Earnings Call: Q3 2020

Nov 20, 2020

Welcome everyone to Sweden Care's Q3 Report. My name is Hakan Lagerberg and this is Ginn Graflin, the CFO. We will run through the quarter and you can post questions over the chat during the presentation and we will try to answer them after the presentation is done. So we'll start right now. Sweden Care, we are a small nutraceutical company, but with worldwide sales. We have sales in over 50 countries and we have had strong growth since we listed the company in 20 16 and we sell primarily products to dogs and cats, but we also have a equine section and to certain markets. We are a small company, as I said, with 64 employees, but we have different small entities all over the world, 8 different countries. And we have one unique product that Sweden Care was based upon. It's called Prodan Packoff, a world leading oral care product for dogs and cats. And as I said, the company was founded around that product, but over the years, we've grown the company. So now we have a full range of nutraceuticals to dogs, cats and horses. And we produce some of our products by ourselves in a state of the art factory in Ireland, GMP certified. And we have lots of partners all over the world in the U. S, France, Sweden and other places with partners to us that produce our products. We have employees, 50% men and 50% women, and we have grown the business, as I said, strongly but kept our high profitability over the years. Now going over to Q3 specifically. We came out from a first half year that was a bit different than the other years we've had since COVID had an impact on our business as well as lots of others. But we came out strong the Q2 end of Q2. And as I hinted in that report that we had very good momentum going into Q3 and now we can see the result of that. We have had a record quarter, 119% growth overall in sales. And we as I also wrote in the report, we knew that that was going to happen because we made a major acquisition at the start of this quarter by Stratford Pharmaceuticals, a nutraceutical company based in Florida, U. S, but you can also see that the organic growth was 27%. So we really compared to Q2 where we had a flat basically no organic growth or very small, we have really speeded up the growth this quarter. We have had if we start with our major external markets, we've had very good growth there, shift orders to all of our big countries, Brazil, Australia, Korea, China, Russia. What's been major focus this quarter, of course, was the integration of our newly acquired company Stratford. We have had different projects to see how we should approach the market specifically. And with Stratford, we got a really good organization to grow the vet neuro channel in the U. S. Primarily. And our sales in the U. S. Has grown very rapidly over the years, but it has been primarily in the pet specialty sector. So now we really look forward to entering the veterinary sector strongly with our Prodan Plakoff product line, but also, of course, the other way around, see what best selling products that Stratford has developed that we can introduce to the pet specialty sector. So lots of, let's say, business integration and business development projects ongoing. Of course, also see where we can cut some costs, but primarily it's been focused on developing the business. Since our approach to acquisitions is really, we only want to acquire strong independent companies that will continue to run as is, and we will basically just focus on where we can add business and improve the business. If we look at different markets where we cover what we cover ourselves is really U. S. And U. K. Is really growing at full speed. And it is, of course, in the aftermath of COVID and now it's starting again, it's really the online sales has been growing exceptionally well. We have partnerships with chewy.com, the biggest online retailer for pet products, and they're based in the U. S. They cover U. S. And Canada. And then of course, Amazon where we've started more close cooperation with Amazon in Europe and U. K. Was is the biggest country for Amazon for our sales and it has really been impressive growth. And we are launching it in different European countries now. We started off with Italy and France and now we've added Germany as well and U. K. Of course. And the, let's say, major, major event that we did during the quarter was actually to acquire 2 new companies, Animal Pharmaceuticals based in the U. S, also in Florida, similar business line and business concept at Stratford. And we also acquired NutraVet, the number one nutraceutical company in the U. K, only focused on the vet sector. We managed to complete that end of this quarter and end of last quarter and now from as of 1st October, they will be fully included in our reporting and we've started the integration work with those 2 companies. So we are going into 2021, we're a completely different company than compared to going into 20 20 and that's very exciting times for us. Sales per region, as I have mentioned before, of course, there's a big change. All of our regions being presented here has grown compared to 2019, but the percentage becomes a bit different now when we have the acquisition of Stratford. And you can see that North America grows from 28% of our business compared to 58% now. And even though our Sweden Care USA organization has grown significantly, the sales there, The Stratford acquisition was really big for us. So of course, they are the major part of the U. S. Sales right now. China is back on track. And even though they came out of COVID a bit earlier, we've seen that they have been a bit slowing in recapping. And it's been the general momentum in China for, let's say, all sales in all sectors is that the consumers in China has been a bit more cautious, but we see that the trend is on the right track right now. So even though the China has been growing our sales, not the same numbers as we were used to, but I had a meeting yesterday with our Chinese distributor and he seems to be very, very year. Rest of Asia is Korea is a very important market for us and also Japan, and they have been growing this quarter as well. And if we look at different other, let's say, regions or countries that have had excellent growth has been Greece, where we have our own company and our own sales force working, has been very good development there. And then if we go over and look at the different products, there's of course a big change now if we compare to 2019 where the pack off line was 89% of our sales. That will, of course, continue to change over the next quarter even more. So this quarter, it was just around half of our sales was Prodent Packoff and we have included a new definition or a new sector, it's topical dermatology products that is really a big, big product sector for Stratford and will be even stronger next quarter since also Animal Pharmaceuticals that we have acquired has very, very strong sales in that sector. Nutraceuticals also boosted by Strathroy Pharmaceuticals, of course. And the other products is basically our Greek daughter company that sells a wider range of, let's say, veterinary hardware as well. And they were included from Q4 2019. Going over to numbers, Jenny will take over. Yes. So as Hakan mentioned, we had sales this quarter of 119% more than we did if you compare to Q3 last year. So we reached almost SEK70 1,000,000 in sales this quarter. 27% of this was organic growth, as Hakan mentioned. The majority of the sales is, of course, coming or the majority of the growth is coming from the Stratford acquisition, but also from the markets where we had high online sales, such as the U. K. And the U. S. Gross margin is a little bit lower compared to last year. We had gross margins of 62 point 6% this quarter compared to 73.7% last year. This is due to the lower gross margin that we have in Stratford. If we look at operating costs, there's been, of course, less physical sales activities this quarter with the expos and travel, etcetera. However, we have as we have done in the last, I would say, year, we have increased our marketing initiatives activities, both when it comes to our branding, but also with digital sales. In the quarter, we also did a study for cats, which is a group that is growing in more markets higher than dogs, and we will come back to that in the future. One other thing that affected EBIT this quarter was exchange rate loss. We had an exchange rate loss of 860,000 compared to a gain last year of 476,000,000 that of course has an impact on EBIT. But overall, we had an EBIT of SEK 18,600,000 for the quarter, an EBIT margin of 26.8 percent and that includes acquisition cost of SEK 1,500,000. So if we do an adjusted operating EBIT, it will be SEK 20,000,000 and we would have an EBIT margin of 29% for the quarter. If we look at cash flow and the balance sheet a little bit, we have increased our working capital, mainly due to large invoicing at the end of the quarter. And then as you know, we have done a new share issue in the end of September, where we brought in September where we brought in SEK335,000,000 to the company. We also took a bank loan of SEK 50,000,000. That's the reason why we have cash of SEK 409 1,000,000. But then October 1, we paid the 2 new acquisitions of SEK 370 6,000,000 Just to mention a couple of things when it comes to year to date. We are now, for the 1st 3 quarters, at EUR 140,000,000, a 50% growth compared to last year, 14% of organic growth this year so far. In the EBIT of SEK 35,000,000 and EBIT margin of 25%, is including then SEK3 1,000,000 of acquisition costs because we both have the Stratford 1 and NutriVet and Animal Farm. So if we exclude those exceptional costs, we would have an EBIT margin of 27.3%, which is well above our long term target. In addition to that, I can just mention that operating cost, we have about SEK 9,000,000 additional operating cost compared to last year due to the fact that we have BUWET and Stratford, which is included in the year to date numbers of 2020, and they were not last year. This is our rolling 4 quarters. As you can see, there's quite a big jump now in Q3. The €135,000,000 that we had last year did not include the Stratfords. So now we have revenues of SEK 174,000,000 almost and an EBIT that also jumped up to almost SEK 47,000,000 for the rolling. Hakan? Yes. And as Jennie said, we've made 2 major capital increases, 1 when we acquired Stratford and 1 when we acquired NutraVet and Amma Pharmaceuticals. And the investor community has appreciated these acquisitions. So we've been trading well above the €200,000,000 after we presented the last two acquisitions. And there's also been strong interest from institutional investors when we made the book building process. So we have a strong list of shareholders, long term shareholders that has been supporting us over these capital increases and also lots of traction from this last year, I would say, from international investors, from U. S, France, Germany, U. So we appreciate that and we're really focused on creating shareholder value and growing the company these coming years. Priorities going forward, of course, Q4 will be a new quarter of integration, NutraVet and Animal Pharmaceuticals. I would say the Animal Pharmaceuticals, as I said, a very close relationship if you compare the 2 companies, Stratford and Animal Pharmaceuticals. And it happens to be also that the 2 organizations have a clear, let's say, division of their major customers. So we see lots of opportunities in going forward. And the organizations have already started to cooperate and integrate, so exciting times over in Florida. And with regards to NutraVet, they are really an excellent organization with everything from, let's say, product development, fulfillment, sales organizations, visiting veterinarian clinics, doing that, of course, a bit differently. Nowadays, since the COVID shutdown in the U. K, since U. K. Is the main market for nugget, but they have handled that excellently. So going forward, we see that they keep on running their businesses and we're just looking for new opportunities to grow the businesses even further. And concerning NutraVet, it's primarily taking the product range out in Europe and to other places in the world. Going into 2020, we were very focused in increasing marketing activities and those include brand building, just streamlining and working, let's say, more professionally than we have done. We still want to keep our entrepreneurial core, but really we are growing in such speed. So we need to streamline a bit more and organize a bit more. And we have really come a long way this year, but there are lots of big projects running right now that will be very, let's say, satisfying to present to the market. One area where what you can see already is that we have a bit different graphic layout and we will continue working with that. Brand and Product Development, as I said, we have now we have excellent well run and independent companies that all have, let's say, product development and brand building as their core. And now we're just looking where we can find the exchanges concerning the competence and taking new products into the market. But we're really as of now, we're swamped with really good products and just interchanging between the companies and see what markets could be suitable for the different products and product lines. So it's lots of work with that. And of course, if we look at different markets, North America will, of course, be continue to be our focus market since we are now increasing our presence there a lot. And of course, that it will be essential that we continue to grow there and really succeed there. So we will that will be a focused market when we will also continue to focus on, let's say, increased marketing activities and marketing spend in North America since we see that we get really good returns on our investments in that sector. China, I'd like to mention as well since that's still the fastest been the last year, still the fastest growing major market in the world and the spend there is going up a lot. So it's really a there's lots of things to be done in China. And as of now, we've just launched the Prodan Black Half and we will, over the years to come launch a lot more products into the Chinese market. Great. And as we also presented in the report, we set the new target and ambition financial goals Last year SEK 500,000,000 in sales and with a 25% EBIT margin. And as our Chairman wrote in the press release when we presented the last two deals is that we're really getting close to that in a speed with speed. So we will present to the market new financial targets and that will be presented at the latest at the Q4 reporting in early February or mid February. May February. Yes. Great. Okay. Is there any questions? Yes. We have received a couple of questions. So I will read them and then we will ask them. So we have one question. Is it possible to get some information about the growth and let me put one here, so you guys can see us. Is it possible to get some information about the gross and EBITDA margin of Stratford during the quarter? Yes, the gross margin is, as I said, lower than our average business. It's about 50% gross margin and we have about EBITDA margin in stress for about 20%. Is it possible to get some indication on the development of NutraVet Animal Farm during Q3 in regards to growth and margin? When it comes to growth, they grow with about a range a speed of about 10% and they have higher margins. We have released those margins in the press releases. So we have nothing to add to that. How do you view the M and A possibilities going forward, Hakan? Yes. Now this has been an exceptional year for us, of course. But since I'm convinced that these three acquisitions will be a success for us and we, of course, have had some training doing this. So I would say that we will be looking at new acquisitions over the years to come. I do not expect any new transaction this quarter, but next year, it's absolutely possible. There's been a lot more activities from the market contacting us than before. So I guess that with these acquisitions that we made, the market has really taken notice of us. So I would say yes, most probably. Yes. Have you started to realize some sales synergies between Sweden Care and Stratford in the quarter? Yes, we've started we've shipped products to Stratford, our powder products, full range of powder products to Stratford and they've started to market it, not so much sales in Q3, but that will pick up in Q4. So absolutely, we're and we're also looking at developing a special it's a special product based on Pardon Placoff, both for Stratford in the veterinary channel of the U. S. And also for NutriVet that has a unique selling point to the veterinarian community in the U. K. Good. Including the 2 recent companies, can you talk about the role for planning out cross selling, which countries, timing, etcetera? And what effect do we expect on sales? I would say that if we start with Nucorvet, they have a unique agreement with the largest veterinary clinic chain in Europe where they have a private label product range being only sold as of now in the U. K. And there was even before our acquisition, they have started to plan for launching that out in the other European countries. And that will, of course, be implemented and that will, of course, be fueled a bit faster now when Swedish Care, since we have a presence in lots of those countries. So I would say that it perhaps will speed up the launch when it comes to NutraVet. Looking at Animal Farm and Stratford, I mean, we're in full, as I said, we're in full time work basically, just looking at what products that Stratford has that we can take to Europe and perhaps produce in our Irish factory, etcetera. So it's difficult for us to say in what countries. But I would say primarily starting off with the countries where we have presence because it's easier for us to start up there. And then, of course, the Asian countries are very interesting for us to launch different product lines. Very good. Let me just hold on here. Sorry, I don't know when to stop, but should we take the question again? I don't know. Maybe it was we got some information that it was mute. Okay, sure. Yes, it was about the human graded products. So no, I really see I haven't seen, let's say, clinical saying that human graded products are better than other products. But I would say that the premium brands, premium dog and cat food, they have been using human graded ingredients the last 5 to 10 years. So I think it's more of a sales some have picked up the sales argument. And then if you say there's a trend of these raw food diets, but there's lots of different trends. There's raw food, there's grain free, and the grain free and gluten free is going back a bit since there were some new clinical saying that it wasn't really good for the pets getting gluten free, but that's also some trendy arguments. But I would say that the pet food business as such going up from medium range to premium. They all have human graded ingredients. So I don't see that's a problem for us. Great. Do you have anything else you want to add, Hakan? No, not really. I'm just really proud that we managed to get such a good start with Stratford and really coming out into Q3 really strong on all of our markets. And then heading on to Q4, of course, this is exciting times, adding 2 new companies with excellent organizations and just including to our, let's say, management team 2 new very strong entrepreneurial guys that have really created these companies from start. And I'm humbled that they want to join Sweden Care and see such a potential joining our group. So it's really exciting. Thanks. Yes. Very good. Thanks everybody for joining and we appreciate this. And it will also be saved online on our website. Thanks a lot.