Swedencare AB (publ)

STO:SECARE

Earnings Call Transcript 2022-Q2

[Hakan Lagerberg, executive]

Welcome to Swedencare's Q2 report. It's me, Hakan Lagerberg; and Jenny Graflind, our CFO. Okay. Now we'll start to present the Q2 report.

Strong sales with preparations for period of higher growth. We had a sales record for the company, and that was as expected since we added 2 important pieces to our puzzle in January this year and February, Innovet and NaturVet. We had solid demand despite world situation. What we can say is that this has proven the fact that we are also presenting on special market insight web page is that the demand in the pet sector is strong and stable, even though insecurities all over the world.

We had organic growth of 4%, below our yearly target of 20%, but we have communicated that previously because we had the toughest comps ever, 45% last year. And also, what we have seen is that the inventory trimming of the larger retail and veterinarian companies have taken effect for us in the quarter. However, we know that the sales out of the door is strong with double-digit growth for all of our products, and we've also seen it with our online sales that have been really strong. So the end consumers are keeping on buying our products and more than in line with our expected organic growth. And we've also communicated that second half this year will be a lot stronger due to 2 major projects that we will describe later on.

We have been focusing this quarter also a lot on business development, integration of our -- all of our group companies and continue to move forward from external to internal manufacturing. As you've seen, we have increased our gross margin, and that is partly due to these transfers from external to internal manufacturing.

We have also presented some interesting market insights on our web page and I mentioned that in my words in the report that we feel that Swedencare is excellently positioned to take part of the ongoing increases in this market.

Looking at our net sales, SEK 471 million, an increase with 194%. Our operative EBITDA margin was 25.2%, stronger than last quarter, and I expect this to keep on getting stronger the quarters to come.

And then looking at some key performance indicators.

[Jenny Graflind, executive]

Yes. As Hakan mentioned, we had net revenues for the quarter of SEK 470 million, which is the highest so far. This is compared to SEK 160 million last year, so 194% increase. The gross margin at 56.1% was the best margin we have had since the Q3 of 2020. It is partly driven by the price increases that we have pushed to our customers, but also with the acquisitions of NaturVet and Innovet has a higher margin.

We also had a change in the purchase price allocation of NaturVet, which resulted in a higher gross margin this quarter and also a revised gross margin for last quarter, where we were able to improve the gross margin of SEK 21 million for Q1. You can see that in the appendix in the report. This is due to the fact that we do not have to reevaluate the inventory and do not have to depreciate that as in the coming quarters.

Operational EBITDA margin of SEK 119 million, an increase of 146% compared to last year, where we had SEK 48 million, a margin of 25.2%. Cash is SEK 235 million, where we closed the quarter. It's been impacted partly by -- we did a small investment in a Czech company, a minority share. We have also paid a dividend of SEK 31 million during the quarter. And after the end of the quarter, we have also paid the earn-out of $27.5 million in the beginning of July for NaturVet. So our operating cash flow is SEK 15.8 million.

We have a strong solvency of 71.4%. Our net debt is below 2.76% for the quarter. One other thing that has impacted the result for the quarter is the tax and the net income. We have a positive effect of SEK 33 million due to a tax valuation contribution for the quarter. And we have also made a change in the company structure in the beginning of the year in the U.S., where we increased the possibilities to use tax depreciation now that exist in the group, which will have a positive effect for several years to come.

Sales per region and the things that are impacting the sales per region is heavily the acquisitions that has been done. So you can see that the North America is the region that is the largest and is growing. It's 78% compared to 62% last year. We have also had -- Swedencare UK had their second best quarter ever, and we also had acquisitions in the U.K. and rest of Europe, which has impacted. But overall, all -- we have growth in all our markets. And as I mentioned in the report, we are also selling now to over 60 countries in the world.

Sales per product. Similar thing here. We have growth in all our product groups. Again, the product groups, they are heavily impacted by the acquisitions or Nutraceuticals, which is now the largest one at 50% of our revenue; and Topicals/Dermatology is also impacted due to the fact that we have the new companies in this product group.

Just to mention, ProDen PlaqueOff had a growth of 16% this quarter. It's now 10% of the total revenues. And during the quarter, we also had the VOHC seal on our dental bones after 2 successful studies that had been performed.

[Hakan Lagerberg, executive]

Sales per brand, it's pretty evenly divided, except for NaturVet, our biggest brand and continues to grow. Innovet came in with 8%. And then we have Pet MD and ProDen PlaqueOff fairly similar. And then RX Vitamins at 7% and nutravet at 3%. And then we have lots of other smaller brands within our group. But strong sales for all brands over the quarter-to-quarter.

Looking at the different regions. North America grew by 271% and there's been lots of activities in North America, as I described previously. We now have combined the forces for the veterinarian sales in the U.S. So we have a new strategy, a more customer-centric team selling in more than one brand. And we have had several successful seminars and customer meetings going forward.

Lots of group projects for optimization, production and other services and price negotiations for group, not individual companies. So that's a big advantage for us now when talking to suppliers, that we have the whole Swedencare group as a buyer. So that work has just started, but there are many opportunities to get better prices from the different suppliers.

Also, when offering private label and contract manufacturing contracts, we are also in a unique position, having market-leading soft chew production, having the leading dermatology producer in the U.S. So there are many opportunities going forward.

Pet MD had a fantastic growth in the quarter, over 30%, and all of our online sales has been really strong. And that's what gives us comfort going forward is that we are more in charge of our own sales and can focus on that compared to the bigger retailers and veterinary clinics that I said was trimming their inventory.

But however, we do see a strong pickup end of this quarter. June was our best month ever, and it's been strong going into July as well. So we do think that these inventory trimmings, they were implemented all over the bigger companies, but they have seen that the demand from the end consumer is strong and continues to grow. So we see an improved ordering for all of our group companies.

NaturVet, 7% growth in the quarter, 20% in June, and going forward, having a strong July as well. As I said, the -- it's partly impacted by our new product line called Evolutions, targeting millennials in the U.S., being distributed out to major retailers now and will be launched online in a month, approximately.

We have launched a couple of new smaller brands capturing openings in the market where we see that the competition isn't too tough. Then we see that with our capabilities, we can be fast moving and enter the market with different brands targeting a specific group or a specific product range.

New soft chew lines both in NaturVet and Vetio completed. As I mentioned in the report, these have been major projects, major investments for us and taken up a lot of time. So it's been a fantastic job from both organizations finishing this. So they are -- they have just been finished, and we are ramping up production as we speak.

We are launching a new ProDen PlaqueOff soft chew line manufactured at NaturVet in Q3. So that will be exciting. We will launch it at SuperZoo in August in Las Vegas.

We also got a patent granted for water and starch-free soft chew manufacturing for Vetio North for our pharmaceutical products. And this is a great achievement. It's been a long process, and now we got notice both from Europe and U.S. for these patent applications. So we will be pushing that when discussing with pharma customers of ours.

Team and skill buildup in both Vetio South and North for the upcoming manufacturing. Both Vetio South and Vetio North are entering a new type of manufacturing of soft chews that we haven't done before. So it's been important that we have the right teams in place.

Going forward to Europe. A growth of 78%. Solid quarter in most markets. Greece a bit more affected by external factors as economy, but also a pickup there in June. In France, we have taken back our distribution for pet retail, adding new direct customers. So we did that end of Q1. And so Q2 has been hectic for our French organization, setting up new customers that we will start to deliver products. We have delivered some in Q2, but primarily second half year.

Innovet our new Italian colleagues, strong profitability and grew stronger than the market. The market as such in Italy was not so strong, basically flat when it comes to animal health products, but Innovet grew by 8% and have just launched a couple of new products and see a strong comeback in the market.

Ireland, there, we installed a new production line basically ordered by our group company, nutravet. So it's a completely new product that is being launched now in Q3, and we will use that production line also for other brands in our group.

Also added a new contract manufacturing client with a global veterinary company. So that is to show that we are active also in the contract manufacturing business.

Very strong sales for Swedencare UK, had a weaker Q2 in '21 than others. So the comp wasn't that strong for Swedencare UK. But however, really good quarter, one of their best ever and very strong sales for ProDen PlaqueOff, specifically online.

nutravet continued to grow our vet-focused brand in the U.K., added many new clinics, but lower sales by approximately SEK 6 million, but that's due to their biggest customer having a change in the pattern of ordering. So for full year, there will be growth in that for that customer as well. And also, international sales grew for nutravet, South Korea being a very important and strong market for them, and also adding a new country, Indonesia. Several new product launches in basically all of our group companies.

Looking at rest of the world, that's been a bit tougher over the COVID years. It's great to see that we're back being able to travel at least to most parts of the world, not really in Asia fully, but still had a fantastic expo at Interzoo Germany, the world's biggest companion animal expo that hasn't taken place for 3 years. So really strong interest, and we presented most of our group brands there, and there are lots of follow-ups to be done right now.

Strong sales in most market, except China. As we have mentioned, China was -- is still weak due to all of the lockdowns, but hopefully, it will start improving now after summer.

To mention some markets. Japan has been really strong. And there, we had a really successful launch of ProDen PlaqueOff powder. It has been sold exclusively in the veterinary sector up until now, but now we've entered the pet retail sector also, and the sales has been way above our expectations.

And looking at the different brands that we do export. The main brands that we export is ProDen PlaqueOff, of course; NaturVet; nutravet; and RX Vitamins, that RX Vitamins are really strong in the sales for Asia as well.

[Jenny Graflind, executive]

1

Yes, this slide is just to show how the revenue and the adjusted EBITDA has grown for the last year per quarter. As you can see, it has an upgoing trend. And the next slide will show you the rolling 4 quarters. Of course, this is our reported numbers. So in the net revenue and EBITDA, it's only included, for example, 4 months of NaturVet and 5 months of Innovet. So as the pro forma numbers is significantly higher, this will continue to increase as we are adding more quarters with the whole group. But at the moment, it's SEK 1.3 million in -- SEK 1 billion in revenues and SEK 319 million in operational EBITDA.

[Hakan Lagerberg, executive]

Yes. And the priorities going forward in 2022 is really use our group size for increasing margin and also working with, let's say, larger customers, focusing on bigger contracts with them. Increase marketing and sales efforts, especially now when we have our production lines ready to be able to take on new customers because that has been an issue previously. Brand and product development. Lots of, let's say, work with rebranding, and ProDen PlaqueOff is being launched this second half year with a completely new design. We have just started in some markets with a sneak launch, but that will be presented all over our markets in the second half year.

And for some other group companies also, we are really focusing on targeted and cost-efficient marketing campaigns. And that has been very successful for us going forward. And all of the group companies that are in Swedencare has the same -- has had the same culture before joining Swedencare, and that is one key issue why many of these successful companies have wanted to join us, is that we are really cost-focused and agile and are not the -- let's say, the company that has a custom to buying in lots of services. We like to do lots of things ourselves, and we have the skills and competencies for that.

We are also adding, of course, talent to our organization. We are growing at a fast pace, and we do need to build up organization. But we do it, as always, very consciously and also when needed. Looking forward at the M&A opportunities. There has been, of course, a bit less activity in Q2 if you compare to Q1 and last year Q4, not only for us but also for the market as such. We do see there are lots of opportunity going forward as well.

So -- but this quarter and going forward, we have focused on integration and really getting these new companies that have joined us to really work well within the group. And that has also been over my expectations when it comes to both NaturVet and Innovet. But we have lots of contact out in the market and many, many companies contacting us. So going forward, I expect us to be active, but let's see. We will come back to that. Some questions.

[Jenny Graflind, executive]

That's the presentation. We have received a couple of questions. I will put on the camera here as well. We have received a couple of questions before the presentation. So let's go through them.

[Jenny Graflind, executive]

So related to the new deals that was indicated to be under negotiation. How are they progressing? And how is the market likely to be proactively informed about deal value over the contract period?

[Hakan Lagerberg, executive]

Yes. That's different in -- for the different, let's say, negotiations that we have. Some will be communicated with a press release and some will perhaps only be mentioned as an increase in sales for some of our group companies. But they are progressing really well. And over this coming half year, I will be able to communicate a couple of them at least.

[Jenny Graflind, executive]

Great. Are you holding the time plan for the Q3 production ramp-up at mainly Vetio but also at NaturVet?

[Hakan Lagerberg, executive]

Yes, we are. Q3 is definitely going to be -- or that has already been live, a small project in Vetio South. And when it comes to Vetio North, we have started this month. And for NaturVet, it's actually -- the -- has started probably around today or at least next week, we will have the new line up and running. But of course, not going at 100% capacity. But absolutely, they are all in production this quarter.

[Jenny Graflind, executive]

Very good. Next question, what is the result of the completed purchase price allocation? And what's behind the adjustments for Q1?

Well, in the Q1, we did a preliminary purchase price allocation, which was now completed during this quarter. The big impact was on inventory. Due to the fact that we have a fair market value on the ingoing balance, we do not have to do -- we do not have to depreciate the inventory, which then had a positive effect of the Q1, which we stated of SEK 22 million. And then it's going to have less depreciation impact on the gross margin going forward, so a positive impact for us.

That's the questions we have received. Let's finish. And in about 5 minutes, we will come back, and we will do a live chat on any questions that comes in.

[Hakan Lagerberg, executive]

Thank you so much.

[Jenny Graflind, executive]

Thank you.

[Hakan Lagerberg, executive]

Bye-bye.