Swedencare AB (publ)

STO:SECARE

Earnings Call Analysis

Earnings Highlight Robust Growth and Expansion

The company passed an FDA inspection with no major findings, showcasing the effective changes in manufacturing. NaturVet and ProDen PlaqueOff products drove significant growth, with NaturVet sales surging over 50% due to both online and retail sales. North America reported 16% growth reaching SEK 470 million in sales, with Vetio South's sales staying flat but poised for improved profitability. The European sector showed remarkable performance with 100% growth and sales totaling SEK 111 million; Spain notably achieved 260% growth. NaturVet experienced a 100% increase with strong direct-to-consumer performance while the Asia-Pacific and Latin American markets demonstrated robust sales, doubling figures and expanding into new territories, specifically Mexico.

A Quarter of Strong Growth and Improved Cash Conversion

This quarter marked a significant milestone with a 17% organic growth, augmented by a very strong cash flow. The company witnessed record-breaking sales during the quarter and especially at the end of the month. The growth was particularly robust in pet retail online, signaling solid performance and resilience in this segment. Despite a softer performance in the veterinary panel, recovery is already anticipated in Q4. Efficient cash management efforts resulted in an impressive 99% cash conversion rate from EBITDA, although such high figures are not anticipated in the future as the focus will shift to investing in new projects. Encouragingly, the company has reduced its net debt to EBITDA ratio to below 3%, well ahead of the Q4 target.

Double-Digit Growth Across All Regions and Continued ESG Commitment

All regions contributed double-digit growth, underpinning the company's geographical strength and a sustained demand for both branded products and contract manufacturing services. Improvement in customer inventory management conclusively demonstrated a rebound from earlier challenges. The company has integrated a new sustainability platform to be operational in 2024, strengthening its ESG endeavors. A company-wide employee survey revealed high motivation levels, though the company continues to strive for further improvements. Revenue soared over SEK 602 million with an increase of 25% from the previous year, and operational EBITDA grew by 35% to SEK 137 million without any adjustments.

Expansions and Setbacks: Contract Manufacturing, Gross Margin Pressures, and Dermatology

The company endured higher material costs and margin pressures, indicating that price adjustments towards customers will be effective from the next year. Ramp-up efforts in Europe and the introduction of a second line in Vetio South are underway to strengthen manufacturing capabilities. However, a decline in dermatology sales, primarily in the veterinarian channel, was noted, albeit a rebound in Q4 is already expected. Pharma saw a decline due to fewer development projects and a production halt from an FDA inspection and reconstruction efforts.

Strategic Push in North America and Continued Brand Strength

Strategic developments in North America continued with the FDA inspection yielding positive results and launching new product concepts under NaturVet, which is experiencing strong growth. ProDen PlaqueOff is also growing steadily and new projects are lined up for 2024. In Europe, sales doubled with exceptional growth in markets like Spain, and the company's entry into Mexico with ProDen PlaqueOff has created new opportunities. Meanwhile, the acquisition of new brands and partnerships is fuelling growth across different geographies.

Outlook: Focused on Growth, Profitability, and Low Debt

Overall, the company remains focused on growth, profitability, and keeping debt levels low. With the market continuing to bounce back, the hard work invested in business restructuring in the previous year is paying dividends. A priority is moving manufacturing from external suppliers to in-house, which is expected to enhance gross margins. Strong relationships with retailers and veterinary companies are anticipated to drive future growth, and a pipeline of new products from Innovet is set to enter the markets, backed by successful clinical studies. The company signals a more active approach towards mergers and acquisitions in the coming years, and efforts to unify the North American assets are projected to yield margin improvements in 2024.

Earnings Call Transcript 2023-Q3

[Operator]

Hi, and welcome to the presentation of Swedencare Q3 report by our CEO, HÃ¥kan Lagerberg. We will have a Q&A after the presentation. [Operator Instructions] Over to you, HÃ¥kan.

[Hakan Lagerberg, executive]

Thank you so much, Emma. Hakan right here. Unfortunately, Jenny Graflind our excellent CFO. He's not with us today due to some change in traveling plans. But I'll do my best answering your question when it comes to the financials. And if there are any outstanding questions, we will be happy to come back with that with Jenny's expertise. So, I'll start with one through. And as Emma said, I will be happy to answer any questions you have after the presentation. So let's see Q3 2023, a strong quarter, 17% organic growth with a very strong cash flow, a sales record both when it comes to quarter and also month has been regularly the last quarters, the end month of every quarter has been the strongest. Looking at the different channels. Pet retail online, really solid growth there. And as I wrote in the report, the Vet [ panel ]a bit softer, but still a good event. There has been some particular areas where it's a bit softer, but you see a comeback in already in Q4, I will come back to that. The cash flow was very strong, as I said, 99% cash conversion from EBITDA. And Jenny told me to say that I do not expect that going forward. But it's an excellent showcase of all that what Jenny and our team and all of the group companies have been doing this all year, I would say. But still this quarter, it really shown an effect with lots of different projects we've had to convert to cash in after rate or everything from accounts receivables to paying suppliers and also looking at our inventory levels. But going forward, we will still continue focusing on that, but I do not expect to have these kind of numbers going forward when it comes to cash conversion. We used the cash in this quarter, of course, to increase our amortization. As we've said, we've been very focused in amortizing on the debt that we have in the company. And we have always been cash generative. And there's no better way to use the cash right now than to get our debt level down. And I'm happy to say that our net debt towards EBITDA is below 3%, and that was our target for full year half Q4, and we're very happy that we were already at that point. Moving forward, we will continue, as I said, but I do not expect the same decline in the debt level every quarter going forward because, of course, we need to use our cash also for some interesting projects going forward. All regions delivering double-digit growth. I have been very clear in my communication that I did expect a stronger second half year comparing to the first half year and mainly due to the fact that our main customers that affected us when it comes to their declining or using their inventory that they had that we saw an end of that in Q2 and the Q3 results really showed that I was correct in my prediction for that. We have a strong demand for our brands and also when it comes to contract manufacturing, as I wrote in the report, our soft competence and capabilities is really in high demand. And going forward, we see an increase definitely in the contract manufacturing side also. And the European demand as also what I predicted has been very strong and will continue to increase over the coming quarters. We are focused on our ESG work. And as I informed you in the last report, we have a new European Commercial Director, Lars Leagues, who will take charge of the ESG work going forward for the group. And in this quarter, we have implemented a new sustainability platform that will come into effect in 2024. That will enable us to collect and analyze data from all the group companies going forward. We have also started to work with the materiality analysis where we see the most important sustainability priorities going forward, and we will communicate that in the next year. And as I also mentioned in the last report, we had for the first time, a group employee survey being set up the same way for all of the group companies. And we had really good results. No group company that there were any issues, very motivated employees and very happy employees being part of the Swedencare family. But of course, there are always things that can improve, and we have analyzed and started working with that and address certainly as going forward. So even though the results were definitely very high in all the areas, we do want to improve wherever we can. Net sales first time over SEK 602 million for the quarter, and that was an increase were 25% compared to last year. The operational EBITDA and the EBITDA and EBITDA was operational and the normal was the same this quarter. We did not have any adjustments between operational and normal. So it went up to 22.8%. I did expect an increase, but perhaps not this much since we are still battling some issues when it comes to gross margin that will be sorted out first in the next year. But nice to see a good boost compared to last quarter and also the Q3 last year. So looking at the KPIs for the quarter. The net revenue amounted to SEK [ 602 ] million, increased 25%, as I said. Organic growth of 17%, a lot higher than the first half year. We had 10% first half year and '17 this quarter, 6% variance impact and 2% acquired growth. The acquired growth came from Belo U.K. and Weber, which was acquired in November 1 and April 3 and the net revenue continues to grow quarter-by-quarter, increase with 5% compared to Q2 2023. Operational gross margin, 53.7 million, mainly affected by higher material costs, where price adjustments towards the customers coming into effect January next year, somewhat lower productivity in some of our manufacturing sites, mainly due to ramping up. As you know, we're ramping up in Europe. We're also ramping up in Vetio South, where we have put in a second line when it comes to [ softwares ]. And also that we -- in Vetio North had fewer development projects in this quarter and the development projects have a significantly higher gross margin than manufacturing contracts. Also a higher degree of contract manufacturing, where we have a lower gross margin. But from a scalability perspective, it's really good for our group. And as you saw, we got the EBITDA up a couple of percentages. The operational EBITDA, SEK 137 million, an increase of 35% compared to SEK 101 million last year. And as I said, no adjustments this quarter. We had very strong cash flow, SEK 135 million. And during the quarter, we had decreased the working capital with [ SEK 33.5 billion ] and quite impressed with that since we are growing the business. And as I said, we have amortized SEK 75 million on [ our own ] this quarter. Looking at the year-to-date numbers, net revenue amounted to SEK 1.7 billion, an increase of 27%, of which 12% is organic. For the first 9 months, all the [ cash flow ] markets have shown growth. The operational gross margin 54.3%, lower than last year and mainly due to the same reasons as for the quarter, somewhat more when it comes to the product mix. Operational EBITDA at SEK 363.8 million, an increase of 14%, and the margin is 21.4%. And Operating cash flow for the first 9 months, SEK 317 million, a positive effect of working capital for the year of SEK 48.8 million due to less inventory and increase of operating liabilities. Investments in tangible intangible assets, CapEx amounted to SEK 27.9 million, which is about half compared to the same period last year and amounts to 1.6% of net sales. We did communicate that we were expecting lower this year since we did some heavy investments for our group last year. Last year, it was 4.6%. And in addition, we have amortizing SEK 125.6 million so far this year. During four quarters. The growth story continues, and we're happy to see that even though we haven't made that much M&A, this year, we still continue to grow our business. Looking at our different products and brands, we see a strong increase when it comes to nutraceutical or supplements, as you also can call it, a decrease when it comes to topical dermatology and that's mainly affected by the lower sales when it comes to the veterinarian channel because when it comes to our top of dermatology, the majority of the customers there are in the veterinary channel. But we do expect the bounce back in Q4 already when it comes to this product area. Pharma also declined. That's mainly due to 2 reasons. It's our activities up in Vetio North. The [ funds ] were very, very tough preparing last year. The Q3 last year was the strongest quarter for the year when it comes to our pharma business. And as I said, a bit lower when it comes to development projects, and we also had a [ big ] inspection together with the rebuild of our bottom line that made us not being able to produce for a couple of weeks in Q3. But I'm happy to say that the FDA inspection first one since 2019, only you have it around 2 to 3 years, but due to COVID, there has been a delay. But we were very happy since we have made lots of changes in our predominantly when it comes to our manufacturing lines. We are very happy to see that the team up North has done really good preparations for the inspection and it was a very good result from the inspections. So no major findings at all. Looking at our different brands, NaturVet is really kicking off a really strong sales for NaturVet. And that's basically in both channels, both online and Pet Retail. As you know, we have launched a new product concept called [indiscernible]. That's been very successful. But I would also like to say that all over the net line has been very strong in demand and gaining new sales. Pulling back off, we continue to grow very, very strongly, over 50% growth for product this quarter and then for full year as well. And in all geographies, it's in all channels, and it's also due to the new product we have added to the line soft chew, product like our soft chews that's been doing really, really well in North America. And those are about to be launched in Europe and rest of the world. This winter, so looking forward to that. Some of the other brands, NaturVet also increased [indiscernible] vet specialty brand dominating in the U.K., but also gain some new export wins. So I really have to see that. Some of the others have also had -- they have had -- even though they've decreased in this pie chart, they have grown their sales. So it's just that the different brands here, as I said, NaturVet and ProDen PlaqueOff has been very strong in the growth. Going through the different regions. Starting off with our biggest region, North America, SEK 470 million in sales, a 16% growth, so lower than the other regions, but still very good growth. And as I said, some of our group companies have had extraordinary growth and looking forward to presenting Q4 for the ones that didn't have that good numbers this year. So a strong quarter in pet retail and online, a little bit softer, but the collaborations with Patterson and MWI that we have presented in the first half year has really starting to show good numbers, and I'm very, very confident of those collaborations going forward. But it moves on in a steady pace, and I expect basically quarter-by-quarter those collaborations will have a nice increase. Vetio South, we've done lots of work there. And this quarter, I mean flat in sales mostly affected by some, let's say, changes like what we did in adding another line and also coming down to sometime raw material ingredient challenges, but made a lot of progress. We have a new general manager and the team all around him, they have done excellent job and they are eager to show in Q4 that they will be presenting both growth and improved profitability. Vetio North, as I said, declined due to some less development projects and a very strong Q3 last year. But also there, we expect Vetio North to contribute a lot more than this quarter. PetMD, our online division, really strong sales continue to grow quarter-by-quarter between 25% and 30%, and that's not only the PetMD brand that they handle. They handle also the ProDen PlaqueOff sales on Amazon, where they've done extremely well in getting rid of the so-called road sellers or diverters selling online. So that will show a lot more on our top line sales and also when it comes to profitability. They are also handling the RX Vitamin sales on the Amazon and Chewy and that has also increased a lot this quarter. ProDen PlaqueOff, as I said, 4% growth amazing, and we do keep on boosting the brand building activities that we do, and we have had a very strong demand for new customers wanting to sell ProDen PlaqueOff. NaturVet, 39% growth, including contract manufacturing. Really happy that we dared to invest in the third production line last year. Now is really starting to pay off, and it will continue to be utilized more and more going forward. We have also made a more structural change. We have moved the RX Vitamin operations down to Tampa, Florida, all done in October and up and operational. So has been a big project, of course, moving down a lot of the inventory, moving down the servers, et cetera, and it's gone really well. We have a strong team planning for this. And the key people from RX Vitamins will work remote and some other operations are moved completely with new staffing in -- down in Tampa. So I'm happy to say that the new CEO was [indiscernible], who came on board when we acquired the [indiscernible] concept for subscriptions to the veterinary channel. She will have both [ that ] and RX Vitamins, and we see lots of synergies between the 2 operations. And I'm also happy to say that we keep on adding new [indiscernible]. So I got them Geoff Granger on board as the new NaturVet CEO as of now, he goes side-by-side with Scott Gorman, the founder of NaturVet that will retire later on. And Geoff Granger comes with tons of experience from big retail from Petco. He joined us from Petco this year, and he's really digging into lots of new things and operative issues, not easy that we have, but you can always make improvements. So I'm really happy to have Geoff on board with all of this experience. Looking at Europe, a strong sales quarter, of course, strong growth here, SEK 111 million in sales and over 100% growth in sales. So 90% of our total revenue. All channels performing. You mentioned some channel especially, of course, online sales continue to grow for us a lot. We do focus more and more on the online sales when it comes to our direct sales. All European markets are double-digit growth and some exceptional Spain, plus 260%. Of course, it's a small market in our group, but really happy to see the hard work from the Spanish team that they're really starting to pay off now. And NaturVet, 100% growth. They did have a, let's say, weak, weak comp, but nevertheless, a fantastic sales by the team, and it's all over both the vet channel, of course, where they've always been performing well, but we have also continued to grow our direct-to-consumer sales that we started roughly a year ago or in September 2022, and it's growing a month or not and really good results there. And then looking at the exports starting to improve quarter-by-quarter also when it comes to NaturVet, lots of interest around the world for the NaturVet brand. Vetio UK, formerly known as CVP, best quarter since they joined in Q4 last year. And I'm really happy to say that it's a good example of a collaboration within the group because of the high demand in Europe, we have utilize Vetio South in the coming quarter as well to supply the customers of Vetio UK and we are also setting up a also set up a softer line in Swedencare Ireland. So we'll start delivering commercial products from Ireland in Q4 and the collaboration between Vetio UK and [ SDC ] Ireland is excellent. The SDC has taken over some machinery from Vetio UK and also all of the knowledge that Vetio UK. has when it comes to the software manufacturing is really helping us to kick start the manufacturing in Ireland. NaturVet by Swedencare, we got the trademark registered or granted for the EU. So we are in the preparation for launching NaturVet in all of Europe basically next year and we'll have a sort of kick off with that when it comes to the biggest Vet Retail exhibition in the world InterZoo in May 2024, but we will probably start a bit early on some of the European markets. The rest of the world, basically doubling the sales -- and I'm happy to say that it's not only product sales, it's also a development project that Vetio North received from a Chinese customer first time, as I presented last quarter, we've got a signed contract with a Chinese customer, and it's really happy to see that, that project is developing well. And we do see an increase of geographies contacting us for development projects. So there is a big demand all over the world when it comes to developing RX products for the veterinarian sector. ProDen PlaqueOff, had a strong quarter – Asia, several countries in South America, Australia and also Mexico, really happy to announce that we have finally been able to enter into Mexico. It's a very complicated market when it comes to regulatory for settlements. But now we have a good partner and really excited to see about what we can do in next with ProDen PlaqueOff .And NaturVet, as I mentioned in the previous slide, starting to be a bit more active when it comes to export. Thailand has been an excellent customer for us this quarter, and the Poland is a new market. And really happy to say that a project that has been in the pipeline for a long time with our largest veterinary customer is coming into effect really in Canada in Q4. So it's a big launch for our, let's say, NaturVet organization that we work with our partner in Canada. ProDen PlaqueOff as an ingredient keeps on growing steadily, not let's say, not the biggest numbers in dollars, but still growing quarter-by-quarter, basically, and we are opening up and planning for new projects in 2024. NaturVet and RX Vitamins have sales primarily in Asia, and I would say it's Japan and South Korea and Taiwan [indiscernible]. Going forward, more or less the same priorities as we've had for this year, it's growth and profitability and low debt level. That's key to us. It's -- we're really happy to see that the markets are bouncing back and all of the hard work we did in '22 is really paying off now in '23 and expect that to continue into '24. We have a strong pipeline when it comes to partnering with lots of big retailers, big veterinarian companies. So I do expect that we will continue in that manner going forward. What will help us improving our gross margin is definitely the continued move from external suppliers to internal manufacturing. We have been delayed in some projects, especially when it comes to [indiscernible] for the North American market. But I have to say that in Q4, we are delivering on many of those switches. So that will beneficial to us. Strong product [ loss ] pipeline, especially from our Italian company, Innovet that has a really high scientific level have had many wins when it comes to present new products in the market. And also, there's been several clinical studies with excellent results. And from a more local perspective, the European dermatology organization had a big meeting in Gothenburg, Sweden, where we presented together with our partner or several basically clinical studies with excellent results, and we were out there and presenting some of the products that -- with the strong interest from the veterinarian market. Keep on working really were close to our main customers. So we find developing relationships. That's the one we want to be as perceived as a very fast moving and exciting partner to work with. And that's the feedback that we get that we have lots of customer focus, both from, let's say, the end customers, but also our partners all over the world that we are very focused on being a partner that you can rely on a partner that you know that you get high-quality products from and also that you get the instant feedback and recognition. That's really important for us. And then, of course, M&A, I [ will be able ] to get questions about M&A and in our DNA, we have been fairly focused on amortizing our debt level and getting the group together and that hard work continues going forward. But of course, there are still interesting opportunities for us going forward. So you can also expect that we – in the coming years, we will be a bit more active than we've been in '23 when it comes to M&A. And also, what I also would like to say is that we've had lots of hard work when it comes to putting together the acting asset as one when it comes to the North American market. We have a big project looking over all of the suppliers and trying to gain, let's say, better pricing, better terms from choosing one or a couple of important suppliers. So that will definitely have a positive effect on our gross margin and bottom line in 2024. We see a lot of opportunities in getting good wins there. That's about it. Sorry, it's already half an hour, but I'm happy to answer any questions that you may have.

[Operator]

The first question comes from Rickard. Please go ahead Rickard.

[Rickard Anderkrans, analyst]

So a few questions, starting off. Very impressive 17% organic growth in the quarter, and you have even easier comparables now and 4 on the growth side of things. Do you expect to grow above the 17% organically in Q4 are your sort of expectations heading into next quarter?

[Hakan Lagerberg, executive]

I would say I'm happy where we are and have a strong momentum. So I don't want to give a prediction if it's going to be '17 or '20 or '16. And I'm happy when we are around this level. But as we said here, there are some comps that are a bit lower compared to Q3 last year. So let's see. I think we [indiscernible].

[Rickard Anderkrans, analyst]

All right. Great. And on the gross margin side, it remains a bit pressured. When do you think you can reach the sort of 57%, 58% levels you talked about previously, just to get a sense of the gross margin recovery trajectory?

[Hakan Lagerberg, executive]

I would say that we're working hard with that. And I hope that we will be there in 2024. I can say that we will be doing 1 24, but definitely, we should bounce back to those levels in 2024.

[Rickard Anderkrans, analyst]

Okay. So perhaps phasing getting there, but not in Q4 or in Q1, but rather phacing for the full year effect?

[Hakan Lagerberg, executive]

Yes. Yes, that correctly.

[Rickard Anderkrans, analyst]

Perfect. Very clear. You guide for growth and margin bounce back in Vetio North and South in Q4, which you have been guiding and expecting a recovery there before. Can you talk about the visibility there and the actions taken that you feel comfortable with the bounce back in Q4 would be...

[Hakan Lagerberg, executive]

Yes. I would say that in Vetio South, we have done -- I mean, basically, the unexpected things that has happened a couple of quarters is definitely not there anymore. We have a strong order book and plan for the manufacturing going forward. So I would say both external and the internal demand is very high. So -- and the productivity and efficiency in the production is a lot more visible than it's been. So I would say that I'm confident on that, but let's -- I mean I will be happy to present it after Q4. So let's say, but we have more control of the visibility of the of course, I mean, things can happen, I mean, external factors, but I don't expect that. So we feel something going to Q1. And October has started well.

[Rickard Anderkrans, analyst]

Perfect. And final one previously this year, you mentioned sort of a cost reduction program or efficiency program. How is that going? How should we think and model about that impact going forward?

[Hakan Lagerberg, executive]

Definitely will be impacting in 2024. We are in the final phases for a couple of important areas as it comes due to raw materials, packaging and transport. And those contracts will be for 2024. So -- and then, of course, we have inventory. But I would say you will definitely see it in 2024, an effect on improved margins on all of those areas.

[Operator]

Our next question comes from Christian.

[Christian Lee, analyst]

Yes. I was wondering if you could break down the organic growth of 17%. How much of it was related to price adjustments versus volume growth? And given the strong sales development in the third quarter, this see any risk of a stocking effect in Q4.

[Hakan Lagerberg, executive]

I don't have it really the breakdown, but I can say, for example, our biggest brand, the strongest brand in the NaturVet. We did not have any price increase in 2023. So I would say the price effect is a couple of percentages of those 70% to say. And no, I don't see a big stock buildup from our customers. It's been really all over, not the single big orders, I would say. So it's a good result of -- as we informed you about in early 2023. We did make some special, let's say, marketing investments when it comes to the displays in some big retailers, and that has really paid off this secondary marketing within the big retailers. We've seen a really good result with that. So I would say that the sales are all over. So very exceptional orders from many customers.

[Christian Lee, analyst]

Okay. Perfect. And my second question is regarding the interest-bearing liabilities that you decreased by SEK 75 million in the quarter. Do you plan to step up the amortization pace to SEK 300 million on annual basis from SEK 200 million?

[Hakan Lagerberg, executive]

No. I think that we did more to SEK 75 million was really due to the strong cash conversion. And I wouldn't say that we plan to amortize SEK 75 million every quarter going forward. No, I wouldn't say that. But definitely, our plan is SEK 50 million as we have communicated.

[Operator]

The next question from Adela.

[Adela Dashian, analyst]

Going back to the gross margin discussion. I understand that there's the development projects that are missing here, I guess, to some extent, is it just that the return of that that will enable you to get back to higher levels? Or is there something else that you're doing that's going to drive that development...

[Hakan Lagerberg, executive]

No, no, there's several initiatives -- price definitely, we will be increasing pricing in 2024. We will also do to this big project we have in North America, we will be able to get better raw material and packaging cost and transport that definitely have an effect as well and also from a fertility space. I mean we have been -- as I said, that will -- we have and really in Q4 utilize their sound for some European customers. That is, of course, not the ideal situation for supplying the European market, both from a cost perspective, but also from a timing and a sustainability perspective, we, of course, want to manufacture the products where we are. And we are ramping up in U.K. and also in Ireland. And of course, we're ramping up. The productivity is a bit less where we want to be more to have it. So I would say that there are many factors that will help us get back to the 57%, 58% gross margin in 2024. So all combined [ we ] will have us do that.

[Adela Dashian, analyst]

And then also on cash flows and the expectation that it will not be as strong in Q4. Could you please just give some more color on why that is? And is there a seasonality aspect that we should keep in mind or anything else?

[Hakan Lagerberg, executive]

No, it was just that it was a combination of initiatives in enduring our inventory levels, pushing payments from getting paid by customers and then perhaps pushing some. We've had a history perhaps being a bit nice to our suppliers pay paying a bit earlier than needed or stuff like that. So I would say that it was a combination. But I mean I don't expect us to have -- I mean, any worse cash buildup than we had in Q1 and Q2, but Q3 has been exceptional. So I just want to say that I don't really expect that for every quarter going forward. We will be happy we have been in some cases since we have had a high demand in cases perhaps we will need to build up a bit more when it comes to inventory levels to be able to supply the demand from the market. So it's -- I would say it didn't take, but Q3 was exceptional, but actually still I think we will have a very nice cash conversion and cash generating activities going forward as we have had.

[Adela Dashian, analyst]

Yes. That makes total on -- and I guess a follow-up on that, if we're able to continue to bring down the debt levels even further then should we think that you're a lot more inclined to do further M&A at this point? Or is the focus still organic growth and integration?

[Hakan Lagerberg, executive]

Yes. I mean still focused integration and organic growth. But as I said, we are a -- we have done a lot of successful M&A going forward, and the market is there and we get lots of contacts and let's say, companies and people one thing to join in Swedencare. So of course, we are in a good position. And when the right target comes along, we will probably won't have to take on acting on that. But let's say in -- we have communicated the big acquisitions we made with NaturVet and that was really the, let's say, very important building blocks for our group and then we have just added some smaller projects. So I expect us to be a bit more active than we have been, but the majority of our growth should definitely come from organic.

[Adela Dashian, analyst]

All right. And in that case, then what is it that -- what would constitute the right targets? Are you looking to expand your production capabilities even further geographic expansion, maybe some of the...

[Hakan Lagerberg, executive]

Definitely... There are some ties that we are interested in and a difficult defined targets. But I would say there are some key markets in Europe where we would in mind, finding an acquisition target, for example, Germany is a market where we are underrepresented. And looking at Asia is a interest not that easy to find good targets. But HS is an important market for us and looking for the prospects going forward, it's a very interesting area. So we find the target or we will probably be setting up some sort of activities in Asia. But if we are starting contrasts, that most likely will be more, let's say, still support office in the Asian markets, but let's say -- and also, I mean, it could be, as you said, some interesting companies that have something that we don't have any even though we have a very wide range of products right now, there are still some areas where we could complement our offering. So it's really dependent on the company's -- I would say the that the company would fit into our group. And as you know, we are very infill. We are focused on growth companies that have been able to grow together with the profitability. So if those factors are fulfilled and then we always look at the offer percentage to us. But let's say, we will -- and we continue to have the dialogue. But as of now, we are definitely focused on continuing paying down the debt level. We think that is good we're using our cash at the momentum.

[Adela Dashian, analyst]

Yes, for sure. If you were to expand in, let's say, Europe or Asia, would that result in a reduction of your exposure in North America? Or is the strategy going forward to keep the, I guess, overrepresentation in North America?

[Hakan Lagerberg, executive]

Yes. We are not worried about that at all. We do think that the U.S. market, the North American market is the most interesting market in the world and there still be a lot of opportunities for us. But -- so it wouldn't be to deleverage the, let's say, U.S. market or anything like that. But it would be more like that -- of course, we would like to have more presence in markets that we deem to be interesting in the German mines.

[Operator]

Our next question comes from Johan. Please go ahead.

[Johan Fred, analyst]

You mentioned higher input prices as a factor for the lower gross margin, which I would assume also affects your competitors. Have you seen price increases from competitors already in Q3?

[Hakan Lagerberg, executive]

No, I wouldn't say that much price increases... In Q3... No, I wouldn't say that. And what I do expect not only because of our, let's say, initiative in putting our buyings together as a group. I would say that we are expecting some due to market conditions. We are expecting some decrease in raw material costing in 2024. The collection is there already for that. So that could be one reason why right people haven't adjusted the price on to their customers, but we do see opportunities for us. We -- our main, let's say, main competitors looking at branded products. I do feel that we are in a very good position, price-wise, up to the market. So we are not afraid of some light price adjustments for one part.

[Johan Fred, analyst]

And of course, you mentioned mix effect from a higher share of contract manufacturing as to why the EBITDA margins and expand while the gross margin fell year-over-year. Are there any additional drivers that could help explain the sort of spread between the 2 factors? And what should we -- or what can we extrapolate from this going forward?

[Hakan Lagerberg, executive]

Yes. But of course, the contract manufacturing has a lower gross margin. But as you know then, we don't have any is G&A cost. So that will definitely have the bottom line when we grow the Patterson manufacturing part of the business. So we're not that worried about the gross margin, which will improve, but I mean we're not worried having contract manufacturing at low gross margin because we see that it -- the bottom line margin, we get good input therefrom the contract manufacturing business. So yes, I would say that you can probably expect that we see a strong demand when it comes to contract manufacturing and -- but I wouldn't say that it will go faster than our venders -- so I think it will be in line with the branded and product manufacturing, we probably grow hand-in-hand base when it comes to both levels.

[Johan Fred, analyst]

And then the final one here on the gross margin -- have you conducted any sort of campaign activities or lowered prices on certain product categories, which could help explain the spread between sales growth and the gross margins?

[Hakan Lagerberg, executive]

Yes. I mean we have been active in growing sales, but how much that effect I think it's more order to some product mix and some key components in the -- that has been a bit higher, but that we are finally seeing an improvement when it comes to the cost for those. So I wouldn't say it's any major campaigns. But yes, we've been active in in part, and we will continue to do that.

[Johan Fred, analyst]

And the final one from me. You've reached your 2023 target of lowering your gearing to below 3x net debt to EBITDA. But do you plan to continue to pay down debt at roughly the same pace that you have been doing for the year? I think that Jenny stated that you had a goal of paying down debt by SEK 200 million per year. Is that still standing?

[Hakan Lagerberg, executive]

Yes. Yes. We will continue to do that going forward. We see a good -- I mean, it's a good way to use the cash to deleverage and then we'll see it will -- when and if we will do any M&A. It will go to the board and discuss how we will best finance that. But we will definitely -- when we are not active in M&A, definitely, we will definitely use funds to pay back the loans definitely.

[Johan Fred, analyst]

Just an additional one for me as well. But do you mind adding some color on what you're seeing in the veterinary sales channel?

[Hakan Lagerberg, executive]

No. As I said, a bit off, but it's been more soft when it comes to to liquids, the D dermatology products and comparing to supplement. But we do see a pretty stable demand going forward. So I do expect that the retina side will bounce back, and I would be surprised if if we see some quarters going forward that we will have a very good growth in that channel as well. So it's nothing, let's say, spectacular. There's been some transactions, as you know, a couple of big M&A activities, and some of those have probably affected us also a bit with the companies wanting to be bit cautious when it comes to building up inventory. And so I wouldn't say that the vet market has dropped significantly when it comes to sales to hetowners, but it's just a bit weaker compared to the other plans.

[Operator]

We have one last question from auto around scalability. How much can you grow in manufacturing before you need to invest in more capacity?

[Hakan Lagerberg, executive]

We can definitely grow a lot more going forward, but we can also increase capacity with not so heavy investments going forward. We have a good set up all of the different facilities. So there's more room to expand. As we did now for some that will come into effect in Q4 that we installed a second software line there. So I would say that we will -- we don't see any major investments in the near future due to the capacity problems. We still have a lot more to go from.

[Operator]

Great. That concludes our Q&A session. Any closing comments again?

[Hakan Lagerberg, executive]

No, just thank you so much for your interest. And I would like to end up by saying that we do have a unique and fantastic organization, and there's been -- the efforts from all the organization has been fantastic. And I'm happy to say that there are many exciting things going forward, and we have a good feeling going forward.

[Operator]

Okay. Thank you all.