Swedencare AB (publ)

Hi, and welcome to the presentation of SwedenCare's Healthier Report, led by our CEO Håkan Lagerberg and CFO Jenny Graflind. We will have a Q&A session after the presentation, so please raise your hand if you have any questions and we will answer them in the end. Jenny and Håkan, the stage is yours.

Hello and good morning. Here's Håkan Lagerberg and Jenny Graflind, and we will present the Q2 2023 highlights. Sales record and 9% organic growth. Yes, we have, as we predicted, had a strong Q2 when it comes to sales. Both the quarter and the month of June was actually our strongest quarter of months ever. We see continued strong growth in pet retail and online, and a bit softer veterinary sales. For the ones of you that follow the market, several veterinarian companies have released numbers and expectations that the 2023 year is a bit softer. But for us, we definitely see a change of... of interest and also, which I will present a bit further down in presentation, we have started to deliver on our major agreements with MWI and Pedersen. So half year two will definitely be stronger for us when it comes to the Vetner channel. And we are also, when it comes to the contract manufacturing side, we see increased orders for the second half year. So I do think that also the veterinary sector as a whole will be stronger second half year than the first. Our organic growth, 9%, almost 10%. So we're on track, not where we really want to be. And my expectations for the second half year is definitely stronger, both the Q2 Last year was a very strong quarter for us, and also when it comes to the situation with the destocking, that has definitely come to an end with this quarter. So I expect that all our major entities will have organic growth next quarter and going forward. This quarter, we still had a couple of entities with a minus in growth. Lower margin and strong cash flow. Jenny will explain the reason for the lower margins and the cash flow continues to be strong. And we focus on that a lot, of course, since we are very dedicated to keep on paying down our debts that we have. And also that we have, we made last year, we made lots of, let's say, investment, both in organization processes and also some CapEx that affected our cash flow last year. The big event in Q2 was perhaps the CMI's public mandatory tender offer. That offer has ended today and we will communicate when we get the information of how many shares was accepted to the offer, we will communicate that, but as I wrote in the report and also the board has communicated previously, is that myself and all other major shareholders that I know have not accepted the offer and we continue to work very well together with Simrise to grow the company going forward. We made one small acquisition in the quarter, a concept with called VetBiosDirect. I wouldn't say not unique, but for us a very interesting concept where we have agreements with individual clinics or animal hospitals or groups of... with a subscription model. So the individual claims pay a monthly subscription model and in return they will get special prices for lots of interesting products that we have, both under a completely unique brand called Gentoo, but also some of our other group brands are offered in this concept. So it's a very new way of thinking and also an attractive way for clinics to be able to get some sort of rebate on the bulk products that they sell in high volumes. So we started last year and we acquired the company this quarter and now we have a bit over 600 clinics subscribing and it grows a lot every month, I would say. Our sustainability work continues, and the highlight for the quarter was definitely for the first time we made a group employee survey. I'm very glad to be able to announce that we had excellent results with happy and motivated employees all over the world. And we will work with all of the results where there needs improvement. We will definitely do that.

But overall, very good results for all of the group companies and as a group in total.

Okay, a few figures to explain the result of the quarter.

We have grown from 470 million to 572 million in revenues, 21%. That is including 9% organic growth. It also includes 1% acquired growth, which is coming down from CVP and VET Buyers Direct. It does not have a huge impact on revenue yet. And CVP, as I wrote in the report, will have a much more impact on the second half of the year. We also had a 2% reclass effect and a 9% currency impact on revenue. When it comes to EBITDA and profitability, in value, it's about the same as last year. But in margin, it's both lower than last year and a bit lower compared to where we want to be. Q2 last year was the highest EBITDA that we had achieved in the past. And in margin, it was also the highest one that we have had since the beginning of 2021. So it's difficult comps. But I will also explain in the following slides why we were a bit lower margin than we want to be. Some KPIs for the quarter. First of all, when it comes to revenue, again, we had a record quarter and we continue to grow quarter on quarter with revenue. Compared to last quarter, we still had a 9% increase, but almost exactly the same structures as we had. Again, it was CVP and bed buyers, which had not a big impact on revenue. When it comes to the gross margin, this is mainly affected by the challenges that we have to optimize the production, as well as we have less and delayed development projects, which those projects of development have a higher margin than our average. In addition to that, we also have some costs associated with the launch of scoopables, but the majority is coming from production and the delayed development projects. And this, of course, has a direct impact on our EBITDA. In addition to that, our external cost is about the same percentage of sales that we've had in previous quarters and also last year's. And one of the reasons why we don't see so much economy in scale on the external cost is that as we grow revenue with Amazon, we also acquire higher cost linked to that. When it comes to cash, despite the growth in revenue and, like Håkan said, a record June, we have an immaterial effect on our working capital, which is good. And during the quarter, we have paid both dividends of 35 million. We have also done the acquisition of Bet Buyers Direct that Håkan mentioned. And we have still been able to amortize 50 million on our loans. And our net debt to EBITDA on a pro forma basis that we report to the bank is 3.4%.

which is, of course, below our covenants.

For the first half year, all markets have shown a strong growth in revenue, both organically and by acquisition. Again, as some of you probably know, we acquired NatureVet in February last year and also Innovet in March 22. Online continues to grow strong. One example is Amazon's seven European markets, except for UK, which we call EU7. They have for the first six months exceeded the full year 22 sales. And also the UK, which is the largest Amazon market, has their best two quarters in history this year. I can mention a couple of things on cash. For the first six months, we have a positive effect on our working capital of about 15 million. And for the first six months, we have made investments of tangible and intangible assets of about 20.9 million, which is about half of what we did for the same period last year.

And it corresponds to about 2% of our total revenue. Our rolling four quarters, as you can see, is growing well in terms of revenue.

It's above 2 billion right now.

And it's a little bit a flat movement, I would say, when it comes to profitability. Product and brand split for the quarter.

The biggest category is our nutraceutical. We have had growth of 32% in this category. This growth is coming from the main reason is the nature that had a record quarter and they are selling products in this category. And then of course, we have also acquired CVP and also VarioSouth has started with their software production since Q2 last year. Another positive thing is the product black-off. Product black-off had a 45% growth compared to last year. It grows in all subcategories and it's primarily the powder that is growing very fast, which is well-suited for the online trade. And also the soft-choose, which is the latest addition to the product category, has sales in the quarter, which is more than 50% higher than we had of the last year, full year.

Okay, looking at the different regions, 80% of our total revenue comes from North America, of course, the most important market for us, and glad to say that we showed a 25% growth quarter on quarter. As I mentioned in the beginning, pet retail and online, definitely the strongest, veterinary side a bit softer, but worth to mention is that both the Patterson collaboration that started a bit prior to MWI, but both of these projects had their strongest month for the year in June, and the launches have started now. So it's really taking off now, and I expect an even stronger second half year. In VerioSouth, we are fairly flat when it comes to sales and manufacturing, but not at the expected level in profitability. So we have been working very hard with that. The team in VerioSouth has made lots of efforts for this. and we see some improvements but definitely we expect a higher profitability second half year we also have a when it comes to manufacturing economies of scale is of course important and we have a strong pipeline both external and internal projects that will come to fruition in the second half year so so we do expect that that video south will start to deliver as we expect Betunorth had growth in their sales, but as Jenny said, there was a bit challenging mix when it comes to the different projects. Not as much development as we had planned, more manufacturing and startup in manufacturing also comes with a bit lower profitability. So Betunorth comes with the same expectations for second half year to have a stronger profitability. Worth mentioning is we have signed several new agreements when it comes to Vetri North. We have an attractive setup in Montreal, Canada, with very skilled teams up there. And interesting to see, as I mentioned in the report, is that we now have the customers from all of the five continents in Australia, South America, North America and Europe, and the newest addition to that geographically wise is Asia. So our first Asian customer and that just shows the attractiveness of the animal health in the pharma sector. So we're very glad to be able to present a new customer and mentioning that's a unique concept that we have in Vetunaut that we have as of now basically just used for our internal or customers that we develop products for, FlavorPal. It's a flavoring product line, a unique one that we have trademarked and patented. No, not patented, sorry. But we have now started to have interest from different pharma companies to be able just to buy the actual ingredient, the flavoring ingredient, and have stability tests out with many customers, so that would be interesting to see when we start to deliver that. PetMD, our online specialist in the US, grew yet again over 30% of the quarter, and it's both counting in the PetMD brand that grew very, very well, and also RX and ProtonPackoff's Amazon sales. And Proton Plakoff continues its success, 76% growth in North America. As Jenny said, it's the powder product still, our first product ever in this product line that just continues to grow very strongly. And adding to that, the soft juice starting to come out in all of the, let's say, pet retail space. But still, we have protein pack-off launches still this second half year with a couple of big retailers. So we expect a strong second half year as well. Bertram Steininger – and nature at as Jenny said, had a really, really strong best quarter ever with this group of both launch and and nature with, as you may remember, was hit last year, but by the big retailers. Bertram Steininger – D stalking from the inventory, so we definitely have seen lots of improvements there. Bertram Steininger – Of the big three I would say to them is definitely we're growing a lot and the third one is expected to grow in in second half year so. So there's more to come there and the Scoopable launch has been over expectations. So we're very happy for that. Since it's our biggest geography, we of course focus a lot on intra-group synergies and sales projects. Lots of stuff happening all the time, everything from cost synergies, but predominantly sales synergies. So one example I can mention is that The Vet Classics brand that comes from Garmin slash Nature Vet has been taken over when it comes to distribution to the veterinary channel for Stratford organization. So very, very excited to see that. We continue the move from external manufacturing to internal. We have a special fulfillment center and we are collecting all of the different fulfillment customers that our group companies have to be transferred to FAV as our fulfillment specialist. And then also we have just launched a NatureVet liquid line being supplied from Vetio under the NatureVet brand and we're going to be excited to see how that delivers. Going over to next region, Europe, 16% growth, 18% of our total revenue. And we see some of the Southern European markets that were slow last year and started off slow this year has come back. For example, I can mention Spain and Greece as good examples with strong growth. Online sales has been really good. As Jenny said, EU7 has sold even more than full year last year. Amazon UK, I think, was up plus 40%. So very strong in the online side. NutraVet, one of our group companies that has a very unique offering and a position specifically on the UK veterinary side, has been for the last year and the start of this year affected by their biggest customer trimming down the inventories. And I'm glad to report, as I said in the Q1 report, Q2 is definitely the last quarter where that will have any effect on the sales. So for the other channels where they're selling products, they have been growing really nicely and neutral will be an important part for organic growth the second half of the year. CVP has been renamed to Vetio UK and lots of collaboration between Vetio UK and Vetio South in the US. And also Vetio UK has now transferred equipment to Sweden Care Ireland. So in Q3, we will start manufacturing soft shoes in Ireland. And as some of you remember, the soft shoes under the Proton Plankoff brand has not been launched in Europe yet that will be manufactured both in the UK and on Ireland. And the launch is Q4, Q1 next year, perhaps. And also, we have a new addition to the team, Laszlo Varga, new European chief commercial officer. He will start mid-August, and we're very happy for that. He has a vast experience from, let's say, international European business, and he will be a great addition to the team. Looking at the rest of the world, a decrease by 19%, but not that oncoming when it comes to rest of the world sales, because many of our customers, they order perhaps two times a year. But one effect that we have seen is that for some of our US brands, there has been a bit Slower sales due to the strong dollar. So price points wise has been a bit difficult for some of the Asian markets. But also there we see increase going forward. So I expect that to bounce back. Kern Packoff had a very good quarter with both Asian markets and South America, Israel and Australia. And I mean, it had very tough comps when it comes to product pack off last year. That was the best quarter last year when it comes to export markets, but we actually managed to beat that just so that we're very happy with that. Polar Pluck Off as an ingredient in Petford continues to grow. Our best year ever as of now. We have exceeded full year sales last year already and we have signed two new partners that we launch products probably next year, could be end of this year, but we still continue to grow those collaborations.

Bert is going forward the same as we presented after last quarter.

It's really growth and profitability and lowering our debt level. That's really the key focus. We knew that going into this first half year that we would be a bit lower in profitability since we had lots of things happening. So I absolutely expect us to bounce back profitability-wise and continue our growth. And so that will definitely continue over 2023 and 2024. We have presented a couple of strong customer collaborations, but we still have a strong pipeline, lots of interest for what we can offer as a group. So stay tuned for that. We will continue to take the advantage of getting help from other great organizations in the world to grow our sales. And the continued move from external to internal. Yeah, that's absolutely a continued project. And I'm happy to say that looking at, for example, Sweden Care Ireland and also our small manufacturing site down in Texas that makes the powder product for proton plaque off. They both have had a fantastic quarter with where you can see when we push the internal projects to our own manufacturing site, we have been able to show really strong profitability. Solidifying relationships with major customers. We just keep on being very active and trying to find new ways of collaborating with long-term customers and that will continue to be our focus. Looking at M&A, we made a small acquisition this quarter and looking at the market as a whole, it's been a bit... it's slower than compared to the last years. But I would say that starting to pick up, You have probably read about a couple of big acquisitions in the market, but we will focus on adding probably a bit smaller additions, bringing something unique to the group. And we have dialogues, but as we've said, this year will be a bit slower when it comes to acquisitions, definitely value-wise.

That was our presentation. So back to you, Eliona.

Yes, and by that we are open for questions. We received the first question in the chat, so I will read it for you. Dear team, well done for the great results. I am very curious on your comments on the end of this talking in pets. How long has that been going on and what gives you confidence we are at the bottom, especially in the context of huge demand for pets in 2020 and 2021 and fears that this talking might take a bit longer as we see normalization in pets ownership over the next couple of years.

Yeah, coming back to the demand from the market is that where we are active, 90% of the products that we sell are basically focused on nutraceuticals that you start using, let's say, middle age for the pets. So we haven't really gotten the COVID boom has not really hit the nutraceutical market. So that's why we're fairly confident that we will our niche in the market will grow strongly in the coming years. And looking at why we're confident, it's really that we've seen improvements in ordering going forward. And from the customers that we get reports when it comes to the stock levels, we definitely see that they are down to where they want to be and need to fill up regularly going forward. We're fairly confident on that.

Yeah, and I can just add on NutraVet, for example, which was the major company that was affected by the stockings in this quarter. We saw water start picking up now in May and June.

So that's also give us a good comfort level on that. Thank you. Our next question is from Richard Anderkrans, Handelsbanken. Hello, hello, can you hear me?

Yeah, we hear you.

Oh, perfect. Good morning. Thank you for taking my questions. I have a few. So first one, starting with the gross margin, you previously mentioned that you expect to return to around the 58% level during this year. Is that what you expect for H2? Or how should we think about sort of the gross margin improvement trajectory just in the next few quarters and going forward? Thank you.

We didn't expect, we were expecting that the production optimization would have had a positive effect in this quarter, which it did not. Now, I hope all those issues are behind us and I hope that we will see a good improvement next quarter. It's difficult to say. I hope absolutely we will be at 58% during the year, at least at the second half of the year. For the full year, due to the fact that this was a little bit lower, I'm not 100% sure yet, but we should absolutely improve our gross margin in the second half.

All right, thank you. That's very clear. Can you expand a little bit more on the challenges for Betio in the quarter? You know, how quickly do you expect the margins to rebound? And you talk a little bit about the visibility that you have there and any data points that makes you very comfortable in that sort of recovery and rebound.

Yeah, I would say a bit different in the different Veteo sites. Looking at Veteo North, it's really the mix of manufacturing and development projects that has a huge impact. And when it comes to development projects, it's not in our hands always when we can expect the work. It's lots of external factors when it comes to that. So this quarter, we had lower... development projects and that has a big impact on Vetur North and also linked with upstart with some manufacturing in Vetur North that wasn't even manufacturing is lower when it comes to cross margin but it was lower than expected and And they have addressed those issues and we feel confident that it will definitely be a lot stronger second half year. Looking at Vedio South, it improved end of the quarter and together with the organizational changes we've made, focusing on, let's say, operators in the manufacturing together with, as I said, the scalability. We have lots in the pipeline, so the gross margin helps overall also when we have more work and constant work in the same types of products. So I would say that we are confident that second half year will be stronger on those sites.

All right, thank you. And you talked a little bit about the margin pressure coming from the online channel as well. Can you remind us of the share of online channel in the quarter, roughly as percentage of sales? And did you expect the sort of additional increase in sales fees to continue from these channels or flattening out or any commentary around the sales fee increase and the outlook would be helpful? Thank you.

Yeah, when it comes to the sales fee, it's a connection. It's a linked sales fees and also some, let's say, marketing investments that we make in that channel. So I would say that the sales fees, we are addressing that a lot, being absolutely more focused and have a dialogue with customers. with Amazon about that because they have increased percentage-wise a lot more than we expected. And for some of this, we can address and improve and have already seen improvements. For some of the charges, we... we can choose a different way of handling it. So we are in strict, let's say, dialogue with Amazon and also choose a bit different strategies going forward. So it will improve, but it's been tough because at the same time, we are very focused in growing the sales online. We have huge success there. it's uh but now i would say that we we focus a lot more on on uh coming down to the right level when it comes to the sales fees so some some we can't uh we we can't uh do anything about but uh certain of the number of the fees we we can do something about and we also have a dialogue as i said they um they they have been appreciative also our position in the markets and and uh And perhaps change some of the fees. That's been favorable to us.

When it comes to the percentage, we usually say that it's about 40%. I would say it's slightly higher this quarter. It's difficult, like we have mentioned in the past, to say the exact number due to the fact that some of our distributors are also selling online and we don't know that exact share. But say around 40%.

All right, thank you. And just a final quick one, if I could. So on the VET buyers direct deal, can you talk about what's the annual sales of that business? What type of EBITDA margin does that business generate? And what do you expect for the midterm organic growth profile for that company?

be it would be interesting but some more yeah it's it's a it's a new newly started uh concept so i mean the the say the sales uh are i mean for for us as a group they are very very low so they won't have an effect on our let's say sales or organic growth but they they will so so that will be as i said 600 clinics and and uh And clinics order, I mean, between 500 to a couple of thousand dollars per month. So it's still small, but growing very fast. So let's come back to that later on. So it won't have any impact, I would say, in our 2023 sales, not much.

All right, thank you. I was just curious because I believe that in the report it says that Vet Buyers Direct contributed around 7 million.

No, sorry, that was CVP and Vet Buyers Direct. Oh, right, all right. And 90% of that was probably CVP. 95% of that was probably CVP.

Oh, okay, perfect. That was a mistake from my end, sorry. All right, thank you for taking my questions.

Thank you.

Our next question is from Adela Dashian. Please go ahead. Yes. Hello, can you hear me?

Excellent. Hi, Håkan and Jenny. Just a couple of questions from me to follow up on the Betje South and Betje North comments here. What's different between the headwinds that you're experiencing now versus the ones that you experienced towards the latter half of 2022? Given that there is additional comments regarding the delays in projects and so on and so forth. Are these new challenges or have they persisted since the second half of 2022?

a bit different between the different sites starting off with Vetio South we have been working very hard the different quarters in both in let's say supply chain and organization and personnel setups and also having some challenges with starting up some some large external customers where we had to take a hit when it comes to profitability. So I would say not exactly the same challenges. We are definitely on the right track. And we see that now in Q2 is the last, let's say, setbacks. We didn't get full... The big thing in Q2 was really optimizing the production lines and having the right staffing. And that didn't have full effect... or still not really full effect, but we've seen improvements. So that together with a stronger pipeline, higher... And manufacturing projects will have a have a positive effect on on that yourself going forward, so I would say that they're looking at that your north it's really I mean they. They had a fairly fairly strong second half year when it comes to sales and they were also good in in in profitability last last half year so so forget your north it's more. is still having growth, but this quarter they had some unexpected costs and some project delays that really affected the profitability of the operations. So I would say that a bit different. Vetur South has been more factors that we really can address ourselves. Vetur North is very dependent on When it comes to development projects, it's lots of external factors and timelines that we can't really control all the time.

Yeah, that makes total sense. Thanks a lot for that. And then I was also wondering about the discrepancy between you state in the report that sales to veterinary clinics or I guess underlying momentum within that sales channel is slowing or is softer than online or pet retail. Would you be able to go into greater detail on why that is if the underlying demand from the end customer point of view is still intact?

I think one big issue is, of course, the inventory levels. That was a bit slower, let's say, to come back in the veterinary channels. But I think also there's been some changes looking at the North American markets. There has been some some changes, some, some of the major players have decided to, to change their way of selling out to the market, avoiding, avoiding some buying groups, avoiding some, some direct sales, just going through a distributor instead of so, so, so that has affected the, the some of our bigger customers to vet your South really to, to just change their way of selling. So that has definitely affected us. But I would say in general, it will be interesting to see, but as we've seen also, is that could be a bit different way of... of the pet owners buying products, finding products more easily online and has become used to that during the pandemic. Who knows, let's see how it pans out. But what we have seen is that the confidence level of our veterinary customers is stronger for the second half year. And we have seen increased orderings coming in. So perhaps it was just a bit delay compared to the pet retail side.

Yeah, got it. And then on the comments regarding your online sales channels and the increased costs there, are you doing anything proactively with your prices to offset the increased costs to you set by the online platforms? Or do you believe that you will be able to reduce the cost through active dialogues with your No, absolutely.

Absolutely. A combination. And it's also not only I mean, general price increase. It's also for those of you that are common to the way our sales are in Amazon. It is we are very focused on on. on working towards Divertus. Divertus is sellers on Amazon that buy our product from a distributor and then puts it up online and lowers the price. And that affects all of the algorithms of Amazon and also Chewy, for example, because they follow each other a lot. So we have been working with our major brands, NatureVet, Proton Plakoff, Arc Vitamins. We have been working really hard this last year to get rid of diverters. And that has been a long and hard work, but it's been successful. And when When we, let's say, more or less get rid of those diverters, the pricing on Amazon will be better by, let's say, automatically. But then, of course, we also look at price increases per se. But I would say that our hard work with the getting rid of diverters has started to... to show in our numbers. So that's also really good for the second half year that we have been working very diligently with that.

Sounds good. And then finally, just on your continued work to move from external manufacturing to internal, would you be able to give us a percentage of sales of how much your internal manufacturing accounts for as a total pie to date?

So roughly 75% is the internal.

At least 75%, I would say.

Excellent. Thank you very much.

Thank you. That concludes our Q&A session. So I hand the word back to you, Håkan and Jenny, for any closing comments.

Just thank you for the interest. It's in the middle of the summer and vacation period. So we're happy to have so many join us. And I would like to give a big thank you to all of the organizations that have been working really hard. And we're very focused in, as we wrote in the report, we're very focused on keep on growing and increasing our profitability. So that will be the main focus for us going forward.

Have a great summer and a great day. Bye-bye.