Swedencare AB (publ)

STO:SECARE

Earnings Call Transcript 2022-Q1

[Hakan Lagerberg, executive]

Welcome to Swedencare's Q1 seminar. Sorry for being delayed. There were some technical issues here. So Jenny and I have been talking now for 5 minutes, I thought that we were live. But...

[Jenny Graflind, executive]

Yes, we started without you. But now, we're here with you.

[Hakan Lagerberg, executive]

So we'll get back to it immediately. So sorry for that. Q1 2022, an exciting quarter for us. Record quarter, of course, that we knew would come since we have had excellent acquisitions. So we started off end of January with 2 fantastic acquisitions for us, really game changer acquisitions, NaturVet in the U.S. and Innovet. I will come back to that.

Our organic growth was 7%, below our target of 20% full year. But as we expected, basically since we knew that the Asian export market was going to be hit, especially China that had the highest ever sales in Q1 2021, unfortunately, no sales there, but hopefully, it will bounce back later this year. And also, we do have, let's say, a bit sluggish quarters. Last year, as you probably remember, Q3 last year was 0% organic growth. So we are not worried about that. Our target is 20% and looking forward to delivering stronger results in the quarters to come. We have had many product launches for lots of our different brands, both, let's say, completely new product launches and also expanding the product ranges for different group companies from other group companies' product lines.

There have been, as you probably know, lots of live expos coming back. So it's good to be on the road again, meeting both pet owners and also B2B customers. So both in the U.S. and Europe, there's been lots of different interactions and expos. And when it comes to Asia, still not much happening there, but hopefully, second half year, the exports will return there as well. Business development, we are focusing on really utilizing all of the resources that we have for fast business development, lots of end customers, B2B customers are really excited and curious about what we can offer now as a group. And we are really an attractive and quite unique player on the market, especially on the North American market. So I'll come back to that as well.

[Jenny Graflind, executive]

All right. Net sales and our operating EBITDA for the quarter. So this quarter, we reached revenues of SEK 378 million. That is our highest quarterly revenue so far, of course, impacted by the 2 new acquisitions that we have done, which are partly included this quarter. NaturVet, which we acquired from 1st of February is included by SEK 110 million; and Innovet, which we included from March 1, has about SEK 10 million of the revenue for this quarter.

So the growth from Q1 2021 is 182%. 10% of those is the currency impact due to the strong USD. And we also have 7% organic growth. Again, we are comparing the entities that we had 1 year ago, where China was a big impact. And due to the fact that we didn't get the China order, it had an impact on our organic growth. And also in the SEK 134 million that we had in Q1 last year, there was several of our entities that had record quarters. They had a great start to last year as well. So that also impacted, let's say, the growth number. But we are very happy with the SEK 378 million.

When it comes to operating EBITDA, again, it's the highest one so far, SEK 94.7 million. Our operating gross margin, which in the last quarter was at 52% has now increased to 55.9% this quarter. I would say there's 2 main reasons for this. One of them is that we have now implemented the price increases, which provides us with a higher gross margin. Many of them were implemented from the beginning of the year, but we will also see further increases in April and later this year as well. And then, of course, we have 2 new companies, which have a higher gross margin than let's say the average of the group.

When it comes to cost, this quarter, we have continued to invest in personnel. We need to grow our group with talented people in order to reach our financial targets and keep up with our growth. And in addition to that, we are doing a reorganization in one of our entities in Vetio North because we are preparing that entity for more production at the end of the year. So that had an impact on, let's say, one-off costs as well this quarter. So when we look at the growth in the EBITDA margin, we landed at 24.9% for the quarter, very good improvement from 18.9% last quarter.

A couple of KPIs. Of course, we have covered a little bit on the P&L. When it comes to the balance sheet, of course, 2 new entities that we have now added to our group has a big impact on the balance sheet. One of them is a production facility, which, of course, then builds the balance sheet and the equity. But other big thing that happened during the quarter is, of course, that we did pay the 2 new acquisitions. They were paid partly with shares, about SEK 500 million; and partly with cash of SEK 4.2 billion. This cash was financed with one directed new share issue as well as we have taken up a new loan of about SEK 750 million.

In addition to that, we have a positive operating cash flow of SEK 45 million for the quarter. And in addition to that, we also have a positive cash flow for the quarter of about SEK 140 million, which means that our cash is at SEK 277 million at the end of the quarter. I can also add that the personnel, last year, at this time, we were 102 people. Now with the new companies, we are 517.

Sales per region. Well, as you can see on the left one, North America, it's really becoming a bigger figure due to the fact that many of the acquisitions that we do has been in the U.S. Last year, North America was 63% of our total revenue, now it's 81%. The other market that I can mention is U.K. and Ireland, NaturVet, which is the company that we bought in the fall of 2020, has had a fantastic start of the year. And the market of U.K., Ireland grew by 35% this quarter compared to last year. Even though they grew by 35%, their part of the total revenue has decreased from 21% to 10% due to the fact that we have NaturVet, which is the biggest impact of North America.

Rest of Europe is, of course, impacted by both a strong growth in Spain, for example, but also the fact that we have acquired Innovet, which is an Italian company. Asia is the one that we have -- it's an increase of 20%. That is partly impacted by the fact that we have no sales in China, but it's partly offset by the fact that we have other entities that sales into rest of Asia.

[Hakan Lagerberg, executive]

So going through the different regions, what has happened there is, as you see, North America, 81% of our total sales, and that will continue to be stronger as the quarters go, especially next quarter since NaturVet has another month within our group. Sales increasing by 264%. And that is, of course, last year we didn't have Vetio as well, which is a really big entity within our group.

So what has happened? As I mentioned, we have had a strong interest from the market, lots of meetings and strategic discussions, both with existing customers and new customers wanting to hear more about our group and what we can offer. So both from our branded products, and especially for private label solutions that's being more and more sought after within the sector, both from the veterinary side, but also from the pet retail side. So we have discussions of big, big collaborations, but we are also introducing new sets of working.

So for example, as some of you remember, we have a unique private label solution for the vet sector in the U.S. where even a single vet clinic can have their own brand being serviced by the Stratford team down in Florida. We are now introducing the same setup for the pet retail sector. As far as we know, we don't know anyone else offering this kind of service. So we are expanding the take on that in the U.S., and it will be very exciting to see, and we will use the NaturVet sales group being out on the market offering this to the pet retailers and being serviced from the Stratford team down in Florida, who has expanded their product line with lots of products from NaturVet.

Online continues to grow, even though we've seen some pullback from the physical stores, both in Europe and the U.S. But Pet MD had a really strong quarter, growing over 20%. Rx continues to grow as we focus more and more on the online sector for them. ProDen PlaqueOff also and NaturVet, all strong online, particularly Amazon has been strong for us this quarter.

Looking at different brands, it's really impressive to see that the ProDen PlaqueOff sales for North America grew by 27% this quarter compared to last year. And that is also due to the fact that we are taking more charge of the online sales where we have had some partners previously.

Launching Dr. Pol. As we mentioned, we are now present in more than 6 big online platforms, and we keep on expanding. As Jenny said, building the organization in Vetio North and South, as some of you remember, we have just started a new site in Vetio South for soft chew and supplement production, and there are lots of different projects there being done together with the customers.

So the full production will start in Q2 -- or at least the full real production will start in Q2, and in Q3 And Q4, it will scale up, so having full production. And also, we have had success for Vetio North with the drug development projects improving the sales funnel there. But they are long-term projects being done over several years.

The integration has been fantastic with the NaturVet team. As you all know, it's a big acquisition for us, and you can never be sure how that will work out. But it's been fantastic. All organizations in the U.S. are thrilled about this. We have just started lots of different projects and we are just looking at all of the options that we have. So it's really important now to be focused, focusing on the key projects. And we have actually hired one new person being responsible for all of the internal initiatives that we have.

We are launching a completely new product line within the NaturVet product offering called Evolutions, holistic and organic all natural product line, being launched in lots of big retailers as of 1st of June. We presented at Global Pet Expo with strong interest from the market, already 65,000 units ordered and those are growing by the day, basically.

And we are also in the finishing touch of installing our third soft chew line in Temecula, California, with NaturVet actually doubling the capacity for our soft chew production from Q3 going forward.

And we've also taken part as organizing a fundraiser for Ukraine in North America.

Going over to Europe. Net sales was 16% of our total sales. As Jenny mentioned, we had a fantastic quarter for Nutravet, both for the U.K. and Irish markets, but also export markets. And we are just about to launch in Scandinavia and some other markets. It's a well thought of and unique brand that is really making presence in the veterinary side. Our Irish production facility has strong numbers, both for internal and external customers, and we are now making also an organizational change, so that our Irish facility will be included in the Vetio setup being spearheaded by John Kane.

Many internal transfer projects. As you all know, it's difficult sometimes to export and import between the U.S. and Europe. So we are really focusing, both from a cost perspective and an environmental impact perspective, that we do not want to ship products over the Atlantic back and forth. So it's really lots of projects for interesting U.S. products to be launched in Europe, we want to produce them in Ireland.

We have changed the setup in France with our new leadership there. So we have taken charge of the pet retail sector that we previously worked with a distributor. Now we are selling direct and opening up several new customers for us. Spain continues to grow from a fairly small number, but impressive work being included in both the veterinary sector and the pet retail sector.

And then Rest of the World and Asia, as you see, 13% down compared to Q1, and that doesn't seem to be too bad, perhaps. But as Jenny said, our organic sales were hit a lot more than the nonorganic. So for some of our acquired companies, they had good export orders, and for our organic sales, they were hit a bit more. However, except for China, we do see that most of our export markets are really coming back. We had some late deliveries in the quarter and also looking forward for the coming quarters since the interest and the activity has definitely increased.

And we will be attending the world's biggest pet show in Nuremberg, Germany, in end of May, where we will meet lots of our current distributors around the world, but also some new ones. Mentioning some projects, as you know, we have started a Brazilian food project and it's really taking off, now being sold in over 300 stores, and we look forward for the continued growth there. Strong market for us for the quarter was Japan, South Korea, Chile and Brazil.

[Jenny Graflind, executive]

Okay. If we look at sales per product category, one year ago, we had quite an even split between the ProDen PlaqueOff, Nutraceuticals, and Topicals/Dermatology. The new acquisitions that we have done, let's say, mainly NaturVet, has more products within the Nutraceuticals, which makes this group grow from 31% of the total revenues to 45% of the total revenues. At the same time, the ProDen PlaqueOff is the group that had a decrease this quarter. This, I would say, is solely impacted by the fact that we did not get the large powder delivery to China. Because as Hakan mentioned, the U.S. market had a 27% growth in PlaqueOff. And in addition to that, our Bones and Bites have also had a very strong growth. Bones grew by 74% and Bites by 54%. So now ProDen PlaqueOff is about 11% of our total revenues.

Pharma, which you can see on the left-hand side, is 4%. This is our Vetio North facility. And as we have mentioned in the past as well is that this is the one that we expect to see growing over the next second half of the year or '22.

Our rolling 4 quarters, for the first time we have more than SEK 1 billion in sales in our rolling 12 months. As you remember from the last annual report, 2021 has a pro forma of SEK 1.6 billion. Also, our operating EBITDA margin is increasing as our new acquisitions contribute with a higher margin. So our operating EBITDA is at SEK 248 million at the moment.

[Hakan Lagerberg, executive]

Coming back to the 2 acquisitions we made in the quarter, just to freshen up for those of you that have heard it before. NaturVet, one of the biggest pet retail brands in the U.S., dominating in Pet Retail and also growing a lot online, have sales to over 15,000 pet shops, #1 pet supplement brand in 4 out of 5 biggest pet retail chains in the U.S. and has a really wide product offering and producing over 95% of the products themselves. So it's powders, soft chews, some liquids and some gels.

Sales in '21 was almost USD 64 million with an EBITDA over 30%. And as I've mentioned, we have really, really started lots of different projects within the group to offer the excellent NaturVet product to all of the other channels and brands where we are selling. Innovet, a more specialized company, but really strong in the Italian market, 90% of the sales in Italy. Being one of the leaders within Nutraceuticals in Italy and one of the oldest companies on the market.

We have gotten a really fantastic addition to our group with a high technical and scientific level. It is Nutraceutical supplements, but with a very strong scientific basis. Several patents and also other IP protection. And we are looking forward to helping Innovet to get their products out into the global market. They are present on some markets with a couple of products, but we do look forward to presenting them in a larger scale to the market.

Sales of about EUR 13.5 million last year, also with a strong margin over 30%. So they are really strong additions to our group.

As we grow, we are formalizing a bit more. John Kane and Brian Nugent is joining our group management that has until now been Jenny and me. So they have been, let's say, in formal group management. But now John Kane, who is the CEO of Vetio, will take charge of all of the group production that we have. So our line will integrate even more with the Vetio setup. And Brian Nugent, who was one of the first acquisitions we made to the group or at least in 2020 when we started acquiring. Since then, we have acquired a number of companies. And Brian has been the key addition to the group and being a key player also in finding acquisitions. So he has been involved in many of our transactions and also growing the group as a joint company. And he has also successfully made a merger between Stratford and Animal Pharm, another group company that we acquired. So he will be joining the group management as the Commercial Director of North America for the veterinary side and the online side. The Pet Retail that includes NaturVet and SwedencareUSA will still report to me as the group CEO.

Priorities going forward, 2022, keep on integrating our group companies and focusing on growing the sales. That's the prime objective for us. We don't focus that much on, let's say, cost initiatives where it's not obvious. We're really focused to grow our business together as a group. We keep on increasing marketing spend. We see a really good return on investment, primarily on the online side. But also in brand building, we are focusing more on social media and also developing our own D2C channel for many of our brands. So we have launched new web stores for many of our group companies, and we'll be launching a completely new one for NaturVet as of 1st of June or 1st of July.

Brand and product development will continue. And also, as I mentioned, prioritizing efforts on strategic partners. So we're really focusing on key deals that will have a major impact on our sales of the group.

Organization and adding talent. I am impressed of the interest from all around the world when we look for new people to join our group. Lots of interest from fantastic people with strong education and experience from what we are looking for. And we will keep on building, but still having the, let's say, the goal of adding as few as we need. Since we want to be a small and fast and agile company and not having too much red tape. But of course, as we grow, we need to grow with the organization as well.

M&A. As you all know, we've been very active, and we are still active looking at lots of different opportunities. Of course, since the activity that we've had, we get lots of offers, but we are very selective. And you can expect us to make more deals going forward, but it will be companies that really add something to our group. So we are scrutinizing lots of different offers that we get. And I expect us to be, let's say, slowing down a bit, perhaps [ not ] one acquisition per quarter going forward.

[Jenny Graflind, executive]

Okay. Finally, we have a couple of questions that we will cover. And then after that, we will have a 5-minute break, and then we will open the live chat. But before that, we have a couple of questions, Hakan. Tell us more about the ongoing integration of NaturVet and Innovet into the group and what is the focus.

[Hakan Lagerberg, executive]

The focus is really to make them feel welcome and really understanding how we operate and work. But I would like to say that we are very open and very informative when it comes to acquisitions. So I think that both NaturVet and Innovet knew what they were getting into. So the integration has gone, as I expected, very well. No problems whatsoever, I would say. It's just -- the only issue is really prioritizing the different initiatives that we are working on. And of course, for both Innovet and NaturVet being privately held companies, I think the integration and work load has been really focused on your things, Jenny, with reporting and finance. But it's been good and setting all of that in place. And then going forward, we just continue to focus on business development.

[Jenny Graflind, executive]

Sounds great. What is the stance of China and Asia? There was no delivery in Q1 to China, are you worried about that?

[Hakan Lagerberg, executive]

Not extremely worried, but it's, of course, not what we planned for. Now China is not as an important market for us as it was a couple of years ago. But of course, not only for the ProDen PlaqueOff that we are not shipping right now, I would say that I'm more annoyed that we can't bring more brands to China, because our distributor in China would like to introduce many of our new brands that we have acquired since the last year or 2. So it's more of annoying a bit, but I'm not worried. I think China will bounce back. But of course, it needs to open up. Our distributors there are still selling pretty good numbers in China, but not the growth as we expected.

Looking at other Asian countries, I'm thrilled about it. We are growing in Japan. We will grow a lot in South Korea, both with our present brands that we have had, but also introducing new ones in both of those countries. And Taiwan has been strong, for example, for Rx Vitamins. And so we're looking forward to developing Asia a lot more. But still, we haven't been able to travel there. I know that at least South Korea has opened up a bit. So I guess, we'll travel to Korea this year, in second half, I guess.

[Jenny Graflind, executive]

Okay. You seem confident that the second half of '22 will be better than the first half. Please explain the background to that.

[Hakan Lagerberg, executive]

Yes, it's primarily due to 2 things. When it comes to NaturVet, we are in the final phase of introducing a completely new third production line that will double our capacity for soft chews in that facility. And that, of course, since we do have a private label contract manufacturing offering as well, those opportunities have had to wait a bit. We service some of them, but we know that the demand is a lot higher than what we have serviced as of last year and this first half year. So we know that, that will grow.

And also when it comes to Vetio, both for the Vetio South, where we have implemented a completely new facility that will start real production in end of Q2; and Vetio North, where we also have signed and approved manufacturing contracts that will start second half this year. So I'm pretty sure that the sales will grow in second half compared to first.

[Jenny Graflind, executive]

Great. Put the camera on. So that's it for our presentation. We will come back in a couple of minutes, and then we will answer any chat questions. So please feel free. Any questions you may have, just write it down in the chat. See you soon.

[Hakan Lagerberg, executive]

See you soon. Bye-bye. Thanks.

[Jenny Graflind, executive]

Bye.