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Edited Transcript of VIRP.PA earnings conference call or presentation 17-Sep-19 12:15pm GMT

Half Year 2019 Virbac SA Earnings Call

Carros Sep 22, 2019 (Thomson StreetEvents) -- Edited Transcript of Virbac SA earnings conference call or presentation Tuesday, September 17, 2019 at 12:15:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Habib Ramdani

Virbac SA - CFO & Member of Executive Board

* Manuela Rodríguez;Investor Relations

* Sandrine Brunel

Virbac SA - Head of Corporate Communications

* Sébastien Huron

Virbac SA - Chairman of the Executive Board

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Presentation

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Manuela Rodríguez;Investor Relations, [1]

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Welcome to the 2019 half year financial results [audiovisual] webcast for Virbac. Hosting the call today is Manuela Rodríguez, Investor Relations for Virbac; and Sandrine Brunel, Head of Corporate Communication.

The presentation materials and additional financial tables are currently posted on the virbac.com website in the section Investors. The presentation slides will be forwarded automatically. In addition, a replay of this call will be available after the conclusion of this webcast at the Investors section of the corporate virbac.com website, Analysts and Investors Presentations.

The forum will be open for your questions 5 minutes before the end of the presentation. If you would like to ask a question at that time, please write it through the chat box on the right-hand of the screen and introduce yourself when writing your questions. (Operator Instructions)

It is now my pleasure to turn the [floor] over to Sébastien Huron, Chairman of the Executive Board of the Virbac Group; and Habib Ramdani, Chief Financial Officer and Member of the Executive Board.

Habib, you may begin.

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Habib Ramdani, Virbac SA - CFO & Member of Executive Board [2]

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Thank you, Manuela. Good morning, good afternoon to all of you. We will start this presentation with a summary of the results before going into more details, and I will then hand over to Sébastien to cover more the strategic and perspectives for the year.

So first of all, we have posted another semester of solid organic growth at constant rate with an increase of 6.6%. As we will see in the next slides, this solid growth has been driven by all of our areas where we are operating. We're also very pleased with the margin which increased by a double-digit figure at the end of the first semester 2019.

The U.S. is showing a 21% growth at constant rate, which is around 7%, excluding the 2018 base effect linked to stock decrease at distributor level that we observed last year. We had, however, different dynamics among our portfolio, and Sébastien will cover these later on in the presentation.

The EBITA, which is the current operating income before depreciation of assets from acquisition, is improving significantly versus 2018 by a solid EUR 22 million or close to 50% growth, leading to a 14.4% EBITA ratio. It can be noted that all regions contributed to this improvement, including the U.S. with the base effect, as well as Chile.

We also benefited from a few one-off positive contributions, and I will come back to them later on, as well as some favorable timing of expenses in H1 versus the second semester, especially within R&D.

Finally and contrary to last year, we benefit from a favorable ForEx impact on sales, which is neutral on EBITA due to the structure of our cost base.

If we move now to one slide that is presenting the evolution of the exchange rate in the countries where we are operating, I won't spend too much time on that. The only message is that we have, for this semester, a much more usual pattern this year than the one that we observed last year. If you remember, last year, all of the currencies depreciated versus the euro, so we had only negative figures and a very strong impact, both on the top line and the bottom line. We are seeing on this semester a much more balanced situation with currencies appreciated and some other depreciated. And the impact, as we've seen, is limited to EUR 5 million on sales and quite neutral again on the bottom line.

So if we move now to the rest of the profit and loss, and first, on the net profit. So the net profit is improving significantly from 2018. It amounts to EUR 28.4 million driven obviously by the operational improvement, on one hand, and the element that we commented on the previous slide, as well as 3 complementary elements lower on the P&L, 2 positives and 1 negative.

The first one, which is a positive element, is a one-off. We have recorded some one-off profit this semester with the most significant being the changes in the pension scheme of the members of the Executive Board. We generated a noncash profit of EUR 3.2 million.

Another one is related to the sale of the U.S. headquarter that we've done during the first semester. We had indeed our headquarter that was no longer adapted to our needs, and we decided to sell it and to relocate the team in another facility that we are going to lease, and this will take place during the second semester.

In addition, we had also an improvement on the net financial expenses essentially linked to a favorable exchange rate impact on CLP, which is the Chilean currency, versus the U.S. dollar, whereas it was very negative last year.

And finally, we have also recorded EUR 7.2 million of nonrecurring expenses essentially linked to a further impairment of our CaniLeish assets, which is, to be precise, slightly more than EUR 9 million of pretax impact and EUR 7.2 million of post-tax impact.

On the debt front, we have seen a slight decrease by EUR 4.6 million at constant rate and scope, which is a good achievement as we know that we are usually, given the seasonality of our cash creation, [decreasing] the debt mostly during the second part of the year. Especially, the debt has increased, however, by EUR 29.4 million, but this is essentially linked to the impact of IFRS 16 to which we'll come later on.

Finally, the group continues its journey to deleverage with a ratio of net debt-to-EBITDA at 3.00, which is well below the limit of our covenant, which was 4.25 that we had to respect at the end of June 2019.

So we will now cover a couple of slides that will describe the evolution of the net sales. So let's have a look now at the global picture. So we recorded EUR 463.7 million of sales, which is an increase of 7.9% compared to 2018. At constant exchange rates, the growth is 6.6%.

Between H1 2018 and H1 2019, we have, thus, added around EUR 28 million of sales, again at constant exchange rates; EUR 4 million coming from Europe, which is having a solid 2.4% growth, with a good growth in many countries such as Spain after a difficult 2018 year, Germany, Benelux, Poland and Scandinavia, all of them driven by the good performance of the companion animal business. While it was more difficult in a couple of countries, including France, which has been impacted by some weather conditions on some of our product portfolio, as well as Italy due to a new antibiotic regulation which is electronic prescription, which had, as a consequence, a lower consumption of antibiotics in volume which affected some of our products.

If we move to the rest of the world, EUR 12 million coming from the U.S., and Sébastien is going to comment on that later on, and also EUR 12 million coming from all the other countries, as we will see on the next slides.

So I won't come back on Europe, and Sébastien is going to comment North America later on in the presentation. So if we look at the 3 other regions, we had first a strong growth in Latin America with a growth that is slightly above 9% driven by Brazilian -- Brazil and Mexico in the animal production segment and fueled also this semester by a good rebound in our aquaculture business in Chile, especially within vaccines and [on the] parasiticides after a difficult 2018 year, as you remember.

Africa/Middle East is growing 6.5% driven essentially by South Africa, which benefit from the launches of new product in 2018. And Asia Pacific is also growing around 6% with Asia growing 9%, having a very strong growth, with strong performance in countries like China, Japan and Taiwan. The situation in India, that is more difficult with a lower growth compared to what we had in the past and essentially linked to a severe drought that India had in the northern region of the country as well as [lowering] price. And finally, Pacific is a slightly eroding overall, essentially explained by the situation in New Zealand having lower sales in '19 versus 2018 and suffering from the stop of one of our in-licensing contracts in that country.

So I suggest we move now to the sales growth by segment starting with companion animals. We can observe, you see, a solid growth in most of the segment, including parasiticides benefiting from the Sentinel growth, a continued double-digit performance of our petfood range as well as our dermatology business. The specialty products are also growing close to 7% during this semester. The only segment that is not growing is the vaccine segment, that remained stable over the period after a strong rebound in 2018.

If we look now at the sales growth within the food producing animals, we have all segments growing except the antibiotics for bovine, swine and poultry, which is showing a 10% decrease during the semester. Three main elements explain this sharp decrease, out of which one is regulatory related. So first, we suffer from a negative market dynamic in France, as I mentioned earlier on, which impacted the overall usage of antibiotics at the market level, and we suffered at the same rate as the market.

Second, we've also had, and I already mentioned it, some changes of regulation in Southern Europe, especially Spain last year and also on Italy this year related to the electronic prescription, which has an impact on the volume of antibiotics being used during this period. And finally, we had also a reduction in New Zealand but linked to the stop of the in-licensing agreement, which I mentioned on the previous slide.

It is also important to note that overall, antibiotics represent now only 7% of our revenue, so our level of exposure to antibiotic has significantly reduced over the past years. All the other segments are growing with, as you can see, vaccines, which is at the core of our strategy, growing double-digit growth; and aquaculture posting also double-digit growth, thanks to the very solid performance in Chile.

If we move now to the sales breakdown by region and business, there is not much to be mentioned. The situation has not materially changed versus last year. Maybe the only point is North America. The weight of North America continues to grow and is now close to 16% at group level.

Before moving to the presentation of the profit and loss statement and the main elements affecting the P&L, I wanted to spend a couple of minutes on the impact of IFRS 16. So we have implemented the new IFRS 16 standard as of 1st of January 2019. And as you can see on the slide, the impact on the balance sheet is around EUR 31 million, and the impact on the income statement is the following: the leasing charges are decreasing by EUR 5.7 million, but at the same time, the amortization charges are increasing by EUR 5.2 million. And we are also adding EUR 0.7 million of interests on leasing obligation.

So it's worth to mention that the income statement impact is only for 0.5 year, whereas obviously the balance sheet impact relates to the overall debt that we have. On a full year basis, we expect the income statement impact to be closer to EUR 10 million, and you can see EUR 10 million of P&L impact on EBITDA as well as EUR 30 million on debt. The ratio is around 3, so we don't expect a material impact on our debt net (sic) [net debt] on EBITDA ratio following the implementation of this new IFRS 16 standard.

So if we look now on the profit and loss statement at real rates. I won't come back to the net sales, again, growing 6.6%, the gross margin growing double digits. You can see on the next 2 lines, net expenses are decreasing and amortization are increasing significantly. We have here the impact of IFRS 16 for which we have some lease expenses that are no longer part of the net expenses line and replaced by higher amortization, which explained why the amortization is increasing that much during the period.

Outside of that and besides also the one-off positive elements that we had an impact in 2019, you can see that we continue to be engaged into a cost control -- significant cost control, which enabled us to improve our operating profit before depreciation of assets arising from acquisitions, which is moving from EUR 45 million to EUR 67 million.

If we look at the noncurrent income and expenses, you see that we have EUR 9.4 million of expenses in 2019. This is impairment of CaniLeish, whereas last year, we had a restructuring expenses recorded on that line. The net financial expenses is moving from EUR 12 million to EUR 8.7 million. We have a stable cost of our debt over the period. So this decrease is essentially explained by the positive exchange rate impact that we have on the CLP versus the USD, whereas we had observed a negative impact last year.

Finally, on the income tax expense, 2 elements to be mentioned. First, the effective tax rate, which is very stable at around 32% between '18 and '19. The only one difference that we had between the 2 years is related to the deferred tax. You probably remember that we are -- we were, in 2018, in the loss situation in the U.S. But given the application of the IFRS standard, we're not able to recognize that deferred tax asset which we depreciated. Whereas this year, the -- we are very close to 0, so the loss is extremely limited. And the deferred tax asset that has not been recognized in our P&L statement is around $100,000, so very insignificant. So the tax rate that we see here is very close and very similar to our effective tax rate at 32%, whereas we had a disconnect given what I just mentioned into -- linked to the U.S. last year in 2018.

So finally, when we put all of that together, we are seeing a significant improvement of our net result, again moving from EUR 13 million to around EUR 28 million in 2019.

So let's move now to the distribution of the evolution of the operating result before amortization of assets resulting from acquisitions, so which is the EUR 45 million which moved to EUR 67 million. So first, all regions, as I already mentioned, are contributing to the increase of the EBITA. With no surprise, the U.S. is driving half of the growth with the positive base affect relating to 2018. Europe is contributing EUR 2 million, and the rest of the world around EUR 10 million as well, which is a very solid contribution.

It is to be reminded that we are also benefiting this year from the 2 one-off already mentioned of slightly less than EUR 5 million. And as you can see, finally, R&D expenses are slightly increasing versus last year during the first semester. But it's worth to mention that we are expecting an acceleration of the spending during the second part of the year on our R&D expenses.

Finally, exchange rate is -- we have a neutral impact on the EBITA linked to the evolution of the exchange rate this year, which was not the case last year.

So the next slide is a zoom on the contribution to the EBITA growth of the U.S. operations and what is driving that increase of EBITA. So you remember that last year was slightly above 0 at EUR 4 million during the first semester, whereas we are seeing a significant growth moving from EUR 4 million to EUR 17 million this semester. A good portion of the growth is on the margin improvement, which is linked to the sales improvement that we had during the first semester. We had some one-off, the building sale that I mentioned, for EUR 1.2 million. We also (inaudible) that we continued to have cost control of our OpEx, and you see that our OpEx are increasing this semester. A good portion of the growth is on the margin improvement which is linked to the sales improvement.

If we move to the next slide, which is the evolution of cash flow, both our operating cash flow and our net cash flow are increasing, respectively, by 40% and 85%, so a very solid growth. The operating cash flow is benefiting from the operational improvements, obviously, that we have discussed, as well as the impact of IFRS 16, which is adding around EUR 4 million of [EBITDA] to the group. The net cash flow is benefiting, in addition to everything that I just mentioned, from the exchange rate impact on the CLP, which explains why it increases more in percentage than the operating cash flow.

If we look now at the free cash flow creation during the first semester comparing 2018 and 2019. So the good news is that the net free cash flow is positive in 2019, whereas you can see on the slide, it was significantly negative last year. The main explanation for this improvement relates to the net cash flow, which is sort of doubling between last year, again moving from EUR 33 million to EUR 61 million.

The CapEx is slightly lower this year essentially due to a timing effect. We expect more investment during the second part of the year. Also, we will finish the year below the EUR 40 million normative level of investments.

The working capital is negative this year, but similar to last year in terms of order of magnitude and it's essentially linked to the seasonality of our working capital. So it's a very usual pattern that we are observing here and that we have every semester. We can mention as well that the factoring program has been more or less stable at EUR 40 million, slightly increasing during this semester versus last semester.

So overall, if we look at the evolution of our net debt, again, the main impact that we see is the application of IFRS 16, which [add] around EUR 29 million of net debt. A part of that, so at constant scope, the net debt has been more or less stable during the first semester, which is again a good news as we are usually creating cash during the second part of the year.

Another element is the exchange rate, which was important last year. It's been less significant this year on our debt. The exposure that we have is essentially the exposure of the U.S. dollar given the fact that we have a portion of our debt that is in dollar.

I will move quickly to the balance sheet analysis, just to mention that we have only 2 main elements that explain the changes between '18 and '19, a part of the usual variation that we observe. The first one again is IFRS 16, and the second one is the increase of our working capital linked to the seasonality of our activity.

If we look at the financing and debt situation, we have respected the obligation vis-à-vis our bank to -- on our net debt on EBITDA ratio. It was supposed to be below 4.25, and we are 3.0. That's the first point. These obligation for 2019 are the one that were initially negotiated with our banks at the time when we established the RCF back in 2015, so we are back in the original conditions of our contracts. Together with that, we're also having a cost of financing that is decreasing linked to that. And finally, we can also mention that we continue to have a sufficient level of financing available to cover our liquidity needs.

Nothing specific to mention at the financial ratios. I already mentioned and commented on the net debt on EBITDA. You can see here the dynamic over the past 3 semesters or so. All of the indicators are in green, and all of those ratios are really moving in the right direction.

And finally, a comment on the shareholding structure, which is very stable. Nothing has materially changed. The family continue to have more than 60% of the voting rights and close to 50% of the shares.

Thank you, and I'm handing over to Sébastien.

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Sébastien Huron, Virbac SA - Chairman of the Executive Board [3]

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Thank you very much, Habib. So let's talk about the strategy execution and the perspectives. After 7 quarters of consecutive growth at constant rate and as we are frequently asked the question about when we'll start to do acquisition again, and I remind that historically, it's the second growth engine of Virbac contributing -- around half of its historical growth rate was linked to acquisition. We thought that it was a moment to step back and to talk a little bit about the overall market and the positioning of Virbac in -- versus its competitor in this overall market.

So if we look at this -- at the evolution of the animal health market from 2007 to 2018, we see that there have been many, many changes. And the point I wanted to make is many times we are being asked about the ability to go back down the path of acquisition. And as our results are now in line with our expectation and as we have significantly started to deleverage the company, we thought it was interesting to look at the competitive environment and to share some element of context and strategy with you.

The first objective of a company, and we tend to forget it, is to survive and to survive in the long term. Then of course, it is to create and develop value for its clients, shareholders and the employees. But this means a right balance between focus and diversity, and Virbac has proven for more than 50 years now to be able to adapt, develop and has shown a great level of resilience over the last 3 to 4 years. We have managed to survive what happened to us in 2015 [and went simultaneously] to our biggest-ever acquisition, we raised a $410 million of debt to acquire the Sentinel. We had to stop the manufacturing in our U.S. factory, which was one of our main factory for the group in the world's largest market. And despite that, we see that over the last 12 years, 6 companies in the top 10 in 2007 had disappeared, and Virbac will likely pass from the ninth largest to the sixth largest animal health company in the world.

So as it is written in our core values published everywhere, written on the walls of Virbac, at Virbac, we choose sustainability. And what does it mean? It is really a complete mindset, a mindset starting by caring about our people where we develop what we call a warm and caring attitude; caring about the environment, trying to reduce our impact on it; and being very selective when we do acquisition; and always putting quality first. It is a real mindset all across the company and that it's also because of this mindset of sustainability and the fact that we are focused on the long term that we are so eager to reach as quickly as possible and in a sustainable way a profitability target of 15% first, then 20% as we know that this is a guarantee of durability, a guarantee for the long-term success, independence and the best way to preserve our identity and our culture.

We talk about resilience. We talk about resilience and sustainability and the right balance between focus and diversity. You see here a slide that shows what the animal health market is, the core animal health market, around $35 billion. And you see the complementary market estimated also around $30 billion, all around, and then what we call adjacent.

What I always try to explain that Virbac is not a pure pharmaceutical company but more a veterinarian company. So what is the difference? A pharmaceutical company, as it is the case for most of our competitor, will focus on its pharmaceutical and biological product, but we have always been focusing on our customers and their needs and, in particular, on the veterinarians trying to serve their needs in the best possible way. And for instance, a veterinarian in companion animal do not sell only pharmaceutical product but sell also petfood and diagnostic.

And of course, when we enter new segments like the petfood and the diagnostic, we only do it if it makes sense for us. So to that purpose, we have always -- we evaluate each new business opportunity under the light of 3 condition that we apply very strictly. The first one is before entering a new market, we make sure to verify that we will be capable to obtain a long-term competitive advantage, a sustainable, long-term competitive advantage.

The second element we check and we verify before we enter a new segment is whether this new segment will be very profitable, and I mean by that, in particular, in terms of ROCE, return on capital employed. And this is, for instance, the case in petfood where the level of CapEx is much lower than we have in the classical pharma business. And we see, despite slightly lesser margin on the product level, we see a higher ROCE in percentage or return of capital employed due to the fact that there is lowest capital requirement.

The third dimension or the third element or condition that we look at to decide to enter a new segment is whether there will be synergies or strong synergies with our core and current existing business. And as an example, after the cost of goods, because in petfood, for instance, we have no synergy in R&D and manufacturing between the petfood and the pharmaceutical or biological product, the first level of expenses in our P&L is our commercial expenses. And when we sell petfood, we mainly utilize our sales force, our commercial sales force to reach our same customer through the same channels. And this allows us to leverage this line of our P&L, which is a significant part of our OpEx.

The same with diagnostic. Even if there, we have to recognize that on this segment, our current competitive advantage, which is positioning our diagnostic as a low-cost offer versus the main leader, is still fragile at this stage. We have not been able to invest heavily in this category over the last 4 years because of our financial situation. And we have not been able to leverage as much as we would have liked to do the miniaturized technology and the fact that you have an evolution from the labs to the point of care in diagnostic. But we are still growing double digit, and we are still trading value in this segment and we still have plan to expand. Currently, we are present mostly in Europe, and we have planned, for instance, to enter with this category in the U.S.A.

So you see that Virbac is also playing not only in the animal health core business but also in these 2 categories. And to the opposite of some other competitor, we have acquired business either to catch up or to fill this gap. We, at Virbac, have decided to grow organically in this market, trying to create and build value over time. So for sure, it takes more time to do, but we also believe that we can adapt to the need of the market with this approach.

Our diagnostic business, as I mentioned, is still small but growing double digit. But on the petfood, we are growing very fast over the last few years. We are now reaching close to the EUR 50 million mark this year. And despite the fact that we had to postpone our entry in China this year due to the African swine fever crisis, which has affected our decision to launch in China because of the sourcing of pork meat in the petfood and for buyer then trading to the importation of petfood containing pork meat from a country exposed to the African swine fever.

The other slide we have looked at is when we look at the evolution, the market evolution over the last 10 years, we know that our main competitor had been very active on the field of acquisition. Virbac was the opposite, has always been very selective. And we have 2 phases, if you wish. From 2009 to 2015, we have done only 2 major acquisitions: Centrovet, entering the field of aquaculture, which was a strategic decision; and Sentinel to build critical mass and again a scale effect in the U.S.A., which is the largest animal health market in the world.

And since 2015, the second phase, it is a phase where we have not done any acquisition, of course. We have been only focusing on deleveraging the company as quickly as possible when all our main competitor were using this second motor of growth to boost their organic growth and improve their financial ratios. Now from now on, we will be able to look again. But still, we will do that very selectively at small acquisition, either to leverage our position in key countries to have a scale and synergy, to speed up the development in some of our country where we have already a strong base or to enter new segments to develop new capability or technology.

I just presented -- when we talk about entering new markets or totally new segments, we normally prefer the JV, the joint venture options to the full-blown acquisition as it is a good way to secure during the transition phase knowledge, relationships and competency within the newly formed company. But if we look at the acquisition as of the end of last year, at the end of 2018, compared to the main competition, so you have a larger competitor than us represented by the slide competitor 1 and 2 where you see the sales larger than the Virbac represented with 2 plus and smaller competitor on the right side.

We look at the position at the end of last year, we can see the following things. First, on the positive side, Virbac has a very well-positioned portfolio overall. Number one, we have 58% of our revenues coming from companion animal, which is the highest percentage of the market, in line with what we have internally projected to the market to be in 2030. We expect the companion animal market to grow faster than the average market. And we know it is a market offering higher margin and higher profitability on average than the food producing market. So this -- the fact to be structurally positioned with a 60% or 58%, 42% [overweight] in companion animal is a very positive point.

The second positive point is that we are among the lowest percentage on antibiotics in our portfolio. Only 17% of our sales are coming from antibiotics, which does not expose us too much, especially because among this 17%, a significant part is in companion animal, which are not very exposed at all; and the other part is in aquaculture, which is currently quite exposed or well exposed, but it is a business with a very low margin for us. So if we were to see the sales decreasing, it will not impact the bottom line significantly; to the opposite, it will probably help us improve our financial ratio.

On the opportunity side, we see, as we previously explained, that we have still a rather weak position in biological in vaccines and that we know we need to develop and reinforce. This is not something new or surprising as we are not present in the U.S. with companion animal vaccines and we have not been, so far, very active on the pigs and poultry side, which are 2 segments made at more than 60% of vaccines. But we have just recently decided to enter the swine market and with the launch of the PCV2 vaccine which is a circovirus vaccine type 2 in Asia. We just got the launch in Taiwan last year and we have informed about the geo extension of this product in Asia. We should see this situation improving. And also, in Europe, where we have recently -- we had in the past not any food producing animal vaccine, but we have changed that 24 months ago with the launch of a cattle vaccine which is quite successful.

On the opportunity side, we see the U.S. as well. As I've stated, there is also not something new and it's not a surprise neither after our industrial issue in 2015. But we have a relatively low market share position in the U.S. and we intend to change that with the 3 main axis of development we have explained before: number one, gaining market share with our current product; number two, launching new products, and we have some new product coming in the coming month; and entering 2 new segments midterm, the petfood and the food producing animal market. This is also an opportunity to develop and improve our ratio as our net margin and [EBITA] ratio in the U.S. should be higher or much higher than the group average in the end.

Finally, last but not least, this is also something we explained in the past, we need to have more important product. And we are focusing in trying to develop bigger brands and bigger product, at least above EUR 20 million. But if we look at the blockbuster category, which is in the animal health market, you find there's product above EUR 100 million. And we at Virbac try to consider the category starting above EUR 50 million. We have none of this product. We have no blockbuster product. And so we want to develop more of these as we have explained before. But this is, for instance, the difference between the large player who have some or many of them and the smaller player who have not any of them. Of course, that has an impact on complexity reduction and profitability increase.

So if you look now at the main 2019 half year achievement. So in brief, first, we gained market share. We have delivered a growth above market rate -- significantly above market rate, 6.6% at constant rate, 7.9% at real rate with a sustainable growth in the U.S.

The EBITA comes at 14.4% with improving profit double digit. Of course, there is around 1 point of exceptional element in this. But a large part of the growth has come also from the volume and the margin increase and the cost control. The debt reduction is of EUR 61 million if we compare June 2016 (sic) [2018] and June 2019. So to avoid seasonality effect, we see a EUR 61 million debt reduction between June '18 to June '19, excluding the IFRS 16 impact. And of course, the financial covenant have been respected and the net debt on EBITDA ratio has been significantly improved at 3.0.

If we look a bit more at the long-term competitivity initiative, we mentioned to you that we will keep trying to improve our competitivity overall and the first thing we were focusing on was the manufacturing site. So we had a complete review of our manufacturing sites. And we have started to execute many action plans in France and in the U.S.A. which are our 2 largest manufacturing sites. And we are trying to gain in efficiency in the different operations of the manufacturing site using benchmark of the competition to also identify area of improvement and where we can make savings and gain in productivity.

We also mentioned the need for us to increase the volumes of production in the St. Louis plant. And we explained that we wanted to do that trying to avoid additional CapEx and complexity. And one way to do it was to sign a private label agreement where we have managed to sign a deal in the first semester that will supposedly add volume to the plant without adding any complexity. And that will keep helping on the [leverage] effect of increasing the capacity in the plant. That's on the manufacturing site.

On the long-term view, it's China. You remember that among the strategy, we say that we wanted to reinforce the position of Virbac in the top 3 market in the world: U.S., China, Brazil. In China, we had a small or rather weak position. We were quite well-established in companion animal but not in any other species. And we have started 2 years ago to outline what we call a think very big plan, which is a plan with multiple initiative, investigation and search of developing the business either through accelerating some R&D program, either through adding more people for registration and speed up the registration of new products, geo extension and also searching for partnerships in different areas. So we are for some advance. For others, it's very preliminary still, but we are accelerating our plan of development in China. And we saw, by the way, that the first semester was quite good with double-digit growth. I will come back to it later.

In the first semester, we have also been quite efficient in launching new product. We have managed to launch more than 10 new products in the first semester, among which certain were coming from R&D are on innovation, but some were also business development agreement and new product we signed with third-party partners. You have a list of some of them which we should see a full year effect -- a full year effect next year and an effect on the full semester in the second semester.

We are also accelerating the digital transformation of the company. We changed our digital workplace to increase collaboration, productivity of our team, of our people. In China, we launched a flagship store on Tmall. In fact, it was launched in August so it was not exactly on the first semester, but it's operating now. And we have launched more web shop which is a very interesting initiative in Japan, Germany, Italy and Poland where we sell, for instance, petfood directly to the pet owner with a relationship with the veterinarian, so it's a 3-party, if you wish. And that allows home delivery and with that, increased loyalty and more sustainable sales over time because we know that when we sell only to veterinarians, people tend to purchase once and not come back. But when you have a home delivery system and a platform, it increase the loyalty and the repurchase over time.

And last but not least, we're also accelerating the ongoing digitalization of internal processes, whether it's HRIS system and other type of internal processes that we try to improve, streamline, simplify with, again, the willingness to simplify as much as we can and streamline everything which is not a must to improve on productivity and gain in efficiency.

I mentioned the mindset of the company with regard to sustainability and long-term performance. One of the key element for us, we are convinced, is our people. We see that our people is the main asset of Virbac. And so we have last year implemented an opinion survey which is called a Great Place to Work. And we are currently implementing many workshops with the people in order to shape, build the company of tomorrow in term of culture, in term of what we want to do and we have follow up in many initiative in the first semester to get this engagement of the people as we believe that the level of engagement of our people across the world will be one of the differentiating elements with other company. We know that when there are acquisition, culture-wise, it's complicated to assimilate each of the culture. We know that this creates some opportunity for us and we want to have our people fully engaged and ask them to help contribute and shape the culture of tomorrow.

And last but not least, a bit less impact that we have seen overall will be one of the (inaudible) Fort Worth real estate which (inaudible) offices of Virbac U.S. As we mentioned before, this is something we are trying to do. Again (inaudible) in order to fully engage and ask them to help (inaudible) and shape the culture of tomorrow.

[Again, with the commercial achievement, we see that it is exactly the same slide as last time. It is consistent with the past presentation mentioned before. We see some significant performance in terms of growth, growing again double digit, in fact, growing 21%] should even be seen in light of the fact that we have slowed down the expansion of petfood because of the African swine fever.

I mentioned before, we pull up -- theoretically speaking, we could have been in China by now and we are not. And with the supply on the pork meat, we are also cautious to not speed up too much the growth of petfood because we need to sustain the supply as we have some pork meat in our petfood. But we see the very good growth which by the way is double digit in every country, almost every country, which show that it is something that seem to be sustainable long term.

VeggieDent chew also growing very fast and very nicely with the new product we launched last year with a new mode of action and very good success. And Suprelorin is growing only 6%, but that was due to supply constraint we have had this year to the opposite of last year. We had known some supply issue, not only on Suprelorin, by the way, on some products, in particular, in Europe. And so we have just a little bit of supply constraint this year or supply disruption. And that is also the reason why Suprelorin has only done plus 6%, but we are working hard in order to compensate and fix this supply constraint which sometimes is linked to a third-party supplier or different process from our partners in raw material [acquisition].

FPA vaccines, I present the 2 lines because last year we were trying to explain what the food producing animal vaccines were growing. I mean by that cattle, swine mostly. And we were growing last year. And to keep the consistency, that's why we see without aquaculture, so we grow 22% in cattle and plus 15% all across the line. And aquaculture vaccine this year are doing very well because they are growing 28%. So the overall food producing animal vaccine is growing double-digit positive on category. That is very important because this is what we believe a segment for the future. This is replacing antibiotics also so that's quite important. And for us, it's a new area in which we are going to keep investing and developing sales and market share.

In term of country, I'll go quick, but the 2 messages is, around 50% of our commercial affiliates are delivering double-digit growth in the first semester, so we have a strong growth almost everywhere and especially in the key markets, in the main market. Again, that's part of the strategy. U.S.A., China and Brazil are #1, #2, #3 market in the world and we want to develop there quicker than the market, which is what we are doing and what we are executing. And also Chile because this year Chile is growing plus 12% in the first semester.

Just a quick focus on the U.S. and Chile. U.S.A., so ex-Virbac performance is plus 21% at the end of June. But again, we benefit from a favorable base effect linked to last year. This year, there is nothing special this year. But last year, we have seen that the stock at the end of June 2018 was lower than at the end of December '17 and so the base effect is favorable for the U.S. And if you retreat this base effect, we see that the growth is around 7%.

We keep seeing what we have seen over the last 2 or 3 years now in other in-clinic market performance level, so the sales from the distributor to the clinic. We see that the Sentinel sales erode still, but globally in line with the market. We are not losing market share in the first semester, but we see a slight erosion of Sentinel in line with the market.

Iverhart and other ranges are growing double digit. So it's exactly the same pattern as we saw last year. On the opposite of the market in the clinic, we see that there is a strong growth of the online sales and we see more and more channel growing in certain product category as they increase their sales online.

For Chile, as mentioned before, the vaccine are growing 28% overall. But you will remember that I explained at the last presentation that we were expecting an increase in injectable vaccines -- sorry, injectable vaccines are growing 45% in the first semester. Oral vaccine are declining 7%. This is perfectly in line with what we expected and perfectly in line with what we explained at the last conference call.

The antibiotics keep decreasing, 14%. And the other product category, parasiticide and other product, are growing nicely. On the other species which are much smaller in Chile, it is overall stable. We see a growth in companion animal, in pigs and poultry, and we see a decline in ruminant but nothing of significant importance.

In term of main priority, we have, in November last year, started to share with the team what are the top 3 priority of the group for all departments, all country and everyone. The #1, of course, is competitivity. We want to keep improving our competitivity long term. So we have the industrial focus, I mentioned before. We'll keep reviewing the profitability of our different manufacturing sites and we have been auditing and managing and benchmarking these sites. And we have started to implement corrective actions, corrective measure in some of them in the U.S. and in France to improve profitability. We keep with the discipline of growing OpEx much slower than margin and sales. We have this objective of growing OpEx at 1/2 or 2/3 of the growth of the margin of the sales. And so that's what we call profitable growth in all regions.

We keep investing a lot of energy in business development which is a significant boost. And we have seen some of the new product launch coming from agreement this year. So that is helping also the top line. And we are, again, very disciplined in term of the HQ cost optimization, trying to keep this cost more or less flat so that we can leverage the growth of Virbac on the bottom line.

The 2 other priority were busters in the portfolio management. We mentioned that this is something where we want to invest and further develop. Two type of busters. And the first is a new one, the one we actually create. So it's innovation and partnership. We work on many things. But of course, this is very preliminary and so there is a lot of risk and uncertainty linked to R&D project. So yes, we don't have visibility what could happen on that so far, but we have activity in this area to try to find disruptive technology or new product that could make a difference.

On the commercial side, this is product which are currently in the market and on where we believe that investing and focusing, we can overachieve the EUR 50 million sales for pharmaceutical product or the EUR 20 million sale for nonpharmaceutical product which are the 2 way we define a Virbac blockbuster. So petfood, Suprelorin, VeggieDent and some others may qualify to this level. And petfood, as an example, I mentioned it's not one product, it's a range, but this should be close to EUR 50 million this year already.

Last but not least, digital and system. It's all across the company. We try to improve in productivity and efficiency. We try to reduce paper and any processes, whether it's industrial, on HR or with the collaboration, digital workplace, and we had some investments in these areas.

As far as innovation is concerned, this slide is exactly the same as the last presentation. There has been no changes. It's exactly the same. We have no delay and no change in the R&D plan over the last 6 months. So we kept everything the same. We keep figuring this twice a year. But over the last 6 months, there have been no change in the timing or in the probability of success or in the potential of our products so the slide remains the same.

And finally, in term of guidance and perspective. We have adjusted the top line as we are now explaining that we should be at the upper end or the higher end of the 4% to 6% range we gave at constant rate, in terms of growth at constant rate. We have adjusted also the EBITA ratio where we believe that now we should be around 2 point of improvement, here again at constant rate, which will improve our EBITA ratio around 2 point versus 2018. And the debt reduction, we already adjusted it in the previous communication but we now believe that we will reduce the debt, again, at constant rate, between EUR 40 million and EUR 50 million.

This slide has not changed either. This is the midterm ambition of the company. It is to be at around 15% of EBITA around 2022 in a sustainable manner, in sustainable way before we keep increasing profitability. And you have the 3 main levers we shared with you in the past, so U.S., of course, but also emerging market and growing profitably in other region and again innovation and the top line would be a significant part of that. This is the green bottom part of the margin optimization which is also linked to new product and top line.

This is all for the presentation.

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Manuela Rodríguez;Investor Relations, [4]

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Thank you, Sébastien and Habib. The chat is now open for your questions. To ask your questions through the chat, please come back on the previous tab of your browser. Thank you.

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Questions and Answers

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Sandrine Brunel, Virbac SA - Head of Corporate Communications [1]

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So thank you very much for being back to the previous page of the chat. We have a question from Bruno Jehle from IDMidCaps. He would like to know why should the EBIT margin before PPA go only slightly up in H2 after the huge improvement of H1. Habib Ramdani is going to answer.

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Habib Ramdani, Virbac SA - CFO & Member of Executive Board [2]

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I will take this question. So there are a couple of elements. The first one is the one-off profit that we had in H1 2019, so it will present -- so we have a 14.4% EBITA, but 1 point, around 1 point is really to those one-offs so it shall be 13.4% outside of that. So the delta between H1 and H2 obviously is impacted by that.

The second element I mentioned it is the timing of our cost. If you look at last year, we already had that. We had much more cost spend during the second part of the year than the first part of the year. And we will have either the same pattern for this year, especially on R&D where obviously your spending are very much related to the timing of your studies. So you have -- you could have a timing effect and we will have a timing effect for this year. To a lesser element or impact we also have on the margin which is linked to the manufacturing activity, we had a very good absorption of our fixed cost during the first semester linked to the activities that we had in our sites. And we will have less of an absorption during the second part of the year so that also could explain a little bit of the delta.

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Sandrine Brunel, Virbac SA - Head of Corporate Communications [3]

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Thank you very much, Habib. We have another question from David. We don't know the company, but he may provide us later on. A question on the U.S. parasiticide market perhaps for you, Sébastien. For OTC product like collars, is this category gaining market share and is this a category you can enter into the future?

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Sébastien Huron, Virbac SA - Chairman of the Executive Board [4]

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The future it is -- it could be long. I can say that we just entered this market. We used to be the inventors of the collar in dog and cat, in companion animal because we are the first company to launch collar that is, what, 40 years ago?

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Sandrine Brunel, Virbac SA - Head of Corporate Communications [5]

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40 years ago.

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Sébastien Huron, Virbac SA - Chairman of the Executive Board [6]

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40 years ago. So it's a segment where we have been strong historically, including with Preventic which has always been recognized as one of the most important collar because very, very efficient immediately on ticks and it's a collar that has been sold in the U.S. for many, many years. Recently, we launched a new collar, again, [leishmaniasis] in Spain. That's among the launch we have seen this year. It's called Prevendog. And the product is doing very well. It's just recently launched in Spain. We are geo extending it in Europe in some market. So we will see that in Europe.

In the U.S., short term, we don't have any specific plan in this category. But as I explained, we always try to geo expand the product we have. We always try to think globally, especially in companion animal. So I cannot exclude that we confirm with the collar at one stage. But very short term, besides what we currently have like Preventic, we have no specific plan.

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Sandrine Brunel, Virbac SA - Head of Corporate Communications [7]

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Thank you, Sébastien. We have another question from Christophe Ganet. He would like to have an update about the sales regarding circovirus vaccines that was a vaccine or vaccine recently launched in Asia. When do you expect? Another subject is, when do you expect your petfood product to penetrate the Chinese market? And do you expect -- what do you expect in term of sales, point-of-sales, breeder, vets? He is asking for figures for petfood in China.

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Sébastien Huron, Virbac SA - Chairman of the Executive Board [8]

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This is 3 question in 1. This is [math technically].

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Sandrine Brunel, Virbac SA - Head of Corporate Communications [9]

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Yes. Yes. This is Christophe Ganet.

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Sébastien Huron, Virbac SA - Chairman of the Executive Board [10]

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We are not going to comment precisely or in detail on the circovirus vaccine sales. The only thing I can say is the market in Asia is around EUR 150 million. It's almost EUR 0.5 billion worldwide and EUR 150 million in Asia. We have just launched a product in Taiwan last year, at the end of last year. We are geo expanding now. We go to registration in 3 markets now. So this is the start of it. So at the moment it's very marginal. It's starting.

We are lucky and not lucky. Lucky, I will start with the not lucky. We are not very lucky because with the African swine fever, for instance, we see markets like in Vietnam where a huge proportion of the swine are being culled and killed so the market may be depressed. At the same time, the fact that there is this African swine fever is forcing everyone to reconsider their agreement, their sales volume, their partnership with companies. So it's also an opportunity to enter the door of a producer and giving them services and helping them with the crisis.

So there is plus and minus in the African swine fever. There is an opportunity for us to penetrate more. And there is the size of the swine herd which is a [big difference]. But it is, again, something for the mid, long term in term of making a significant contribution, but the sales are starting very good, very well. And at the moment, in Taiwan, for instance, we are doing quite well. We are quite happy with the market share and the penetration, but it is the beginning of the story. And we tend to geo expand it over the next -- we've got [3] registration this year and we get more in the coming years, so it will take 2 or 3 years before we see it ramp up.

For petfood, we have delay. It's difficult to say. But to give an order of magnitude, we talk about probably 18 months to 2 years' delay for our plan of launch in China.

And for the strategy, we will go -- first, we don't share exactly this level, not to give too much information to our competition. But in China, the only thing I can say is that the online market is very significant, and so we will have a smart approach to try to leverage this fact.

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Sandrine Brunel, Virbac SA - Head of Corporate Communications [11]

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Thank you, Sébastien. So we stay in the U.S.A. for the 2 question to come. The first one is about the acceleration of the concentration of our customers, the veterinary clinics, the corporate clinics in the U.S.A. Is it a risk for Virbac?

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Sébastien Huron, Virbac SA - Chairman of the Executive Board [12]

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The consolidation is not only in the U.S.A. We see it in many geography. We see it in the U.K. We see it even in France in one aspect, in Northern Europe. We don't see this as a risk. We have a -- we believe that this is as much as an opportunity than a risk. In fact, you can much quicker and much more easily get in and you can much quicker and much easily get out.

If you get a corporate clinic or you sign a deal with one of these chain of clinics, you get a huge market share. So for a midsized player, it's probably more an opportunity than a risk. And the sales coverage, the number of reps doesn't become so much of a key element because it becomes a key account management. And now the discussion on the deal is at the top management of the corporate clinic with the corporate, the top management of the pharmaceutical company.

So overall, so far, everything we have seen is probably neutral. In term of impact, we have managed to gain many opportunity. Also, [7] of these chain of clinics, for instance, they ask private label. We have been -- used to do private label for our clients. We are, again, a customer-centric organization. And so we are -- the mindset is that we could do that. Certain time, it may be not as automatic for some of our competitor who have been used to build their own brand and strong brands. So when a corporate [channel] clinic wants to have a private label, we are quite proactive and we can make deal with them.

So overall, we don't see that, so far, as a risk. We have seen that as an opportunity. But it is true that you can get in and out very quickly. The benefit is that when you get in or out, normally, it's for 3 years or 2 or 3 years or a bit more long term than just a yearly contract so that give you a bit of visibility for your business and you can manage it more properly.

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Sandrine Brunel, Virbac SA - Head of Corporate Communications [13]

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Staying in the U.S. market, there is a question, if you could comment also the level of discounting in the U.S. market this year in the parasiticide sector. Has it been better than last year, the discounting?

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Sébastien Huron, Virbac SA - Chairman of the Executive Board [14]

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So if I assume the discounting is related to price...

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Sandrine Brunel, Virbac SA - Head of Corporate Communications [15]

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[Related in price].

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Sébastien Huron, Virbac SA - Chairman of the Executive Board [16]

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I will assume it's -- is that the situation. We -- there has been no significant difference. We are -- price is not really an issue in the market where we compete. The only exception being Sentinel because it is highly priced versus competition but for historical reason. And -- but beside that, it is not really an issue. So we don't have problem to increase prices overall in general.

And then on the parasiticide market, the only exception is again Sentinel, but we don't see any difference with last year. We see it more or less in the same situation than last year.

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Sandrine Brunel, Virbac SA - Head of Corporate Communications [17]

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Thank you, Sébastien. Habib, it's for you, a question regarding CapEx from Christophe Ganet. What level of CapEx should we anticipate for 2019 and the estimation for 2020?

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Habib Ramdani, Virbac SA - CFO & Member of Executive Board [18]

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So for 2019, we shall be below the EUR 40 million, as I mentioned. I would expect between EUR 30 million and EUR 35 million. By the way, that was one element mentioned which triggers the improvement of our debt reduction during the -- that we updated in July. And for 2020, really, the level to be expected is around EUR 40 million which is our normative. I mentioned that -- the fact that we are below was essentially linked to a timing effect, linked to also the seasonality of some of our investments. We had in the recent past some significant investment linked to St. Louis with the internalization of Sentinel Spectrum, with the Iverhart Max Soft Chew as well which required equipment investment. So we were a little bit higher, closer to the EUR 40 million. We are sort in a low phase now, but we have some projects that will kick off. And so we can expect to be back to the normative level in 2020.

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Sandrine Brunel, Virbac SA - Head of Corporate Communications [19]

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Thank you very much, Habib. A question regarding the business in the U.S.A. What about the part made by private labels? I presume this is the question regarding the vet market, not sure you have the figures, Sébastien?

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Sébastien Huron, Virbac SA - Chairman of the Executive Board [20]

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Yes. It's very discretionary. It's very, very discretionary. In fact, I mentioned in the first half commercial achievement that we signed a deal for a private label. It was signed in the second part of the semester, so very recently. And so we don't see an impact in the first semester which is of importance. So we may see if this is successful whether it can grow. But as of today, the part made of private label is discretionary.

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Sandrine Brunel, Virbac SA - Head of Corporate Communications [21]

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For Virbac or for the market as well?

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Sébastien Huron, Virbac SA - Chairman of the Executive Board [22]

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I understood for Virbac, sorry, but part of the business in the U.S. so I assume we talk about the Virbac business.

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Sandrine Brunel, Virbac SA - Head of Corporate Communications [23]

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Okay. Thank you.

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Sébastien Huron, Virbac SA - Chairman of the Executive Board [24]

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But we have example like that because my other comment was linked to corporate [channel of] clinics. We have, for instance, in the U.K. few products which we make under private label for corporate [channel] clinic and it is very successful because then the corporate clinic managed to switch almost entirely the business of competition with our own product because they use it under their own brand. So again, private label, it makes more sense when you have a captive market, when you do that with a corporate channel clinic and you have a captive market.

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Sandrine Brunel, Virbac SA - Head of Corporate Communications [25]

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Still, regarding the parasiticide discounting question, there is a question, David wanted to know more, asking more about discounting by your competitors because if he remembers correctly, one of our competitors discounted significantly last year, Interceptor.

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Sébastien Huron, Virbac SA - Chairman of the Executive Board [26]

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No, that has not improved. That is even worse because now we have a generic of Interceptor. And so we have one new player which is very aggressively giving part of its product for free or making promotional offer, buy one, get one free. So we have -- no, this has not improved. We resist quite well. As I mentioned, we were at the end of the first semester in line with the market evolution. We are eroding. We are clearly eroding, but in line with the market. But it is a bit pulling down, yes, by the fact that there has been one more generic competition entering against Interceptor. And this generic product came with very aggressive condition because there is no unmet need. And as there's no unmet need, they, of course, tried to use the commercial or the pricing element as an element of negotiation.

This being said, this product is -- the market is very resilient and there is a lot of [we don't see] in this market. It's -- vets are very loyal to brands and we see a lot, a lot of time before these things change. So I don't expect significant changes linked to this question. But this is not helping and this is not improving versus last year. Is that the question?

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Sandrine Brunel, Virbac SA - Head of Corporate Communications [27]

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Okay. That's clear. So far, Manuela, we don't see anyone typing or starting to type an additional question. Is it time to close the session and to say goodbye or...

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Manuela Rodríguez;Investor Relations, [28]

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Yes, we do. Thank you for attending the session. The session is over now. Thank you.

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Sébastien Huron, Virbac SA - Chairman of the Executive Board [29]

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Thank you very much.

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Sandrine Brunel, Virbac SA - Head of Corporate Communications [30]

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Bye.