Good afternoon, everyone. We are pleased to welcome you all to the Virbac 2022 Half Year Results Webcast. Hosting the call today are Manuela Rodriguez, Head of Investor Relations, and Sandrine Brunel, Head of Corporate Communications for Virbac. We'll be joined by Sébastien 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 investor section of our corporate website, and a replay of the meeting will be available at the conclusion of this meeting. You will be able to pose your questions by using the chat section on the top right-hand corner of the screen, and all the questions will be answered during the question and answer session, or afterwards, if time does not allow to answer them all.
It is now my pleasure to turn the floor to, Sébastien Huron and Habib Ramdani. Habib, you may begin.
Thank you. Hello, everyone. Good morning. Good afternoon. Welcome to this session. We will start as usual by a focus on the financial results. I will share two summary slides to share with you the main features of this financial release. We'll then go into a little bit more details on the top line or the bottom line, and all the other financial elements. I will hand over then to Sébastien, who will cover more of the strategy and execution part of this presentation. Thank you. Let's get started with the summary. As you've seen, we have posted a strong sales growth, organic growth of 12% at constant rate, which has been driven by very solid performance in all of our regions. We'll go into a little bit more details.
This has been done in a 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 the slowdown of the market, which is now visible, and Sébastien will cover that in 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 lead us to EBITDA 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 EBITDA 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. This evolution has been driven by a growth of our sales obviously, which has a positive impact on our profits on the one hand. On the other hand, we have also experienced increase of our cost base, which resulted into a 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 the 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, FX impact. You see that we have recorded a favorable FX impact, adding EUR 23 million of net sales, as well as a favorable impact on our EBITDA, 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 it stand today, we expect to have for the second semester a similar impact in magnitude as the one we have seen on the first semester.
Very briefly, if we look at the evolution of the different currencies to which we are exposed, you see the line variance, FY 2022, FY 2021, which is the evolution of the currencies versus the euro. All of them or the vast majority of them, of the currencies to which we are exposed, have appreciated versus the euro, which triggered the positive impact that I share, with the exception of the Japanese yen 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- EUR 77.6 million, at real rates, essentially, driven by the higher level of sales, the activity.
The only negative impact that we had below the EBITDA 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 resulting 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 close to EUR 20 million. Nonetheless, we have had a decrease of our total positive cash situation by EUR 54 million during the first six 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 need 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. 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 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- EUR 660 million, which is a 12% increase at constant rate.
You see that we have had no change in perimeter during this semester. 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 a EUR 64 million at constant rate, with 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.
It's adding EUR 12 million of sales during the period with nice contribution from our historical brands, and Sébastien will cover that in a little bit more details. A nice 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. 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 insight on Australian performance. Latin America has had also a solid growth, 15%, with very good contribution from our two first countries, Brazil and Mexico in the region. Asia has had a 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.
On the other hand, India, which has performed very well, adding more than EUR 9 million sales on our top line, comparing 2021 first semester with 2022 first semester. A very strong performance in that country. This was the performance by country and by region. We are moving now onto a view 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 pet food leading the way, 28% growth on our pet food 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%-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. Zoletil has had a strong contribution. The other segment with the dental contribution has grown 13% as well. Parasiticides, you see 11.5% during the period, with nice contribution from products such as Milbemax. 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 limitation 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 animals segment. Same picture, green everywhere. We are growing on all the segments with nutritionals leading the way, 19% growth, so a very nice growth with India representing 2/3 of that performance. The parasiticides segment as well, close to 17% growth during the period, with Australian parasiticides having contributed significantly to that. Our vaccines business as well on FPA, you see 7.5% growth with a nice contribution in Latin America.
Some product contributions such as Bovigen Scour in Europe as well. 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, so 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 on material costs is also growing slightly less, 15%, impacted 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%, and moving from EUR 233 million- 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.
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- EUR 117 million. It decreased slightly as a ratio, but you remember that I mentioned we had one-off profits for the two semesters, 2021 and 2022. If we restate for those one-off profits, we are even slightly improving on this EBITDA ratio.
We have no other non-current income and expenses recorded, neither last year during first semester, nor this year during first semester of 2022. 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- 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 profits. I can mention that our effective tax rate has also remained more or less stable at around 28%, when comparing to 2021 same periods.
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. All of the region 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 and to increase the ratio for the full year by 1 point.
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 costs. 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 payments, which have increased with the increase of our net profit. 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, exchange rate impacts, positive.
You see that it's adding close to EUR 5 million more EBITDA 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, and close to 13% growth between the two periods. The net cash flow is growing as well, slightly less at 5%. The difference is essentially linked to the exchange rate 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 -EUR 49.5 million. You see on the cash flow chart, waterfall chart, that it's essentially linked to the working capital requirements evolution that we had during the period, which has consumed EUR 150 million. I will comment that a little bit more. 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 requirements. You see the negative 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 happen at the beginning of the year. We have also the payment of the profit sharing, of the bonus, of several payments like that.
We have a seasonality in the way we are consuming and generating cash, which is obviously very visible when we look at the flow chart like that. That's the first element. The second element is the evolution of our activity, the acceleration of the evolution of our activity, which generates the need for financing our working capital, especially on the inventory dimension. We made 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. Obviously, we want to protect as much as possible our ability to deliver the customer demands. That's the second element. Finally, we have also some one-off elements for this semester.
When we compare to the first semester of 2021, for instance, on factoring, we had a positive impact of factoring last year or negative impact of factoring this year. 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 cutoff impact specifically for this semester. Final comment on that. We expect to have, as I already said, a positive cash generation during the second semester, very similar to what we had the previous year, where our cash-generating pattern is more backloaded at the end of the year. 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 now we are moving from EUR 151 million-EUR 274.5 million of working capital, and 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.
If we look at what 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 safety stock within our manufacturing sites and our commercial site as well. The rest remains more or less the same. Obviously, the nice financial position that we have, especially with the negative net debt, translates into a very positive financial ratio.
We continue to be fully deleveraged with a net debt on operating cash flow, which continues to be negative at the end of June 2022. 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 shares and slightly more than 66% of the voting rights. Thank you. I'm now going to hand over to Sébastien for the strategy execution and some comments on our perspectives.
Thank you very much.
for 2022.
Thank you very much. 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. What is really important is to understand that we have been gaining market share over the last five 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. 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, 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 the conflict in Ukraine and Russia, it has really put a lot of pressure on the energy costs, on inflation, on transportation costs and things like that. We see that there are many challenges. We have been used to that and to manage in this complicated environment. 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. 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 objective in 2018 that have been reached, and now we want to design a new roadmap to take us further.
The team will come up by the end of the year with a final roadmap for the coming three to five years in terms of commitment, engagement, and objectives for the ESG. In Great Place to Work, you know we do a survey every two years. We have started workshops bottom-up involving all the teams across the world in order to improve on the dimensions we can improve, and that is also progressing well. Last but not least, we are investing also in the digital transformation, both in the business side with webshop, market access, home delivery and things like that, but also on the manufacturing system. We have deployed in the US our core model information system, the ERP, this year. In terms of business, the geographies are doing quite well at the end of June.
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 booster 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%. We have been launching new products, so they are not very significant product in terms of sales, but we are adding on the top line. The Tulissin has been launched in the U.S.
You know that Tulissin is a generic of Draxxin. This is a large R&D product from the 1980s, 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. We have launched many of our products like Milpro in China and the wet formula of our pet food in Europe. If we look at the main geographies 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.
We also had a base effect, a very positive base effect in the first half, linked on one side to the Clomicalm and Itrafungol that we didn't have last year. We got them in March, April, and we have had this year for the first six months, Clomicalm and Itrafungol. iVet was purchased in July last year. We have it in the first six months this year. The 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 see.
We have the figures from the clinics, and we see some slowdown. We are also, of course, impacted by the inflation. Australia is one of the best years ever in Australia at the moment. You know, we had many issues with climate linked to the fires and many dry seasons in the past. This year seems to be a very good year for Australia, rebounding a little bit from previous years that have been a bit depressed. This year we grow very strongly with 24%. The team is doing a really good job over there. We are growing on the basis of a strong market. The market is quite favorable, but we have done a very good job in controlling the generic competition on Multimin.
We have launched 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 a 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. Despite expecting a 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 tried to enrich the pipeline.
We need to keep focusing on the profitability of the country, but we are quite confident mid 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 end of the first half, we have been down, and that is mostly linked to the COVID, which had two impacts. You had a first classical impact on the sales force being locked down, on the fact that we had much less activity at the clinic level, much less visits. We were really impacted by the COVID.
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, two new parasiticide product, very early in Q1. These have been delayed in Q2. Now they are launched, but we have not benefited from this launch and the sales force impact like initially planned in January, February, and this has been delayed. 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 mean a strong growth or a good growth of China. It is true that the first half has been slowing us down significantly.
Just to say that now we have hired the 25 reps, so we'll hire 24 more next year. What is really important to understand in China, there are three segments in the companion animal market. One is a 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 two parasiticide, Milpro and Effipro. We expect to add a third one by year-end or next year, Effitix. So we will be a real player in the parasiticide market. We hope to come with vaccine in the coming two-three years. That will complete the range. We expect to launch pet food by late 2023, early 2024.
That is very good for China, because besides the commercial sales force where we invest heavily, we will have a complete range of product on all the segments. That mean 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 a slowdown over there of the activity, but we expect to rebound. What is impacting us much more, it's a conflict between Ukraine and Russia, because this is putting a tremendous pressure on energy costs, inflation. There is some constraint. Indirectly, because we don't have a significant business in Ukraine and Russia, we communicate about that.
It is not impacting us directly because the business is very tiny and small. We are not affected directly, but indirectly 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 to whether there could be some limited energy supply during the wintertime. We expect, we anticipate as much as we can and try to anticipate this risk, but it is also too early to say whether it could materialize or not. 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. It is clear that the time is more challenging than it has been in the past. All these impacts, inflation and all these consequences are very. It's way too early for anticipating an impact in 2023. At this stage, we are not capable to quantify what this impact could be. To sum up all that, we have reaffirmed our guidance for the revenues at between 5%-10%, so it's a bit wide. We may have to fine-tune it in the coming months, depending on how it will perform. So far, we confirm, and we have not moved on that. For the EBITDA, it's around 15%.
We have just adjusted the net debt evolution because as it has been understood, some working capital has increased. We took some decision, and because of that, we had an impact on the net debt reduction. We had previously communicated on -EUR 60 million, and it will be probably in the range of EUR 30 million. That's all, and we can probably open the session for the Q&A.
Thank you, Sébastien. Habib. Yes, we have several questions. The first one is on the market trends. What are the markets or species on which you observe the most slowdown?
So far, the market is slowing down on both sides very much versus what it was in 2021. If we look at the two markets, companion animal is still very dynamic versus the food-producing animal market, with much flatter. In the first half, for instance, the food-producing animal market is flat. When you look at the 4% or 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 then the price elasticity of the market has changed? How much do you estimate your price increases in 2023, and when exactly?
Yeah. 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, anything 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, to vet, and they had not so many of the other expenses they normally have. 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. I don't know if I would classify this as a price elasticity, as per the category itself. It's just an arbitration. 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. Yes, people will have to make arbitration now.
Thank you, Sébastien. 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?
I can take that one. We can estimate that those new product acquired last year through iVet acquisition, Clomicalm, Itrafungol, represent around EUR 10 million of sales, additional sales during that semester.
Thank you, Habib. What is the global trend in July, August?
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%-10%. It means that we expect to slow down during the second part of the year. I can share that we are seeing that slowdown in July and August. We can say as well that we are 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. As Sébastien Huron shared, we 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? Have you seen an acceleration in demand this summer or deterioration of the supply chain?
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 that at some point, we expected that we could reduce those safety stock as the situation will normalize, and we don't necessarily see that as we peak. We might keep those a little bit longer than expected. We don't have that sort of normalization, more normalization on our safety stock.
Thank you. Coming back on the two last years, can you explain why the market has been abnormally strong in the past two years? What does return to normal mean? Perhaps for Sébastien, this one.
Yes, but it's a bit what I've 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. We have seen much more focus on the family member, and you know, the pets are now considered as a family member. We have seen a few things. We have seen more adoption of families, so we have seen a huge increase of adoption over the last two years. We have seen an increase of visits to the vet clinic because people had more time. They were working from home, so they were more exposed to whatever issue the dog or the cat may have.
They were maybe detecting more easily or having more time they had the opportunity to go to the vet. 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. The three elements, more adoption, more visit, and more spending per visit has explained that last year the market has grown 10%, which has never been seen before. 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 get a puppy, you normally go three times to the vet the first year.
You go for the vaccination program, you go for the parasite, and you go three times. When it become adults, one year later, a puppy normally become adult after one year, you go to the vet once a year for the vaccination. Just there, for the new puppies, you go from three visit per year to one visit per year. All this has induced a reduction of the number of visits. For the food-producing animal, I think it's flat. It's just that there has been a rebound in 2021 versus 2020, because in 2020, 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. In 2020, the effect was very negative on the food producing. It has rebounded in 2021.
There was also the African swine fever on the swine side in 2019 and 2020. There has been a rebound in 2021. What we see in 2022 is flat. It's totally flat versus 2021. That's a bit more back to the normality. Historically, the animal health market has always been growing between 4%-5% if you look at the last 10 years before COVID. Now we see a growth at 3.5, 3.5 the second quarter, which is a bit below the historical average, but with a base effect. What we say, it's more or less going back to historical level.
Thank you, Sébastien. Regarding the current economic situation, what are the first impact of inflation that you have in your accounts, some figures? I don't know if we can share something that's.
I think, and Habib will complete, 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. 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. On the raw material and stocks, we normally have safety stocks. We normally have six months overall of stocks in the system. 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.
We don't have visibility on the pricing, but what we know is whatever the level are now will impact us more in 2023. In, for instance, the overall dimension that will impact us heavily is 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.
Maybe just to complete, we have also shared in the past the transportation costs, which added several million EUR more because of the cost of container that has grown significantly during 2020, at the end of 2021 and the beginning of 2022. This is an example of a strong impact on us linked to inflation overall.
Thank you. 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?
We had some pressure on the margin during the period with some mixed effect during that specific first semester. We had also, to a lesser 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. That could have played a role as well. 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.
Two more things maybe on that. The inflation hit it more quickly in the U.S. than in France.
That's right.
We had already some impact of the inflation in 2022. The second thing to keep in mind, we are entering two new markets, pet food and food producing. 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 the significant level of margin we could expect in few years from now. The cost of market entry new segment is also not helping. There is pressure on the margin and there is a bit of CapEx 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. Are inflationary pressures that 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. 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-19 crisis, was exactly the same pattern. 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. 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. 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 a pattern. We communicate once a year now on the new products, and that give an idea of what we are going to launch. We have, of course, in 33 countries all over the world, launches all the time, but nothing very significant that deserves to be specified or commented.
An additional question regarding the pipeline. You have not updated your pipeline slide. Why?
Because there is no variation on a six-month basis that's required to do this. It's a lot of work to fine-tune it for very, very little variation within six months, so we decided that it was making much more sense to communicate once a year. You can be reassured it will be published in March next year. We will try to do it once a year because this is a long-term investment, by the way, and we cover three years, and so the adjustments over six months are very insignificant.
Thank you, Sébastien. Can you share with us the metrics that you keep an eye on to predict future market growth? A good question, but for 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 newsletter with all information. Based on that, we have many indicators we read, the number of visits in the vet clinics. We have in certain countries a report of the number of visits, the spending per visit, and criteria like that. 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.
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. So that's what we track and follow.
We don't have any crystal ball.
We know that nothing goes up forever, and nothing goes down forever neither, so.
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 inertia or the dynamic of the adoption, things like this, because not all the dogs were adopted on January first, and not all of them became adult on December 31st. Of course, these things have a bit of slowing down over time. 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 or the fuel is very expensive, the fuel in the farm.
All that put a huge pressure on the farms' profitability, and they reduce everything they can. It's a bit normal. We see a flat market. It's even not too bad as being flat. Even if the drugs are normally a very tiny proportion of the overall cost, I guess the mindset is to save everywhere they can. Voilà. Again, the market is not down, it's flat.
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 four or five years ago, and the way to implement it, we are in the pharma business. It takes a lot of time. When we decide to geo-extend the pet food, to geo-extend our products, Suprelorin, Stelfonta, by the time you decide it and the time you can get the registration, the setup of manufacturing, the sales force trained and the commercial force ready to sell and sell the product, it takes a few years. This can be explained, in my opinion, by the fact that it took us two to three years to get what we had anticipated to do to be well executed. For the last 18 months, we see the full execution, we see the full execution of what we tried, we explained three years before.
It didn't start, like, 18 months ago, it was starting three years ago. The time to ramp up the inertia it took to get it done everywhere as a I don't like to say war machine, it's not appropriate, but as a very efficient system, it took that. 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. In an inflation world, it would be even more important and more true. We know that the increase in R&D that we have decided last year, same thing as what I just said, will take four or five years before yielding results.
Whatever we are adding now will induce huge significant results and probably a nice pipeline, but four or five years from now. 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 adopt for 2023?
That's for Habib.
You choose.
No, it's
Either for Habib or for Sébastien.
It's really too early.
We discussed it a lot. We have discussed it a lot.
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 2022, sorry. It's really too early to give figures. We don't have a clue as we speak.
We don't have the return on our budget. Normally, we have a process which has started already to have a consolidation of budget bottom up based by the country. We have some guidelines based on inflation, and we are going to see how it consolidates and what it brings back. Based on that, we will have to take some decision, make some arbitration. 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? That's for the first question. I have another one which is linked to working capital. Let's answer first to the acquisition. Do you see a deal flow and an evolution in multiples for M&A?
Well, 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 Dechra has purchased one of them. It's a pipeline. It means high risk. It means a few years from now to have the sales. 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. 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.
It would make sense that all the company with a high level of debt will be under tremendous pressure. It could 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 of 2023?
For the second half, no. Again, that's why we have adjusted slightly our net debt evolution for the year. For 2023, it's really again still too early to have a view on what will be the situation and how much we'll 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?
What we have shared just to give an order of magnitude, obviously the main source of consumption for us is linked to our manufacturing site all over the world. We have shared that 50% of our production, internal production is based in France, in Carros. Within Carros, just to give an order of magnitude, it's a couple of million euros if we add energy plus electricity plus gas. That's what it is today. It was less, much less in 2021. This figure is 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.
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. 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.
Move up, I think we can think it will move up, but we don't know.
You're right. The magnitude of the moving up, you're right.
It could be a few million euros, depending on how it plays.
Yeah.
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 a COVID, the vets were overwhelmed, and they managed to increase the number of visit and increase the way we are dealing with it. Yes, there is a bit of pressure on capacity, that's true, but I doubt that this is the 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, to a period of being breathing again and happy, to a period where now they are a bit busy. I will not put it as they were two years ago, one year ago, and so I don't think this is the main reason of the slowing down. It is true that there is a bit of shortage in certain countries, not everywhere, and in certain positions.
Are you going to reallocate 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 or, you know, 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 learned from the COVID. It seems that one year later, everybody forgot about that. 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. It's true that after the COVID, the people have needed to meet again, to see each other, to travel. We try to slow down that a little bit. That's the number one thing. We don't compromise anything long term.
Yeah.
In R&D, for instance, we try to spend as much as it makes sense, of course, but as much as we can. We don't compromise short or long term. 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 operation excellence and the operation daily activity. On these, we try to put pressure to stick to what makes sense and what is a must. On the R&D, it's kind of carve-out. We spend it if we need it.
Thank you, Sébastien. Given the widespread price increases that are surprising no one today, what increase could you put in place for 2023?
Price increase, you mean?
Yeah.
That's the second question coming back.
Yes.
We say it's a bit too early to say.
Yeah.
Basically we have proven, and because 2021 we have increased price by 4%-5% in term of price variance, and there was no inflation. We knew the inflation would be coming, so we have been quite disciplined, and by anticipation, we have increased price. That explain 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%-5%. We have explained that in the presentation, the price variance between 4%-5%. It means that despite inflation talks, it's difficult to go much further above that. We are between 4%-5%, which is good.
If you look at that we do that over two or three years, we will be over inflation over a period of three years. When you look at the calendar year per year, it's true that the 4%-5% in 2022 may be just enough to offset the increase of cost. If we repeat that in 2023, because it seems very difficult or unlikely to go above 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 the energy cost, the inflation, everything. That is too early to say. We don't know what the real inflation impact will be in 2023 on salary, on raw materials, on energy and things like that.
That's, we will try to compensate again by a 4%-5% price variance. This is what we can deduct from what we have been doing over the last two years.
We have a last question regarding our energy supply contracts. Are they secure until when? Until when are they secure? Did you negotiate these agreements before February 2022?
Only the difficult question at the end.
Yeah. No, 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. In France, we have the ARENH 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. The question is more the availability of gas rather than really, let's say, the impact on price. For this one, we have a fixed contract up until 2024, for instance.
I mean, the amount for us in Carros is less than EUR 1 million, so it's very small. The situation is very different from one country to another. There is not the same price pressure. It's going up everywhere, but it's not the same magnitude of ramp up in other countries, so it really depending on a country-by-country basis.
Just to complete, Habib, in France, we cannot secure the total. It's a 100% energy. We have secured a part of it, but not the totality. The part which has not been secured is the one that may have an impact on us.
Exactly.
Yeah.
Thank you, Sébastien and Habib. We came to the end of the questions, and to the end of this meeting today. On behalf of all the Virbac team, I wanted to thank 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.