Vimian Group AB

STO:VIMIAN

Earnings Call Transcript 2023-Q1

[Operator]

This call is being recorded. Welcome to the Vimian Group Q1 Report 2023. [Operator Instructions]

Now I will hand the conference over to the speakers. CEO, Fredrik Ullman; and CFO, Carl-Johan Zetterberg Boudrie. Please go ahead.

[Fredrik Ullman, executive]

Good morning, and welcome to Vimian's First Quarter Earnings Call in 2023. I'm Fredrik Ullman, CEO, and with me here today on the call Carl-Johan Zetterberg Boudrie. I'll jump in to the first quarter highlights right away. So I'm very pleased to present a strong quarter for Vimian and a positive start to 2023 in all 4 segments.

Our effort to reiterate organic growth were successful, and we delivered a 30% total growth, of which 13% organic in total and 16% in companion animals. As we've stated, we have [indiscernible] program in MedTech. And if we compensate for that, the growth in companion animals was still double-digit. We delivered EUR 88.1 million in sales with an adjusted EBITDA margin 29.6%, which is a sequential strong increase.

We maintained our focus on the integration of acquired companies with several key initiatives ongoing. We continue to focus on innovation and successfully launched some very exciting platforms I'll tell you more about in a little bit.

We also expanded our geographical reach in customer Specialty Pharmaceuticals with the acquisition of the nonregulated part of Bova in Australia, a milestone in our ambition to build a global position in Specialty Pharmaceuticals.

With that, I would like to hand over back to Carl-Johan to talk a little bit about the numbers.

[Carl Johan Boudrie, executive]

Thank you very much, Fredrik, and good morning, everyone. As Fredrik mentioned, we delivered 30% revenue growth, achieving EUR 88.1 million in revenue in the first quarter. The organic growth in the Companion Animal segment that accounts for 94% of our overall business was strong at 16% and overall organic growth was 13%.

We have seen strong growth in many areas of our business, boosted by the Annual Order Program and pull-forward of sales in Medtech. When adjusting for the pull-forward sales, organic growth in the Companion Animal segment was still double digit in the quarter.

Growth in Diagnostics continued to be held back by the phaseout of COVID sales, but this is the last quarter with significant impact on comparables relating to COVID. Adjusting for COVID sales, we report good organic growth in all our segments in the quarter despite the challenging macroeconomic environment.

The FX tailwind continued in the first quarter, although slowing down a bit from previous year, supporting our revenue growth with 2%. The adjusted EBITDA increased by 27% to EUR 26.1 million for the first quarter. This equals an adjusted EBITDA margin of 29.6%, which is slightly below same period last year, due to phase out of COVID sales in Diagnostics and investments in especially Specialty Pharma. Overall, we see a stable or improving gross margin, which strengthened with 0.7 percentage points in the quarter, where our price increase of an average 5% in the quarter have mitigated cost increases and inflation.

We, as Vimian Group, have a good diversified geographical footprint with Europe and North America accounting for approximately 45% of overall revenue each. With our successful growth in the Annual Order Program in MedTech as well as Specialized Nutrition in Specialty Pharma, we have increased share of revenue in North America during the quarter. But with the recent acquisitions of Bova Australia and Vettr, APAC will increase its share of overall revenue and even further diversify our geographical sales going forward.

The strong development for core in the last couple of quarters continues. And as of the first quarter, our pro-forma revenue was EUR 321 million. Since 2020, we have more than tripled the business through organic growth and continued strategic acquisitions. Revenue growth has also supported strong profit increase. Since 2018, adjusted EBITDA have increased with 106% in average per year, growing our profitability ahead of revenue, reaching a pro-forma adjusted EBITDA of EUR 84 million in the first quarter.

We continue to actively drive several organic growth initiatives and synergies within and between our segments and acquired entities to drive continued strong revenue and profit development.

With that, I would like to hand over back to Fredrik for some further insights to the quarter and business update per segment.

[Fredrik Ullman, executive]

Thank you, Carl-Johan. So as you know, we run 4 attractive verticals, and I'll go into each of them starting with the Specialty Pharmaceuticals vertical, which is accounting for 43% of our last 12 months revenue.

Specialty Pharma had a growth of 9% organically, and we actually accelerated that organic growth led by the Therapeutic Care Specialty Nutrition and Specialty Pharmaceuticals that delivered exceptional 40% growth in the quarter. Geographically, we see strongest growth in the U.S. and Benelux, lowered somewhat by the U.K. The margin in the quarter reflects investments in the new allergy test and investments in the shift to direct sales in key geographies. On the operational side, we completed the launch of our next-generation allergy test which was positively received in the market. And we launched more than 25 new products in the quarter and hosted our annual education week with more than 2,000 veterinarians participating.

The development of the new allergy vaccine is also proceeding according to plan with positive outcome from the most recent studies on laboratory dogs. In line with what we've communicated last quarter, we have now established direct distribution for our Dermatology & Specialty Care products in France and Belgium. A good example of how we integrate products from acquired companies into our country organizations and take out the middlemen.

All in all, we see a continued positive trend in Specialty Pharma with good growth and a very exciting product development and innovation pipeline. And we're also building a strong brand and have now transitioned Avacta to Nextmune U.K. labs, now during all labs in the U.K. Dermoscent in France has transitioned to Nextmune France. And Axaeco has become Nextmune Scandinavia Logistics. And in addition to that, we have progressed on the organizational integration of most recent acquisitions.

Moving on to the MedTech segment, which accounts for 37% of revenues on the last 12 months basis, Here, we saw 24% growth. We had an exceptional performance in the quarter, driven also by the Annual Ordering Program that grew with many new customers and that now includes the full Movora brand portfolio. But the segment grew also double digit, even taking that effect out of the equation.

In the program, customers buy their full year demand in the first quarter and pay in monthly installments. This drives the sales and margin, but it also increases receivables in the first quarter. Over the year, we will see growth in margin normalize.

Operationally, the program frees up time for the sales force to focus on new customer acquisition in the coming quarters, and we also see improved efficiency and reduced number of shipments. The team is now very focused on bringing the acquired companies closer together. And in particular, we are focusing on supply chain optimization and sourcing optimization to drive profitability and cash flow improvements going forward for this segment. But with the management transition now completed in Movora, I'm very confident we will take -- we'll make significant progress over the coming quarters here.

Moving on to the Veterinary Service segment accounting for 13% of our revenue. Here, we saw 16% organic growth. Veterinary Services had a strong quarter with good organic growth improvement and also improved profitability driven by successful renegotiation of supply contracts, new member growth. Most markets delivered double-digit organic growth, and we saw an accelerated transition to upgrades of members into higher-tier programs.

We also welcome Vettr to complement our Australian services offering and added 1 clinic in Sweden. We now have more than 5,300 member clinics and enjoy a very strong position as a leading member service platform globally.

Moving on to Diagnostics. Diagnostics accounts for 7% of our revenue. And here for the last quarter, we had this COVID [indiscernible], but -- so that is why we saw a minus 18% organic growth. But taking that out of the equation, we saw 6% organic growth in the core business, excluding COVID.

Our cost, and this is where we see consecutive organic growth in the core business here. Our cost program is starting to generate results, and we are reinvesting part of the savings into new growth initiatives. And one of them that is a particularly exciting is a new parasitology platform that we have just launched in the first quarter and it's an AI-enabled platform to detect and analyze and quantify parasites in animals. In essence, we're replacing a time-consuming and manual process with a user-friendly, cost-effective AI-driven point-of-care diagnostic tool that takes only a few minutes to complete and gives a higher accuracy than the human eye.

So in the first quarter, we started the -- to commercialize the platform in Germany, Switzerland, Austria and France. And so far, only for equine, but we will launch in more species further on. And the customer feedback has been very, very positive. It's still early days, but I'm very excited about this -- the progress we're making in this new technology.

So with that, I'd like to hand over to Carl-Johan to go a bit deeper into the numbers.

[Carl Johan Boudrie, executive]

Thank you, Fredrik, and as said, let's give you some more color on the first quarter financials. As we said, a strong revenue growth in the quarter resulted in a reported revenue of EUR 88.1 million, which is significantly above the EUR 67.9 million reported for the same period last year equal to revenue growth of 30%. Adjusted EBITDA increased by 27% in the quarter to EUR 26.1 million and the operating profit improved strongly from EUR 11.2 million to EUR 18.5 million, equal to an operating profit margin of 21%, which is 4.6 percentage points above the same quarter last year.

The operating profit includes items affecting comparability, which decreased in the quarter compared to the previous year, primarily due to lower acquisition-related costs. The slightly lower adjusted EBITDA margin of 29.6%, is primarily following the phaseout of COVID sales in Diagnostics and key investments in Specialty Pharma.

Net financial items amounted to minus EUR 8.5 million which consists of 3 main parts: financing costs of EUR 3 million with an average interest rate of 4.8%; adjusted contingent considerations of EUR 3.1 million; and the negative exchange rate impact of EUR 2.4 million. During the quarter, Global One, Bova and Best Paw has performed very well and better than expected, reaching full earn-out thresholds which will be paid out in the second quarter.

Profit for the quarter amounted to $5.5 million, with earnings per share of EUR 0.01 and adjusted earnings per share of EUR 0.02. Cash flow from operating activities amounted to EUR 1.1 million, with a negative impact from change in working capital. Inventory increased by EUR 3 million, predominantly with a slight increase in MedTech and Specialty Pharma and receivables increased by EUR 20 million predominantly driven by the annual ordering program in MedTech, where customers purchased their estimated full year demand of orthopedic products but paying in monthly installments throughout the year. This resulted in a cash conversion in the quarter of 26%. But as we communicated before, there is a variability between quarters, especially as a consequence of the Annual Ordering Program in MedTech.

Cash flow from investing activities, which is primarily related to M&A, with 3 add-on acquisitions closed during Q1 2023, decreased compared to last year to EUR 17.2 million in the quarter. We have increased our focus on integration of acquired entities with both revenue and operational synergies advancing in all segments.

Cash and cash equivalents amounted to EUR 45.9 million at the end of the period, slightly above EUR 42.2 million at the end of previous quarter. Improving cash flow and specifically net working capital continues to be a priority, and several actions have been taken and initiated. Especially in MedTech, we are focusing on supply chain optimization including rationalizing inventory locations, stock keeping units, distribution and further digitalizing the supply chain.

At the end of the period, net debt amounted to EUR 292.8 million versus EUR 257.5 million as of 31st of December last year. This results in the leverage, which is net debt to last 12 months pro-forma EBITDA of 3.1x.

On April of this year, Vimian subsidiary, Veterinary Orthopedic Implants reached a settlement agreement with DePuy Synthes, resulting in a patent dispute between the parties. Under terms of the agreement, the defendants are obliged to make a single payment of USD 70 million, payable in the second quarter of 2023.

As per the end of 2022, Vimian has booked another current liability of USD 70 million and a claim of USD 56 million, which is the USD 70 million minus USD 20 million withheld purchase price at acquisition plus an additional USD 6 million in legal costs towards the sellers of VOI as a current receivable. And all in all, this has no impact on the reported net debt for Vimian Group.

We have started the year positively with a good first quarter, but the global economy and macroeconomic outlook is still uncertain, while we continue to monitor demand very closely. Our Annual Ordering Program in MedTech had been very successful with even more customers joining the program to secure supply and facilitate their business. This has resulted in a slight pull-forward of some business from the second and third quarter of this year.

With more or less no COVID sales as part of the comparables for Diagnostics after the first quarter, we have returned to organic growth in April in the segment. We have settled the U.S. patent dispute early April, and the process to retrieve compensation on the indemnification protection is ongoing. And also as I said, a number of acquisitions have performed extremely well, why -- of the total earn-out considerations, we have -- that are payable within 12 months of EUR 47.5 million, the majority will be paid during the second quarter which, of course, will weigh on net cash flow in the second quarter of this year.

With that, I hand back to you, Fredrik, for some concluding remarks and also an update on our ESG agenda.

[Fredrik Ullman, executive]

Thanks, Carl-Johan. So I'm pleased to see how it was on the ESG agenda. We have to work now with representatives verticals and really with the aim to create a foundation for ESG around the planet, people and animals. If we look at the planet and emissions we released our first sustainability report yesterday as part of the annual report. And we were, for the first time -- it was the first time we reported group Scope 1 and 2 emissions and we are well below peer average, and we've now set targets to further reduce our emissions. And in the next phase, we will also include Scope 3 emissions, which are important to cover as part of our production since that is outsourced to some extent.

On the people agenda, we have hosted our first annual recurrent Month of Ethics, where we trained all employees on the new established ESG policies. And we have also launched a company-wide employee engagement survey to start to use employee engagement and satisfaction as a core KPI in the company. On a diversity level, we already have 45% of our leaders are women, and we have 37 nationalities in the company. And on the training point of view, we trained 11,000 veterinary professionals during 2022 on new procedures.

On the animal side, beyond supporting improved care for tens of thousands of animals, we sell over 500 products that support the reduction of antimicrobial resistance. And looking forward, near term, we focus more on qualitative targets, we deliver on our action plans and prepare for the new regulatory framework that is around the corner. We also integrated ESG criteria in our commercial due diligence process for M&A.

Now if you look at 2023, to conclude. Vimian have a very positive start to the year. We expect to continue to see growth the rest of the year. And we will focus on delivering on our strategic agenda, building strong global market positions in our select areas in the global animal health market.

Of course, 2023 is still another uncertain year for the world. But we continue to closely monitor demand. But I remain very confident that the animal health market is resilient. And our position is strong. We have strong pricing power. We have a very attractive portfolio and also an attractive innovation pipeline with more and more new products to come, so I'm looking forward to see how 2023 develops.

And with that, I'm open to any questions you might have.

[Operator]

[Operator Instructions] The next question comes from Adela Dashian from Jefferies.

[Adela Dashian, analyst]

My first question relates more the MedTech division and the pull-forward that you saw now in Q1. How should we think about that for the remainder of the year? And was this year in any extent different than last year, for example. So I'm just trying to dissect what could potentially be the revenue assumptions for MedTech throughout the remainder of the year.

[Fredrik Ullman, executive]

So as I mentioned before, Adela, if you look at the organic growth of 24% in MedTech, if you take out that pull-forward effect, you would still have a double-digit growth. Also, you would also see a double-digit growth for overall companion animals, which is 94% of our revenue. And essentially, just the delta would be -- you would have that out of Q2, Q3. So slightly lower growth than double-digit growth there in consequent 2 quarters. But if you look at the full year, I expect to grow the overall business, all of Vimian, at least in line with market growth or above.

[Adela Dashian, analyst]

Okay. Great. And then on to recent innovations, and you did have some disclosure regarding the allergy vaccine in this report. Could you give us any indication of what the timeline is there given that you've now communicated that there will be an allergy vaccine? So just any type of light on that specific innovation.

[Fredrik Ullman, executive]

Yes, the plan is to launch that vaccine in 2025. And we already announced it last year, we went through the safety trials, so toxicology, et cetera, and that all looks good. And we're going [indiscernible] in the second half of this year.

[Adela Dashian, analyst]

Are you -- is there any competitor that is doing the same thing or looking into the same thing? Or are you the sole player here?

[Fredrik Ullman, executive]

No, there are some products. This is a very unique approach, but there are products in this space, it's a franchise of over $1 billion that we're looking at here. So it's a market, an addressable market that is above $1 billion.

[Adela Dashian, analyst]

Interesting. Okay. And then just finally on your cash generation and how we should think about inventories. Now I do understand that Q1 is inventory heavy due to the AOP but what are you doing to mitigate or I guess, bring down the level for the remainder of the year? And how should we think about the inventories for the year-end 2023?

[Fredrik Ullman, executive]

Yes. So the reason why the inventories are up is also because as we launch more products in more countries, we need inventory to launch. So it's kind of a proactive approach, but we are putting a very strong focus on supply chain optimization, looking at reducing lean times to reduce inventories, reduce complexity. And just be the -- change the habit of some of the companies we've been interested in to make sure this is a high deliveries KPI, the net working capital [indiscernible]. And -- so that's what we're doing, essentially lean management and supply chain. That takes, of course, a little bit of time to see the effect of given lean times being relatively long in certain businesses. But those are some of the initiatives we're taking. And I expect to see an improvement in the midterm -- in the coming -- in the quarters to come. But I think that's going to be a continuous movement and there's a huge opportunity actually to improve your [indiscernible].

[Adela Dashian, analyst]

So does that mean that we should expect lower inventory levels? Or will they be heightened due to the new products that are being launched.

[Fredrik Ullman, executive]

No. All in all, I expect to see a trend towards lower inventory levels as a percentage to sales.

[Operator]

The next question comes from Blanka Porkolab from Barclays.

[Blanka Porkolab, analyst]

I have two, please. The first one is, could you talk to what dynamics you have seen across the different businesses in April relative to Q1? And then my second question is, how should we think about the phasing of growth for the remainder of the year across the different businesses, given comps ease? And do you still expect high single-digit organic growth for the full year?

[Fredrik Ullman, executive]

So for the first question, I think what we need to look at is the quarter -- second quarter, and we still see the positive development. We expect a positive development also in Q2, of course, not with the MedTech impact, but we still see -- we expect to see a positive development for the full year and second quarter.

And to your second question regarding saying that we don't give guidance. But as I said, I expect to grow in line with market or above for the full year.

[Operator]

The next question comes from Rickard Anderkrans from Handelsbanken.

[Rickard Anderkrans, analyst]

So first question relates to Diagnostics segment. You hinted returning to growth in April. It would be super helpful to get a sense of what type of growth levels we should expect from that segment? Is it sort of like low- to mid-single digit or in the double-digit space. Just anything on the Diagnostic, sort of momentum and organic growth would be super helpful moving into Q2.

[Fredrik Ullman, executive]

Yes. I would expect mid-single digit there for now and then see how quickly the innovations take up momentum that we are launching. But I would say the core business, I would say mid-single digit, right now, and that's due to our exposure in Europe. We're growing strong in Asia Pacific, but it's a smaller part of the business. So that's the highest growth market where we're putting more and more focus on Middle East, Africa and APAC are strong growth and Europe due to the macroeconomic and post COVID situation with government spending less on annual health is impacting us negatively there. So I would assume mid-single digit.

[Rickard Anderkrans, analyst]

That's super helpful. Looking at the balance sheet, how should we think about deleveraging moving through the year? Should we expect a tangible lower net debt-to-EBITDA here moving through the year? Or -- can you help us on the deleveraging side of things for the year would be super helpful?

[Carl Johan Boudrie, executive]

Yes, sure. So I would say, as we said, we do have a strong emphasis and we continue to have a strong emphasis on improving cash flow and then especially working capital. And we do expect cash flow to improve during the year, which should drive organic deleveraging.

As I mentioned though, sort of short term, in Q2, we had a high portion of earn-outs payable, which will weigh on net cash flow. But looking at cash flow from operations, this will improve sort of sequentially throughout the year as AOP customers will pay for the orders every month and as we continue to manage inventory levels.

[Rickard Anderkrans, analyst]

So just a final one for me, please. You mentioned sort of positive earn-out revisions related to Global One, Bova and Best Paw. Can you elaborate a little bit on that performance? Is it primarily top line or profitability or any particular highlights from this business as it would be interesting to hear a bit more on the development compared to your expectations.

[Carl Johan Boudrie, executive]

Yes, sure. No, I think in all these companies, they've been performing extremely well. And as we communicated in the last couple of quarters, we've seen strong growth between 25% and 40%, second quarter compared to same quarter last year, you're looking at Bova and Global One last year, and we continue to see good and solid growth in the first quarter and the positive sort of perspective going forward. I would -- so that's from a revenue perspective, and that has, of course, resulted in a strong profit development within these companies as well.

We did have high expectations for these companies as we've entered into what we believe are extremely interesting segments where we are sort of growing with the segments and taking market share and expanding those segments within the Specialty Pharma if we talk to Global One and Bova. So they have performed extremely well according to expectations, where we expected them to perform well, but also in some cases, above expectations.

[Operator]

[Operator Instructions] The next question comes from Adela Dashian from Jefferies.

[Adela Dashian, analyst]

Yes, sorry. Just one more question from me. Related to the net financials line on the income statement, it was quite elevated, and I saw that it was due to some purchase considerations going live in the first quarter. How should we think about just that effect in the coming quarters?

[Fredrik Ullman, executive]

So sorry, just to -- sort of follow your question, you mean the net financial items in -- now in the first quarter and sort of what we should think about that going forward?

[Adela Dashian, analyst]

Yes. Aside from your interest expenses.

[Carl Johan Boudrie, executive]

Okay. Now I said the net financial items was a bit larger this quarter compared to same quarter last year. And as you said, it was predominantly 3 elements of which the 3 elements were roughly of the same size. So 1/3 of that was adjustments in earn-out or contingent considerations.

Of course, it's dependent on the performance of acquired entities going forward. We have had a few entities performing extremely well in the last quarter is why we have to revise that upwards both in the fourth quarter but also now in the first quarter. I do expect, going forward, that sort of upwards provisions would decrease, we will see slightly lower net financial items going forward than we have now.

[Adela Dashian, analyst]

Okay. Got it. And then just finally, is there any, I guess, aside from Diagnostics, is there any segments within your companion animal exposed businesses where you're seeing an effect of the macroeconomic uncertainties. I know for the past couple of quarters, really the only effect you've been seeing is in Italy to a greater extent. But has that changed at all? And is it now it seems like it's recovering back to growth. Could you comment on that?

[Fredrik Ullman, executive]

Yes. Italy is back to growth. So Italy was predominantly affected in the second half of last year as gas prices went up. And Yes, we're seeing certain segments in certain countries having slightly lower growth. But I would say nothing that worries me on a global and cross-company scale.

[Adela Dashian, analyst]

Okay. And the strong growth you've been experiencing within the orthopedic implant business in North America, is that's still continuing off a pretty high order backlog from the pandemic? Or is that starting to normalize to an extent?

[Fredrik Ullman, executive]

We expect to continue to see -- I mean, on a -- there is quarter-to-quarter variations, but I expect to continue to see a good growth in MedTech going forward. The pandemic effect, I think, will be a positive one in the years to come for us because most of the dogs that -- or most of our patients are not puppies. They're more in the 3 to 4 to, say, 3 to 7 years age span and so I would rather see a positive effect for us in the coming years from the pandemic rather than a short-term effect last year.

[Operator]

The next question comes from Rickard Anderkrans from Handelsbanken.

[Rickard Anderkrans, analyst]

Just a quick follow-up, Fredrik, you referred to expecting to grow in line or faster than the market this year organically. Can you comment a little bit on what your expectation is for market growth in conjunction with Q4, you talked about 8.5% annual growth in the sector in the years ahead, but it would be helpful to add some color for your expectations for this year for the underlying market, just to put it in perspective.

[Fredrik Ullman, executive]

Yes. So last year, we saw a 5% market growth. And this year is still a bit uncertain as to what the market growth will really be. The few companies that I'm starting to report, you see that it's been a pretty good start in the market. But I don't think anybody knows exactly what the market growth will be. When we speak about 8.5%, we're looking at a 5- to 10-year market growth horizon. But of course, 2023 is still a very special year, I would say, from an interest rate and global economic situation, war, et cetera. But I can't give you much more guidance in that record, unfortunately.

What I would point out though is if you look at our last 12 months pro-forma revenue, we are EUR 321 million and adjusted EBITDA of EUR 84 million. And I think that is about 2 million shy on top line and EBITDA of consensus for the full year '23. I expect to continue to see growth in the coming quarters. So I hope that helps.

[Operator]

The next question comes from Kristofer Liljeberg from Carnegie Investment Bank.

[Kristofer Liljeberg-Svensson, analyst]

Just a quick one follow-up on your previous answer there. Do you expect organic sales growth to be positive in the second quarter despite the phasing effects from the Annual Order Program in Medtech?

[Fredrik Ullman, executive]

Yes. Yes, for MedTech and yes, for the Group.

[Operator]

There are no more questions at this time. So I hand the conference back to the speakers for any closing comments.

[Fredrik Ullman, executive]

Well, thank you very much for attending the call today. If you have additional questions, you know where to find us. Maria is available for any follow-up questions you might have. And yes, we'll go back into second quarter here and continue to work with the team to deliver good results. Thank you so much again, and have a great day. Bye-bye.