Vimian Group AB (publ)

Welcome to the Vimean Group Q3 Report 2024. For the first part of the conference call, the participants will be in listen-only mode. During the questions and answers session, participants are able to ask questions by dialing pound key 5 on their telephone keypad. Now I will hand the conference over to the speakers, CEO Patrick Erickson, CFO Karl-Johan Zetterberg-Boudry. Please go ahead.

Thank you very much and good morning and thank you for joining our third quarter earnings call. I'm going to jump straight into it today and maybe look at some of the highlights from the third quarter. We continue to show a double-digit organic growth and margin expansion in the quarter. We had a strongly adjusted EBITDA growth and we improved our cash flow from our operations and we passed an important milestone when we entered into an adjacent and an additional MedTech niche when we acquired business in the dental space there. I want to go through a little bit more in detail on what was driving this results. So first of all, a 10% organic revenue growth, and it's driven by our specialty pharma and our veterinary services segments, which both showed very strong growth. Our adjusted EBITDA grew by 20%. and ended up being 21.9 million. Our EBITDA margin came in at 25% year-over-year, and that's also an improvement. If we turn to our specialty pharma segment, we show strong growth here with 13%. We had very strong growth across all of our therapeutic areas here. As you know, we've talked about a growth initiative here as the one focus point to drive organic growth is our cross-selling initiative that yielded one third of the growth came by way from that initiative alone. And the positive margin development that we've seen here in specialty pharma is driven by continued focus on integration of our acquisitions and optimization of the business in general. The adjusted EBITDA grew by 24% in this part of our business. If we then turn to MedTech, Organic growth in this segment was 4%. And it's driven, it's slower than in Q2, it's driven by softness in the US surgical elective high cost market or high price market, which would be knees and hips. And today we don't see any sign of recovery in this part of the segment in America. We had continued high single-digit growth in our European and APEC businesses. The margin improvement here is driven by the annual order program, where we have now flattened out our sales of those products across each quarter. And that even now is our margin profile over quarters in the years as well. Our initiative to drive growth in MedTech is all about capturing the white space. We do that mostly by way of education and conducted over 20 on-site educations with almost 300 participants in the third quarter. Our adjusted EBITDA for MedTech grew by 19%. We now switch over to our veterinary services business. Very strong growth here of 17%. And we see positive momentum across all of our key geographies in the business. Our initiative for growth in veterinary service, as you know, is all centered around acquiring new members. And we added 250 new clinics to our membership for a total of 8,200 at the end of the quarter. Margins were up substantially here, and it's really because of our higher penetration of services on existing customers, and we're seeing good benefits of the scale that this business is now starting to drive. The EBITDA growth for veterinary services came in at 34%, which is an exceptional growth for this business. Now turning to Our fourth and last segment, diagnostics business, is about 5% of our total business. We continue to see decline in this business by 5%, and the end markets here, which is a livestock-focused market, has unchanged characterizations. The profitability in this business is lower as we have launched this parasitology test to the companion animal business where we're refocusing and diversifying this part of our business also into companion animals. We'll continue that effort in the future as well. And with that said, maybe switch over to the acquisition that we just did. We're very excited about having completed this. the IM3 acquisition. Um, it's in a global leader in the veterinary dental space. And just as a reminder of our strategy where we've, we've said that, um, M&A strategy is for tuck-ins that adds products or geographies into our existing platforms in specialty pharma and medtech or in veterinary services. We also said that we're looking for new therapy areas for specialty pharma and medtech, and this is exactly that, a new therapy area for our medtech business. We're excited to have acquired the global leader in the vet dental space, and IM3 has a very strong brand recognition in this niche. The niche grows very fast and has very high customer satisfaction. And as we've said before, but just as a reminder, this acquisition would add about 7.7 million in EBITDA. And we consolidated the business into our operations here on October 1st this year. We were to look a little bit closer at the company. It It's a family owned business that was founded in Australia about 30 years ago that has been a very, very successful building, um, customers in over 40 countries, uh, selling both direct and through distribution. We're adding 85 employees, uh, into the family of and welcome them to the family of Indian. And, uh, we have offices in the U S Australia Island and, uh, in the UK. Um, Just like we have in our orthopedics business, wide space capture and education is a key driver for growth here. IM3 has a number of state-of-the-art education centers that can be used both for dental and orthopedic education. So we're very excited to add more capabilities here. If we look at additional acquisitions in this segment, we are looking at driving acquisitions that will help us improve and increase the margin profile of the business. That includes consumables businesses, includes distribution businesses that will help us acquire that. If we look at our product portfolio in here, we have some very specialized dental units, x-ray units, instruments that are used for the actual surgical procedures or the dental procedures, some small equipment services and consumables. So today, about 32% of the revenue of this business is of recurring nature. So with that said, I'm going to end my piece here and hand over to Kalyon who will walk us through a little bit more details on the financials. Over to you, Kalyon.

Thank you very much, Patrick. And that's it. Let's take a more detailed view on the financials for the third quarter. Adjusted EBITDA in the third quarter was 21.9 million euro at the margin of 25.0%. This is a solid improvement from 22.9% for the same quarter last year, supported by positive margin development in all of our three largest segments. as we see effects from cross-sales, benefits of scale, as well as mix. We report operating profit of €10.1 million, a year-over-year growth of 2%. Items affecting comparability clearly impacted the operating profit in the quarter. In total, the items affecting comparability amount to €6.5 million, with costs for the IM3 acquisition, as well as continued high level of legal costs for the U.S. patent litigation. The net financial items of minus 9.3 million euro consist of three main elements. Finance expense of minus 3.8 million, with an average interest rate of 6.0% in the quarter, offset by 0.5 million interest income. The quarterly discounting impact of minus 1.2 million euro, an impact of 0.1 million euro from probability adjustments on contingent considerations. And lastly, a negative impact of 5 million from non-realized effects on revaluation of debt. The income tax expense for the quarter amounted to 2.7 million euro. In total, this results in a net profit for the quarter of minus 1.2 The negative result is a consequence of the high amount of items affecting comparability, as well as the negative impact from FX in the net financial items. Q3 cash flow. Cash flow from operating activities reached 16.7 million in the third quarter, an improved cash generation compared to the same period last year, as well as the second quarter this year. Networking capital amounted to 80.8 million euro at the end of the quarter, equal to 23% of revenue. A decrease from 82.0 million at the end of June, which equaled 24% of revenue. We see opportunities to gradually improve working capital and cash generation over time. During the quarter, we further improved our processes for inventory management across the group. And as a consequence, the decrease in networking capital of 1.1 million euro compared to the end of the second quarter is driven by the decrease in inventory in MedTech and lower accounts receivables as MedTech AOP customers pay their monthly installments. The decrease was to some extent offset by slightly lower accounts payables. Cash flow from investing activities of minus 89.2 million euro primarily reflects timing effect from financing the IM3 acquisition payable on October 1st. Cash flow from financing activities of 70.7 million where the proceeds of the rights issue in the second quarter of 142.7 million has been used to repay 142.4 million of debt. partially offset by the new loan of 78.5 million euro for the IM3 acquisition. At the end of the period, net debt amounted to 140.3 million, down from 144.1 million at the end of the second quarter. External lending totaled 240.1 million euro following the repayment of the proceeds from the rights issue, as well as the use of funds to finance the IM3 acquisition. Leveraging the quarter equals 1.3x compared to 1.4x at the end of the second quarter. With this financial review of the quarter, I would like to hand the word back to Patrick for concluding remarks before we open up for the Q&A session.

Thank you very much, Colin Wong. So just in conclusion here, if we look at this, we're delivering a quarter with double digit growth. We continue to see margin expansion. We improved our cash flow in the third quarter. We have our eyes on the US surgical market that remains very soft. And we'll continue to deploy the various commercial actions and monitor the situation here for the future. The long-term growth drivers in this industry is very clear and strong. The humanization of pets, the elderly population of pets as well because they live longer, and also the ability to treat animals. our companion animals when they get sick is great healthy growth drivers that will continue to show good solid growth for the future here. Our near-term priorities are all centered around organic growth, continue our operational improvements, drive really the best place to work and making sure that we onboard our recent acquisition in IM3 and continue to advance our M&A pipeline and agenda. With that said, I'd like to open up for Q&A. Thank you very much.

If you wish to ask a question, please dial pound key five on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial pound key six on your telephone keypad. The next question comes from Rickard Anderkrans from Handelsbanken. Please go ahead.

Good morning and thank you for taking my questions. So first set of questions on sort of growth and expectations for IM3 for the five year earn out period here. Is it reasonable to assume, you know, some 10% organic growth for the business over that period? And does your full earn out imply, you know, plus 25% EBITDA CAGR, which is in line with the development of the acquired companies you presented in conjunction with updated targets earlier this year? So from the start there, thank you.

Rick, good morning. Thank you for your question. When we look at IM3, You know, the margin is at 21 and a half, and we think that the EBITDA margin for the business is going to grow over time. And we do that by way of operational improvements, by looking at additional acquisitions that has recurring higher margin, and also potentially acquiring some of the distribution channels that are available there. And all those three together will kind of move the margin up to a higher level. On the growth rates, we saw healthy growth in IM3 in the third quarter, and we can continue to see how IM3 will grow at about the average of VMIAN today. The niche is growing very fast. I think we can capitalize on it, and we feel very good about how that can add to the value creation of our company going forward.

All right, perfect. And a follow up. Since you're set to pay earnouts for the deal, do you expect to generate meaningful excess free cash flow from the business to fund new acquisitions if we adjust for the earnouts as well?

So on that, we see good opportunities for solid cash generation from IM3 or our dental business within Medtech. And as discussed when we announced IM3, there's two portions of the earnouts. There's one earnout with a hurdle where we believe that's very likely that earnout will be reached. And then as Patrick mentioned, there's a second earnout option for the sellers that would imply very strong performance for us for IM3. And if those earnouts would be payable, then there's a very strong cash generation achieved by the business as well.

Alright, and what's the rough split between sort of the hurdle and the sort of optionality based on performance?

So the first earn out payment on the hurdle that's 10 million and then the optionality in the full amount is 50 million if they would reach sort of the full second tranche of the earn out.

Very clear. Thank you so much for that. And on the weak outlook for Medtech in the US, you mentioned not really seeing any improvements in the short term. But looking at industry data from the US, there seems to have been 7% growth year over year in the market in the US in September. Was that just a blip in the curve or have you seen deterioration in October? It would be interesting to hear a bit more on what you're seeing and the underlying development there. Thank you.

Thank you. That's a good question. As you know, that same data source that you're looking at was minus one and minus one, and year-to-date it's minus 1.3. So it could be a blip in the curve in September. Of course, it would be great if it wasn't, but I think it's too early to call it out. And if you look at the monthly variation of that number, it is quite volatile. So although we've It could be the beginning of a turnaround, but we don't want to suggest that it is. Let's look at October and November and get a few more months. And if that pattern is prevailing, then I think we are in the turnaround. But I think it's too early to call, Rick, at this point.

Fair enough, fair enough. And just a final question. Any update on the oversight launch in the diagnostics business? When can we expect to see top-line impact there and recovering margins back to double digits? Should we assume single-digit margins for diagnostics in 2025? It would be interesting if any sort of flavour on the outlook there would be very helpful.

So on the companion animal launch within... within diagnostics and as we communicated in previous quarters, we've taken a conscious decision to invest in the go-to-market for the companion animal diagnostics solutions that we have. And as you rightly point out, that has had a negative toe on margins for 2024. And we continue to see that for the rest of the year. The companion animal launch is progressing and we see an uptick in the companion animal business, even though we know we're launching a new technology and it takes time to get uptick in the market, even though we see a positive momentum and it is a race-a-date solution where we will continue to see a recurring revenue stream as we have more and more machines installed. With that said, this will be a continuous journey where we'll start to see improving sales and improving margins over time. And it will not be a step change. It will be a gradual improvement for diagnostics and for the companion animal solutions over time.

All right, so single digit should probably then for a couple of few more quarters, then we should probably assume single digit levels.

We should assume that we should see sort of a, call it a slight but steady improvement of margins as both the companion animal business is likely to continue to show positive momentum, even though, as we said, we're doing this go to market investment now for the full year. And we will take a very close evaluation in the beginning of next year to see. So what's the next step in our companion animal diagnostic solutions and how we take that to market? And then, of course, it is dependent. on how our livestock business performs as well, because that's the largest part of our diagnostic segments. And we see that we have healthy margins within our sort of core livestock diagnostics business. So as both continue to develop, hopefully positively during next year, we will see a gradual margin improvements of a quarter of a quarter.

Okay, that's helpful. Thank you for taking my questions.

The next question comes from Marco Pires Cox from Barclays. Please go ahead.

Hi, there. Good morning. Thank you for taking my question. I have two, please. So firstly, just on the US medtech business, obviously, weakness here started last quarter, and we're still seeing some weakness there. I'm just curious whether you have any visibility on the ground when it comes to IM3 and the dental business there, given that you know peers in the overall dental market as a whole have reported weakness in the us market there for quite some time so i'm just curious to see whether you're seeing weakness in iron free as well as in the us medtech business um and then secondly just a quick one on spec pharma you know one third of organic growth here today coming from cross-selling i just wonder how are you thinking about this over the longer run do you think this is a reasonable basis to continue, or do you expect to be able to expand this to be a higher contribution to organic growth over time? Thank you.

Thank you for your questions. We'll start with the first one. When it comes to potential softness in the dental business in the U.S., we don't see it in the dental business. We see it in the high-end elective surgical procedures on knees and hips in the U.S. orthopedic business. On the specialty pharma piece, the cross-selling initiative, has a long runway. We're still in the beginning of that initiative. We've acquired 20 businesses in specialty pharma, and most of them have a characteristic where it's been a local company with its own manufacturing that has had local sales, if you like, or sold in that country plus adjacent countries. And we're making those product portfolios truly international as part of this cross-selling initiative. And you should also think about any additional acquisitions we do in specialty pharma will be folded into the cross-selling initiatives as well as part of the synergies in any acquisition like that. So, you know, I think and I see that this initiative has a very long runway.

Perfect. Thank you.

The next question comes from Arvid Nikander from Carnegie. Please go ahead.

Good morning and thanks for taking my questions. So first off on IM3, consensus seems to expect the underlying market to rebound in 2025. And assuming that it does, how confident are you that IM3 will be a double-digit growth business this year? You see any risk of this, for example, with temporary loss of customers as you convert distributor markets to direct markets or any other factors? And secondly, on orthopedics, do you believe there will be any sort of meaningful pent-up demand once the market does fully rebound? I'll start there. Thanks.

Okay. Thank you, Arvid, for your question. So the first one is on IM3. We're not looking to make a lot of radical changes right in the onset here. So I don't expect us to see any movement on customer base or any changes there. I think that the primary focus for us in IM3 is all about accelerating the organic growth and making sure now that IM3 is part of a bigger family that we can leverage the scale that we have and the capabilities that we have together and be stronger that way. So I would expect IM3's growth rates to increase and improve over time. The second question about pent-up demand for orthopedics, it's a possibility that that might happen. You know, if you need a knee or a hip on a dog, There's a certain window where it's economically feasible to actually perform that surgery. If you wait too long, I think you leave that window. If the market rebounds here in a very short order, I think there could be a positive rebound. But if this is a longer time, period, I'm not sure there's going to be a rebound because those animals are going to be outside of the window where it's, you know, defendable to actually go through those relatively expensive surgeries.

Great, thanks. And just the last one, if I may. Consensus doesn't seem to expect any major margin violation for MedTech in 2025. Assuming a full market rebound, how hopeful are you that you can improve the margin for IM3 already in 2025? Doesn't seem like you're planning much near-term initiatives there, but yeah, conversion of distributor markets to direct markets, increased focus on consumables or other initiatives, any color there would be helpful. Thanks.

Yeah, good, Arvid. And maybe I'll get back to your questions and maybe just to fill in on what Patrick said on to the US dental market and what we see opportunities for IM3. I think it's important to remember as well, as we communicated when we entered the dental space with the acquisition of IM3, there is a great reason why we're entering this space and why we see very long term sort of avenue for growth. because this is a segment with a lot of white space that we see. So even if there would be a slower market, or as you asked Arvid, in terms of changing, going direct from distributors, et cetera, we see a lot of white space to cover within the dental business. And it is a huge opportunity for vets to increase their offerings within dental as well for them to develop and grow their business. Then to your question, Arvid, on margins for IM3, So we have a very sort of long term belief that we can continue to develop our dental business with very solid growth and margin expansion to over time bring them to the fleet average of the group. And this we will do through step by step, very consciously making sure that we improve margins, looking to sort of develop and invest in the business in the long term to ensure that we capture wide space, that we drive growth. That will, of course, over time mean that margins will improve. But we are investing in the business for the long term. We are investing in the business to ensure that, especially from a sort of financial and governance perspective, we're meeting the requirements from the main market listed company. So that is weighing a little bit on the cost level and as a consequence, the margin for IM3 and Medtech Dental. But With that said, we are positive that we sort of continuously will improve margins in MedTech Dental over time to bring it to a fleet average from a group perspective.

Great. Thanks. Those were all my questions.

The next question comes from Sten Gustafsson from ABG Sundahl Collier. Please go ahead.

Good morning. If you could go back to the U.S. medtech market, and I'm sorry if you already covered this in your prepared remarks, which I missed partly, but would it be possible to split up the market in the elective surgical procedures and more trauma? and talk about the performance in how the acute or trauma market is developing. And also, if you could share with us the growth rate in EU and rest of the world for the MedTech business, that would be helpful.

Yeah. Thank you. Good morning, Stan. And then we'll start with your second part of the question. The Europe and APEC businesses is growing high single digits. And the North America business grew 1%. So that's the kind of growth division. We split up internally the growth rates for the elective and the non-elective. So if you look at fracture plates, which are typically non-elective, if you've had trauma and you break legs, you will put fracture plates on there. The volume of fracture plates is very steady. the volume of knees and hips, particularly on knees, because it's a much higher volume there than on hips, that's where we see the volume decrease here as a result of, I think, people electing to do those surgeries either later or postpone them to maybe never. And I think that was a different question about that. But it's hard to speculate whether they're going to rebound or if those are lost opportunities. But we do see that the trauma-related business is very steady and the knee business is where we see the market impact. And people are delaying those surgeries today.

Excellent. And sort of share of sales, roughly, are we talking 50-50 or is it 80-20 split between the elective and non-elective in a typical year or so?

Stan, that's a great question. I actually don't know the exact split on that.

We can get back to you on the exact split. No, I don't know the exact split. We should look at different products in terms of if it's elective or more trauma-based. I think that's a different way of slicing it. We can get back to you on that still.

Yeah. Okay. And then finally, general question on pricing for MedTech globally. Is that positive year over year or positive? Yeah, prices... How does that work typically?

Yeah, global prices up 5%. The price increases that we have conducted in the past, yeah.

And do you expect to be able to raise prices also for next year?

Probably, but not at the same level. There would be smaller price increases...

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

The next question comes from Kavya from UBS. Please go ahead.

Morning. Thank you for taking my questions. I've got two, please. The first is, again, on US MedTech. I was just curious to understand how you're thinking about next year in terms of your commercial strategy, given what you're seeing. Do you expect to do another annual ordering program next year? Would it be downsized? Would it be a similarly small size this year? Yeah, so that's on that. And then on specialty farmer, I was wondering if you could share whether the cross-selling initiatives are concentrated to certain therapeutic areas and brands. And then also, if I could, have another one on specialty farmer on a regional basis and it's like there was some shifting dynamics here so sequentially it looks like Europe's obviously still very strong double digits but possibly stepped down versus last quarter and North America steps up sequentially versus last quarter so yeah are there any dynamics to flag there please in terms of where the products are launching where the integration efforts are concentrated regionally that would be helpful

Thank you very much. I'll start by answering your first two questions. I'll let Carl Johan answer the third question you had. So the first one was related to MedTech and whether we see an AOP program coming next year. And we reduced the AOP program quite significantly this year in the first quarter. There are still customers who prefer to do AOP programs, and they will continue to do so in the first quarter. So I expect there to be a level of AOP program. It might be a little bit smaller again in Q1, which I would guess that we'd have a couple more customers maybe switch over to either month or quarter program. And then on the second question on your specialty format piece on cross-selling, If you kind of go down and what is it that the team is doing there, there's 15 distinct cross-selling initiatives inside of that piece. And they go across multiple geographies and multiple therapeutic areas. So it's a little bit all over the board probably is a good answer to that. yeah but there's additional things you can add into the cross-selling going back to the other year about how much runway there is so there's significant runway in the program i didn't tell you why maybe you want to take the third part of the question which is for regional dynamics yeah so and also on on um on your question relating to um

And one of the reasons why we see continued good runway for cross-selling within Sperm Pharma, predominantly so far, it's mainly within adjunct dermatology. We're starting to see other initiatives sort of bearing fruit in the other therapeutic areas as well, but maybe even more runway going forward. And that's why we see this as a runway to drive continued growth. On the regional dynamics and the growth in the U.S. and the growth of North America versus Europe between the two quarters, there are two sort of main things to keep in mind in that. One, in Q2, we had a very strong sales in our specialized pharmaceuticals business, especially in Europe and in the UK, where one of our competitors were struggling and struggling. And we had a great opportunity to go in and capture business. So we had a very strong performance in specialized pharmaceuticals in the second quarter, which sort of weighted up share of sales in revenues. And we also had slightly slower growth in our specialized nutrition business, which is predominantly North America, U.S. based. So mix effect driving sort of the performance in the different regions between the quarters. In this quarter, we've seen sort of an uptake in growth in specialized pharmaceuticals, taking a larger share of sales, which also has a mixed impact on the margin if we look sort of sequentially Q2 or Q3. And secondly, there's a seasonal effect as well. We had a very strong month or month quarter in Europe in Q2. It's slightly slower in Q3. And that's to a large extent a seasonal effect from summer period in Europe.

Understood. Thank you. That's very clear. The next question comes from Rickard Anderkrans from Handels Banken. Please go ahead.

Hi, just a quick follow up. So I know UK is a quite important market for the Vimeo group. So there was another company in this space who called out that the larger vet chains have been somewhat cautious in the UK, potentially due to the antitrust investigation ongoing in the market there. So I just wanted to kick the tires and see if that's any concern or risk that you're seeing or if you felt anything of that you wanted to double check. Thank you.

No, and as you say, we're monitoring that event closely. Maybe we can see also, of course, there's maybe some of the larger corporates in the UK, they have needed to take action based on this investigation that's ongoing. From our perspective, we see a continued good momentum in the UK and we have a very diversified both customer base and sort of route to the market in the UK. So we haven't seen any really impact from this. And as we've communicated before, we're welcoming this investigation and making sure that we do what's best for for pet parents.

All right, perfect. Thank you so much for taking my questions.

As a reminder, if you wish to ask a question, please dial pound key five on your telephone keypad. 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. Thanks for your attention and interest today. Again, double-digit growth in Q3, margin improvement, and improvement in our cash flow generation. We do see impact from our U.S. surgery business, as we've talked about here. However, we are confident that we will finish the year with healthy results Full year, solid growth and looking forward to meet you again when we report the fourth quarter and the full year. Take care and have a wonderful day now.