Swedencare AB (publ)

STO:SECARE

Earnings Call Transcript 2022-Q3

[Hakan Lagerberg, executive]

[Audio Gap] me, Hakan Lagerberg, CEO; and Jenny Graflind, CFO, that will present our report.

[Jenny Graflind, executive]

All right.

[Hakan Lagerberg, executive]

Let's see, Q3 '22 highlights. Strong market despite unstable environment. Yes, I will not guide you in the macro climate, but of course, it's been a special year, this 2022 and Q3 has continued. We, as a group, had sales record as expected, since we added both Innovet and NaturVet this year. Solid demand despite world situation. We've seen solid demand in most markets, predominantly U.S., really strong, certain markets in Europe and export markets are starting to pick up.

Organic growth, 8%, below my expectations for this quarter, and we really haven't had our stars aligned this quarter. A couple of incidents that really affected the organic growth, but as I've written in the report, I feel that we have a very strong demand from the end market and that the coming quarter and year will be stronger.

Many of our group companies had really strong quarter despite the situation. And coming back to the organic growth, it was predominantly two companies that affected that, and there are some reasons for that. And one of them being the ongoing major agreements that impacted our sales. We have, as I've written in the report previously as well, we focus a lot on aligning our sales, strategy for every brand that we have, and we focus on a couple or one important partner for the different channels. So that has affected this quarter. But going forward, it will be one of the key components for us growing stronger than the market itself.

Many collaborating initiatives within the group. We, of course, have a completely new situation when adding two major components like NaturVet and Innovet. And we really are focusing on group initiatives, both from the, let's say, cost synergies, but predominantly on sales synergies. And it's really rewarding to see that for many of the group companies that have had external suppliers, we shift that to internal manufacturing. And we are far from being finished in those processes. So we will continue focusing on transferring product manufacturing from external suppliers to internal so that we have the full margin, and we can control the deliveries.

[Jenny Graflind, executive]

Let's speak about sales. So this quarter, we grew by 119% from last quarter or Q3 last year of SEK 221 million, and this year, we delivered SEK 484 million in sales. 8% was organic, 95% was acquired revenue, and we had a 16% currency impact. NaturVet, which we acquired in February 1, contributed with SEK 172 million during the quarter. And Innovet, which we acquired on March 1, contributed with SEK 35 million. Vetio, which we acquired July 1 last year is also included in the organic growth for this quarter.

A couple of things that impacted the revenue. As we have discussed and communicated many times before, we expected strong production ramp-up in Q3. And this was very successful in Vetio North as we expected. Vetio North was actually delivering the best quarter in their history, both in revenue and on profit which was great to see. We had delays in Vetio South, one of the big production projects with a big customer was delayed from September to October, which impacted the revenue significantly. One other thing that impacted the revenue negatively is that we had a retroactive price adjustment of about SEK 4.5 million, which impacted the quarter together with the same customer, very small deliveries to this customer. This was to the largest veterinary distributor in Europe.

So these two together, both the retroactive price adjustment and the fact that we were only able to deliver very small delivery basically had a double hit this quarter. So that negative growth in the U.K., Ireland market is also having a negative growth for the year in this -- for this market.

In addition to that, I'm sure you know about the hurricane that Florida was impacted with in the end of Q3, which of course stopped a few deliveries during the quarter. Together with that, Hakan has mentioned several times about the shrinking of inventory. In addition to a lot of the customers wanting to have let's say, smaller inventory levels. There's also been a change due to the fact that during COVID, a lot of customers place larger orders. And now when that supply chain has been, let's say, adjusted more recently, it put a smaller, but more frequent orders. So that also has an impact on sales.

A couple of KPIs. I have already mentioned the revenues and the operating gross margin was for the quarter, 55.8%. This is a similar level to last year at 55.9%. However, it's lower than we had last quarter. In Q2, we delivered a gross margin of 58.9%. And the reason for this quarter having a lower gross margin than the last quarter is one of them is the customer mix. We also did a lot of launches of both products and to new customers. And when we do launches with both products and to new customers, it normally comes with more specials in terms of prices and also with additional marketing costs. So that had an effect.

We also had, as I mentioned before, about this delayed delivery. So of course, there's more prep cost for production, which impacts in -- both purchases and transport was impacted in gross margin. So as we are phasing out these production preparations together with some process changes that we have made during the quarter, and also as we are implementing another price increase in the beginning of the year, we should be back to our Q2 gross margin level already by next quarter.

External cost was impacted mainly by large exports that we have in Q3. Q3 is normally the quarter where most exports are done both -- all over the world actually. In addition to that, we had a redesign of our ProDen PlaqueOff products, which of course had both the design cost and some scrapping of old design materials impacting the EBITDA margin.

Further down, we have exchange gains. We had a very strong U.S. dollars as everybody knows. So we had a positive effect. We also have an increased interest expense, as we have additional loans taken up in the quarter connected with our earn-out that was paid on July 15. And of course, we have a bit higher interest rates, which are impacting the interest expense. Cash flow was impacted by a bit higher inventory and also the earn-out payment for NaturVet.

[Hakan Lagerberg, executive]

Net sales by region. So here, we have North America, 84% of our total sales, of course, the predominant region for us. We have strategically focused on that, both with acquisitions and also from an organic growth perspective since it's the biggest market in the world and also have had the last years among the big markets, the strongest growth.

So continued quarterly growth despite inventory shrink is among top customers, strong end customer demand, and that's the, let's say, frustrating thing for us, as a group, and the different group companies is that we see that out-the-door sales from our larger customers, larger pet retailers and also from veterinary chains is that they are selling out a lot more of our brands than what we are able -- what we are allowed to ship to them. So -- but we expect Q4 to pick up. And -- but as Jenny said, going forward, we -- the market is like this that the big retailers, they expect faster deliveries and ordering a bit smaller, but more frequent.

And we can also see it why I'm so confident on our sales is really the strong online sales that we have. So Pet MD, for example, growing by 35% in the quarter. The online sales on Amazon for NaturVet was up even more than that. So when the inventory levels really pan out, we are sure that we will continue to grow and grow a lot faster than the market.

As I said, several intra-group projects when it comes to synergies, costs and new businesses. Some of the new businesses take some time, but we have really interesting initiatives, and we have one key employee focusing only on intra-group projects, and that's really exciting.

To mention one small company that we added last year was FAV, our online setup for lots of different platforms, the fulfillment company, had 1-year anniversary now, end of September. And this year, FAV has grown 76%. And that's mainly just starting to the rest of the group companies starting to use the FAV capabilities. So we will continue to focus on that and find sales that we wouldn't find otherwise.

ProDen PlaqueOff, another fantastic quarter, grew by 67% and really all over the place. New customers, existing customers, online, really strong one of the key components for Pet MD that handles ProDen PlaqueOff sales. And just finding new customers, both from our regional organizations, Swedencare USA, but also with the NaturVet sales force taking on ProDen PlaqueOff, and that was actually launched in August and starting to have some deliveries out end of September, but we expect a lot more. So it's really exciting times. So best ever quarter for Pet MD.

Vetio, as a whole despite the somewhat lower Vetio South growth, as Jenny explained, and also Swedencare USA. NaturVet was flat for the year, and they are really, really hit hard by the big retailers since they really delivered that. But as I said, online really strong.

Stratford and Rx due to different customer contract negotiations, a decline in sales, but we expect both of them to come back strong. And to mention some of the new products that we have launched. Evolution brand, a completely new organic brand, focusing on the millennials, has had a flying start, shipping out products in August and September, primarily. And to mention a specific product line, board spectrum products really, really going off the shelves there, so exciting going forward.

We have also focused on, as I said, since online is so strong with the platforms, we have also taken a strategic decision to focus a bit more on D2C online shop for our different brands. So we have a completely new site for the NaturVet products, and it was launched in September. So it will be exciting to see how we work with that. And we have also focused more on social media. So we are increasing the followers in Instagram and Facebook. So it's lots of different online projects going on.

Going further with Europe, a bit softer quarter for Europe. Italy, really strong market for us. Innovet Italy, a fantastic company and growing a lot faster than the market. So taking market share in Italy despite being a dominant player already. So -- and that's really due to strong product launches and a really strong sales force and contact into the market, but predominantly also that -- their product is top of the line and really are -- have lots and lots of scientific evidence from their products. So the market really takes on when they launch new products.

Yes, Jenny, as mentioned, the price adjustment and the inventory adjustments for nutravet. The exciting thing is that we managed to agree upon a new 7-year contract with Europe's largest veterinary group for the U.K. and Ireland, and we are discussing new geographies. So it's really exciting. And they are also one -- nutravet has always been a key supplier to them, but they are also very much interested in what we as a group can offer when it comes to different products.

Nutravet also launching an online shop, has been -- their product line has only been sold in physical veterinary clinics previously. So it has been a very cautious and well-prepared launch when it comes to online sales. So a certain part of the product offering will be offered online and more complex products will still only be sold within the physical veterinary clinics. So -- and it has been well received both by the end consumer, but also from the veterinary clinics, understanding that there is a reason to be able to offer the products a bit more convenient to the end consumer.

We reopened a warehouse in U.K., not really our plan a couple of years ago. But due to Brexit and the -- both from a cost perspective, but also the transportation complications with different documentation, it makes it very complex to have single shipments, smaller shipments between the EU and the U.K. From a cost perspective, it won't affect us that much, but we're very happy when Ireland could handle U.K. But it is what it is. Brexit is here to stay. So we have adapted.

Several new product launches that are exciting from the different group companies. Zooplus where some of our distributors have sold into -- have started to have direct contact with us. So we have started with a couple of products now, but we expect to grow the collaboration with Zooplus in the years to come. ProDen PlaqueOff also grew in Europe, not as fast as U.S. but still. So -- and there's also, for example, U.K., the largest market for us when it comes to ProDen PlaqueOff. The Amazon sales there grew by over 20% this year, and we have increased our sales with 5%. So that's also a very good example of the inventory shrinkage, but the sales growth are really impressive.

Lots of initial private label discussions in Europe. Private label is not as common as in the U.S. and also that -- so there are lots of different situations in the different European markets. So we have lots of initiatives there. We are also preparing to launch the Innovet line in both Greece and Spain as first group countries. The setup in those countries are very similar to Italy when it comes to the market. So we expect it to be an interesting launch.

And then one major key for us going forward is, as you know, that the soft chew supplement products that we sell in the U.S. is really dominating area. And that hasn't really come to Europe in the same way. So we have laid down the strategy and we're looking forward to having soft chew manufacturing in Europe, and we both have strong demand for our branded products, but also, as I said previously, when it comes to the private label. Soft chew is a key component for our fast growth.

Looking at the export, rest of the world is stronger, grew quarter-to-quarter comparing years, but slower than last quarter, but that was expected since we -- as you know, if you followed us, we have some quarterly differences when it comes to exports. But really, really happy with Brazil growing a lot, both with the ProDen PlaqueOff normal products, but also with our pet food collaboration in Brazil. Actually, the Brazilian project will become the biggest project that we have when the year has passed. So it's really a strong project there.

South Korea continues to be our strongest market in Asia, both for ProDen PlaqueOff, but also in NaturVet and Nutravet. Japan is fairly strong for NaturVet, but the really impressive thing to see there is that when we now have entered with ProDen PlaqueOff in the pet retail space when it comes to our powder product, that it has really exploded. And previously, we only sold in the veterinary channel. And there, it has been a small growth, but the -- since launch, it has definitely grown a lot more than we expected.

China, still locked down, but expecting an order in Q4 for ProDen PlaqueOff and hopefully being able to launch a couple of our other brands in 2023. Our distributors in China are expecting a lot stronger 2023 than 2022. That's been really weak.

And speaking of that, speaking on Asia, it's really, really good to see that the expo has come back in Asia. So it's a first expo that we have participated in and really the only major expo that's been able to participate as a European or U.S. citizen in Asia. What is being held this week in Bangkok, and I've spoken to the colleagues who attend there, and they are thrilled about the interest in Asia. I think it's been really focused from the whole region that looking forward to meeting people and looking at new products. So we expect lots of interesting things to come out of that expo.

And on that term, it's really that we -- what's been frustrating these last years is that we haven't been able to really launch the new group brands that we have acquired into the export market since it's really dependent on traveling. And since traveling has been very restricted, it's been frustrating not being able to launch a couple of our really strong and interesting brands. But looking forward to that for next year.

[Jenny Graflind, executive]

Our role in 4 quarters, it continues to grow. As you can see, our net revenue is at now almost SEK 1.6 million. And remember that this is reported figures, so this is not -- does not include proforma numbers. Our operating margin, rolling 4 quarters is at 22.6%.

[Hakan Lagerberg, executive]

Quarters going forward in the last quarter and 2023. Really, international sales, as I said, lots of opportunities there being focused, not so much perhaps last quarter now, but definitely 2023. Launch of soft chews in Europe and international, both label and private label.

Product launches and development. We have a strong pipeline of new products from many of our group companies. And as you know, we also take advantage of the different products that we have in the group. So perhaps not new products for all of our brands, but new products being launched. And that's one of the key component, for example, with the Pet MD success is really that we now have a vast basket to choose from our different manufacturing companies and brands that can be included in the Pet MD brand.

So that's really a strong factor for our growth.

Utilizing group resources and other synergies in all areas, basically. So starting to identifying different responsibilities within the group that can be utilized from any group companies. So that will continue. Growing and solidifying relationships with major customers, as I said in the beginning. It's really a key component for us that we want to be a preferred supplier and partner for many of the most important players in the different markets. And we have an excellent both track record, but also a continued discussion and meetings with really interesting players on how to grow together.

And as to take from the market is really that when we present the full group now, what we can offer as a group, it's -- we are a -- I wouldn't say unique, but we are a very different player than many of the players in the market. So we can offer strong brands, we can offer private label solutions, we can offer contract manufacturing solutions. So that's really a good setup that we have.

M&A. As I wrote in the report, M&A has been a bit slower when it comes to -- comparing to the last years when we've been very active. So last acquisition we made was 1st of March with Innovet Italy. We still have lots of discussions ongoing. The market has been unstable for from -- let's say, publicly listed companies as included, and also the private sector has perhaps been a bit slower when it comes to expectations from what you could get out of the deal.

So of course, a bit more uncertainty and a bit, let's say, slower market for looking at the pet sector as a whole. And -- but we have many interesting discussions, and I expect us to be active in the market going forward.

[Jenny Graflind, executive]

Great. That was the end of our presentation. We have received a few where -- let's put on this -- the camera. We have received a few questions this morning. So let's do those first, and then we will take a short break and then you guys can send in your questions, and we will answer them by chat.

[Jenny Graflind, executive]

So the first one. It's now been a year since the patent of the ProDen PlaqueOff expire. Has the competitive landscape changed? And are you surprised by the continued growth?

[Hakan Lagerberg, executive]

I would say that the competitive landscape when it comes to dental care product is -- has always been strong and tough, and dental care products is expected to grow faster than the market. So absolutely, it's a competitive landscape, and we also see lots of new products coming to the market.

We haven't seen that many new products with our, let's say, active ingredients. And that is, I mean, partly due to -- of course, you can find the same algae growing somewhere else and being processed somewhere else. But we have always been fairly securing that the most important thing for us is that we have a unique product. No one has the same processing for the final product and lots of different, let's say, key component that makes our product more efficient. But even more important is the strong work we have laid down, the foundation with building the brand.

ProDen PlaqueOff today is really a strong brand, top of mind or at -- if not top, I mean, in the top 3 and in most markets, when it comes to oral care product, and we are expanding the product line as -- going forward. But the really -- it's nice to see that our original product, the powder product still continues to grow. And even among this quarter was the strongest growth in that product compared to the different products we have in the product line. So it's really impressive.

So haven't seen any major competition that has affected us much when it comes to this. So I would say that even I'm a bit surprised about the strong growth of ProDen PlaqueOff. But as I said, we have laid down good foundation to continue to grow.

[Jenny Graflind, executive]

Yes, you mentioned it was 67% in North America, and it was 30% overall.

So second question, why was your retroactive price adjustment made in the quarter? And what was the amount?

I can take that. The amount was about SEK 4.5 million. And the reason for this retroactive price adjustment has been a long term or long negotiations for the last year with these big customers. And there's been -- now finally in Q3, all the terms were settled. We were able to get in a longer contracts, 7 years. We have minimum volumes, of course, in the contract, and with that came a special discount that was implemented from the first of the year. So that's the reason for this retroactive price adjustment.

This hurricane in Florida, was there any material damages from it?

[Hakan Lagerberg, executive]

Fortunately not. The hurricane was predicted to go over the Tampa area. So -- but it didn't. It turned earlier, so it came over the Naples area, unfortunate for them, but of course, fortunate for us. So no material damages.

What happened was that our staff was obliged to either stay at home or to evacuate somewhere else. So of course, this last week, we didn't have staff on -- I think it was 1 or 2 days that week. So it really -- and there was also, of course, a problem getting transport since many trucks were forced to work for the government or the different municipalities. So that -- it affected our sales, but not any material damage.

[Jenny Graflind, executive]

Good. Do you still have a target to reach 20% organic growth for 2022?

[Hakan Lagerberg, executive]

Yes. As I said, disappointed about the 8% organic growth this quarter, but important to just make, let's say, some background. We have never set up a 20% target. We have set up that if we will -- if we should reach the SEK 4 billion in sales in 2026, it's roughly 20% growth year-to-year going forward. And I, of course, last year, I expected stronger organic growth this year. But since the macro climate and with the inventory shrinkages and the one-offs that happened this quarter, it will be a challenge to reach 20% this year, but we will definitely have our strongest growth quarter in Q4. So -- and I'm very confident on 2023 going forward.

[Jenny Graflind, executive]

Good to hear. If the end customer sales grow by double digit, why don't you?

[Hakan Lagerberg, executive]

Yes. I think we have explained it, but it's really that -- it's not really up to us. The inventory levels from our bigger customers. So at some point, we will catch up. So we expect strong growth going forward.

[Jenny Graflind, executive]

Very good. Any final comments or otherwise -- no? Thank you very much for participating. Again, we will stay, come back in about 5 minutes and answer any questions you might have. Thank you.

[Hakan Lagerberg, executive]

Thank you so much for listening.