Earnings Call: Q1 2021

Apr 29, 2021

Quarterly report

My name is Hakan Lagerberg. I'm the CEO of SwedenCare. And with me, I have Jenna Grafland, our CFO, and we will present the Q1 report for 2021. Yes. You may ask questions during the webinar and we will answer those at the end of the presentation. Okay. 2021 Q1 highlights. We had strong growth as expected to over 2 50% growth and the organic growth was 25%. As we've written in the report, despite some challenges regards deliver in production mainly based on COVID. We were hoping that those issues would be solved by end during the quarter. But as you all know, there were some backlashes with that. So lockdowns and also some Logistic and Transportation Issues, of course. But overall, we're very satisfied. We have had growth in every sector, every channel, despite the issues we've had. The one thing that we've been transforming over be last year and this year is, of course, the online sales. Now it's over 50% of the total sales of the group and primarily driven from the big online platforms as Amazon and Chewy, but and also Tmall and the others in China. But we expect continued growth into those channels. But of course, the retail offline stores and clinics will pick up over the years to come. One amazing achievement is that we have 2 dental care products, the powder for dogs and the powder product for cats. Both are number 1 in the dental care sector on Amazon UK. So it's we're really thrilled about that. And we will keep on reporting our progress in the online channels. We've had several ongoing sales and co op discussions with major players in both in U. S. And EU. And it's driven by, of course, the acquisitions we've made last year and the product offering that we now can show. And it's really it's from a sector where we haven't been focusing on, but we will continue with our own sales, but also enter into a lot more of these corporations since we see that we can grow our sales of course a lot, but also get in touch with these major players, helps us to keep on delivering new products and have markets for those. We ended this intense quarter with yet another acquisition, a very nice company called Rx Vitamins that I will present later on in this presentation. What we've been doing this quarter is, of course, have lots of internal and external projects. And I have named a few here, both projects that we've been working on and finished and some that will continue over the year to come. We're very happy to say that we've started our own production in the U. S. For the first time, a new daughter company called Tilverka down in Houston, Texas. We were hoping to start production in Q1, but actually it was 1st week in April, we launched the production and it's been great to see. And since we've had some challenges to fulfill the demand from the market, we're really happy to have this onboard and the team down in Texas have done a fantastic job getting this running. So over this year to come, we will continue take more of the production from our own resources. The integration of Animal Farming to Stratford down in Florida has spin a huge project, both in finance, warehousing and logistics. And it's also a project that from my side, I was hoping and thought it would be finished in Q1, but and it actually was, but lead the stress on the organization and the efforts done has also been fantastic. So we're just looking forward to having everything over. So turn now from Q2. Everything is set in place and we'll just keep on focus to grow the business and it will be a lot better for those companies to be able to put all the resources on growing the sales. We've launched some new products, the SoftShoe Product and Plac Off, PetMD, a co label product for Plac Off on Amazon. Nutra Pak is being launched in the UK with NutraVet, all of those products having the active ingredient Proton Plakoff. And we have lots of other new products that has been introduced and will be introduced over the year to come. So there's lots of focus introduce new products. As the first group country, we have launched NutraVet in Greece. Sales are starting now here in Q2 and it is sort of a test run how we will launch NutraVet get out in other countries where we're present and also that we can use that setup for partners in countries where we don't have our own setup. We are increasing the production in our facility in Ireland, both new products and we're also exploring the possibility of starting to produce dermatology product in a wider range on Ireland or in Ireland for the European markets. One big thing for Q2 is the launch of Animal Farm and Amazon and Chewy. Animal Farm has never been sold online in the U. S. Through these channels and Holden will take care of that project and we're very excited about that and have high take stations on the sales there. We will present a new web solution as we've outlined in the last report that we'll focus turn more direct sales to consumers on all the markets we're in. And that includes a completely new web solution, so that we can both market it better, but also have all of the backbone solutions for logistics, set up payment in a better way than we have today. Big online projects in Europe, where we are transforming the first of all, the Amazon sales in Europe, where we're present in half of the Amazon countries in Europe. Now we will be entering into agreement that covers all of Europe and that will be handled from our new online department in the U. K. That has been so successful in handling the Amazon U. K. Account. And going over to the sales and numbers, Jenny? Yes. Let's look at the sales per region. And the biggest difference is, of course, North America. This is where we have done the acquisitions of Stratford Animal Farm and Holden, which, of course, has a big impact. So the North American market has grown from 27% last year to 63% this year. This market will, of of course continue to be a bigger part of the pie as we have the RX acquisition that we just completed coming into our books from April. Despite the big growth that we have in U. K. Market, both with the acquisition of NutraVet and also the organic growth that we have had in Sweden Care UK. This part has decreased a little bit from 25% to 21%, but of course, it's highly impacted by the North American Growth. We have seen record sales in several markets. Spain and Greece and several other markets have had their best quarter ever. It's a smaller part of the group, but still important to us. The rest of the world, We have made a good delivery to Brazil this quarter. And that's why we have the growth in this part. And if I look at Asia, Asia has decreased from 14% to 6%. However, it's including a big order to China, Which we did not receive in Q1 of last year. However, other markets, which are big in Asia, such as Korea and Japan, We have not received an order now in Q1, so we're expecting that in the coming quarters. Let's look at the sales per product. Now with our acquisitions, we have a much more, let's say, even split Between our products group, if you look at the pie to the left, we have about 1 third Protoplackoff, a third of nutraceuticals and a third of the topicals and dermatology projects or products. This is A big difference from last year when product backlog was representing 82% of our total sales. Seeing that, I need to emphasize that the product backlog still have very strong growth. It was grown by 33% Despite the fact that we have delays in the production of our dental bites and Powder is the product which is growing the fastest. We had about 40% growth In the quarter, mainly driven by sales in the veterinarian channel in the U. S. And also online, where We also launched it with a co branded brand with Holden. This is a new short, which we are now presenting due to the fact that we have several strong brands in our group. So this is just showing you the split where PetMD is coming. It's the online brand with Holden from that acquisition. As you can see in other, we have a small part of Rx Vitamins. And people may think why is it now already a part Since it's already in our books from April. The reason is that Arex has sold some products to Holden in the past. So that's the reason for that. A couple of KPIs, DKK 133 million in revenue this quarter. As Hakan said, 2 55% increase in our revenue. 25% of this is organic growth. Our gross margin is a little bit lower. It's 60% versus last year's of 71%, but this is in line with our expectations as we have lower margins in Stratford, for example. If we look at our external cost and our, let's say, odd cost, we have acquisition cost of almost $1,000,000 this quarter do to Holden. We also have one off cost with the production facility in Texas and also this moving Cost of the logistics and the warehouse. Despite this, the one off cost and the higher marketing cost that we have, The synergies and the scalability in our business results in quite a big decrease of operating expenses compared to Sales is about 12% decrease if you compare percentage of sales. We also have when we work with Amazon, we have Higher external costs related to that as well. So the operating EBIT is SEK 36,000,000 for the quarter And 26.9 percent EBIT margin. If we look at cash, at the end of the quarter, we had $162,000,000 During the quarter, we paid the acquisition of Holden, which impacted our cash of $123,000,000 We also have an increased working capital Due to the fact that a lot of the revenues came in, in March, and therefore, we have higher accounts receivable. I also wanted to note that we are paying the Rx Vitamins acquisition just as we have opened April, and that will impact cash cash with $161,000,000 but we are also taking up a $90,000,000 loan to finance that. Our rolling 4 quarters, as you see, has quite a nice trend. We expect this trend to continue, especially now since we have Yet another company to include in our financials from April. Yes, some words about Rx Vitamins. It's a classic company in the nutraceutical industry for pets in the U. S, one of the first introducing products, has really set a high standard for development of formulas to veterinarians and really every ingredient in the RX Vitamins products has a reason for being in there. And they have been very detailed in compiling the different products and the ingredients thereof. Craig Kyskeras, the CEO has been is the founder, has been running the business since start and has been also both him and Rx Vitamins, our founding members of NASC, the National Animal Supplement Council. It's say organization that sets up some standards for producing these kinds of products and also when it comes to labeling. So it's really a good reference case and also the knowledge we get with Craig is enormous. All of the products have been formulated by a well known veterinarian, Doctor. Silber and Craig together and with of course some external experts. They have a very strong foothold within the progressive and innovative veterinarian community and also one would say some of the more open minded veterinarians willing do to test new and innovative products. Their sales in 2020 was around $8,500,000 and while we as I said, I described it previously, why we thought it was a good fit for us, it's also because as Jenny told you, Holden has had a relationship with Rx Vitamins, just introducing Rx Vitamins on Amazon last year 2020. And with, I just been starting it and had really, really good results. So we see a big opportunity in developing that channel. We will also launch the RX product and product lines within group companies and some more international markets. They are present in 10 to 15 markets all over the world, but we see the opportunities and there have been interest already. What we also will do is offer our larger partners with the Coepp Private Label Solutions. That is an area where Craig and his team hasn't had time to really focus on they have focused on building up a unique customer setup with smaller practices, around 5,000 clinics all over the U. S. And really focusing on direct sales to these. So they haven't used match distributors in the veterinarian sector. So they have really a good track record of true customers keep on buying their products, but we see a big interest for these product lines in from some of the major players. We will also, of course, make it vice versa, introduce high quality products from all of our different group companies into the RX brand since, as I said, there's lots of trust in the RX brand, loyal customers that want to keep on buying just the RX products. So we really think it's a good fit. And from what I've heard, the start of April has been really good with Rx, so our other group companies. So we expect this to be a really successful contribution to the group. So going forward, basically the same priorities as we presented after the last quarter. It's really much about the integration of the acquire companies. But I would like to stress that we're really focused on keeping the entrepreneurial spirit in all of the companies that we not we just see the add ons and the opportunities. Those are the things we focus on. So it's really no big, let's say, integration processes. It's really the only integration that's really fixed is the reporting and the finance. Otherwise, we focus on keeping the growing the current sales, growing the business and just adding positive factors to the business. Keep on increasing marketing, but very, very, let's say, planned and organized spend in dollars where we see we get at least $1 back. So it's really we increased the budget, but really with the focused do investments, not really just a big, big marketing campaign all over the world. So we're really focused on that. Brand and Product Development, of course, with all of these new brands in the group, it's really staking out the way forward where we perhaps focus 1 brand more offline and another more online and keep on introducing put different products on the different product ranges into the new our group brands. And also, of course, product development. As I said, we have many new product launches this year and in the pipeline for the years to come. Also trying to get as much products out in all the markets we're in and also our export markets. It takes a bit longer time with export markets, but we have presented all of our new ranges to our different partners all over the world and there's lots of interest. And just be keeping on being very agile and looking for good opportunities in the markets and in in all channels. So we see we're in a market that is predicted to grow with double digit numbers and we definitely aim to outperform in that market. So we will continue to have growth over 20%. Okay. That's it for our presentation. So we will take some Q and As at the moment. Let's see. We will have the first one. Do we expect any one off costs related to the Orec acquisition in Q2? If so, how much? Yes, we will. We will have cost of about Somewhere between SEK 500,000 and SEK 1,000,000, I would say, a one off cost. Will the OpEx go down in the coming quarters? Yes. We expect it as we grow, We expect it to continue to use more synergies and have scalability in our in the group. However, as Hakan said, all our companies, we are not buying or doing the acquisitions with strong integration. It's more of a, let's say, A result of doing the integration. It's not something that we are striving having specific projects for. No, but the increasing top line, I mean, the sales is really we're not foreseeing any heavy investments. It's we will add couple of resources here and there because we need to grow the organization a bit, but it's definitely that OpEx will come down. Yes. Question for you, Hakan. Is it possible to quantify the magnitude of sales that were delayed from Q1 to Q2? Yes, it is fairly possible. I would say at least $1,000,000 but probably more, but it's not lost sales. We will get that in the coming quarters. Do we have any data for repeat sales from Plakkoff customers? No, not an discuss the exact number of in the study. But we do have an extensive customer reference with all of the, let's say, customer reviews. You can watch if you go into Amazon, you can see it in the references. If you Google or if you look at Instagram, lots of satisfied customers, but I don't have a percentage. But from the feedback we get is that customers tend to keep on buying it for a lifetime of their pet if they start using it. Yes. Your expectations on the coming quarters, can you give some examples what you expect for the next quarter in terms of integration project? Yes, as I mentioned before, there's a couple of big ones. It's of course, introducing Animal Farm on the online sales. We will introduce Prodan Plakoff in more product ranges, as I said, with NutraVet introducing completely new product called NutraPlac. There are other big synergy products or synergy sales products, I would say, where we offer a completely new product offering to external bigger customers, major players as I said. So we're discussing large projects there. And if we look at our partners out in the world, they will be bringing on more of the brands turn to new external markets. We have one question here. Do you see financing how do you see financing upcoming acquisitions, Stocks or more bank loans going forward? Probably a combination. Yes, probably a combination. It's going to depend a little bit of the size, But we have a strong balance sheet, so we can absolutely use our balance sheet with bank loans as well. Yes. But one important factor in all of these deals is that we will have share as a component for the seller for management staying on board. So that's really important that we want to have focus managers within the group that has a stake in the game. What is driving the biggest net sales growth going forward? Is it online sales or is it utilizing the existing veterinarian network with more products? What is driving the biggest net sales? Is it online sales or utilizing the existing veterinarian network with more products? I think the online sales is driving more sales at the moment, but as I said, we have some major negotiations and discussions that could be more really volume based. So, but online, I would say, has the upper hand. A couple of questions when it comes to the pipeline and First of all, is it can we get an idea of the current acquisition pipeline? Yes. The number of targets that we look at is somewhere between, I would say, 5% to 10% and that is always in the loop. But then some are discarded fairly fast and some will look into a bit more detail. Is it typical the seller that is contacting you or is it Are you contacting the seller? Nowadays, I would say it's more often the seller contacting us. Yes. Okay. Let's see. One other thing is about this Amazon sales And I wanted to explain just a little bit short. I mentioned in the report that half of our external cost is coming from the direct sales to our online channels. And the way Amazon is structured is that we have, of course, a higher gross margin when we sell to Amazon as we are basically skipping one layer. But the way Amazon works Of course, they have a service cost and marketing cost and listing cost, such as, for example, if you want to deliver your products to one specific warehouse instead of 10 different warehouses or if you want to ship in pallets, etcetera. So that, of course, have an external cost impact, but it's saying that it still has a higher gross margin. So when it comes to the bottom line, it's not a big difference working with other customers. Let's see if there's any other questions that we could answer here. There's substantial difference between geographical in terms of average spend per pet. As you mentioned, new pet owners are present Of present days, our spending more is wait, I can't say is one trend. But where do you expect the spend per pet to grow the most. Europe is lagging U. S. Do you expect Europe to catch up? No, not really. We've I mean, historically, the average spend has been around half if you take Europe as a whole compared to the U. S. And a couple of new surveys being presented is really that the U. S. Is taking off. It's expected to go from last year, the total spend was US100 $1,000,000,000 for the first time in the U. S. And that's expected to grow nearly up to 300 by 2,030. So I do think that the U. S. Will actually increase the gap between the spend and the EU. So U. S. Definitely. Okay. I think that's it. Thank you so much. Thank you for listening into us. And we've had an tie it in quarter and we do expect to be presenting really exciting reports the year to come. Thank you. Take care. Bye bye.