as good as it gets. There will always be someone popping up. But it's at the normal level. We do see some, let's say -- some, let's say, smaller distributors selling out all of the, let's say, old label products. There are still those around in the distributor -- some smaller distributors and that's creating some issues. But I mean, overall, I would say that we now focus on having Transparency programs on majority of our products. So they cannot be delivered into Amazon from rogue sellers. So where we now have some issues is just from other online platforms selling at lower prices and then the Amazon algorithms react. But I would say it's under control, and we definitely see that our marketing spend will have better ROI, as I said. We've seen it already this quarter, and that will continue to improve in Q4.

Okay. Last question from my part. Could you confirm like how large the new big box private label contract has added in terms of sales or any -- at least any indication of the magnitude?