Swedencare AB (publ)

Hi and welcome to the presentation of SwedenCares Q3 report led by our CEO Håkan Lagerberg. We will have a Q&A after the presentation so please raise your hand if you have any questions and we will answer them in the end. Over to you Håkan.

Thank you so much, Emma. Håkan Lagerberg here. Unfortunately, Jenny Graflin, our excellent CFO, is not with us today due to some change of 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 Jenny's expertise. So I'll start with a run through. And as Gemma said, I will be happy to answer any questions you have after the presentation. So let's see. Q3 2023. Let's see. Here we go. A strong quarter, 17% organic growth with a very strong cash flow. 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 channel a bit softer, but still a good demand. There's been some particular areas where it's a bit softer, but we see a comeback 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 do not expect that going forward. But it's an excellent showcase of what Jenny and her team and all of the group companies have been doing this all year, I would say, but still this quarter, it really really showed an effect with lots of different projects we've had to convert to cash in a faster rate. Everything from account 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 use 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 after Q4. And we're very happy that we're already at that point. Going forward, we will continue, as I said, but 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 compared to the first half year. And mainly due to the fact that our main customers that affected us when it comes to their decline or using their inventory that they had, that we saw an end of that in Q2 and the Q3 results really showed that, 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 software 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 increasing. very strong and will continue to increase over the coming quarters. We are very focused on our ESG work and as I informed you in the last report, We have a new European commercial director, Laszlo Vargas, 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 go through the most important sustainability priorities going forward and we will communicate that in next year. And as I also mentioned in the last report, we had a 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 with 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 certain areas going forward. So even though the results were definitely very high in all areas, we do want to improve wherever we can. Net sales. First time over 600 million SEC for a quarter. And that was an increase with 25% compared to last year. The operational EBITDA and the EBITDA and EBITDA was operational and the normal was the same this quarter. We do 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, the KPIs for, for, for the quarter. The net revenue amounted 602 million SEK, increased 25%, as I said. Organic growth, 17%, a lot higher than the first half year. We had 10% first half year and 17% this quarter. 6% currency impact and 2% acquired growth. The acquired growth came from Betio UK and Bet Buyers Club, which was acquired on November 1st and April 3rd. And the net revenue continues to grow quarter by quarter, increased with 5% compared to Q2 2023. Operational gross margin 53.7, mainly affected by higher material costs where price adjustments towards the customer is 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 Verdeo South, where we have put in a second line when it comes to soft shoes. And also that we in Vetro North had fewer development projects in this quarter. And the development projects have a significantly higher gross margin than the manufacturing contracts. And 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, 137 million, an increase of 35% compared to 101 million last year. And as I said, no adjustments this quarter. We had a very strong cash flow, 135 million SEK. And during the quarter, we have decreased the working capital with 33.5 million SEK. And I'm quite impressed with that since we are growing the business. And as I said, we have amortized 75 million on our loan this quarter. Looking at the year-to-date numbers, net revenue amounted to 1.7 billion, an increase of 27%, of which 12% is organic. For the first nine months, all geographical 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, 363.8 million SEK, an increase of 14%, and the margin is 21.4%. Operating cash flow for the first nine months, 317 million. A positive effect of working capital for the year of 48.8 million SEC due to less inventory and increase of operating liabilities. Investments in tangible and intangible assets, CapEx, amounted to 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 amortized 125.6 million SEC so far this year. Rolling 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. And looking at our different products and brands, we see a strong increase when it comes to nutraceuticals or supplements, as we also can call it, decrease when it comes to topicals dermatology. And that's mainly affected by the lower sales when it comes to the veterinarian channel, because when it comes to our topicals dermatology, the majority of the customers there are in the veterinary channel. But we do expect a bounce back in Q4 already when it comes to this product area. Pharma also a decline. That's mainly due to two reasons. It's our activities up in Vetio North. The comps were very, very tough comparing 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 had a FDA inspection together with a rebuild of our bottling 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, normally you have it around two to three years, but due to COVID, there's been been a delay, but we're very happy since we have made lots of changes predominantly when it comes to our manufacturing lines. We are very happy to see that the team up north had done really good preparations for the inspection and it was a very good result from the inspection. So no major findings at all. Looking at our different brands, NatureVet is really kicking off, really strong sales for NatureVet. And that's basically in both channels, both online and pet retail. As you know, we have launched a new product concept called Scoopables that's been very successful. But I would also like to say that all over the NatureVet line has been very strong in demand and gaining new sales. Proden Plakoff continues to grow very, very strongly, over 50% growth for Proden Plakoff this quarter and for full year as well. And it's in all geographies, it's in all channels, and it's also due to the New product we have added to the line, soft shoes, protein pack of soft shoes that 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, Nutravet also increased a lot of our vet specialty brand dominating in the UK, but also gaining some new export wins. So really happy 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, NatureVet and Perlin Plakoff has been very strong in the growth. Going through the different regions, starting off with our biggest region, North America, 470 million SEC 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 strong quarter in pet retail and online, a bit softer, but collaborations with Patterson and MWI that we've 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. video south we've done lots of work there and and this quarter uh i mean flat flat in sales um mostly affected by by some uh some some um let's say changes like what we did in in adding another line and also coming down to some some raw material ingredient challenges but um but made lots of progress. We have a new general manager and the team all around him. They've done an excellent, excellent job and they are eager to show in Q4 that they will be presenting both growth and improved profitability. Jone Peter Reistadler, As I said, declined due to some less development projects and a very strong Q3 last year, but also there we expect to get you know to contribute a lot more than than than this quarter. PetMD, our online division, really strong, 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 protein plaque of sales on Amazon, where they've done done extremely well in getting rid of the so-called rogue sellers or diverters selling online. So that will show a lot more in our top line sales and also when it comes to profitability. They are also handling the RX vitamin sales on Amazon and Chewy and that has also increased a lot this quarter. Proton Placroft, as I said, 54% 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 Proton Placroft. NatureVet, 39% growth, including contract manufacturing. Really happy that we dare to invest in the third production line last year. And now it's 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 and up and operational so so has has been a big project, of course, moving on all of the inventory moving down. the service, et cetera, and it's gone really well. We have a strong team planning for this and the key people from Arcs Vitamins will work remote and some other operations are moved completely with new staffing down in Tampa. So I'm happy to say that new CEO is Lynn Bogren who came on board when we acquired the VetBios Direct concept for subscriptions to the veterinary channel. She will handle both that and RxVitamins and we see lots of synergies between the two operations. And I'm also happy to say that we keep on adding new competences and skills. So we have have gotten Jeff Granger on board as the new NatureVet CEO. As of now, he goes side by side with Scott Garman, the founder of NatureVet that will retire later on. And Jeff 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 issues that we have, but you can always make improvements. So I'm really happy to have Jeff on board with all of his experience. Looking at Europe, a strong sales quarter, of course, really strong growth here, 111 million in sales and over 100% growth in sales. So 19% of our total revenue. All channels performing. You mentioned some channels, especially, of course, online sales continue to 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, 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 NutraVet, over 100% growth. they did have a let's say weak weak comp but nevertheless fantastic fantastic sales but by the team and and it's all over both both the the vet channel of course that where they have always been been 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 month on month and really good results there. And then looking at the exports starting to improve quarter by quarter also when it comes to NutraVet. Lots of interest around the world for the NutraVet brand. Vetur 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 collaboration within the group because of the high demand in Europe, we have We have utilized Vetio South and will utilize Vetio South in the coming quarter as well to supply the customers of Vetio UK. And we have also set up a soft chew line in Sweden Care Ireland. So we'll start delivering commercial products from Ireland in Q4. And the collaboration between Vedeo UK and Sweden Care Ireland is excellent. The Sweden Care Ireland has taken over some machinery from Vedeo UK and also all of the knowledge that Vedeo UK has when it comes to the software manufacturing is really, really helping us to kickstart the manufacturing in Ireland. Nature Vet by Sweden Care. We got the trademark registered or granted for the EU. So we are in the... the preparation for launching NatureVet all over Europe basically next year. And we'll have a sort of kickoff with that when it comes to the biggest pet retail exhibition in the world, Intosu, in May 2024. But we will probably start a bit earlier 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 got a signed contract contract. with a Chinese customer and is 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 Plakoff, 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 supplements, but now we have a good partner and really, really, really excited to see about what we can do in Mexico with Proden Plakoff. NutriVet, 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 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 Nutravet organization that we work with our partner in Canada. Proton Plakoff, 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. NatureVet and RxVitamins have sales primarily in Asia, and I would say it's Japan and South Korea and Taiwan for the market. Going forward, more or less the same priorities as we've had for this year. It's growth and profitability and lowering debt level. That's key to us. 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 to partnering with lots of big retailers, big veterinarian companies. So do expect that we 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 soft shoes for the North American market. But I have to say that in Q4, we are delivering on many of those switches. So that will be beneficial to us. Strong product launch pipeline, especially from our Italian company, Innovetta, that has a really high scientific level, has had many wins when it comes to presenting new products to 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 up there and presenting some of the products with a strong interest from the veterinarian market. keep on working really close to our main customers, solidifying, developing relationships. That's key for us to be, 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 A partner that you can rely on and a partner that you know that you get high quality products from and also that you get instant feedback and recognition. That's really, really important for us. And then, of course, M&A, I often get questions about M&A and that's 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 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 to putting together the acting 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 important suppliers. So that will definitely have a positive effect on our gross margin and bottom line in 2024. We see lots 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.

Thank you, Håkan. The first question comes from Richard. Please go ahead, Richard.

Right. Good morning. Thank you for taking my questions. Hopefully you can hear me okay. So a few questions starting off, you know, very impressive 17% organic growth in the quarter and you have even easier comparables now and Q4 on the growth side of things. Do you expect to grow above the 17% organically in Q4? What are your sort of expectations heading into next quarter?

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

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

I would say that we're working hard with that and I hope that we will be there in 2024. I can't say that we will be there in Q1 2024, but definitely we should bounce back to those levels in 2024.

Okay. So perhaps, um, you know, facing getting there, but, but not, uh, not in Q4 or in Q1, but rather, you know, facing for the full year effect. Yes. Yes, that's correct. Perfect. uh very clear uh you you guide for growth and margin bounce back in in vetio uh north and south and in q4 which you have been you know guiding and expecting a recovery there before you talk about visibility there and and you know the actions taken that you feel comfortable with with the bounce back in q4 would be yeah i would say that in in vetio south we we have um

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 in that, but I will be happy to present it after Q4. So let's see. But we have a We have more control of the visibility. Then, of course, I mean, things can happen. I mean, external factors, but I don't expect that. So we feel confident going into Q4. And October has started well.

Perfect. And the 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?

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

Very clear. Thank you for taking my questions.

Thank you. Our next question comes from Christian. Please go ahead.

Yes, good morning. 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, do you see any risk of stocking effect in Q4?

I don't have it really the breakdown, but I can say, for example, our biggest brand, the strongest brand, NatureVet, we did not have any price increase in 2023. So I would say the... the price effect is a couple of percentages of those 17%, I would say. And no, I don't see a big... big stock build up from our customers. It's been really all over, not 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 changes let's say, marketing investments when it comes to displays in some big retailers. And that has really, 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 no big...

very exceptional orders from many customers okay perfect and my second question is regarding the interest bearing liabilities that you decreased by 75 million in the quarter you plan to step up the amortization that pays to 300 millions on a basis from 200 millions

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

Okay, great. Thank you very much.

Thank you. The next question from Adela.

Yes, good morning. I hope you can hear me. 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 that you're doing that's going to drive that development?

No, no, there's several initiatives. Price, definitely, we will be increasing price in 2024. We will We will also, due to this big project we have in North America, we will be able to get better raw material and packaging cost and transport. That will definitely have an effect as well. And also from a productivity space. I mean, we have been, as I said, we have... and will in q4 utilize video south for some european customers that that is of course not the ideal situation for for for supplying the european market both from a a cost perspective uh uh but also from from a timing and a sustainability perspective we of course want to manufacture the the products where where we are and and we are ramping up in in UK and also in Ireland. And of course, when ramping up, the productivity is a bit less where we want 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 will help us do that.

Okay, excellent. That makes sense. 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? Is there a seasonality aspect that we should keep in mind or anything else?

No, it was just that it was a combination of initiatives in lowering our inventory levels, pushing payments from getting paid by customers and then perhaps pushing some, we've had a a history, perhaps being a bit nice to our suppliers, paying a bit earlier than needed and 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 don't expect that for for every quarter going forward. We have perhaps been, in some cases, since we have a high demand, in some 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, give and take. But Q3 was exceptional, but I still think we will have a very nice cash conversion and cash generating activities going forward as we have had.

Yeah, that makes total sense. Thank you. And I guess a follow up on that, if we're able to continue to bring down the death 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 protein integration?

Yeah, I mean, still focused internally. integration and organic growth. But as I said, we, we are a, we have done lots of successful M&A going forward and, and the market is there when we, we get lots of, lots of, lots of contact and, and, and let's say companies and people wanting to join SwedenCare. So of course we are in a good, good position. And when the, the right target comes along. We will probably won't hesitate on acting on that. But let's say we have communicated that the big acquisitions we made with NatureVet and with InnoVet. 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 organics.

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

Geographic expansion, definitely. There are some geographies that we are interested in and a bit difficult to find targets, but I would say there are some key markets in Europe where we... wouldn't mind finding an acquisition target. For example, Germany is a market where we are underrepresented. Looking at Asia is of interest, but not that easy to find good targets. But But Asia is an important market for us and looking for the prospects going forward, it's a very interesting area. So either we find a target or we will probably be setting up some sort of activities in Asia. But if we are starting from scratch, then it most likely will be more of a, let's say, sales support office for the Asian markets. But let's see. And also, I mean, it could be, as you said, some interesting companies that have something that we don't have in the group, even though we have a very wide range of products right now, there are still some areas where we could complement our offerings. So it's really dependent on the... I would say that the company would fit into our group. As you know, we are very entrepreneurial. We are focused on growth companies that have been able to grow together with profitability. If those factors are fulfilled, then we always look at the offer presented to us. But let's see. And we continue to have the dialogues. But as of now, we are definitely focused on continuing paying down the debt level. We think that is a good way of using our cash at the moment, definitely.

Yeah, 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, over-representation in North America?

Yeah, we're 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 still with a lot of opportunities for us. So it wouldn't be too... to deleverage the, let's say, US market or anything like that. But it would be more that, of course, we would like to have more presence in markets that we deem to be interesting. And Germany is one of those.

Excellent. Thank you so much for your detailed color.

Thank you. Thank you. Our next question comes from Johan. Please go ahead.

I can't hear anything.

Sorry. Still struggling. Good morning, Håkan. Thank you for taking my question. 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?

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 buy-ins together as a group, I would say that we are expecting some, due to market conditions, we are expecting some decrease in raw material costings in 2024. The prediction is they're all ready for that. So... So that could be one reason why people haven't adjusted the prices out to their customers. But we do see opportunities for us. Our main competitors looking at branded products, I do feel that we are in a very good position price-wise out to the market. So we are not afraid of some slight price adjustments for our own part.

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

Of course, the contract manufacturing has a lower gross margin, but as you know, then we don't have any basically SG&A costs. So that will definitely help the bottom line when we go to the contract manufacturing part of the business. So we're not that worried about the gross margin, it 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 there from the contract manufacturing business. So yeah, I would say that you can probably expect that we see a strong demand when it comes to contract manufacturing, but I wouldn't say that it will go faster than our branded products. So I think it will be in line with branded and contract manufacturer will probably grow hand in hand basically when it comes to growth levels.

Okay, that makes sense. And 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 gross margins?

Yeah, I mean, we have been active in growing sales, but how much that effect? I think it's more due to some product mix and some key components 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... It's any major campaigns, but yeah, we've been active in getting products out there. So, and we will continue to do that.

And the final one from me. You've reached your 2023 target of lowering your gearing to below three times 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 200 million SEK per year. Is that still standing?

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

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

Yeah, as I said, a bit softer, but it's been more soft when it comes to... to liquids, the medicated dermatology products, and comparing to supplements. But we do see a pretty stable demand going forward. So I do expect that the veterinary side will bounce back and I wouldn't be surprised if we see some quarters going forward that we will have a very good growth in that channel as well. So it's nothing spectacular. There's been some Some transactions, as you know, a couple of big M&A activities and some of those have probably affected us also a bit with companies wanting to be a bit cautious when it comes to building up inventory. So I wouldn't say that the vet market has dropped significantly when it comes to sales to pet owners, but it's just been a bit weaker comparing to the other channels. Thanks so much.

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

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

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

No, just thank you so much for the interest and I would like to end off by saying that we do have a unique and fantastic organization and 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 Good feeling going forward.