Earnings Call: Q2 2021

Jul 29, 2021

Quarterly report

Welcome to Sweden Care Q2 report and half year. My name is Hakan Lagerberg. I'm the CEO of SwedenCare. And by my side, I have Jenny Grafling, our CFO. We will go through the quarter and half year somewhat and then we have some questions that we will answer. And after that, we will have a pause for 5 minutes and then we'll start our chat session for half an hour. Yes. So please wait with your questions until the end of the presentation. Okay, there we go. Q2 highlights. We had strong growth as expected since we have acquired a number of companies over this last year. So plus 400% in sales and our organic growth was 45%. And as I wrote in my comment in the report, I was gladly surprised by the organic growth was stronger than I expected, but that shows the trend that we've been saying that we have strong demand for our products and product lines and we'll keep on growing the years to come. Improved profitability, of course, that shows the scalability of our business. As we grow our sales, we do not need to grow the cost in in the same way. So that will also be continuing. What we saw some highlights was really a strong recovery from the vet and pet channel and that is of course Q2 last year was the, let's say, worst from the pandemic that we had last year, the Q2 was really the quarter where no one really knew what was going to happen. And basically all of the fiscal stores and clinics closed down in imported markets. And so there was a lot of uncertainty. And now we're still with the situation we have. The most markets have come back to normal and we see a strong demand in these channels. But we are still growing in the for the online sales. So we have overall had strong growth in all of the channels. Looking at different markets and product groups, we also see the same asked for the company as a whole, strong growth in every market basically and all of our product groups as well. Several of our group companies had revenue records this quarter. We have introduced a couple of new Prote and Plakoff projects both one which I mentioned within the NutraVet in the UK, a Nutraplac product that has been very successful in the initial launch. We have also had a couple of new projects with our PetMD Group company that's launched a Prodome pack of co branded product. And also with when it comes to online, as I mentioned in the last report, we are really focusing on the online sales, both the big platforms as Amazon, Zuwei, Zuplus and Tmall in China and also developing our own online presence from our own online shops. Lastly, end of the quarter, we made a really large acquisition, the largest in our history and I will come back to that at the end of the presentation. Some of our integration and bigger projects, some of them I mentioned last time, I just want to follow-up on them and some are new. We had a really interesting project with launching the topical and dermatology products from Animal Farm and Stratford Products from our group company Sweden Care U. Say entering the pet retail channel in the U. S. Is it is being launched properly in a couple of weeks at the big expo called SuperSU in Las Vegas, but we've already started sales and have good response from the market. Lots of our customers and our big distributors have taken this line in and it will be exciting to follow the development there. Also the production dermatology products for Europe in our Irish facilities getting closer. It's a complicated process, but we are getting closer and now with the addition of Vediio, it will be even easier for us to launch and to develop products since we will get access to all of the knowledge and know how that video has in this area and they're really the experts. We have had continued our buildup of our logistic and fulfillment center in Florida. So now Holden 2 of the PetMD and the other brands have moved to a new warehouse just linked with our AnimalPharma Stratford warehouses. So we will be able to handle it more effectively and also use the resources from the different companies when needed. Animal Farm to Amazon and Chewy and PetMD on Amazon UK has just started. Last weeks of June, we entered with a couple of products and the launch continues in July August. So I was hoping that would be in the beginning of Q2, but due to different reasons, primarily from these platforms, as I also mentioned, there has been a lot of demand and lots of strain on the fulfillment centers of Amazon and Chewy. So it has taken a bit longer time to be able to get the products in. But now they're in some of them and the full lines will be in before this quarter is over Q3. And we continue to have very exciting and large scale business opportunities just discussed. And we have entered a couple of deals that will be presented later on, but we continue that and with the Bet Your Acquisition as well. Of course, we are taking a much bigger space in the animal health sector and we are getting noticed. And as I would like to underline eased the speed and the willingness to make deals from our organization. That's really what we're looking for and we're very fast moving and that is being appreciated all over the world. As I said, fantastic quarter for many group companies and we just keep on building and we're just in the beginning of the, let's say integration of the different product lines, the opportunities that we have right now. It's really just in the beginning and I expect us to keep on growing all over the bar. We've had an interesting situation with the Brexit challenges that we've been able to solve very well due to our group setup. It's that NutraVet for example have had some issues exporting to the EU, lots paperwork and formalities. And the other way around, getting product in from Ireland, from our Irish facility has not been a real issue, but the rules would get a bit tighter exporting to UK going forward. But we will solve that very well. So we will use our Irish Logistics Center for the the new target exports to the EU. So we will have a larger part of the products say in Ireland for the whole of EU and vice versa, we will ship larger shipments from Ireland to the U. K. Being held at the NutraVet warehouse. So we've managed to solve that really well, but that will be an issue for many companies that don't have the same presence as we do in both the UK and the EU. Continued with our online efforts since we've had really good return on investment with marketing different marketing campaigns, both on Amazon, Shuey and other platforms. So that really gives us more confidence to go forward because we see that we have fast payback on all of our investments. Moving over to the numbers, Jenny? Yes. So the net revenue for the quarter was €160,000,000 and that's an increase of 400% compared to the same period last year. And as Hakan mentioned, we had organic growth of 45%. There was several of our subsidiaries, which presented their best Q2 ever, and there was actually a few of them who actually had their best quarter ever. Our gross margin for the quarter was 59.1%, which is in line with the year to date gross margin as well. As mentioned before, we are increasing our marketing spend and also it's because it's linked to the online platforms, which makes it increase, but half of the external cost is linked to the online platforms. During the quarter, as you know, we acquired Rx. So we had about $1,000,000 in acquisition costs linked to this. So if you look at the EBIT for the quarter, it was $44,000,000 Adjusted for this acquisition cost, we had an EBIT of $45,000,000 which is 28.1 percent EBIT margin. So one thing that's quite interesting is that despite this increasing marketing spend and if I adjust for the non reoccurring acquisition cost, The synergies that we have and the scalability of the business is continuing to decrease the external and the personnel cost in relation to sales. So we have done it's been decreasing by 9% and 11 percentage points for this quarter. Just wanted to add about the channel split. As Holger mentioned that the veterinarians has really been opening. We can see that even though the online is growing a lot, it's been decreasing from 50% of our total sales to about 39%, while the vet and the pet has increased. Last quarter was a little bit less than 30% in that and now it's about 37%. To mention a couple of things on the first half year, again, we had net revenue for the half year of SEK294,000,000, an increase about 3 22% compared to the first half year last year and organic growth for the 1st 6 months of 34%. I have also added a rolling 12 month revenue of the 464,000,000 Which is the reported one. A little bit later in the presentation, we will after we speak about the Vethio, I will explain how the pro form a will look, Including Verio. The acquisition cost for the first half year, as we had in addition to Oryx, we also had Holden. So The total acquisition cost is €1,900,000 So adjusted for that, we had operating EBIT of €81,100,000 with an EBIT margin of 27.6%. And there has been quite a lot of happenings in the cash flow. We had a Cash flow of $1,100,000,000 for this quarter. This is mainly impacted by the new share issue that we did at the end of the quarter of $1,100,000,000 This cash from the new share issue together with the loan was used to pay the Verio Right after we have closed the quarter. So that's why we had $1,200,000 of cash at the end of the quarter, but then just a day after we paid the €1,500,000 A couple of other things that impacted the cash, we paid dividend of €17,000,000 in the quarter. We also paid Rx acquisition of the SEK 199,000,000. We have done a couple of investments During the quarter, mainly in our production facility in Texas, but also with this new logistics center that we have in Florida. I can also mention on this slide the earnings per share. As you know, we have done a share split In the quarter, where each share was split into 5 new shares. And last but not least, we have 113 employees at the end of the Sales per region, well, the strongest growth is, of course, in North America. And this market has 62% of the total revenue versus 32% last year. And this is, of course, due to that we have made during the last year. UK and Ireland is also affected by the NutriVet acquisition that we have done. And that's why they were able to stay at the 21% of the total company. In addition to that, NutriVet has also delivered Good quarter. So that also helped the numbers. Sales to Asia has doubled compared to Q2 last year. And rest of the world, you can see how it's mentioned in the left pie. It's impacted by, Among other things, a first delivery to our pet food partner in Brazil. Sales per product. Well, the biggest difference here is the nutraceuticals, which is now growing to be the largest Product group. Rx offers product in this group. That's one of the reasons. But it's also due to the fact that topicals and nutraceuticals, that's where we have the new product there from the new acquisitions. I also want to add that the product backlog had a growth of 43% in this quarter and it's in all formats, the bones, the bites and the powder. And this is partly impacted by the cross selling that we have started now between our acquired businesses where we can sell the Placoff to both new customers and in new formats. It makes it quite nice that last year, if you look, we were highly dependent on the product lack of with 85% of our total sales. Now we have a little bit of a better split between the product groups. Sales per brand, the biggest changes from last quarter is that Rx, Of course, it's growing at 12% of our total sales due to this acquisition, which we included from 1st April. The private and the co label part has also had a strong growth in the quarter due to large sales to the largest vet Chain in Europe. Animal Farm has also had a strong growth. This is mainly due to the fact We had had issues in the supply chain, as Joakan has mentioned, in several instances. And some of these Supply chain issues were resolved specifically with animal farm supplier. So that's why we had good growth there. Here's our rolling 4 quarters, which is again of the short. We had the blue one is the EBITDA and we have a 29.2% margin on our rolling 4 quarters. Now we'll hear about the Lettio Olli. Lettio Olli, yes. As I've heard, this is a very big and also the most transformative acquisition we've made since now we also enter into the drug space of Animal Health where we have not been present previously. And Vireo was created by 2 different companies, one focusing on dermatology liquids, liquid products down in Florida and 1 drug development company and manufacturing company in Canada. And those 2 companies were merged and by then by that, Bedio was created. And the video is really the leading CDMO in animal health, basically the only one, only focusing an end model when you have the drug competence as well. And they work as a contract manufacturer and we got to know them as a very top notch supplier to one of our group companies. And they have really been diligent in transforming these two businesses that they bought to be state of the art. There have been lots of investments and we keep on and the plans for going forward is really big, big growth ahead. We're adding a new facility in Florida to take care of soft chews and nutraceuticals. So there are lots of things happening in video already before we bought them. But we were impressed by their plans and we will add a couple of things going forward. The sales for 2020 was US32.3 million dollars with EBITDA of 6 €500,000,000 and 2021 has started really well with €20,000,000 in sales and a bit over €4,000,000 EBITDA. And as I said, there will be lots of add ons when the new facility in Florida is ready and that will be in Q4 this year. Next slide. And why we were interested is really that we saw that it was a really, really solid and impressive company that they built. It was we had the relationship being the best supplier we had for 1 group company. And we have really I know I expressed some concern last report. And it's really due to the fact that we are have such high demand, especially in the U. S. And we have had some strains when it comes to supply. I have been a bit nervous on how to solve that because we really will have the possibility to grow really fast, but then you need to have products, of course. And this gives us a certainty going forward into the future, so that we would be more certain in how we can get products. And also of course the quality of products. We know this is top line quality. And so we will transfer for some other product groups from different group companies into Vidyo. So that's a real reassurance for us to be able to grow faster than the market. Then what we get is really, as I said, getting drug development competence, getting into the drug sector as a contract manufacturer that of course opens up different possibilities for us to how we should grow in the coming years. We get an excellent management team that has built this impressive company, both from a technical production and analytical excellence. We get in house soft tube production facility. We have the soft tubes in the Perio North with the drug capacity and now we're building a soft shoe replica of that production line for non drug products and that is of course the sector where we are active as of now. So we will develop a lot more Softview products and that's the administrative area of giving docs active ingredients. That's Soft Chew is the sector that grows the most in the U. S. And we haven't really been able to do the most of it as we have had some issues getting Solsysh products. So that's really an increase for coming into 2022 that we can add a lot of new products there. State of the art product development and regulatory competence, they are approved for both selling drugs into the U. S. And the EU with Drug Canada approval. They also have very good knowledge about the regulatory environment both internally but also for exports. Of course, even though we as a group had excellent distribution network, this opens up a new ballgame for us, lots of new players that we haven't had relationships with before. And both from the animal pharma companies, but also veterinary chains and players there. And I also would like to emphasize that that video will continue as a strict CDMO partner. All of our group companies will be customers more or less to VADIO. But they will also focus they will definitely focus on going forward with all of their partners they already have and find new ones. So we want to create a CDMO player that really takes the lead in animal health worldwide. As of now, it is in North America as you know, but we will look how we will handle the Vereo expansion all over the world going forward. So this is how Sweden Care will look like now when we have acquired Verio. So on the column to the left, You would have our reported 12 months trailing numbers from July last year until June this year. The $464,000,000 which I just mentioned and the $135,000,000 in EBITDA. The pro form a, the next column is basically all our acquired businesses, The period which is not included in the Sweden Care for the last 12 months. So for example, the new travertine animal farm, you would have 1 quarter Yes, you would have 3 quarters included in the Sweden Care numbers. And then, of course, we have the Vereo, 12 month trailing for Vereo. With elimination means that we will have a pro form a numbers sales of €990,000,000 and with an EBITDA of €241,000,000 So EBITDA margin of 26% is our pro form a numbers. Yes, the sum of priorities for 2021 and going forward is, of course, we keep on working with the integration of the acquired companies, but I would like to emphasize that we have acquired really nice and qualitative companies that are developing by themselves. We focus the integration on sales opportunities and marketing. And of course, when we see obvious opportunities like warehousing and logistics, then we do it. And also of course, when looking at production going forward. We'll keep on increase our marketing spend as we see really good return on investment there as I mentioned. Continued with brand and product development. This video deal, of course, opened up a whole new box filled with opportunities. And all of our group companies applauded this acquisition. And there is a long list of different product developments and new products just been entered in different product lines with the Veitio deal. So we just have to prioritize which one we will focus from the beginning, but there will be lots of things happening going forward. Of course, include different products in different product lines that will continue, that's the low hanging fruits. And with our group growing so much, we of course have had lots of contacts with different partners and new possibilities in basically all over the world. So it's really we are working at high speed and but it's very fulfilling to know that we are in such a high demand. So we will continue working at high speed. And as we mentioned in our report, we've had lots of questions about our financial targets. And what we will say is that we will review this under second half year of twenty twenty one and come back with that. Okay. We have received a couple of questions before this meeting. So we will take those now. And again, if you have new questions, you are very welcome to add them into the live chat, which will start 5 minutes after we end this hesitation. But let's do the questions that we have received. So Vereo showed lower EBITDA compared to Swedish Care's margin Steve along with Holden, while NutriVet is in the higher range. How much with video strength in its overall margin by moving production products In the overall range from 3rd parties into video? It's definitely we can't say an exact number. But of course, all of our group companies, when also having transaction with each other, we want to keep the same margin as they would have had with external companies. So of course, video having a bit lower margin as of today, I would like to under fine. Vidyo has been taken on a lots of cost when building this company and also they are just in the beginning of volume production in Berio North. So there are there is already a number of deals where VideoNorth are doing product development, but those contracts are linked with manufacturing. And when manufacturing starts going up in Video North and also with the expansion in Video South, the margins will improve for Video. That's Sandler. Yes. Are there any operational cost efficiencies to begin in video? And what would imply a stronger margin over time? Yes, I would say of course, as I said, just mentioned that they have invested in lots of, let's say, production capacity and when that gets going in full speed then of course the margin will improve. Yes. Has Verio entered any volume commitments or long term deals ahead of our acquisition? And if so, in what magnitude and what timeline? Yes, absolutely. If you would like to describe the 2 different entities is that VideoSouth is producing dermatology products and will produce nutraceuticals and soft juice without drugs included. Those are more in line with shorter term agreements. They have some, let's say, 5 year agreements there with volumes linked to it. But in general, I would say, nutraceutical market as such or non prescribed market as such. That's more of a shorter agreement. Looking at Video North when it comes to drug development and when it comes to production. There it's not uncommon to have, let's say, 5 between 5 to 10 year deals. So we won't say what deals they have already, but I can say that in there are agreements that will short production in 20222023 and they're working on them right now. So they will grow. Very good. You mentioned there are still back orders from suppliers. What is the impact of this? What do you do to mitigate the issue? And how do you expect the situation to develop in the coming quarters? Yes. One important factor was of course the acquisition of Berio as I said. We will transfer some product lines from other suppliers and then also just securing for if we're not, let's say moving them to video, we have seen an improvement and some of these issues with back orders has of course had some explanations due to the pandemic. There has been some trouble in getting the, let's say, pox and different ingredients and such. But I would say that with the help of video we will be able to basically be fully up to speed by the end of this year. That's my expectations. Great. Despite a solid let's move on to another topic. Despite the solid ownership structure, Swedish Care seems to have an increased interest from new investors. Why is this and what type of investors are they? Yeah, I would say the animal health market as such and market such has drawn a lot more interest from investors all over the world. You've seen more and more listings and for some reasons investors has realized that this is a very it's a strong solid market and that has had growth since end of World War II basically. So it's a new situation. And then for Sweden Care, we've as long as we have grown and presented good numbers, I would say that we do have more international investors being interested and more, let's say, bigger investors, bigger investment funds and stuff like that. And also we've as I mentioned that we've been including different ETFs, but and also when we entered the MCSI index, some funds have invested from that. So I would say that there's strong interest and we have many, many, let's say 1 on ones with big groups from the U. S. And Asia. Yes. Now let's move to some M and A questions. Please explain the purchase process of Verio. How did you find the target? What made you successful in the deal and was it an exclusive process? Yes. Benio, as I said, was a supplier to one of our group companies, a good relationship with them and they always delivered according to agreements and at the highest excellence of our products, so no problem with that. So that's really what made us interested. And since they were owned by a PE firm, we knew that they would have a plan to sell it at some point, but the plan was really for them to sell it in 2022, 2023 perhaps. But we had some initial contacts with the management and they were really key factor of us been able to buy Verio that they wanted to keep on developing Verio and thought that Sweden Care was the optimum new owners. So it was an exclusive process and we're very happy that we were able to conclude it. Are you now content in this area after the value acquisition and the other 5 done in the last 12 months? Or do you have an appetite for more? I would say that we have an appetite for more, but have to be also cautious that Vereo it was a very big acquisition for us. But I would say that we our target list has not diminished. We get lots of more offers and have some discussions, but you never know when or if a deal comes through, but we would like to add on new and high qualitative companies in this sector. And what kind of companies are you looking for then? Still I would say the as we've always did up until the Verio deal was basically strong and strong brands, strong product lines, product companies could be strong in one market and that we see possibilities to grow the sales by entering new markets with that product lines those product lines. But so we're pretty broad, but the I would say product companies primarily could be distribution companies, could be production companies if we see good fit the when it comes to region. Yes. And last, if you make additional acquisitions, Financial targets for 2025 seems to be easy to reach. Will these be revised? Yes. I think we've answered that. It will be. That's it. It will be revised this year. Yeah. It will be reviewed this year. Yeah. Okay. So that's the end of the presentation and the questions that we have received. And then we will take a 5 minute break And then we will answer the questions in the live chat. So please feel free to add your questions and we'll come back in a couple of minutes. Okay. Thank you so much. Thank you. Bye bye.