Vimian Group AB (publ)

Good morning and welcome to Vimeon's first quarter earnings call in 2023. I'm Fredrik Ullman, CEO, and with me here today on the call, Kaliwan. I'll jump in to the first quarter highlights right away. So I'm very pleased to present a strong quarter for Vimeon and a positive start to 2023 in all four segments. to reactivate organic growth were successful, and we delivered 30% total growth, of which 13% organic in total, and 16% in companion animals. As we stated, we'd have a PULP program in MedTech, and if we compensate for that, the growth in companion animals is still double-digit. We delivered €88.1 million in sales, with an adjusted EBITDA margin 29.6%, which is a sequential strong increase. We maintain our focus on the integration of acquired companies with several key initiatives ongoing. And 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 customized specialty pharmaceuticals with the acquisition of the non-regulated 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.

Thank you very much, Fredrik, and good morning, everyone. As Fredrik mentioned, we delivered 30% revenue growth, achieving 88.1 million euros in revenue in the first quarter. 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. But 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 phase out 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 macroeconomical 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 26.1 million euro for the first quarter. This sequel to 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 Bo of Australia and Vetter, APAC will increase its share of overall revenue and even further diversify our geographical sales going forward. The strong development recorded in the last couple of quarters continues. And as of the first quarter, our performer revenue was 321 million euro. Since 2020, we have more than tripled the business through organic growth and continuous 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 84 million euros 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.

Thank you, Carl Johan. So as you know, we run four 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. The specialty pharmaceuticals had a revenue of 9% organically, and we actually accelerated that organic growth. led by the therapeutic air specialty nutrition and specialty pharmaceuticals that delivered exceptional 40% growth in the quarter. Geographically, we see strongest growth in the US and Benelux, lowered somewhat by the UK. The margin of 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 2000 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 and 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 Avakta to next-gen UK labs. now doing all lab in the UK. Dermacent in France has transitioned to Nexmune France. And AXA Eco has become Nexmune Scandinavia Logistics. And in addition to that, we have progressed on the organization 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 now into the full of our 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'll 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 from this segment. But with the management transition now completed in Mavora, I'm very confident 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. So veterinary service 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 welcomed Vector to complement our Australian services offering and added one 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 overhang. 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 actually where we see competitive 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 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 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 the progress we're making in this new technology. So with that, I'd like to hand over to Kalyuan. to go a bit deeper into the numbers.

Thank you, Fredrik. And as I said, let's give you some more color on the first quarter financials. As we said, the strong revenue growth in the quarter resulted in reported revenue of 88.1 million euro, which is significantly above the 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 26.1 million euro and the operating profit improved strongly from 11.2 million euro to 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 previous year, primarily due to lower acquisition-related costs. The slightly lower adjusted EBITDA margin of 29.6% is primarily following the phase-out of COVID sales in diagnostics and key investments in specialty pharma. Net financial items amounted to minus 8.5 million, which consists of three main parts, financing costs, of 3 million euros with an average interest rate of 4.8%. Adjusted contingent considerations of 3.1 million and the negative exchange rate impact of 2.4 million. During the quarter, Global One, BOAVA and BestPo 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 0.01 euro and adjusted earnings per share of 0.02 euro. Cash flow from operating activities amounted to 1.1 million with a negative impact from changing working capital. Inventory increased by 3 million euros predominantly with a slight increase in medtech and specialty pharma and receivables increased by 20 million euros predominantly driven by the annual order program in medtech where customers purchase 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 percent 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 three add-on acquisitions closed during Q1 2023, decreased compared to last year to 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 45.9 million at the end of the period, slightly above 42.2 million at the end of previous quarter. Improving cash flow and specifically networking 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 292.8 million versus 257.5 million as of 31st of December last year. This results in the leverage, which is net debt to last 12 months before my EBITDA of 3.1 times. On April of this year, Vimion subsidiary veterinary orthopedic implants reached a settlement agreement with DP Synthes, resolving the patent dispute between the parties. Under terms of the agreement, the defendants are obliged to make a single payment of 70 million US dollars, payable in the second quarter of 2023. As per the end of 2022, women has booked another current liability of 70 million US and a claim of 56 million which is the 70 million minus 20 million withheld purchase price at acquisition plus additional 6 million illegal costs towards the sellers of the UI as a current receivable. And all in all, this has no impact on the reported net debt for Vimeo and 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 order program in Medtech have 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 US patent dispute early April, and the process to retrieve compensation on the indemnification protection is ongoing. And also I said, a number of acquisitions have performed extremely well, Of the total earn-out considerations we have that are payable within 12 months of 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.

I'm pleased to see how it goes on the ESG agenda. We have a quarter 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 one and two emissions, and we are well below peer average, and we will now set targets to further reduce our emissions. And in the next phase, we will also include scope three 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 quantitative 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, we may 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.

If you wish to ask a question, please dial star 5 on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial star 5 again on your telephone keypad. The next question comes from Adela Dashian from Jefferies. Please go ahead.

Good morning, everyone. My first question relates more to 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.

Thanks. Thank you, Adela. 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, the delta would be, you would have that out of Q2, Q3, so slightly lower growth than double-digit growth there in the consequent two quarters. But if you look at the full year, I expect to grow the overall business, all of Vivian, at least in line with market growth or above.

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.

Yeah, 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 in patience for Ecclesi in the second half of this year.

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

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

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 year and how should we think about the inventories for the year end of 23?

Yeah, 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're putting a very strong focus on supply chain optimization, looking at reducing lead times to reduce inventories, reduce complexity, and just be... change the habits of some of the companies we've been interested in to make sure this is a highly personalized KPI, that networking capital is a personalized KPI. And so that's what we're doing, you know, essentially lead management in supply chain. That takes, of course, a little bit of time to see the effect of given lead 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 quarters to come. But I think that it's going to be a continuous movement, and it's a huge opportunity actually to improve the weighting of the companies we own.

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?

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

Okay. Thank you very much. That's all from me.

Sure. The next question comes from Blanca Porcolab from Barclays. Please go ahead.

Good morning. Thank you for taking my questions. 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 comp's ease? And do you still expect high single-digit organic growth for the full year? Thank you.

So for the first question, I think what we need to look at is the 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 expect to see a positive development for the full year and second quarter. And to your second question, regarding things that we don't give guidance, but as I said, I expect to grow in line with market or above for the full year.

Thank you.

The next question comes from Ricard Anderkrans from Handelsbanken. Please go ahead.

Right, good morning and thank you for taking my questions. So first question relates to diagnostic segment you hinted, you know, returning to growth in April would be super helpful to get a sense of what type of growth levels we should expect from that segment, you know, 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. Thank you.

Yeah, 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, our strong growth and Europe due to macroeconomic and post-covid situation with government spending less on on on animal health is is impacting us negatively there so i would i would assume in single digits thank you that's super helpful

looking at the balance sheet how should we think about you know deleveraging moving moving through the year should we expect you know a tangible lower and that's EBITDA here moving moving through the year or can you help us you know on the deleveraging side of things for the year would be so helpful yeah sure so 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. We should drive organic deleveraging. As I mentioned, though, sort of short term in Q2, we have a high portion of earnouts 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.

All right, just a final one from me please. You mentioned sort of positive earn-out revisions relating to Global One, BOVA and BestPo. Can you elaborate a little bit on that performance? primarily top line or profitability or any particular highlights from these businesses would be interesting to hear a bit more on the development compared to your expectations.

Yeah, sure. Now, 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 percent compared to the same quarter last year, looking at BOA, VAN and Global One last year. And we continue to see good and solid growth in the first quarter and the positive perspective going forward. 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 growing with the segments and taking market share and expanding those segments within then 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 In some cases, above expectations.

All right. Thank you. That's all for me. Thank you.

As a reminder, if you wish to ask a question, please dial star 5 on your telephone keypad. The next question comes from Adela Dashian from Jefferies. Please go ahead.

Yes, sorry. Just one more question from me related to the net financials line on income statement. It was quite elevated and I thought 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?

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

Yes, aside from your interest expenses.

Okay. Now I said that the net financial items was a bit larger this quarter compared to the same quarter last year. And as you said, it was predominantly three elements of which the three elements were roughly of the same size. So, a third 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 quarters, 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 upwards provisions would decrease. We will see slightly lower net financial items going forward than we have now.

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 fact you've been seeing is in

Italy to a greater extent but has that changed at all and is Italy now it seems like it's recovering and back to growth could you comment on that oh yeah Italy Italy is back to growth so Italy was predominantly affected in the second half of last year as gas prices went up and Yeah, 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.

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

We expect to continue to see, I mean, 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 or most of our patients are not puppies, they're more in the three to four to, say, three to seven year 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.

Thank you so much.

You're welcome.

The next question comes from Rikard Anderkrans from Handelsbanken. Please go ahead.

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 expectations is for market growth in conjunction with Q4? You talked about 8.5%. annual growth in the sector in the years ahead, but would be helpful to add some color for your expectations for this year, for the underlying market, just to put it in perspective. Thank you.

Yeah, so last year we saw 5% market growth, and this year is still a bit uncertain as to what the market growth will really be. The few companies that have started 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 five 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, etc. But I can't give you much more guidance on that, unfortunately. What I would point out, though, is if you look at our last 12 months per former revenue, we are 321 and adjusted EBITDA of 84. And I think that is shy of 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 that helps.

Right. Super helpful. Thank you very much for taking my questions.

The next question comes from Christopher Liljeberg from Carnegie Investment Bank. Please go ahead.

Good morning. 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 facing effects from the annual order program in MedTech? Thank you.

Yes. Yes for Medtech and yes for the group.

Okay.

Thank you.

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

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 yeah, 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.