Virbac SA (VIRP) Earnings Call Transcript & Summary

Good afternoon, everyone. We are pleased to welcome you all to the Virbac 2022 Half Year Results Webcast. Hosting the call today are Manuela Rodríguez, Investor Relations; and Sandrine Brunel, Head of Corporate Committee for Virbac. We'll be joined by Sebastien Huron, our Chief Executive Officer; and Habib Ramdani, 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 corporate website, and a replay of the meeting will be available at the conclusion of this meeting. [Operator Instructions] It is now my pleasure to turn the floor to Sebastien Huron and Habib Ramdani. Habib, you may begin. Thank you.

Hello, everyone. Good morning, good afternoon. So welcome to this session. We will start, as usual, by a focus on the financial results. I will share 2 summary slides to share with you the main features of this financial release. We will then go into a little bit more details on the top line, on the bottom line and all the other financial elements. And I will hand over then to Sebastien, who will cover more of the strategy and execution part of this presentation. Thank you. So let's get started with the summary. So as you've seen, we have posted a strong sales growth, organic growth of 12% at constant rates, which has been driven by very solid performance in all of our regions. We'll go into a little bit more detail. And this has been done in the context of a market that is still having good dynamics, nonetheless, with a slowdown of growth in this first half of 2022, which was anticipated. As you know, we have shared that we anticipated this slowdown of the market, which is now visible, and Sebastien will cover that into a little bit more details later on. If we look at the increase of EBIT adjusted, we have continued to grow on this financial indicator. We have added EUR 7 million at constant exchange rate, which led us to EBITA ratio to revenue of 19% for this semester. It is to be noted that we have had some one-off positive impacts, both last year as well as this year. If we restate for those one-off positive impacts, you will notice that our EBITA ratio to revenue has been more or less stable or even slightly increasing, moving from 18.5% at the end of June 2021 to 18.6% at the end of June 2022. So this evolution has been driven by a growth of our sales, obviously, which has had a positive impact on our profit on the one hand. On the other hand, we have also experienced increase of our cost base, which resulted into margin contribution in absolute value. But with a lower margin contribution in percentage of revenue essentially linked to the impact of inflation on our raw materials and other incidentals. We've also had a higher level of expenses when comparing this semester with last -- with 2021 semester, which is the result of the rebound on commercial expenses following the release of the COVID-19 restrictions as well as continued inflation of some of our costs such as transportation, energy cost and so on and so forth. Finally, on this slide, ForEx impact. You see that we have recorded a favorable ForEx impact, adding EUR 23 million of net sales as well as a favorable impact on our EBITA adding close to EUR 5 million linked to the evolution of the currency. We can also note that at that stage, based on the currency as they stand today, we expect to have for the second semester a similar impact in magnitude as the one we have seen in the first semester. So very briefly, if we look at the evolution of the different currencies to which we are exposed, you see the line variance, A '22, A '21, which is the evolution of the currencies versus the euro, all of them or the vast majority of them have -- of the currencies to which we are exposed to, have appreciated versus the euro, which triggered the positive impact that I shared, with the exception of the JPY and the Chilean currency. If we continue to go down our profit and loss statement, the net profit has increased as well, moving from EUR 73.7 million to EUR 77.6 million at real rates, essentially driven by the higher level of sales, the activity. The only one impact -- negative impact that we had below the EBITA is on the financial expenses, and it's linked to the unfavorable exchange rate impacts related to CLP exchange rate. You know that we are exposed to the CLP, and this resulted into a little bit more than EUR 6 million of negative exchange rate impact, whereas last year, it was sort of neutral for the same period. We continue to be cash positive at the end of June 2022 with a financial excess of 20 -- close to EUR 20 million. Nonetheless, we have had a decrease of our total positive cash situation by EUR 54 million during the first 6 months of the year. A portion of it is linked to our usual seasonality, for instance, on trade receivables, where we are paying the end-of-year rebates for many countries at the beginning of the year. So we have a natural seasonality. Another portion of it is linked to the acceleration of the increase of our activity and thus, the working capital needs that has also increased, i.e., on inventories, for instance. We have had also additional dividend payment when we compare this semester with last semester. And finally, we expect to have the usual pattern of cash generation, which is more during the second semester rather than the first semester for us. I can mention as well that linked to that essentially to the working capital, and we'll come back to that later on, we have adjusted the expectation of the net debt decrease for the full year we. Expected at the beginning of the year to decrease our net debt by around EUR 60 million at constant scope and currency. We expect now to decrease our net debt by EUR 30 million for the entire 2022. Let's move to some highlights on our consolidated sales and some explanation. You see first that our consolidated sales have grown by 16.4%, moving from EUR 529 million to EUR 616 million, which is a 12% increase at constant rates. And you see that we have had no change in perimeter during this semester. So if we look at now where this growth is coming from, you see that we have added EUR 87 million of additional sales versus last semester versus the first semester of 2021, which is EUR 64 million at constant rate, with a good contribution from Europe, EUR [ 14 million ], with countries such as U.K. and France leading the contribution in absolute value for the period, Italy, not far behind and a growth rate for this region of 6.2% during the period. North America has had also a very nice growth during the period, 15.6%, which is even 20% at constant rate. So it's adding EUR 12 million of sales during the period with nice contribution from our historical brands, and Sebastien will cover that in a little bit more detail. And that's contribution as well from new products that have been added to our portfolio in the U.S. Rest of the world, 20% growth, a very significant increase, adding EUR 38 million more sales. And if we look at a little bit more details on this rest of the world, which encompasses for us Asia and the Southern Hemisphere, you see that the growth has been -- Africa and Middle East is leading the way in terms of contribution to growth for this region by growing by 25%, adding EUR 24 million. Pacific then has had a very strong performance, 23% growth, with a very strong growth in Australia, and we'll cover that later on, giving you some more insights on the Australian performance. Latin America has had also a solid growth, 15%, with very good contribution from our 2 first countries, Brazil and Mexico in the region. And Asia has had 11% growth with a slightly more mitigated performance. If we look at a little bit more into the details with China, having suffered for this semester with a decrease of our sales in China, essentially linked to the COVID-19 situation and lockdown in the country, and we'll come back to that later on. And on the other hand, India, which has performed very well, adding more than EUR 9 million sales on our top line comparing '21 first semester with '22 first semester. So a very strong performance in that country. So this was the performance by country and by region. We are moving now on a vision by segment, starting with Companion Animals. You see that all of the different subsegments of Companion Animals have performed very well. All of them have grown more than double-digit growth with the Petfood leading the way, 28% growth on our Petfood activities business. Reaching nearly EUR 50 million -- sorry, EUR 50 million at the end of June 2022, with France having a nice contribution to that, the U.S. as well with the iVet acquisition, the rest of Europe beyond France, having had a nice contribution as well, and Latin America, to a lesser extent. All the other segments have grown between 10% to 13%, with segments such as Specialties. You see 13.7% growth with our flagship products such as Suprelorin that have contributed very nicely during the period, Clomicalm as well, [ Zoletid ] has had a strong contribution. The other segments with the Dental contribution has grown 13% as well. And Parasiticides, you see 11.5% during the period, with nice contribution from products such as [ Milpro ] And finally, maybe a comment on Biologicals, you see 12%, so double-digit growth despite the limitation, the continued limitation in our capacity or production capacity during the period. You know that we expect those limitations to gradually move away, starting from 2023, following the investment that we have made on our equipment. We are moving now to the Food Producing Animal segment. Same picture, green everywhere. We are growing on all the segments, with Nutritionals leading the way, 19% growth. So very nice growth, with India representing 2/3 of the performance, the Parasiticides segment as well, close to 17% growth during the period, with Australian Parasiticide having contributed significantly to that. Our Vaccines business as well on FPA, you see 7.5% growth, with nice contribution in Latin America, some product contributions such as [ Provision ] score in Europe as well. And finally, the contribution of the Antibiotics, which is still growing at 2.8% despite some shortage that we had on some of our products. I will cover very briefly the sales breakdown by region and business. It's more or less the same. We have increased slightly the percentage of sales in North America, following the very strong growth that we had in that region. And the rest remained more or less equivalent. Let's move now to the profit and loss statement at real rates that we are showing here. You see, first, the nice dynamic on the net sales, growing 16%. Gross margin and material costs is also growing slightly less, 15%, impacting by inflation on our costs, which explain why in terms of ratio it's slightly decreasing versus what we had in 2021. Our net expenses are growing as well, around 12%, moving from EUR 233 million to EUR 268 million. This has been driven by what I explained during the introduction, it has been driven by the rebound of our expenses following the COVID restriction. It's also the result of our strategic decision to invest in R&D and to increase the investments in R&D. We will cover that in the next slide. But you see that overall, as a ratio to sales, we have managed to limit nevertheless, the increase of those net expenses versus the increase of sales. And the ratio is improving, compensating slightly the gross margin on material cost ratio, which is going the other way around. Our current operating profit before depreciation of assets arising from acquisitions, is increasing as well, moving from EUR 104 million to EUR 117 million. It decreased slightly as a ratio. But you remember that I mentioned we had one-off profit for the two semesters, 2021 and 2022. If we restate for those one-off profits, we're even slightly improving on this EBITA ratio. We have no other noncurrent income and expenses recorded, neither last year during first semester, nor this year during first semester of 2022. So the operating profit is exactly similar to our operating profit from ordinary activities. The net financial expenses is increasing, as I mentioned earlier on, moving from EUR 1.6 million to EUR 8.1 million. It's essentially driven by the exchange rate impact on CLP, which explain more than 90% of this increase. Income tax remains relatively stable as a ratio to revenue to operating profit. And I can mention that our effective tax rate has also remained more or less stable at around 28% when comparing to 2021 same period. So all in all, our net results, group shares is moving from EUR 72 million, increasing to EUR 77.5 million, a nice increase of our net results. Let's have a look at the breakdown of EBIT adjusted evolution, comparing 2021 to 2022. You see where the growth is coming from. Europe, adding EUR 7 million; North America being positive as well and the rest of the world as well. So all of the regions are contributing positively. No surprise R&D is contributing negatively because we are increasing the amount of expenses that we are allocating to R&D, following the decision that we made to increase the ratio for the full year by one point. And this increase would have been even higher if we restate from the one-off compensation that we had in 2022, which was lower than the one we had in 2021, from Elanco following the acquisition of some portfolio research products. Corporate and other, EUR 5.8 million higher cost. It's essentially driven by the rebound of expenses, travel that I mentioned, for instance. It's also linked to some expenses such as profit sharing and bonus payment, which have increased with the increase of our net profit. And finally, we also have a base effect linked to the one-off that I mentioned and especially a provision reversal that we had last year during the same period. Final comment on this slide, the exchange rate impacts, positive. You see that it's adding close to EUR 5 million more EBITA for this semester. You remember probably that the past few years, the impact of the exchange rate have been more negative. So we are very pleased to see, obviously this year, a positive impact. Let's move to the cash flow and the evolution of our operating and net cash flow. The operating cash flow is following the nice increase of our EBIT adjusted, as you see, close to 13% growth between the 2 periods. The net cash flow is growing as well, slightly less at 5%. The difference is essentially linked to the exchange rates that I mentioned. Let's have a look now to the evolution of our free cash flow during the period. You see that at the end of June 2022, we are in a net free cash flow negative position at minus EUR 49.5 million. You see on the flow chart, waterfall charts that it's essentially linked to the working capital requirement evolution that we had during the period, which has consumed EUR 115 million. I will comment that a little bit more. But before that, just a quick comment on the CapEx, which is -- so we have spent around EUR 25.5 million of CapEx at the end of June, which is a 25% increase versus what we had last year. You know that we have also decided to increase the amount of CapEx that we are investing, and we expect to have an acceleration of this spending outflow during the second part of the year. Let's come back to the working capital requirement. You see the negative, the consumption of cash. Several comments to make. The first one is that, a good portion of that is linked to the seasonality of our activity, which is a usual pattern that we have every first semester. We have, for instance, the payment of the end-of-year rebates, which happened at the beginning of the year. We have also the payment of the profit sharing of the bonus of several payments like that. So we have a seasonality in the way we are consuming and generating cash, which is obviously very visible when we look at the [ product ] like that. That's the first element. The second element is the evolution of our activity, the acceleration of the evolution of our activity. We generate the need for financing our working capital, especially on the inventory dimension. And we made a management decision to protect and to implement security stock in the overall environment and all of the disruption that we are experiencing or seeing within our supply chain. And obviously, we want to protect as much as possible our ability to deliver the customer demands. So that's the second element. And finally, we have also some one-off elements for this semester when we compare to the first semester 2021, for instance, on factoring, we had a positive impact of factoring last year, a negative impact of factoring this year. So when we compare, it creates a slight difference. Accounts payable as well to a lesser extent, had an impact. It's really a sort of a cut-off impact specifically for this semester. Final comment on that. We expect to have, as I already said, positive cash generation during the second semester, very similar to what we had the previous year, where our cash generating pattern is more, again, back loaded at the end of the year. So specifically when we compare the opening net debt and the closing net debt, we continue to be positive. As you see, we are having a net financial excess of EUR 20 million at the end of June 2022. Quick comment on balance sheet analysis. I will only comment the main change, which is on the working capital. As you see, again, we are moving from EUR 151 million to EUR 274.5 million of working capital, a significant increase during the period. Again, part of it is linked to the seasonality that I mentioned. So it's a usual pattern to have that increase. And if we look at, which is more interesting, this working capital at the end of June 2022 as a ratio to sales and we compare it to the same amount at the end of June 2021 as a ratio to sales, the major difference is linked to the inventory position, which has increased as a ratio to sales, following the comment that I made regarding our willingness to implement security stock within our manufacturing sites and our commercial side as well. The rest remains more or less the same. Obviously, the nice financial position that we have, especially on the -- with a positive net debt translates into very positive financial ratio. We continue to be fully deleveraged with the net debt on operating cash flow, which continued to be negative at the end of June 2022. And finally, shareholding structure as of end of June 2022. We have the shareholding structure that has not materially changed versus last period. The Dick family continues to hold slightly less than 50% of the share and slightly more than 66% of the voting rights. Thank you, and I'm now going to hand over to Sebastien for the strategy execution and some comments on our perspectives for 2022.

Thank you very much. So welcome to all of you. First half of 2022, another very strong performance, a very strong first half, where we have grown at 12% at constant rate and scope. And what is really important is to understand that we have been gaining market share over the last 5 years. And we have had the top performance of the animal health industry, and we are quite proud of that, over the last 18 months. So it means that in 2021, we have been growing with the fastest growth of animal health, the same for the first half of 2022. The financial results, Habib has commented them, so I will not come back on it, 19% EBITDA at the end of June, cash positive. We are, at the moment, adapting quite well and quickly to all the new challenges. As you know, they are -- we are facing many challenges. First, the market evolution, slowdowns, like we had anticipated. That's why we gave quite a wide guidance initially at the beginning of the year. We were expecting a return to normal of the market, and this is what we are seeing at the moment. There is more pressure from inflation with a conflict in Ukraine and Russia. It has really put a lot of pressure on the energy cost on inflation -- on the transportation cost and things like that. So we see that there are many challenges. But we have been used to that and to manage in this complicated environment. So, so far, we are performing relatively well and trying our best to offset and compensate for all these challenges. At the same time, we do that short term, we keep investing in the very long term. So we keep investing in the 2030 vision, and we are progressing on all the dimension. We are accelerating our R&D investment as much as possible, as much as we can do it. We are continuing to invest in production and the CapEx. We want to invest to have a better position in manufacturing mid-, long term. In ESG, we continue to push as well, and we have worked very hard this year on the task force to build the new roadmap. As you know, we had defined objectives in 2018 that have been reached. And now we want to design a new roadmap to take us further. And the team will come up by the end of the year with a final roadmap for the coming 3 to 5 years in terms of commitment, engagement and objectives for the ESG. In Great Place to Work, we do a survey every 2 years. We have started the workshop bottom up, involving all the teams across the world, in order to improve on the dimension we can improve, and that is also progressing well. And last but not least, we are investing also in the digital transformation, both in the business side with web shop, market access, home delivery and things like that, but also on the manufacturing system. And we have deployed in the U.S., our core model information system, the ERP, this year. In terms of business geography, we are doing quite well. At the end of June, we have seen that most countries were growing double digits, especially U.S., but also India, Australia, U.K., Brazil and Mexico and Italy. They have all performed quite well. We are, for many, many years now, pushing some of the buster commercial programs, and in particular, the Pet food, who still grow at 27% in the first half, so quite strong. The Veggiedent, close to 30%, and Suprelorin, 20%. And we have been launching new products. So they are not very significant products in terms of sales, but they are adding on the top line. The Tulissin has been launched in the U.S. You know that Tulissin is a generic [ tulathromycin ]. This is a large product from Zoetis, and we are through this product entering the food producing animal market, the cattle market, but also the swine market in the U.S. We enter this market directly on the cattle side and through a partnership on the swine side. We have launched the HPM, the Pet Food range of Virbac, in the U.S., and this is starting slowly as expected, but it is starting slowly. And we have launched many other products like Milpro in China and the Wet formula of a pet food in Europe. If we look at the main geography and make a focus, in the U.S., we had a good performance of 20% at the end of the first half, with a good growth of the dental product, of the dermatology. But we also had a base effect, a very positive base effect in the first half, linked on one side to the Clomicalm, Itrafungol, that we didn't have last year. We got them in March, April. And we have had this year for the first 6 months, Clomicalm and Itrafungol. And iVet was purchased at the -- in July last year, we have it in the first 6 months this year. So base effect in the U.S. has been very favorable in the first half. It will be less favorable in the second half. And that may explain also why the performance has been so strong in the U.S. at the end of June. Here also, of course, we are impacted by the slowdown of the market that we keep -- we see. We have the figures on the clinics, and we see some slowdown. And we are also, of course, impacted by the inflation. Australia, it is one of the best year ever in Australia at the moment. You know we had many issues with climate linked to the fire and many dry season in the past. This year seems to be a very good year for Australia, rebounding a little bit from previous year that have been a bit depressed. But this year, we grow very strongly with 24%. The team is doing a really good job over there. We are growing on the base of a strong market, and the market is quite favorable. But we have done a very good job in controlling the generic competition, Multimin. We have launched a new product like Stelfonta, Suprelorin, and the perspective remains quite good for 2022. In India, we also have a very leading and strong growth, with 17% growth at the end of June. Here, we have a very good team. We have an excellent commercial team and a very good mastery of all the supply chain parameters, and that is helping us to outperform the market. And despite expecting the slowdown, we expect a slowdown of the market and the economy over there, we are quite positive on the mid-, long term due on one side to the quality of our teams, but also because we have, for the last few years, try to enrich a pipeline. So we need to keep focusing on the profitability of the country, but we are quite confident mid- and long term. China has been much more challenging. That is maybe the only gap in my communication versus last year, where I was anticipating a strong year for China. I still believe we will catch up by year-end. But at the first -- at the end of the first half, we have been down, and that is mostly linked to the COVID, which had two impacts. We had a first classical impact on the salesforce being locked down on the fact that we had much less activity at the clinic level, much less visit. So we were really impacted by the COVID. But even more for us versus our plan, we had planned to hire 25 reps at the early beginning of the year, and we were going to launch Milpro and Effipro, 2 new Parasiticide products, very early in Q1. And these have been delayed in Q2. So now they are launched, but we have not benefited from this launch and the salesforce impact like initially planned in January or February, and this has been delayed. So I am still positive, expecting a rebound in second semester. I still hope that at the end of the year, we will be in line with what we expected last year, which means a strong growth or good growth of China but it is true that the first half has been slowing us down significantly. Just to say that we are -- now we have hired the 25 reps, we will hire 24 more next year. And what is really important to understand in China, we had -- there are 3 segments in the company and animal market. One is the Parasiticide, one is Vaccine and one is all the rest, to make it simple, the pharma. So far, we were playing only on the pharma side. This year, we are adding 2 parasiticides, Milpro and Effipro. We expect to add a third one by year-end or next year if it takes. So we will be a real player in the parasiticide market. We hope to come with vaccines in the coming 2 to 3 years that will complete the range, and we expect to launch Pet Food by late 2023, early 2024. So that is very good for China because besides the commercial salesforce where we invest heavily, we will have a complete range of product in all the segments. So that means that mid-, long term, we are extremely positive on China. As far as the perspective for 2022, I already mentioned COVID -- the COVID impact, mostly on China, and that has impacted us in the first half. We have seen slowdown over of the activity, but we expect a rebound. What is impacting us much more, it's a conflict between Ukraine and Russia because this is putting a tremendous pressure on energy cost, inflation, there is some constraints. So indirectly because we don't have a significant business in Ukraine and Russia, we communicated about that. So it is not impacting us directly because the business is very, very, very tiny and small, so we are not affected directly. But unlikely through the inflation, energy costs and the raw material and everything, we see that we have an impact there, and we are trying to manage it as best as possible. It's too early, and we have no visibility as whether there could be some limited energy supply during the winter time. We expect and also we anticipate as much as we can and try to anticipate this risk. But -- they're also too early to say whether it could materialize or not. And so overall, the strong inflation is clearly putting pressure on our margin. It is putting pressure on our cost base. But so far, all these negative impacts should be offset for 2022. We manage as best as we can with as much agility and adaptability as possible in order to compensate this. But it is clear that the time is more challenging than it has been in the past. And all this impact, inflation and all these consequences are very -- it's way too early for anticipating an impact in 2023. So at this stage, we are not capable to quantify what this impact could be. So to sum up on that, we have reaffirmed our guidance for the revenues at between 5% to 10%. So it's a bit wide. We may have to fine-tune it in the coming months, depending on how it will perform. But so far, we confirm, and we have not moved on that. And for the EBITA, it's around 15%. And we have just adjusted the net debt evolution because as it has been understood, some of our working capital has increased. We took some decision. And because of that, we had an impact on the net debt reduction. We have previously communicated on minus EUR 60 million, and it will be probably in the range of EUR 30 million. And that's all, and we can probably open the session for the Q&A.

Thank you, Sebastien, Habib. Yes, we have several questions. The first one is on the market trends. What are the markets of species on which you observe the most slowdown?

So far -- so the market is slowing down on both sides, very much, versus what it was in 2021. But if we look at the 2 markets, companion animal is still very dynamic or [ still ] dynamic versus the food producing animal market with much flat in the first half. For instance, the food producing animal market is flat. So when you look at the 4%, 5% on the first half, it's mostly driven by companion animal and the food producing being flat.

A question on price increase and price elasticity. Do you consider that the price elasticity of the market has changed? And how much do you estimate your price increases in 2023? And when exactly?

I don't know if the price elasticity has changed so much. This is something a bit difficult to quantify at this stage. What has changed is that when the people were locked down and had no possibility to travel, go on vacation, fly and things like that, they were really focused on their pets and their family. It was getting people closer, and they were much more inclined to spend money to go to the clinic and vet. And they have now so many of the other expenses we normally have. And so it was much easier for them to spend on their dogs. Now, they go on vacation, they travel, they move much more, they go out. And so we see that there is clearly less time to dedicate to the visit of the clinic, and there is probably less money to dedicate on the spending of the dog and cat, especially when we see the impact on the fuel, on the gas and all the things, the energy costs are very expensive, and people today have to make priorities. So I don't know if I will classify this as a price elasticity, as product category in itself. It's just an arbitration. So I think they will still buy, but there is also an impact on the volume. In fact, we see the volume down more than the price so far. But yes, people will have to make arbitration now.

Thank you, Sebastien. We have two questions regarding the new product launch in 2021 and 2022. What are the sales level for those products at the end of the first half?

Yes. So I can take that one. So we can estimate that those new products, acquired last year through iVet acquisition, Clomicalm, Itrafungol, represents around EUR 10 million of sales -- additional sales during that semester.

Thank you, Habib. And what is the global trend in July, August?

So we don't communicate on monthly revenue. Nevertheless, what I can say is that we have done 12%, constant exchange rate, as you've seen. We have announced that we expect 5% to 10%. It means that we expect a slowdown during the second part of the year. I can share that we are seeing that slowdown in July and August. And we can say as well that we're also seeing volatilities over the last few months, which is something quite new, versus the past much more volatility on a month-to-month basis. So as Sebastien shared, we will -- could fine-tune our guidance as we move forward and we have more visibility.

Thank you, Habib. Regarding the safety stock, what explains that you did more safety stock than forecasted in your guidance in July? And have you seen an acceleration in demand this summer or deterioration of the supply chain?

So on the first part, which is the safety stock and the change, the acceleration, it's not necessarily that we have adding even more safety stock. It's more than -- at some point, we expected that we could reduce the safety stock as the situation will normalize, and we don't necessarily see that as we peak, so we might keep those a little bit longer than expected. So we don't have that sort of normalization, more normalization on our safety stock.

Thank you. And coming back on the 2 last years, can you explain why the market has been abnormally strong in the past 2 years? What does return to normal mean? Perhaps for Sebastien this one.

Yes. It's a bit what I have explained. It's -- during the COVID, the people were locked down, their ability to do classical things like traveling, going to restaurants out, were a bit reduced. And so we have seen much more focus on the family members. And you know the pets are now considered as a family member. So we have seen 3 things. We have seen more adoption of family. So we have seen a huge increase of adoption over the last 2 years. We have seen an increase of visits to the vet clinic because people had more time. They were working from homes, they were more exposed to whatever issues the dog or the cat may have and so they were maybe detecting more easily, or having more time, they had the opportunity to go to the vet. And they have more discretionary spending. They could spend a bit more money not going out, not going on vacation, not going to the restaurant. So they spend more. So there are 3 elements, more adoption, more visit and more spending per visit. As explained that last year, the market has grown 10%, which has never been seen before. And what is returning to normal is that people now are not going to the vet as frequently as they did last year. There is also a normal effect. When you have a puppy, when you get a puppy, you normally go 3x to the vet the first year. You go for the vaccination program, you go for the parasiticide, and you go 3x. When it become adults, so one year later, a puppy normally become adult after one year, you go to the vet once a year for the vaccination. So just there for the new puppies, you go from 3 visits per or to one visit player. So all this has induced reduction of number of visits. And for the food producing animal, I think it's flat. So just that there has been a rebound in '21 versus '20 because in '20, again, all the restaurants were closed. We had seen that the people were moving from eating salmon, beef and meat to chicken and eggs at home. And so in 2020, the effect was very negative on the food producing. It had rebounded in 2021. There was also the African Swine Fever on the Swine side in '19 and '20. There has been a rebound in 2021. And what we see in 2022 is flat. It's totally flat versus 2021. So that's a bit more back to the normality. Historically, the animal health market has always been growing between 4% to 5%, if you look at the last 10 years before COVID. And now we see a growth at 3.5% in the second quarter, which is a bit below the historical average, but with the base effect, what we say, it's more or less going back to historical level.

Thank you, Sebastien. Regarding the current economic situation, what are the first impacts of inflation that you have in your accounts, some figures? I don't know if we can share something that's...

I think -- a bit [ with COVID ]. But this year, the first impact we have, I think it's on the Pet Food. For instance, we see on the Pet Food, a very high increase of the raw materials, and we see that very quickly because you cannot have stocks on Pet Food. And my point is to say that in 2022, we are not so much impacted by the inflation. On the [ salary ] level, it was adjusted a bit before the inflation really hit us. And on the raw material and stocks, we normally have safety stocks. We normally have 6 months, overall, of stocks in the system. So between the annual contract and the stocks, we are not heavily impacted in 2022 which, as we explained before, it may not be the case in 2023. So we don't have visibility on the pricing. But what we know is whatever the level are now, will impact us more in 2023. And for instance, the overall dimension that will impact us [ I believe ] the energy because, for instance, for electricity and gas, we see that at the moment, the price are very high, very important, and that will have also an impact in 2023. Maybe you want to comment, [ Habib ].

We have also shared in the past transportation costs, which added several million EUR more because of the cost of container that has grown significantly during at 20 -- the end of 2021 and the beginning of 2022. So this is an example of a strong impact on us, linked to inflation, overall.

A question on the U.S. portfolio. When we are still relaunching our U.S. portfolio? Why did North America adjusted EBIT only go up by EUR 1.3 million?

Yes, we had some pressure on the margin during the period, with some mixed effect during that specific first semester. We had also, to a later extent, some under absorption linked to the ERP implementation, where during several weeks, we are not able to produce at the level we used to produce. So that could have played a role as well. But we are very much focused on the margin for the U.S. and making sure that we continue to improve not only the production margin but also the EBIT adjusted of the U.S. business, leveraging the top line growth.

And two more things, maybe, on that. The inflation hit it more quickly in the U.S. than in France. So we had already some impact of the inflation in 2022. And the second thing to keep in mind, we are entering 2 new markets, pet food and food producing. And when you do that, you have the expenses but you don't really have the sales and not the margin, especially in pet food, because we have -- as I explained in the past, we have very small quantity produced in a third-party manufacturer. So we don't have a significant level of margin we could expect in a few years from now. So the cost of market entry in new segment is also not helping. There is pressure on the margin, and there is a bit OpEx that we need to invest to prepare for the future.

Thank you. Given your strong H1 level of profitability, the H2 assumes a major slowdown in profitability, inflationary pressure that's significant? Or does this reflect some conservatism?

No, it's a good question. It reflects the sort of usual pattern that we have on the dynamic of our expenses between first semester and second semester. And if you look at the historical split of the expenses in 2021, it was heavily the case. We had 19.7% EBIT adjusted first semester, and we ended the year, as you know, at 16.3%. If you look at 2019, which was the first year before the COVID crisis, it was exactly the same pattern. So we have a dynamic with our budget cycle, with the acceleration of investment, where we tend to have more expenses during the second part of the year versus the first part of the year, and we expect the same this year. One additional feature, probably for this year, is the R&D, where we made the decision, as you know, to increase our spending of R&D by one point. And between the decision and the implementation, the rollout, it don't happen like that. It takes time to recruit in order to have your R&D studies running full speed. So that's also an element that explains the dynamic of our profitability.

Thank you, Habib. Let me check the following one. Do you expect more product launches in the second half compared to the first half?

No, we don't expect much more. We have the pattern we communicate once a year now on the new products, and that gives an idea of what we are going to launch. And we have, of course, in 33 countries all over the world, launches all the time, but nothing very significant that deserve to be specified or commented.

Additional question regarding the pipeline. You have not updated your pipeline slide. Why?

Because there is no variation on a 6-month basis that's required to do -- it's a lot of work to fine-tune it for very, very little variation within 6 months. So we decided that it was making much more sense to communicate it once a year. So you can be reassured it will be published in March next year. But we will try to do it once a year because this is a long-term investment, by the way, and we cover 3 years. And so the adjustment over 6 months are very insignificant.

Thank you, Sebastien. Can you share with us the metrics that you keep an eye on to predict future market growth? A good question but the time being...

To predict future market growth. I don't know if we follow KPI. We have a fantastic system in Virbac, which is our competitive intelligence department, where we have a lot of data on a daily basis, on a weekly basis. We have a kind of news letter with all information. And based on that, we have many indicators we read, the number of visiting the vet clinics. We have, in some countries, a report of the number of visits, the spending per visit and criteria like that. So with a sampling of a few countries like U.S., Spain and a few other countries, we have some good KPIs that give us a flavor of that. But to be honest, we feel it on the activity on a monthly basis when we see the sales, when we see the behavior of the distribution, reducing stock or not, we have a good feeling about that. And so that's what we track and follow.

We don't have any crystal ball.

But we know that nothing goes up forever, and nothing goes down forever.

And why is the slowdown more marked on production animals? The inflation of the sector should allow purchasing power to breeders and more consumption.

No, I think that we could explain that. First, on the companion animal, there is still a bit of innovation all the time. So it's driven by innovation. On food producing -- and then you still have the -- the inertia or the dynamic of the adoption thing like this because not all the dogs were adopted on January 1 and not all of them became adult on December 31. So of course, these things have a bit of slowing down over time. So it's an evolving slowing down. On the food producing animal, I think with the [ price ] pressure on [ cereals ], on cost, the lack of liquidity, inflation, the gas -- fuel is very expensive, the fuel in the farm. So all that put a huge pressure on the farms profitability, and they reduce everything they can. So it's a bit normal. We see a flat market. It's even not too bad, has been flat. But even if the [ drugs ] are normally a very tiny proportion of the overall cost, I guess the mindset is to save everywhere they can. So -- but again, the market is not down, and it's flat. So...

And how do you explain your very strong performance over the last 18 months? Did you change anything in your sales process, incentives or channels?

No, we didn't change anything. We have just designed a vision and a strategy like 4 or 5 years ago. And the way to implement it, we are in the pharma business. It takes a lot of time. When we decide to go extend the pet food, to go extend our products, Suprelorin, Stelfonta, by the time you decided and the time you can get the restoration, the setup of manufacturing, the salesforce trend and the commercial force ready to sell and sell the product, it takes a few years. So this can be explained, in my opinion, by the fact that it took us 2 to 3 years to get what we had anticipated to do to be well executed. And for the last 18 months, we see the full execution, we see the full execution of what we tried -- we explained a few years before. It didn't start like 18 months ago. It was started 3 years ago. But the time to ramp up the [indiscernible] took to get it done everywhere as I don't like to say war machine, it's not the appropriate. But as a very efficient system, it took that. So now at the moment, we are executing well everywhere. What we need to do now is to keep adding new products. We need to add top line because we have explained that to increase the bottom line, we were highly sensitive to the top line. So in an inflation world, it will be even more important and more true. And so we know that the increase in R&D that we have decided last year, same thing as what I just said, will take 4, 5 years before yielding results. So whatever we are adding now will induce huge -- huge -- significant results and probably a nice pipeline, but 4 or 5 years from now. And in between, we need to keep adding top line by commercial excellence, either commercial excellence, either acquisition, but whatever we can in the meantime.

Coming back to the inflation, what's the assumption on the wages inflation scenario would you recommend us to add up for 2023?

That's for Habib.

Either for Habib or for Sebastien.

It's really [indiscernible]. A lot of discussion on the topic. I know that it's the same for all companies. It's extremely difficult to anticipate what will be the situation, what will happen. We know it will be higher and probably significantly higher than what we had in 2021 -- in 2022, sorry, but it's really too early to give the figures. We don't have a clue as we speak.

And we don't have the return of budget. Normally, we have a process, which has started already, to have a consolidation of budget bottom up, based by the country. So they have some guidelines, based on inflation. And we are going to see how it consolidates and what it brings back. And based on that, we will have to take some decision, make some arbitration. So it's too early, as Habib explained.

Thank you. On the M&A side, do you see an increase in deal flow and an evolution in multiples? And can we count -- and that's for the first question. I have another one, which is linked to working capital. So let's answer first to the acquisition. Do you see a deal flow and an evolution in multiples for M&A?

There are not too many targets. We are very actively searching, and we don't find assets with sales at the moment. We see pipeline assets, and Dick has purchased one of them. But it's a pipeline. It means high risk, it means a few years from now to have the sales. So it's a valuation. It's a very tricky valuation system. We don't find good assets with current sales that will make sense for us. But what I heard is that the valuations start to reduce, and we have been informed that now the multiples are starting to reduce, but I don't know how much credit I can give to that because we have not realized any [ acquisition ] yet. But it would make sense that all the company with a high level of debt will be under tremendous pressure. So it would make sense that the multiples start to slow down for sure.

Thank you. Habib, can you count on a normalization of the working capital for the second half or 2023?

For the second half, no. And again, that's why we have decided to -- we have adjusted slightly our net debt evolution for the year. And for 2023, it's really, again, still too early to have a view on what will be the situation and how much we will have to preserve our top line by keeping a significant level of stock.

Thank you. Another question regarding the energy cost increase. Can you quantify energy cost as a percentage of sales, electricity, gas?

So what we have shared, just to give an order of magnitude, obviously, the main source of consumption for us is linked to our manufacturing sites all over the world. We have shared that 50% of our production -- internal production is based in France, in Carros. And within Carros, just to give an order of magnitude, it's a couple of million EUR, if we add energy, plus if we add electricity, plus gas. So that's what we -- what it is today. It was less in '20 -- much less in 2021. And these figures are not correlated to the spot price of electricity. As you know, we have some protection in France, based on the type of contract that you have. So what we don't know is what will be the situation next year in 2023. It will depend on the regulation that the French government is going to take as we move forward. So still too early to say if it will remain at that level or if it will move up or if it will significantly move up in 2023. It's still a question mark as we speak.

And [ Europe ], I think -- we can think they will move up, but we don't...

You are right. The magnitude of the moving up.

Will be a few million, depending on how it plays.

We have an interesting comment on the global vet activities. Other global veterinary peers have talked about how vet visits are down because of capacity constraints. Meaning, shortage of vets or even vets not working on weekends as much as last year, not necessarily because the demand isn't there. What are your thoughts on this comment?

It's like always. I mean, everything is true. It depends on what you focus and how you look at it. I think the situation is not homogeneous across the country and across the sectors. So it depends what you are looking for. When there was COVID, the vets were overwhelmed, and they managed to increase the number of visits and increase the ways they were dealing with it. So yes, there is a bit of pressure on capacity, that's true. But I doubt that this is a main explanation why the market will be less strong. I don't see that as being the main reason. This being said, the vets have been going from a period of being totally overwhelmed, had a period of being briefing again and happy at a period. But now they are a bit busy. But I will not put it as they were 2 years ago, one year ago, and so I don't think this is the main reason of the slowing down. But it is true that there is a bit of shortage in certain country -- in certain countries, not everywhere and in certain position.

And are you going to arbitrate or defer expenses to maintain 2022 margin targets?

We are trying to focus on all the expenses that generate short-term gain. We try to cut, again, maybe what may be nice to have. During the COVID, there was so much talk about the new behaviors and the new normal and what we should do differently now that we learn from the COVID. It seems that one year later, everybody forgot about that. So we try to focus on that, to use more of the video conference, to fly less for the planet and for the savings because the flights are extremely expensive. But it's true that after the COVID, the people have needed to meet again, to see each over, to travel. So we try to slow down that a little bit. That's the #1 thing. But we don't compromise anything long term. So in R&D, for instance, we try to spend as much as it makes sense, of course, but as much as we can. So we don't compromise short for long term. But for the rest -- I mean, to make it simple, we dissociate the R&D part. We make like a carve-out of the R&D part versus the operational excellence and the operational daily activity on this. We try to put pressure to stick to what makes sense and what is a must. But on the R&D, it's going to carve out, we spend it if we need it.

Thank you, Sebastien. Given the widespread price increases as [ prices on ] today, what increase could you put in place for 2023?

Price increase, you mean?

Yes.

That's the second question coming back? I say it's a bit too early to say. But basically, we have proven them because -- 2021, we have increased price by 4% to 5% in terms of price variance, and there was no inflation, but we knew the inflation will be coming. So we have been quite disciplined. And by anticipation, we have increased price. That explains why the margin has expanded, why the margin has increased in 2021. In 2022, we're in the middle of the inflation talk of the media, and we are increasing price from 4% to 5%. We have explained that in the presentation, the price variance between 4% to 5%. It means that despite inflation talks, it's difficult to go much further above that. So we are between 4% to 5%, which is good. And if you look that, we do that over 2 or 3 years, we will be over inflation over a period of 3 years. But when you look at the calendar year, year-per-year, it's true that the 4% to 5% in 2022, maybe just enough to offset the increase of cost. And if we repeat that in 2023, because it seems very difficult or unlikely to go over that, even if we could try and that's what we do every day, it will depend on how much we will be hit by energy costs, the inflation. And that is too early to say. So we don't know what the real inflation impact would be in 2023 on salary, on raw materials, on energy and things like that. But that's we will try to compensate, again, by a 4% to 5% price variance. This is what we can deduct from what we have been doing over the last 2 years.

And we have the last question regarding our energy supply contracts are secured until when. Until when are they secured? And did you negotiate these agreements before February 2022?

All the difficult questions.

Now what I can say is that we have the very classical type of contract for electricity, for instance, in France, again, a good portion of our electricity consumption, not the only one because we have a situation in industrial sites in many countries. So in France, we have the [ iron ] contract. We are in this contract for 2023, for instance, which is probably the same for many companies. We have secured our gas contract in France, for instance, it's not a huge amount, but it's very critical for us. And the question is more the availability of gas rather than really, let's say, the impact on price. And for this one, we have a fixed contract up until 2024, for instance. But I mean, the amount for us in Carros is less than EUR 1 million, so it's very small. And then the situation is very different from one country to another. There is not the same price pressure that's going up everywhere, but it's not the same magnitude of ramp-up in other countries. So it's really depending on a country-by-country basis.

But just to complete maybe, in France, we cannot secure totally of 100% energy. So we have secured a part of it, but not the totality. And the part which has not been secured, is the one that may have an impact on us.

Exactly. Yes.

Thank you, Sebastien, Habib. We came to the end of the question, so to the end of this meeting today. On behalf of all the Virbac team, I want to tank you all for your attendance and your loyalty to the Group. And wish you all a good evening. Thank you.

Thank you very much.

Thank you very much. All the best.