Virbac SA (VIRP) Earnings Call Transcript & Summary

Good afternoon, everyone, and sorry for the bit of minutes that we took, we had a technical issue. We are pleased to welcome all of you in Paris to the Virbac 2021 Full Year Results Conference and Webcast. Hosting the call today is Manuela Rodriguez of Investor Relations; and Sandrine Brunel, Head of Corporate Communications for Virbac. We will be joined today by Sebastien Huron our Chief Executive Officer; and Habib Ramdani, our Chief Financial Officer. Before we begin, I will remind you that the slides and additional financial materials presented are available on the Investors section of our website, and a replay will be available at the conclusion of the meeting. For those attending virtually, you will be able to post your questions by using the chat section on the top right-hand corner of your screen. All the questions will be answered during the Q&A session or afterwards if time does not allow to answer them all immediately. It is now my pleasure to turn the floor to Sebastien Huron and Habib Ramdani. The floor is yours.

Thank you, Manuela. Good morning, good afternoon to all of you. It is my pleasure to introduce that session. And as usual, I will cover the first part, which is sharing with you our 2021 financial statements. And I will then hand over to Sebastien, who will cover the strategy execution and share also a bit of perspective with all of you. Let's start with a quick summary of what we have achieved in 2021. We have had an excellent growth of our top line with an 18.4% organic growth, which has been driven by an excellent performance in all areas in a very dynamic market. We also had some nice contribution of new products and I will cover that later on. We had a strong EBIT adjusted increase. We added EUR 43.7 million at constant exchange rates, which lead to achieving a 16.3% EBITDA ratio to revenue at real rates or 15.9% at constant exchange rate. So this very strong increase has been driven by, first, a strong gross margin contribution of all of our regions as well as a positive product mix. It has been compensated a little bit by a higher level of expenses. You remember that last year, we've been heavily impacted by the COVID, which had had an impact on our ability to spend. And finally, we also have recorded some one-off positive impact in 2021 for around EUR 5 million. A part of it is linked to our transaction with Elanco. And another part is linked to provision reversal related to some disputes. Finally, on this slide, you see that the ForEx impact has been negative on the top line. We lost EUR 9 million, but it has been positive on the contrary on the bottom line, plus EUR 2.5 million, which is due to our cost exposure in some currencies, especially the dollar. I will cover that very briefly. You see the evolution of our exchange rates. It's a much more balanced picture compared to what we've seen in the previous years, especially in '19 and '20. If we continue to go down the financial statement, you see that the net recurring profit has increased significantly. We have added EUR 40 million, which is the consequence, obviously, of the strong improvement that we've had on our EBIT adjusted. The net profit on the contrary is decreasing, moving from EUR 140.3 million to EUR 115.7 million, but it is essentially linked, as you remember, probably, of a base effect in 2020, we recorded the profit linked with the divestment of Sentinel. From a cash situation to conclude that summary, we have ended the year with still a positive cash situation at around EUR 74 million, which is a EUR 10 million improvement versus the situation at the end of 2020. And in a nutshell, we have generated around EUR 80 million of free cash flow during the period. And we have used a good portion of that to finance our acquisition, notably the buyout of the minority shares of Centrovet in Chile, as you know. So we continue to deleverage and to be fully deleveraged now with a net debt on EBITDA ratio which is negative at minus 0.36 at the end of December 2021. So very briefly, just to share with you the comparison between what we have achieved and what we have shared as a guidance for 2021, and you will see that we are fully aligned on all indicators, notably top line, EBIT adjusted and net debt. Let's move now to the top line. To cover it I will provide some elements, explanation linked to the geography and then to the product segments. So we have broken the EUR 1 billion milestone in terms of top line, as you see here. And we have recorded EUR 1.64 billion of sales at the end of 2021, which is a 14% increase versus 2020. It's even a 15% increase at constant exchange rate. And if we restate for the significant perimeter impact that we had last year with the divestment of Sentinel, you see that on a pro forma basis, we have recorded 18.4% of growth between 2020 and 2021. And this includes also the contribution of some new products, notably the one acquired from Elanco with Clomicalm and Itrafungol as well as iVET, which represented around 1.6 points within the 18.4% of growth. Let's look at where this growth is coming from on a geographic basis. So as you see here, we have added EUR 166 million of sales at constant rate, excluding the negative impact of the divestment of Sentinel, between 2020 and 2021. So 20% of this increase is coming from North America where we have added, excluding the impact of Sentinel, EUR 35.7 million, which is a consequence of the very good dynamic of all of our product ranges as well as the contribution of new products, including Clomicalm, Itrafungol as well as iVET in the U.S. Europe has contributed to 40% of that growth, adding EUR 62.5 million between 2020 and 2021. And this is a consequence of an excellent dynamic in all of the European countries, which enable us to generate a 16.2% growth in Europe, which is extremely high. Rest of the world is contributing for the remaining 40%, adding EUR 67 million between the 2 periods. And if we look at in more detail, the rest of Europe -- rest of the world, sorry, contribution, which is the purple and red parts on the graph, we see first that Latin America has had an excellent growth as well, 16%, driven by Mexico and Brazil, the top 2 countries in the region. And we can mention as well Chile. You remember that at the end of June, it was negative in terms of growth. We have seen a rebound that Sebastien is going to cover later on. Asia, Pacific, respectively, 16% and 11% growth, driven by many countries that have had a very dynamic development, including India, which represented around 45% of the growth during the 2 period. We have had a very nice rebound after a difficult 2020 year in India. But some other countries contributed as well. Australia, New Zealand, China and other countries. And finally, Africa, Middle East, also a very solid contribution to the growth at 24%. Let's move now to the sales growth by segment, starting with companion animals. No surprise, obviously, all segments have contributed significantly. And you see that the majority of the growth is above 20%. The only red part is parasiticide, but it's linked to Sentinel divestment. Excluding Sentinel, it's growing as well. The top growth is coming from specialty segments, which is growing 29%. We have within that segment, products such as Suprelorin, anesthetics product ranges as well as Movoflex and the contribution also of the new product, Clomicalm and Itrafungol. The petfood then has had a fantastic year with 25% growth. And basically, all of the countries where the product is available, has had a very high growth during 2021. Antibiotics/Dermatology as well, as you can see a [ 22% ] growth. And finally, a nice rebound within our vaccines range. You remember that we suffered last year of a pipeline rupture. And we had a sales decrease which we have entirely recovered at the end of 2021, but we are still operating under production constraints within vaccines in terms of capacity and we are not in a situation to meet entirely the demand. Food producing animals segments. It's the same picture, growing everywhere around double-digit growth in most of the segments. The leading segment is the vaccines, contributing 25% growth. Then we see the nice rebound on the nutritionals driven notably by India. Antibiotics has done well as well, 15% growth. We have the benefit of the product launch of Tulissin within that segment; parasiticide as well, a 10% growth with growth coming from Asia, Pacific and Latin America essentially. And finally, aquaculture, slightly less dynamic at 5%. And again, Sebastien is going to cover this activity in more details. I will move very briefly here, you see that the structure of our portfolio has not fundamentally changed between 2020 and 2021. So this is it for our top line. I suggest we move to the profit and loss statement. And before going into the details, I'd like to mention us a restatement that we have done on our 2020 financial account in order to account for an [indiscernible] publication from 2021 related to how we account for the expenses related to the IT investment in cloud or SaaS. So basically, some expenses that had been accounted as an investment in 2020 have been restated to account them as an OpEx, operating expenditure in 2020. So we moved around EUR 2 million of intangible assets into expenses, and that's the restatement that you see here. So the impact on our net expenses is of about EUR 2 million, and the impact on our net results is nonmaterial at about EUR 1.4 million less related again to that change in accounting policies. So we will go -- I will go in to -- I will explain and comment the difference between our 2020 restated financial account with our 2021 one. So you see that the current operating profit before depreciation of assets arising from acquisitions has increased significantly. We have moved from a ratio of 13.6% to 16.3%. So it's close to 3-point improvement, so very substantial. And this is a consequence of a very strong top line growth, which have been mitigated by a net expense increase as well. You see that on the third line, which is explained by the dynamic of our activity, notably within industrial, by the rebound and our cost following 2020 that has been impacted by the COVID. And you will see later on, especially on R&D, for instance, but also commercial expenses, travel as well, we've seen a rebound. But it's a controlled rebound, which enable us, again, to improve substantially our EBIT-adjusted ratio to revenue and to increase it as well in absolute value. If we continue to go down, profit and loss statement, moving to the noncurrent income and expenses. You see here the profit from Sentinel divestment last year of about a little bit more than EUR 60 million. We had a EUR 1.2 million of expenses, noncurrent expenses this year, which is related to an impairment on one of our R&D assets, but it's very nonmaterial. The net financial expenses has decreased moving from EUR 10.4 million to EUR 8.5 million, which is consequences of the improvement of our cost of debt in the context of the divestment of Sentinel and the decrease of our debt, obviously. And it's compensated by a negative impact on the foreign exchange rate, especially linked to the CLP evolution, Chilean currency between the 2 periods. A comment on the income tax expenses. You see that we have moved from EUR 33 million to EUR 43 million, which is an increase in line with the increase of our net result, obviously. From an effective tax rate, we are slightly improving our effective tax rate moving from around 28% to 27% in 2021. So finally, a very nice increase of our net result from ordinary activities. We have added EUR 40 million moving to EUR 117.8 million of net result from ordinary activities. So let's see where our EBIT-adjusted improvement has come from during the 2 periods. We see that, again, we moved from EUR 127 million to EUR 173 million. Europe has contributed significantly. We've added EUR 39 million. Rest of the world as well, EUR 23 million, in line with a very good dynamic on the top line. North America has been stable which is an excellent performance when we have in mind that we have divested in the U.S., our Sentinel product last year, which contributed significantly to the profitability. So in a nutshell, we have offset entirely the impact of these divestments, whereas we thought it would have a more lasting impact previously, but this is the consequence of the very good excellent dynamic that we had on our -- on the rest of our portfolio in the U.S., and we will cover that later on with a little bit more detail. Evolution of cash flow in line with the evolution of improvement of our P&L. You see that we are adding around EUR 40 million of net cash flow and operating cash flow. And let's see how we've used that comparing 2020 restated and 2021. There are 2 elements, 3 comments there. The first one is that the net free cash flow is more or less stable at around EUR 68 million. It was slightly above EUR 70 million last year. Despite the fact that, and that's my second comment, that we have ramped up, as expected, our CapEx investment moving from EUR 30 million to slightly below EUR 50 million. We would have been at EUR 49 million if we don't take into account the accounting restatement that I mentioned on the cloud and IT investments. And finally, we have also increased our working capital requirement, which is essentially linked to the increase of our stock in absolute value in 2021. And we have done that, first, to follow in line with our activities with a strong improvement of our activities and production volume in a very, again, dynamic year. We have also added stock to cover product launches. And you've seen that we had several product launches in 2021. And finally, security stock have been also increased in the context of disruption of supply chain for some of our components and raw materials. So we have had a bit of security stock increase in 2021. So as I mentioned in my introduction, we finished the year with a positive net debt situation at EUR 74 million. And you see that the acquisition have accounted for EUR 59 million of spending, and this is essentially linked to the acquisition of the minority share of [indiscernible]. So at constant rate and scope, without taking into account the acquisition, we would have ended the year at around EUR 117.7 million, which is EUR 54.3 million improvement. So regarding the balance sheet, nothing has substantially changed. I covered the working capital that has increased slightly between the 2 periods, and I cover the explanation essentially linked to the stock increase. Financing, we can share with you that we have renegotiated -- successfully renegotiated our revolving credit facility. The previous one had a maturity in April 2022. And in October, we signed a new RCF, and you have here the component of that new credit facility. It's a line of EUR 200 million with a bullet repayment in 5 years. We have 2 options, important options. The first one is an extension, a possibility of an extension by 2 years. And the second one is an increase -- a possibility to increase the line by EUR 150 million. We have a covenant, which is set at 3.75, which is a net debt on EBITDA ratio at the end of December, at the end of every year. And finally, we have added a green component on this new revolving credit facility including the necessity to achieve some objectives on CSR indicators that have been defined, which could have an impact, positive or negative on the cost of financing. And this amount, the EUR 200 million, including the possibility to increase by EUR 150 million is obviously sufficient to cover our need and also give us some room to go on and continue our programmatic acquisition plan. Financial ratio, I'm not going to cover. You see that all of them are negative. And finally, the shareholding structure has remained the same with the Dick family continuing to be a majority shareholder with 49.7% of the shares and 65.9% of the voting rights. With that, I'm going to hand over to Sebastian to cover the remaining of the presentation. Thank you.

Thank you, Habib. So let's talk a little bit about the strategic execution and the perspective. First, to put it back in the frame in the context, I'd like to present this slide to remember to everyone what we really try to do long term despite we publish annual results, we are really working for the long term. So first is -- I don't know if it's classical focus on people, but we really try to have the best and most engaged people. And the most engaged is very key in Virbac. We have proven that during the COVID situation, people have proven an incredible level of engagement, and that is really important. So that's something we monitor. That's something we invest time. We have the Great Place to Work results. I will share that later on. But we really try to take care of our people as much as we can. The second thing is to simplify as much as we can because the company has been growing very fast, and we need to constantly think about simplifying and digitalizing the company. So that's something we focus very much on the manufacturing process, for instance, but on different key processes. HR, we have implemented Workday. Finance, purchase and also in terms of business where we have a web shop, where we try to leverage the online sales also for the pet food, for instance. The third element is we really think and focus on the long term, so to better prepare the company for the future. And here, it's all the management of the portfolio, streamlining, rationalization, but also making strategic investment in certain key segments, vaccines, pet food, for instance, we mentioned that before and trying to develop big product, large product, which is probably what Virbac is missing the most when we analyze compared to the top 4 of our portfolio, the main element of differentiation is a lack of 1, 2, 3, 4 very, very large products. And all that, of course, is supposed to help us generate accretive growth in order to reach our new target 20%, which is our 20% of EBITDA ratio, we would like to target before 2030. And we will on top of the organic growth based on commercial performance, based on innovation, also try to boost the M&A and trying to find some target acquisition. I have shared with you that we put in place a strategy Virbac 2030. It seems to be more spread now. But we did that back in 2020, in the middle of the crisis of the COVID. We really look long term, and we have established a long-term vision and strategy plan, which was based on 10 main axis, and you have the list of the 10 points or axis. So the purpose and the culture, which is the level of engagement of our people, which is really something very key. Where do we stand? Last time I shared with you a slide with the proportion of pet food sales within Virbac versus market, biologicals and vaccine sales and pharmaceutical sales versus market benchmark. So that's something we try to rebalance as well. And then different point you can read on innovation, manufacturing strategy, M&A and of course, ESG. This time, I thought I will share with you 2 of them. So the purpose, because this year has been a year where we have tried to write down the purpose of the company. And we will work on the manifesto in 2022, which are all the consequences, all the engagement that the company will take based on this purpose. Back in 2018, we designed a new vision. The key element were unique, innovative and agile. Unique, it's not just words. I mean unique, it's -- we are probably very unique in many aspects, but one of them is a portfolio. You don't have other animal health company of our size, we have pet food, vaccines, diagnostics and pharmaceutical. So the diversification we have, which make us not be a pharmaceutical company, but make us be a veterinary company where we try to bring veterinary solution. And when the vets need pet food, diagnostic, pharma or vaccine, we bring it to him, and not just pharmaceutical and vaccines like most of other competitors are doing, for instance. Agile is a concept of adaptation, but with speed, and we want to conserve the speed because we are a midsized player, we want to be much more agile and much faster in many aspects than the larger company. And we believe we can gain market share and things being agile. And then, of course, I mentioned before, empowering and engaging our people. So that was 2018 vision. You had all the values. I will not detail them, of course, but you find entrepreneurship, which is something we tend to lack in larger organization. We want to remain small in the mindset, in the spirit in order to keep the entrepreneurship. We want, of course, innovation, engagement. We are customer-driven forever. We give a lot of attention to our people. Pay attention to people is really, really key. And again, choosing sustainability, I always say a word which is quite key, choosing, because it means some trade-off to have the sustainability. And with this, we have now designed the purpose attending the health of animals. We also take care of them every day so that we can all live better together. And we will try to decline that into a manifesto in 2022 to list all the engagement that the company will take. The second element I would like to share with you on the 10 main axis of the Virbac 2030 strategy is the differentiating innovation. We are doing 3 things to summarize. We are doing many, many things. But within innovation, 3 main dimensions. First, it's not very new, but it has been accelerating over the last few years. We are trying to make it a more global R&D company, developing global products. One of the reasons why we don't have very large product historically, it is because our product were quite local or regional, but we have not so many very large products on the global level. Pet food, for instance, for many, many years, remain within Europe. Now we have launched it in the U.S. Next year, we will launch it in China. A few years from now, we launch it in Brazil. That's an example. Vaccines for companion animals, We are not in the United States. We are not in the U.S. So historically, we have not managed to develop a very global R&D. Over the last 4 or 5 years, we are accelerating that. And now the objective is to gain time to market, considering the product, considering the studies, considering all the development plans with in mind all the markets where we will go all over the world. And the idea is to help build a larger product, Blockbusters or Key Products. It also allows us to get a better ROI, return on investment by mutualizing the competencies, but also the expense on the global scale. The second thing is to try to bring more innovation by more differentiation. Innovation is something that we define as being visible, value-added, profitable and sustainable. What I mean by that is, for many companies, bringing innovation is bringing a new compound. But if the company is in same family as the other compound, most of the time, it does not bring any value. So if you take enrofloxacin or ciprofloxacin, marbofloxacin, there is very, very little difference. It could be considered as innovation, but it does not bring a lot of value. We are really focused on trying to bring added value and things that would really create value for the veterinarians and the pet owner, for instance. And that's something we try to do more and more also because it will help us create Blockbusters. And there are many unmet needs in animal health. We know, all of us know the sea lice, for instance, issue for the salmon industry. So there are also many unmet needs on which we want to make some bets in order to try to find a Blockbuster product that will rebalance the portfolio and help us grow in a very sustainable but also very accretive way. The third element is probably the most -- the newest things, the most different we have done this year, which is to increase the pipeline. And to increase the pipeline, you cannot do it very quickly because it's not just adding resources or financial resources, you need people and you need competent and trained people. You need an animal facility. So it's not just the question of adding more money, it's also adding more staff, more facilities, more labs. And so you are sometimes quite limited in your capacity to increase your pipeline or your speed of R&D. And so we have decided to out-contract and outsource much more than what we did in the past. And that's the reason why we have decided to increase our R&D spending by 1 point of revenue from 7.5% to 8.5% this year, in 2022, in order to really speed up the pipeline, but also make the bandwidth much larger. And so with that, we try to enlarge our capacity of bringing innovation to the market. And we have managed to move from 60-40 in terms of fixed versus variable costs in R&D to 50-50. So it makes it much more productive. To make it simple, with 20% more R&D spending, we can accelerate by 50% the number of projects and products because the variable part is what really counts. And with 20% increase in R&D total budget, we can really accelerate by 50% our project -- number of projects. So that's really what we try to do in the 2030 vision. And it will take a few years before we see the results in terms of productivity, but it should help us create value and bring more value to the market. With that in mind, just to share with you that for the last 3 or 4 years, we have beaten the market constantly year after year. In blue, you have the Virbac line. In green, you have the market line. This is without pet food. Here you have only pharmaceutical products. So if you add pet food, the gap is even wider, which means that's why in 2021, we had a highest level of growth, and we have probably grown double the speed of the market. We estimate the market growth around 8% to 9% in 2021. And at constant rate and scope, we have grown 18%. So twice the speed of the market. And that was the global market, but you also have on the cattle side, for instance, that we have a very good performance, as you see gaining market share on this market as well. So 2021 has been really an exceptional year for us with a very strong performance in terms of growth. Gaining market share again for 3 consecutive years, beating the market in all regions. That's also very important. And we have gone with a significant gap without pet food, 5.3 points above the market at the end of September. EBITDA and the cash, Habib commented. In terms of overachievement in times of the COVID crisis, we have taken the opportunity of the Great Place to Work survey, opinion survey to ask some questions to our people, and they were extremely satisfied by the way the company has managed the crisis. We had more than 90% of the people very satisfied with way we managed that. We had a rapid adaptation of our people everywhere across the world in terms of operational excellence and business excellence. We had a rich year in terms of acquisition. So we have some acquisition we paid like iVET, which is a company that is helping us in speeding up the entry in the U.S. market. But we have also acquired the rights of an innovative parasiticide compound from Elanco, that we will be developed -- that we are developing. And we have acquired the worldwide rights of Clomicalm and Itrafungol. This is a very good product. Very -- with a good level of margin and that are helping us quite significantly in terms of growth and performance. We are trying to improve our return on capital employed. So we have divested Magny also, which was an industrial site producing antibiotics and products like that. We have divested it. And the Virbac 2030, I commented it before, we are working and focusing very much on ESG road map. We made many improvements last year, and we have even a more important focus in 2022 where we will redesign a new road map for the next 3 to 5 years. And then I'll ask you take care of the other points. And Great Place to Work was a really good achievement based on the comment from the people from Great Place to Work. They told us that they have never seen such an increase between 2 surveys at 2 years difference to grow by 8 or 9 points of improvement. It was an outstanding progress. In terms of geographies and product range, it was an exceptional year as well. We have growing double digit in most of the countries, India, Brazil, but also France, Mexico, U.K., there has been so many European countries have been also very -- performing very much. In terms of product ranges, the best commercial programs keep delivering after 3 or 4 years, still a very high level of growth. So pet food is 27%. Veggiedent is 30%. Suprelorin is close to 20% growth. So you see a very sustained growth over years. And we had many new product launches last year, Clomicalm, Itrafungol, Tulissin, iVET petfood and Stelfonta. I made a focus on 5 geographies. One is the U.S. because the growth was quite good at constant rate. And once we have divested Sentinel, we grew 41.2%. This was based mostly on our existing product like dentals but also on the addition of some new products like Clomicalm, Itrafungol, Cyclavance a new product we launched in our dermatology portfolio. And then parasiticides, Senergy and Stelfonta. So this has been the real dynamic of 2021. And in 2022, you see we have also many launches which are planned. Tulissin has already been launched. It is a generic of Draxxin. Draxxin is a product from Zoetis, and it's an antibiotic. It's a huge market in the U.S. It's close to EUR 180 million. And so we launched Tulissin, the Pet Food with HPM has also been launched in February. And we have many other products that will come, as you can see on the slide. So we expect the U.S. to keep growing this year in a good way. Chile. Chile we had a very difficult year. You remember with the COVID, the close of the restaurants. The salmon industry has been hit very hard. But we had anticipated last year that there will be a rebound in the second half. And we see that we have closed the year slightly above, very, very slightly above at 1.2%. So the situation is more or less normalizing. That was before Russia and Ukraine. So we'll see what will happen in terms of export of salmon and consumption of salmon. But at the moment, it is more or less normalizing. What is very important is that we had many risk. We had many risks at Centrovet. And you know we have pushed back the acquisition from 2017 to 2020. And before realizing the acquisition, we have managed to remove many of these risks. The first one was a renewal and extension of significant third-party agreement. We have managed to extend them. So we push back the risk and have renewed the agreement. And we have renewed also the registration dossiers of some parasiticide product with DIRECTEMAR. So that was a very good news, and that was done before we acquired the 49% of additional shares of Centrovet that you see here. And so there is only one risk now, only one risk remaining, which is the filing of the updated registration dossier of the existing vaccine that will be done in April. So we are going to submit this new dossier to get a definitive registration of these vaccines. So far this vaccines were registered like temporary for 1 year. And every year, it was a renewal of the vaccines because salmon many years ago, I guess, were considered as [ animal ] species. So for other animals, the vaccine are registered for 5 years or more. But for salmon, it was only 1 year renewed. And now the Ministry of Chile has changed the regulation and they want to give permanent registration also for the vaccine in Chile. But of course, the requirements are more important. So we need to comply with this new regulation. And we will submit the dossier in April. So that's the last risk we need to overcome in the coming months. India has been a top performer last year. So that's why we want to focus 1 minute on it. It has led the growth at EUR 16 million, a 20% constant rate. That has been many, many years, we have not seen India performing so well. We have explained that by the disruption of the COVID. As we are the leading player in India, many smaller companies are trying to copy our products, and it was not very helpful in the past. But when the COVID came, many small companies disappeared or had many distribution issues, logistic issues. And so we had finally the place to grow our operation very well, and the performance was really, really strong. We see that the demand remained very stable, very strong, but we see the smaller player coming back. So between the base effect of last year and the coming back of some player, we need to see how this will evolve this year. But we are confident because we have a rich pipeline, and our team are really, really engaged and still keep performing quite well. What -- one area of attention will be the profitability ratio, because in terms of profitability, India, it's a very important country for us, but we have products which normally have structurally a lower level of margin. So we need to make sure that with inflation and the structure of the portfolio, we will not be too much affected by inflation. France has been also a top-performing country last year, also with EUR 16 million growth. We are very successful in petfood with close to 18% market share. We are growing in all product categories and especially in the key products, the large product. We have managed to put some very significant price increases. That was very helpful, and with many new product launches. So you have a vaccine, the ringworm vaccine, but also a very interesting product, I was mentioned innovation, Daxocox is a very good example. It's a new compound, but this one really add value because it's a once-a-week anti-inflammatory treatment instead of once a day. And for the one who treats their dogs or cats with a pill, you know that to give a tablet to a dog is not very easy and so if you have to do it once a week instead of once a day, it's a huge advantage. In terms of perspective, we expect the market trends to remain positive, but we expect some slowing down versus last year. We will launch wet petfood, [indiscernible] petfood and 3 antibiotics. So we expect a good performance of France again this year with an expectation also of a slow recovery, but a recovery of vaccine business. As you know, we had backorders last year, and we expect to slowly catch them back over time. China. China is the second largest market in the world. It's a huge market above EUR 7 billion. It's growing 20% per year. So it's a very significant growth. Online are playing a key role in China. And we are overinvesting in China now very significantly. So first of all, we have started a few years ago with the pipeline. So we have 2 new parasiticide registrations that were recently obtained, Effipro Duo and Milpro, which are 1 external and 1 internal parasiticide. So we have 2 new products that will be launched. We have a third one coming we hope by year-end. And we have some vaccines registration in the current process to be registered in the coming months or years. And so we have a very rich pipeline coming to market. And to support that, we have decided this year to strongly invest in the commercial forces, and we are adding at the moment close to 30 people this year and probably 20 people more next year. So we'll be adding 50 people in terms of a commercial organization in China over the next 2 years. And the idea is to take this pipeline and push it very strongly in the market. And so we expect a very strong growth in China over the next coming 3 or 4 years and also with a petfood entry in 2023 and '24. And of course, we also look at possible M&A exploration in order to further boost this overall growth. So China should be poised to a significant growth in the coming 3 to 4 years. With that, you have the updated table about the innovation. There is from one year to another one sometimes some delays in R&D programs. So you can have some move from one year to the other one, but you see that overall, the portfolio is quite balanced. Last year, we didn't communicate any value on 2024 for the food producing animals. We were on a very early phase of some potential Blockbuster products. Some of them will be more delayed like 2025. So I put the footnote, which is quite important for 2025. It's very difficult to evaluate that in the sense that if the product comes, it could be a huge product, but if it don't come, it could be zero. And in 2025, there are many of them which are still very uncertain. So it's a very early stage with a lot of uncertainty for 2025. But for the rest, you see that it is quite stable and quite positive year after year with some shift from one year to another one. In terms of the exposure to Ukraine and Russia, we just wanted to share with you that we do not have direct exposure. We have no affiliate in these 2 countries, no subsidiary. We have a limited exposure of directly through distribution, but this represents less than 0.5% of our total revenues. So it is not material at group level. We, of course, set up an internal team. Many of our people are trying to get involved. The country at the periphery, like in Poland, they are doing many, many things as they can in order to support the Ukrainian people, trying to be -- helping them in many, many ways. And again, it is a very dramatic situation where everything we can do, we try to do. We make some donation and we make many actions like that either locally or regionally with our different teams all over the Europe -- Eastern Europe part of Virbac. What we have done also is starting to monitor the situation of the indirect impact. So if we don't have a direct impact, we expect to have some indirect consequences like for instance, the gas supply eventually, but we see the cost of energy going through the roof. We of course, have in petfood, for instance, as the cereal cost is increasing very much. And that is used to feed the animals. But with influenza in chicken, for instance, you have also many chickens being killed. So to find chicken today to make petfood is, for instance, quite difficult. So the cost of some ingredients and materials are going up, and that is putting inflation pressure on our cost structure. So that's the main element we monitor. We have some supply element that we try to monitor to avoid any backorder or any issue in production, but also the pressure on price and cost of some components. So far, we are managing it quite well, but this remains an area of attention that we need to monitor every day. So with all that at this stage and considering the overall situation, we have kept our guidance, which is between 5% to 8% at constant rate and scope. So that is assuming a normalized market growth around 5%. So what we have said is we expect to beat the market. And assuming the market will grow around 5%, historically was going 4% to 5%, except over the last 2 years. We expect to grow above market rate, so 5% to 8%, but of course, there is not any major geopolitical event that has been included in that. And so depending on how the war will extend and what will happen, we don't know whether there could be some supply disruption or other issues. But so far, this is what we think is the most realistic guideline -- guidance we can give. In EBITDA, we are around 15% at constant rate. It is more or less a consolidation. We say that we will try to maintain the 15% to 16% EBITDA ratio. The 16% EBITDA ratio, 16.3% at a 0.5 point of exceptional event. So in fact, it's 15.8% on a recurring basis. And we have decided to invest 1 point of R&D more. So the 1 point R&D means that at an operational level, before R&D, we are trying to maintain the level of EBITDA we had last year despite inflation and despite the OpEx growth because, of course, with the COVID situation easing, we will see more traveling, more people will start to have present in physical meetings. So there will be a bit of rebound in the OpEx, of course. In terms of net debt evolution, we expect to manage to decrease again this by EUR 60 million, so without dividend in constant rate and scope. And I leave it with the agenda of the meeting. Thank you very much.

Thank you, Sebastien. So we are moving to the question, we will first begin with the ones for the people being present in Paris and then go with the chat. So the first one is always the most complicated.

The first question or the first answer is the most complicated?

Both. Let's see the question.

Christophe-Raphael Ganet from ODDO. A few questions. First, on the attention point you mentioned, I mean, inflation. So can you figure out some quantum around the cost of energy, for example, the price increase you are expecting for '22, should we expect 2 price increases, so the second one in the second half of the year? And what should we expect on wages as well? So can you put on the table some figures for the impact of inflation? That's the first question, yes.

So I'll start to respond and Habib will complete. I think we'll do a good job as 2, yes. So the first thing is when I say that we are very agile, it's true. So I expect the teams all over the world because, of course, it's a different situation country by country. But our team are briefed. They know that and expect them to be very agile and very reactive on this point, and they will try to cover the inflation cost as much as possible, everywhere it is possible. And we are tracing that quite precisely. That's one comment. The second comment is, inflation is not a picture. It's a trend, and it's a movie at the moment, and we don't know exactly how it will unfold. So for 2022, most of our pharmaceutical and vaccine costs are already negotiated. The terms have been negotiated for most of the volume of the purchase of 2022. So we know more or less where we should land. But it is not the case for petfood, for instance. You cannot stock components for petfood. So petfood, the price will maybe keep increasing or may decrease over the second part of the year and that we don't know. That's why I say it's not a picture, but more a tendency we have to see. The third element I'd like to share is that we have anticipated this inflation. We knew it will come. And so we anticipated in 2021 with significant price increases, I mentioned that before. And so the only aspect is that part of this price increase has been already factored in, in 2021 while the inflation is really hitting now. So there may be a slight timing effect between the 2 years. And I'll let you answer on the energy maybe cost.

Yes. So the energy is a bit of the same situation. A part of the contract have already been negotiated at the end of last year. So it's included in a way in the guidance that we have shared. Just to give an order of magnitude, the cost of energy for Carros for instance, which is our industrial site and headquarter representing around 50% of the production that we have worldwide in-house is around EUR 2 million, just to give an order of magnitude, including the increase that we've seen at the end of last year. So it's not that we are not necessarily in an industry where the cost of energy is representing a very significant part of the value added of our product. But obviously, it has an impact on us as it has for all companies.

It has more or less doubled over the last 2 years?

Yes. Yes.

Second question regarding China. Is it possible to have figures about the current contribution in sales and in EBIT? And where should we land in 2 years given the pipeline of launches you have?

Yes. No, we don't give sales precisely by country. But we expect that we will double the sales of China over the next few years. But at the moment, we are more in the phase of investment. So we are not so much worried about the profitability ratio of China. We are much more in the mindset to improve top line and margin and put the OpEx or the expenses we need. So the bottom line is not so much our [indiscernible], at the moment, sorry. But we want to grow as fast as we can. And we believe that once we will have grown enough, then we can optimize the expenses and the different ratio. But the first stage for the next 3 to 4 years is to really grow the top line and the product. So we want to launch many new products and add many sales force. But what I can tell you also it's in the top 15, but not top 2, top 15 at the moment. So it's a very small affiliate for us. And it can be also partly explained because we are not in the food producing animals in China. The companion animals market, which is dog and cat is probably 15% of the market. And so we are not playing very much in the 85% so far, that we plan to do with a partner, but not directly immediately.

Okay. Understood. And the third question is on your EBIT guidance, actually. Notably regarding the ForEx impact. Should we have our forecasts, if we take the current parity? Should we have a positive effect as we had last year? Or what's your best guess around the FX impact on EBIT for 2022, please?

Yes, it's quite complicated. It's very volatile in terms of evolution. What we can say is that with what we are seeing as of today, we expect to have a positive impact on the top line. So we have many currencies that are appreciating versus the euro in a country where we operate. So we should have a positive impact. And it's been several years that we have not seen that, but should be positive. And if the order of magnitude of the positive impact is significant, and it could be with the current exchange rate again, then it could also have a positive impact on the EBITDA in absolute value. And then on the ratio it's really too early to tell. So we'll provide probably more insight early April as we communicate the first quarter, we'll have a little bit more visibility and 4 months of history.

This is Rolando from [indiscernible] Bank. Congratulations for your performance, your results. Regarding -- I wanted to come back to the recent acquisition you made recently. Can we have an idea or an amount, a range of what the amount you invest for iVET, your acquisition of iVET? And the second question will be, if you have a strategy in terms of M&A for the upcoming months and or coming years. Is there any region you will be focused on maybe?

So just to make sure we understand your question is related to the Chilean....

iVET, sorry. The U.S. Yes.

Okay. So I don't think we have disclosed the figures. But it's...

The acquisition. What we paid and we have disclosed. What we paid, but not obviously information related to the P&L of iVET. So this has not been disclosed. And we paid EUR 7 million -- $4.5 million. Sorry, we paid for iVET $4.5 million and there is earn-out -- possibility of earn-out up to $2.5 million.

But it's a very low multiple versus what normally market pay. So that was on iVET. So again, we try to do acquisition to create value. We don't want to just pay full value, transfer the value and then try to make synergies, which sometimes is a [indiscernible] that explain how you get rid of people. It is not really what we try to do. I'm not saying we will never be obliged to do, but that's not what we focus. We try to bring companies that we can either perform better than they are doing or leverage something else. iVET was, for instance, something that will help us a lot in terms of logistic, market access and accessing veterinarian directly with our distribution, and even pet owner directly with petfood. And we had our petfood range that was coming and is launched now in February. So that is going to really, really help us very much in the market access. So the way the deal was structured is quite beneficial from this perspective. In terms of target in M&A, U.S., Europe, that are the top markets we are looking at always because we are very well equipped, again, commercially to create value. So if we bring an asset within the organization, we can create more value with it. But we are not close to opening new countries or new geographies by acquisition. That's also another way where we don't have overlaps and we may go and keep adding on the top line. And for innovation and manufacturing, for instance, it's good to open new geographies, because you can leverage your R&D program, and your manufacturing production. So that is also part of the deal to search for acquisition in new geography to have more presence, and small to middle size acquisition. We are not looking for a big, large transformation organization.

So thank you. We have another question from the chat. The question 1 is, if you could explain if you expect any margin improvement before 2025?

Yes. So what we have stated was that 2022 will be a sort of stabilization phase for us which you've seen, as Sebastien mentioned, and we will sort of stabilize our EBIT adjusted next year if we restate for the additional R&D investments. And also, if we restate for the one-off that we had this year in 2021. We continue to have as an objective to move to 20% EBIT adjusted in the horizon [ '25-2030 ], which means, obviously, that we will have to improve our EBIT adjusted as we move forward.

Can you express your priorities in terms of M&A, products versus geography, what type of multiple are you ready to pay?

Again, it's more a question of opportunity because we can say we like that, but we see that it does not happen like that. So if I was looking for priority, I would say, vaccines at good multiples in geography like U.S. and Europe. That will be my dream, my wish, but it doesn't work like that. So then of course, we'll try to find a target that makes sense for us, as I expressed before. Product is perfect because product we can digest, integrate very quickly, very easily, so product acquisition will be perfect. But historically, the product acquisition was fall out from big and large merchant acquisitions. So Elanco buying Bayer or Bayer buying -- so that was making some overlaps and then it was an opportunity for midsize player to buy this product. This does not seem to be the case anymore. There are not so many mergers to be expected. So we have to see, maybe it will come. But in the meantime, it's more searching for pipeline, biotech company or start-up. And then the issue is a balance between risk and valuation. So we try to find, we try to collaborate. But it's too early to say. So we search very actively, but we don't know what we will find yet.

So I have 4 questions. I have asked the 2 first. The third one is very long. So be prepared. It's regarding R&D. Roughly, assuming peak sales over 3 years, it looks like the pipeline could add something like EUR 150 million or EUR 200 million revenues by 2025, on your slide. Is it reasonable? And if so, how should we think about portfolio turnover, products in decline and discontinuation in the base business? And how do you expect mix shifts to impact profitability over time?

So I'll try to start, you complete Habib if I miss a few points. I don't know if we communicate too much on that, but maybe we could find the data also. We have a vitality index around 12%. And by that, I mean product that is less than 3 years old in the turnover. So we have quite a sustained contribution of new products, but new product can come from innovation. They can come from distribution, and they are of all nature, so petfood, pet care, pharmaceutical, vaccines. .

Geo extension as well.

Geo extension as well. So when we call this innovation level, yes, of course, it's realistic. Otherwise, we will not put it. Of course, there is always a certain level of risk. And the problem is we try to -- we have a concept that we don't put on the [ shop ] product, which have a probability of risk higher than 50%. So if it's very early stage and very risky, we normally don't put it at least for the next 3 years because for the next 3 years, we are close to the process of submission of the dossier registration. So we have more visibility. Said in other words, the figures you see for 2022 and 2023 are very well mastered. The figure you see for 2024 is a bit more uncertain and 2025 is very uncertain. But we try to be as realistic and as cautious as we can. So yes, it's realistic. Then the third question was what?

And while just to add, the figures that we have is peak sales. And there is another dimension, which is how long does it take to get to the peak sales. And obviously, for some products, it could take longer than for other. A product like Suprelorin, we still not have reached the peak sales, and it's been in the market for several years. So that's also a dimension to keep in mind.

Yes, that's an issue, in fact, for petfood and Suprelorin and very innovative product because if it takes 10 years, we only have 3 years. So we try to give you the figures after 3 or 4 years, but it's not really peak sales, so it's a bit complicated.

Did you ask me for the last part of the question?

[indiscernible]

The last part of the question was how do you expect mix shifts to impact profitability over time?

Yes, that is a good question, and that is probably not very, very favorable with what we know today in terms of current portfolio. What I mean by that is petfood is growing very quickly. And petfood, you have 2 ways to look at it. In terms of return on capital employed is very, very good. In terms of product margin, it's not -- so far, it is at the level of the average margin of the group. But the group margin is lower than what we would like it to be. So we will try to push to increase it. And if, for instance, inflation is kicking up, in pharma and bio it's easier to compensate than it is in petfood. So the product mix should not be so favorable, but what may compensate is innovation. Because if we bring very good new vaccines or if we have 1 or 2 Blockbuster products in the portfolio in one of the innovative segments, it can change that as well. So the structural product mix of the current portfolio may be unfavorable. But everything we do in R&D innovation will compensate that if we are successful. So...

Okay. Thank you, Sebastian. I have the question 4. Hospital visit volumes in North America for dogs and cats are down, logos low single digits year versus year. Are you assuming a recovery to positive visit growth in your guidance?

No. We are -- well the guidance is not based on the U.S. number of visit only. Of course, we are a global player on every market, so the dynamics are not always synchronized because of the COVID. The fact is with the base effect, and we have the same story in India, we will see a different -- a difficult base of comparison for many things. So I'm not surprised at all that the number of visits is decreasing. I mean, it has been increasing so much last year that at one stage compared to last year, it should normalize. So we expect -- what we expect in the guidance is a more normalized market. So if the market is growing around 5% overall. And that could be a mix of volumes and price and new innovation, price increase and number of visits. If it grows 5%, we will be -- we should be okay with the guidance. If the market is decreasing very much or increasing more, we will provide the guidance over time. But at this stage, this is what we know and what we see.

We have a question on the trend. Most of the way through first quarter is over, what are you seeing in terms of growth versus guidance?

What we can say is that we are on par, online to -- we continue to be good with the guidance we have shared for the entire year, 5% to 8% is a good one. And it's too early to tell on the...

The fact is it's very too early because there is a base effect, as we said. Inflation is picking up now, so most of the impact will come from now on the second part of the year. And when you have a bit of inflation, you may give price increase a bit higher. So of course, distribution may stock a little bit more, and this will normalize over the years. And it also depends on trend because we discussed that last year, when the market is going up, the distribution tend to buy more stocks because their forward forecasts are increasing, and they don't want to be in backorder. When the market starts to slow down, they will tend to reduce their stock, so buy less from you. And so there is a bit of lag between what you see and what happens in the market. So we need to be careful because of that. So it's too early to say more than that.

We have a question on R&D. What is the percentage of research and development that is directly expensed in the P&L? And because if we restate your EBIT margin guidance by 1 point increase in R&D spending, the margin is improving versus 2021. Thus, inflation should be more than compensated by price increase and operating leverage.

So on the first part of the question, which is how much of R&D do we expense? So the vast majority, more than 95% of our R&D is fully expensed, is accounted as OpEx.

And if we restate your EBIT margin guidance by 1 point increase in R&D spending, the margin is improving versus 2021.

No. So 2021 is 16.3%, as we've seen. 2022 is around 15%. So if we increase by 1 point, we would be at 16%. We have stated that in 2021, we had around 0.5 point of one-off exceptional profit. So the 16.3% is 15.8%. So recurrent, you're right. So basically, if we restate R&D were slightly increasing or we are flat, as you stated, between 2021 and 2022.

Flat because we had the full year effect of the new product, which is [indiscernible] as well. So overall, we are.

More or less flat, yes.

In terms of operational performance.

Any other question in the room, in the meeting room?

Yes. One -- maybe one or two questions. By geographies, we have understood that China should drive clearly growth for '22. But where should we see the highest rates of growth by geographies again? And the other question I had, yes, was the contribution of Clomicalm and Itrafungol, in terms of margin, I just get you if I'm right, it was positively contributive to EBIT improvement. Can you be -- can you provide more granularity on that, please?

Yes. So China, what I say is that we should expect strong growth over the next 3 to 4 years. This year, we are adding 30 reps. As of yesterday, we had found 8 or 9 of them. So by the time you get the 30 reps on board, you train them, you get them up to speed, you don't have an immediate effect. You just need to factor that in. So I'm not sure about 2022. I don't want to say I don't care, but almost. What I want is that 3 to 4 years from now, we may have doubled the sales or try to double the sales in China. So that's what we try to do. And so China should be very strongly performing over the next 3 to 4 years in a relative percentage of growth versus other country. 2022, we'll see and you see the COVID, they are confining in Shanghai. There is a lot of disruption with COVID. Their vaccine doesn't seems to work so well. So there is always short term, a little bit of uncertainty, and we have to see. The main eye of contribution, this is something I always mentioned to the people in these meetings is look at Europe, because Europe remains 40% of the company. So when Europe does 3% growth like it was historically the case, the company was doing 4% to 5% growth. When Europe is doing 8% or 9%, the company easily do 10% or 11%. And when the Europe does 15%, the company does 18%. So it is very important to look at Europe, I think, because it remains a very significant part of the company, and that could explain the part of the leverage. Then of course, the key country of [indiscernible] India, Australia, Chile, U.S. So you have to also look at these 4 countries. They are the main contributors in terms of mass -- in terms of mass of sales and mass of EBIT. And so you need to look and track this as well. And you had a last question. Yes. Clomicalm and Itrafungol, we have disclosed that the contribution of Clomicalm and Itrafungol and iVET was 1.6% on the top line. And what we say EUR 14 million. And iVET was 6 months, and Clomicalm and Itrafungol was 9 months last year. So that was a very significant contribution and EUR 14 million for the group. And then the level of margin of Clomicalm and Itrafungol is above average margin of the group. That's all that we say, we don't give more, but it's accretive contribution because the margin of the product is above the average of [indiscernible].

Which is not the case for iVET because of the infrastructure, obviously. .

And you had a last question.

Yes. This is a question from James. He's asking if you could clarify your prior answer on margins. When you mentioned flat is that on the 15.8% with the adjustment? Or is it on the 16.3% that is reported?

So let me do it at again. So 2021, we have the ratio of 16.3%. That's what we've seen for 2021. We mentioned that we have 0.5 point of exceptional profit. This is the EUR 5 million that you see on the introduction slide. So if you restate for that exceptional profit, we are at 15.8% for 2021. Then we said that for 2022, we expect to be at around 15%. So moving from 15.8% to 15%. But one of the reasons why we have that decrease is because of the other investment or increased investment in R&D. So we decided to have 1 point more of investment in R&D. So if you restate for R&D, the 15% to be comparable to the 15% in 2022. If you want it to be comparable to 2021 without the R&D effect, it would be more 16%. And Sebastian added that we also have a slight positive impact next year for Clomicalm, Itrafungol and iVET because as he mentioned, those products only came during the year in March and in June for iVET. So we'll have a full year impact. And as especially Clomicalm and Itrafungol are relative, the 2, 3 months will add a bit of a point. So we are more or less stable, if you restate for R&D for the full year effect of Clomicalm and Itrafungol, and if you restate for the exceptional element of 2021.

But to make sure to be clear, we have 16.3 points in -- 16.3% in 2021, and we expect to be around 15% in 2022. So we are not at the same level at all. We are at the same level if we look at what Habib explained, restating for many one-off or exceptional things to compare apples with apples in terms of commercial or operational performance. It's more to say in terms of operational recurrent performance we'll be flat in terms of profitability based on what...

Seems to be clear, James will tell us on the chat. I have 1 question from Louisa. You mentioned production issues still in Carros. What is the situation over there?

Yes. And so no, we -- I mentioned that we had production issues in Carros if you remember, in 2020. We have entirely -- in the vaccines for cat and dog, we have entirely corrected those issues. Last year, we have resumed the production, but we are now facing a production capacity. We are not able to meet entirely the demand. And we are working on that with additional investment that will come in 2023. So what we have realized in 2022 is we have offset entirely the loss that we had in 2020 because of the issues. We have offset that entirely by adding EUR 15 million more sales, but we continue to be -- not to be able to meet entirely the demand.

Which has increased a lot with COVID, with adoption and vaccination of puppies and kittens.

Thank you very much. I guess it was the last question and the time is running, we are about to achieve the last minute of the meeting, it is almost 4 o'clock in France. So thank you very much, Sebastian. Thank you very much, Habib. Manuela, my partner, thank you as well. And thank you to [ Xavier and Florian ] for the technical support and all the organization. See you soon.

Thank you.

Thank you. Goodbye.