Dechra Pharmaceuticals PLC (OTC:DPHAY) Q2 2022 Earnings Conference Call February 21, 2022 4:00 AM ET
Company Participants
Ian Page – CEO
Paul Sandland – CFO
Conference Call Participants
Max Herrmann – Stifel
Anand Date – HSBC
Mike Mitchell – Panmure Gordon
Andrew Whitney – Investec
Zoe Karamanoli – RBC Capital Markets
Kane Slutzkin – Numis
James Vane Tempest – Jefferies
Edward Thomason – Liberum
Disclaimer*: This transcript is designed to be used alongside the freely available audio recording on this page. Timestamps within the transcript are designed to help you navigate the audio should the corresponding text be unclear. The machine-assisted output provided is partly edited and is designed as a guide.
Operator
00:02 Good day, and welcome to the Dechra Pharmaceuticals Half Yearly Results Webcast and Conference Call.
00:08 I will now hand over to Ian Page, CEO. Please go ahead, sir.
Ian Page
00:12 Yeah. Good morning, everybody. Thanks for joining the call today. I’m pleased to report another excellent set of results, very strong revenue growth that we have continued to benefit from the strong market. People spending more money on pets, but I’ll talk about that a little bit later in the presentation.
00:33 I think probably the other operational highlights on Slide 3, would be the acquisitions we’ve made particularly post the year-end, LAVERDIA, which expands our portfolio into oncology and again I’ll talk about this afternoon but more detail later on.
00:50 Looking at these strategic enablers, the growth drivers behind the business, our people, as always and we have a number of them in the room with us today, have played a fantastic part in maintaining the business’ success throughout a very difficult couple of years that there has been COVID, the COVID affected and we have kept all aspects of the business performing very well, particularly at the front line people with a manufacturing and the laboratories that have done an excellent job.
01:19 In technology terms, we’re globalizing the business more and more every year and we’ve a couple of major programs underway to bring technology across the Group, particularly within manufacturing and a new quality management system. A quick word on manufacturing, people recall a couple of years ago, we’ve got the number of supply issues, delighted to say that most of those issues barring few minor projects that are still in remediation, the manufacturing has done an excellent job, particularly if you look at the high levels of growth and being able to support that growth has been a big achievement.
01:56 Just one of the slide points on manufacturing, you have noticed in the historic years that we’ve been exiting third party contract manufacturing that is now washed through the business and we’re no longer reporting on that basis. From an ESG perspective, we’re still making excellent progress with decarbonization being the main priority unsettling measurable targets that the Paul and his team are working very hard at the moment.
02:24 I won’t say much about the financial highlights other than the revenue growth is excellent and was mainly organic within the period. Underlying EBIT is slightly flattered by low R&D spend, but it is nice to see that leverage coming through.
02:40 And that I’m not talk — I’ll pass you on to Paul, who will cover the financial slides in detail, starting on Page 6 of the presentation.
Paul Sandland
02:49 Thank you, Ian. Good morning, everybody. As Ian said, we’re really pleased to report excellent performance in the first half of our financial year with all major product categories posting double-digit growth. On a constant currency basis, revenue was up strongly by 15.9% delivering a 15.9% increase in gross profit. Our operating profit is GBP93.9 million represents a 22% increase on half one last year with a revenue growth, as Ian said, aided by phasing of research and development costs, being a little bit lower than we anticipated in the first half. This is leveraged strongly to increase underlying operating profit — operating margin, sorry, by 140 basis points to 28.2%. Underlying EPS also increased strongly by 24% in line with trading.
03:34 Move onto segmental performance, we delivered excellence organic growth in the period supplemented by the product acquisitions we’ve made that Ian will touch on a bit later in the presentation. Just to clarify what we’re including where we’re in our numbers, we have — in our EU existing business includes DVP EU, DVP International as well as our remaining third-party contract manufacturing.
03:55 In EU acquisitions, we have one month of Osurnia relating to July sales for which there’s no comparator and five months of Tri-Solfen in Australia and New Zealand following its successful launch in August 2021. The Nordics, with North America existing business includes a full like-for-like Mirataz and a five-month like-for-like for Osurnia. In acquisitions, we have the one-month balance of Osurnia and a small contribution from the other U.S. product rights deals announced in our recent trading update.
04:27 Moving on to EU Pharmaceuticals. Slide 8 — Slide 8, EU Pharma delivered substantial revenue growth booked by 10.5% on the prior year. Growth has slowed as expected as we start to see this market returning to more normalized levels of trading. The existing business increased by 8.3%. This still represents a very strong organic performance given the comparative period included a pre-Brexit load of EUR7 million.
04:51 Tri-Solfen in Australia and New Zealand, in July sales of Osurnia added GBP4.3 million of revenues through acquisition and operating profit from existing business increased by 8.2% with operating margin maintained at 33.3%. Tri-Solfen on the one-month of the Osurnia sales contributed a healthy GBP3.5 million of EBIT at a margin of 59.5% reflecting the gross margin nature of product sales. Consolidated underlying EBIT margin increased by 50 basis points to 33.8%.
05:25 Moving onto Slide 9. In North America, we delivered exceptional revenue growth of 26.1% with our existing business in particular performing ahead management expectations growing by 25%. This reflects a strong demand for our CAP and Equine products in that territory. Acquisition revenue consist of GBP0.6 million from Osurnia and GBP0.6 million from the product rights deals we completed in the period.
05:48 Underlying operating profit increased strongly by 25.6% to GBP43.6 million with the majority of that increase coming from our existing business. Operating margin on our existing business reduced by 20 basis points to 34.5%, as a result of SG&A normalization which we previously flagged following COVID-19 restrictions being lifted. Acquisition margin of no impact on the consolidated underlying EBIT margin, which was also 34.5%, a small reduction of 10 basis points on the prior year.
06:22 Moving onto pharmaceutical research and development on Slide 10. We continue to make progress on the pipeline, despite COVID-19. As Ian said, our R&D investment of GBP13.5 million in the period was a reduction in spend compared to half one in the prior year. The period on period decrease as the results project cost phasing, which we expect to catch up in the second half. But the total R&D spend, only GBP0.5 million related to Akston and we expect investment to increase significantly in the second half.
06:52 Moving onto Slide 11, our gross margin in the period was maintained at 56.9% with CAP continuing to be the main driver of growth. On SG&A expenses, they increased to GBP81.8 million in the period, as our cost base started to normalize post COVID-19. However, despite this increase, SG&A actually reduced as a percentage of revenue from 24.9% to 24.6%.
07:18 Moving to Slide 12 and currency, we continue to see volatility with the significant weakening of both the Euro and U.S. dollar adversely impacting our reported results for the period. I’ve included the usual sensitivities to show the impact of exchange rate variations, have on our numbers as well as the impacts of current exchange rates would have had, have these rates applied for the period. If current rates had applied for the whole period, the impact would only been minimal with underlying diluted EPS only been 0.3% lower.
07:51 Moving onto cash flow on Slide 13. The Group continues to enjoy very strong cash generation on the back of the excellent trading performance in the period. Net cash generated from operations increased by 24.1%, to GBP103.3 million resulting in cash conversion of 110%.
08:09 Moving onto our net debt, we reduced net debt in the period by GBP7.1 million to GBP193.1 million by December 31, with the strong cash generation of the business being utilized to fund the six product acquisitions we made in the period, which you can see in the bridge, as part of our CapEx number. The annual significant movements in the period with payment of the dividend and interest in such things. The pro forma leverage quoted of 0.9 times includes full year EBITDA for acquisitions and is on a pre-IFRS 16 basis.
08:41 On tax in Slide 15, our underlying effective tax rates increased our signpost to 23% reflecting the regional mix of operating profit and loss of patent box benefits. The reported ETR of 23.8% includes the tax effect of an exceptional preferred tax charge due to the Dutch corporate tax rate increasing to 25.8% on the January 1, 2022. We continue to monitor relevant tax legislation internationally and the impact this could have on our ETR. Most of the territories in which we pay tax seem to be converging in medium term to a rate of about 25%.
09:19 And finally just finish off on the numbers and other financial items, non-underlying items in the period was GBP36.5 million which almost entirely related to the amortization of acquired intangibles. The balance of GBP1.1 million related to an impairments on our non-core agrochemicals business which was sold at GBP3 million post period end. The interim dividend of GBP0.12 per share is an increase of 8% and reflects our confidence in the business and its future prospects. On banking, we have significant headroom on facilities and covenants, which will enable us to consider further relevant acquisition and investment opportunities as they arise.
09:56 I hand back to Ian to provide some more detail on the first half highlights.
Ian Page
10:00 Thanks, Paul. Just going back to the markets. Many commentators have commented on the increased number of dogs and increased spending on pets and there is no doubt about that over the last two years during COVID, but we are now seeing normalized levels of growth returning. I would however remind you the normal growth in our industry is still pretty strong and we expect mid-single digits as an underlying market that growth. And I’d also remind you that we have a long history of outperforming those markets.
10:32 Looking at EU Pharmaceuticals, it is on mostly mature part of our business and mainly organic growth is an excellent performance with good growth in every country, other than the UK. The UK was against the took comparator in the prior year, but we’ve now seen that Brexit load washed through and as we start the second half of our financial year, we’re now seeing also the UK get back into growth. North American performance was quite exceptional, particularly if we bear in mind that there is new generic competition within the market within the U.S. and particularly an old subject that we’ve talked about is white label builds by wholesalers.
11:13 We’re still seeing a little bit of an increase in those products and one or two that have completed with Dechra. So you know that performance is therefore very exceptional. Not just in the U.S., but across the whole of our operating businesses. It’s great to see sales teams back in from the customers. Our relationship with vets is key and one thing that we do extremely well is that technical sale with all the representatives having the capabilities to do lunch and learn lessons and also the educational programs that we’ve put into that, so a very important to support especially therapeutic categories in the growth in those areas. So I said that real positive to deal to get back face to face.
11:57 Also the North American Pharmaceutical segment is driven mainly by the USA, but it’s pleasing to report that both Canada and Mexico have performed well. And just a quick note on our international business, which we report in the EU segment, that’s also performed very strongly, particularly in Australia and Brazil where we have our own subsidiaries. But we’re also getting growth out of a number of our distribution partners around the world.
12:25 Looking at it by product category, company annual products at 74% revenue, all the main driver of the business. You can say it is the highest levels of growth again referring you back to what I’ve already said on the strong market growth within Companion Animals and the increased spend on pets. We have exceptional growth in a number of our key therapeutic areas, particularly our major sector of endocrinology but also topical dermatology and anti-infectives have done extremely well in the period.
12:59 Equine continues to see growth, particularly benefiting from a couple of products that came out of the AST Le Vet stable an acquisition we made a few years ago, those products were part of the pipeline that we launched in the prior year, but also through lifecycle management from an old but still important and very large product to Equipalazone. FAP market, so this is almost entirely in Western Europe. FAP market such started to recover post-COVID.
13:29 Nutrition, another successful period. These are branded specific therapeutic pet diets. We’ve again seen excellent growth in a very competitive market. Our Vet refocus services as well and we’re getting practice gains within Europe, but also when I’m seeing decent penetration of these products into international markets, particularly into Japan and South Korea.
13:57 Looking at the pipeline. As ever, we’re built on a lot of smaller products, the major blockbuster products in every single period, you’ll recall, we’ve got numerous registrations in several territories and in this half year that again has been the case. A couple of products they’re worth mentioning in their own right, would be in Equine Strangles vaccine, which is a development opportunity with licensed in a few years ago and we’ve now registered that and taking it to market. And we’ve also bolstered our U.S. portfolio of generics within the Amoxi-Clav suspension which fits alongside nicely with the Amoxi-Clav tablets that we have had a lot of success with it within the U.S. market.
14:40 Probably the one negative that might just need a little bit of explanation is Tri-Solfen and pleasingly we’ve had it registered in the UK, but in Europe, the partners Medical Ethics to remind you we own 49.5% of our business, they’re responsible for taking us to registration not Dechra, but we do have the global marketing rights to multiple species and multiple application, but the first target market was piglet castration, Medical Ethics took the decision to withdraw the application because going through the procedure, a number of countries insisted that the product was sterile. This is quite surprising to us. The legislation in the European Pharma peer, which is designed for human products and Vet new products actually says that products that go into should be sterile. However, there is an exemption for Veterinary Products who had justifications given. We gave an excellent justification.
15:37 We can actually prove that we have improved stability of the wound the bearing in mind that these piglet castration has done in the dirty farm environment. It’s quite remarkable that we believe that animal welfare has been compromised by the not giving us an approval routes at this stage for a product which is safe, efficacious and is economical for farmers to use. It would have generated a huge amount of compliance. We have number of options, we’re exploring at the moment just to have to get this product registered. But what is interesting, we’ve managed to get a registration in Portugal, and there are regulations within Europe, called the Cascade regulations which actually means that the big farm units, whether there’s a clear demand for this product in numerous countries, particularly Spain and France, these farm units will actually be able to import from Portugal.
16:33 So, we will be putting a lot of pressure to lobbying and through information into the market to try and get the situation resolved, but we also have as I said earlier, a number of other opportunities as how we can take this to market that will hopefully cover in September when we see it for the full year results. In terms of animal and the positive on the pipeline, we still recognize opportunities and we’re always finding new ideas to put into the pipeline in this period, that as we’ve mentioned.
17:07 Delighted to have made some more bolt-on acquisitions. I think we’ve said in the past that sort of platform deals where we have to complete due diligence by bank. Companies have proved our difficult so to fund these excellent smaller acquisitions that we completed in the half year to bolster our Equine portfolio in the U.S. and also our companion animal portfolio in the U.S. is very pleasing. Rompun and Butorphanol are all the smaller products, but that’s something new for our Equine to say and on that you can on analgesic portfolio.
17:42 Sucromate takes us into slightly different specialist area within horses into reproduction, its use of synchronizing of breeding. ProVet is actually a device where you extract — the horses hold looks spinning down and reinjected into the horses. It’s a proven way to improve soft tissue injuries in horses and it is a device that the vet can actually take within — into the stables and it’s good to be increasingly widely used we believe over the next few years.
18:14 The Companion Animal Products demonstrate — products inhalation anesthetics that they used in the majority of operations. Isoflurane is a historic one. Sevoflurane is a more modern one and these really complements our sort of critical care anesthesia analgesic portfolio that we offer to vets. Pleasing to have launched the Atopivet range which would licensed in from a Spanish company, excellent novel products that give us something new within our topical dermatology portfolio.
18:47 Post the period end, we acquired LAVERDIA, really excited about this project. It’s a worldwide opportunity. This is a tablet that you can give to dog on a daily basis. So it’s only applied and will extend the dog’s life once it’s got lymphoma, which is a type of cancer, a very common cancer in dogs. Because of the clinical need, the FDA in the USA granted a provisional marketing authorization. This is not a common thing for the FDA to do and that means we can actually sell the product while we complete the development program and not only will it be registered in the USA, but will also be registering within Europe under the key international markets.
19:34 So, the business is in good shape. Looking at the outlook trading in the second half has already started strongly. Those markets are returning to more normalized growth and I think you’ll see that not just ourselves saying that for the commentators within the market are also reflecting that as our number of results from our competitors. Supply chain continues to be a big benefit to the business and we continue to identify new growth opportunities and new acquisitions and you can see within the six month period, we’re also successfully executing strategic opportunities, which will continue to develop growth. So we remain very confident in the Group’s strength and future prospects.
20:21 That finishes the presentation. So we’d like now to open to questions, please.
Question-and-Answer Session
Operator
20:33 Thank you. [Operator Instructions] We will now take our first question from Max Herrmann from Stifel. Please go ahead.
Max Herrmann
20:54 Right. Thanks very much for taking my questions and congratulations on a great first half. Three, if I may. Firstly, I just wanted to understand a little bit more in terms of the phasing of the R&D spend. You commented that’s partly related to Akston spend, and I wanted to get a better idea of where you are in the development of more key milestones, we may expect in the second half of the year?
21:22 Secondly, I think in the release, there was some comment about continuing expansion of the U.S. field force. Just wanted to get a bit more color on what you’re doing there and geographically throughout the U.S., is there any focus on that build out? And then finally, great to see the nutrition business is growing really strongly. Just wondered whether there was a margin mix impact on that business relative to the pharma business. So are margins in line with the rest of the business or are they lower or how do they vary? Thanks very much.
Ian Page
22:02 Paul will take perhaps the Nutrition and I’ll take — afterwards, I’ll take the U.S. field team,
Paul Sandland
22:06 Yeah. Let’s take Nutrition first, Max. So margins on Nutrition are a little bit lower than our average margin in the CAP business, but still above facts, so around the 50% mark. So it’s still a small part of the business. It’s great to see growth but it’s not really going to impact on the overall margin of the Group, particularly with fat, going strongly as it is.
22:29 Then on your first question about R&D spend. Yeah. We have underspend just over GBP30 million in the first half. I have guided to the full year figure being around GBP40 million. We do expect a significant catch up in the second half. We still think we will be around a little bit below GBP40 million, but GBP38 million to GBP40 million range for the full year. And within that Akston, because of the milestones we expect spending the full year to be around GBP4 million to GBP5 million on Akston, come the end of the financial year. So we will have a significant catch up in half two.
Ian Page
23:04 Yeah. Thanks Paul. In terms of the…
Max Herrmann
23:06 Can you…
Ian Page
23:08 Go on, Max.
Max Herrmann
23:10 No. I was just going to say on that — just following up on that, the Akston GBP4 million to GBP5 million spend. Is there any particular milestone that you’re referring to?
Paul Sandland
23:18 Yeah. It’s related to providing the API for the clinical trial.
Max Herrmann
23:24 All right. Thank you.
Ian Page
23:26 Just on the U.S. sales team, the LAVERDIA acquisition, the original have intended to try and sell it themselves. We’re trying to — we want this deal by persuading them, we could actually get market penetration quicker than that, but they have started to build the sales team. So as part of the deal, we agreed to employ the majority of the people, which I think was about 11 or 12 people that they had employed to start the sales themselves. So we’re bringing those into our organization.
23:57 Bearing in mind, it is a new therapeutic sector to us. So having a better coverage within the U.S. market is going to be important, but also, I think if you look compared to most of the big pharma, we’re still that somewhat smaller in terms of the sales team that we have. Our representatives do still call in the awful of the practices in the majority of territories. There’s no – there is – your other point was where are we focusing that sales team, there was nowhere specific, it would be just spread across the whole of the U.S.
Max Herrmann
24:31 Right. Appreciate that. Thanks very much.
Operator
24:34 Our next question is from Anand Date from HSBC. Please go ahead.
Ian Page
24:40 Good morning, Anand.
Anand Date
24:41 Hi. Good morning, everyone. Hey. Good morning, guys. It’s couple from me. Just on Akston, could you talk about their progress on ramping up the manufacturing capability and the status of the larger dog trial, I think the 100 dog trial, please, when the results expected, what’s going on there? And I’ll give you, there is couple more.
Ian Page
25:03 Anand, we need to be in conjunction with Akston. At this point, that will be a question for them. Our contract doesn’t allow to speak on their behalf. So I’m sorry. I’m not trying to avoid you your question, but I’m not allowed to answer that question without their permission. They are very restrictive because they’re principally a human company that are developing the product for humans that they don’t want any comment making without the prior permission.
Anand Date
25:33 Okay. Fair enough.
Ian Page
25:35 I would reiterate that there is nothing on to all, however.
Anand Date
25:38 Yeah. Okay. And then just on LAVERDIA, just more generally, could you talk about the characteristics of Oncology that make it quite attractive? And then the second is, why now, because, yeah, obviously, you’ve done a lot of product deals in the first half as well. But what reassurance that there’s still plenty of white space to go for your existing core therapeutic areas as well?
Ian Page
26:08 Not entirely sure what you mean by that. It’s a huge amount of scope to add new products to our existing.
Anand Date
26:14 Well, that’s what I’m saying. You don’t like the product in the first half, but the — if one wanted to be bearish, one could argue, it’s a bit with they’ve gone to a new therapeutic area, why have they chosen to do that one…
Ian Page
26:28 Okay.
Anand Date
26:28 Oncology is quite attractive. It’s like, do you know what I mean? I don’t agree with it but it’s a…
Ian Page
26:34 Anand, now I understand your question. You’ve got to bear in mind, we’ve never been completely restrictive on the therapeutic sectors within which we operate. We have always said things that involve a specialist technical sell is what we’re very, very good at and the reason why we managed to win this deal was because that the prior owners of the product saw that it was exactly our area of expertise. So we’re constantly looking at new therapeutic sectors but not things like flea, tick and worm, but anything that involves a specialist technical sell, we are good at. So it isn’t really moving into an area that we don’t have competency. And you say the cancer market is an attractive one. But probably not as much as you may think because the oncology products tend to historically cause a lot of sickness within the dogs and don’t actually sustain lives that much longer.
27:33 And the beauty of this product is that there are very few side effects. You’ll be aware of the most chemotherapy products have an awful lot of side effects and this product can be used, actually can be a long used — alongside those chemotherapy products, but can use individual as a products as well and will extend the dog’s life for a good number of months and that’s very, very important to people when their animals are diagnosed with cancer. And to that end, it was a category that we’re delighted to move into.
Anand Date
28:10 Yeah. Fair enough. Perfect. Thanks very much.
Operator
28:15 We will now take our next question from Mike Mitchell from Panmure Gordon. Please go ahead.
Mike Mitchell
28:24 Thanks. Good morning, all. Thanks for taking my question. Just wonder what your options are practically with regard to Tri-Solfen in Europe. I’m just thinking, is this an issue with the regulatory solution only or are you going to be looking at manufacturing processes and what that means potentially in terms of additional costs or timing for Europe?
Ian Page
28:40 Yeah. First thing, I’d say is, please bear in mind, this is just one application piglets castration. It’s got numerous other applications that we’re working on as well. But to answer your question more specifically, we are considering a number of things. We’re considering reapplying with a slightly different indication, which would involve a little bit more clinical work. We’re considering doing some national applications in one or two countries, where there is a huge demand from farm units, where the thing — we think that maybe a little bit of pressure that we can bring to bear from a little bit of lobbying, not direct from ourselves by the animal welfare groups and the farming groups. So and — but we’re also looking at the suggestion that you made as a manufacturing change. Can we actually irradiated this products or can we filter to sterilize it, both are options that we’re looking at the moment? The problem with that is one of the great things about Tri-Solfen is very economical to be used on farm and bear in mind that most of these procedures are actually done without pain relief at all, but one of the ethical issues with this is to actually drive compliance and a low easy to apply — low cost easy to applied product will actually help that compliance. As soon as you start having sterility into the package you’re adding to cost. So that’s not our preferred route, but it is an option that we’re considering.
Mike Mitchell
30:13 Understood. No. That’s very helpful. Thanks. And just a follow on LAVERDIA. Just wondered if you could elaborate some of the conditionality being approval that’s in place at the moment. Just wonder what terms there are there and what the obligations are in terms of timings, in terms of full approval?
Ian Page
30:27 The obligations are that we continue to provide clinical data, that you continue to work on a full approval. There is an annual review by the FDA to reinstate that approval and I think it runs for five years, by which time you’ve got to complete all the clinical data, but we’re well down the road with those clinical studies, the safety and efficacy is obviously key. But in terms of safety and CMC, we’re pretty much far down the road already. So that five years will be a challenge to us.
Mike Mitchell
31:07 Right. Great. Thanks, Ian. Thanks, Paul.
Operator
31:13 Our next question comes from James Gordon from J.P. Morgan. Please go ahead.
James Gordon
31:18 Hello, James Gordon, J.P. Morgan. Thanks for taking the questions. First question was about normalized historical growth within the period and there’s been a lot of moving parts over the last few years to just distorting growth to the positive and the negative. So what do you think historical growth would be in a clean basis now over the last three or four years? And do you think, assuming we do come out of COVID, the growth trend does actually change or do we just go back to what that was — that was the first question please. Just on M&A, you’ve done quite a few — sorry, yes?
Ian Page
31:49 I’ll just take that one first and if we could — then come on with your second question. The normal historic levels of growth before COVID were sort of low-single digits within Europe and mid-single digits sort of 6%, 7% within the U.S. We’re still probably slightly higher than that at the moment. But it is sort of reverting more to those numbers that — you’ve got to bear in mind that the markets are not measured brilliantly probably with the exception of the U.S. so most of our debt is coming out in the U.S. at the moment and you may have seen one of the bigger competitors report their fourth quarter recently, which actually reflects exactly what I’ve just said.
32:33 We also have some fairly hard evidence from the major veterinary company within the U.S. that provide practice management systems that they are also published information that show what practice turnover and footfall has being sort of over the last quarter, which supports information that we’ve given you today. Sorry, what was your other part of your question?
James Gordon
32:59 Well, it’s maybe just on that first question. The low-single digit and the mid-single digit that was market — in terms of what Dechra was doing and…
Ian Page
33:08 Yeah. But Dechra is…
James Gordon
33:10 A few percentage points about that program.
Ian Page
33:12 Yeah. We’ve always said our objective is to outperform markets and we’ve done that for 20 years.
James Gordon
33:22 Thank you. The second question was M&A. So you’ve done quite a lot in licensing of individual products. I think also heard about it was harder to do some big deals during COVID, the challenges doing face to face diligence. But are you in discussion in any bigger company deals, taking a whole companies rather than just products? Is that something that could step up over the next 12 months.
Ian Page
33:42 Always, but we’re always talking to companies that we consider as potential acquisition opportunities. When you actually get them over the line or if they have decided that they want to sell to you is a completely different subject. I mean, to give you some examples, AST Le Vet was eight to nine year courtship, it’s not longer. So, a lot — most of the business we bought with courtage, I’ll say for a good period of time before we actually get to buy them. So there are always businesses that we’re talking to, but the key thing as well, James, has always been during COVID the ability to travel. So we are now back out traveling and able to get out of the UK and then have some conversations face to face. You’ve got to bear in mind it’s never cherry picking exercises. There are not many businesses within Animal Health. So hence, a lot of the success that we’ve had is because of this relationship that we’ve developed with businesses. I mean if you look at the LAVERDIA type product, I mean, that was about having a relationship with the business.
James Gordon
34:56 Thanks, Ian. Thank you. And then third and final question. On Tri-Solfen, you mentioned one scenario for Europe will be that you might have to irradiated or filter the product in order to get EU approval. So, you would actually be tweaking the product. If you did have to do that, how much of the delay would that be from now. So when they could actually potentially be approved, if that scenario played out? Is that a lot of work and then lots of trials that’s repeated or is that way to receive it?
Ian Page
35:19 No. I would say, it would be a major development, which is why I said, it is in our preferred route. You’ve been talking, I would have thought a minimum of two years. But again just to repeat, this is one application, piglet castration. It has numerous applications in different markets.
James Gordon
35:40 Thank you.
Operator
35:44 We will now take our next question from Andrew Whitney from Investec. Please go ahead
Andrew Whitney
35:51 Hi, Ian. Hi, Paul. Thanks a lot for taking the question. Just one left from me. Is there an optimum balance of the group at Dechra as a whole if I think about CAP versus FAP versus Equine? I saw you’ve done some Equine deals recently and some CAP deals. And if Tri-Solfen, which can be a relatively big driver in FAP, just nudges out a little bit, do you think about the group in terms of the balance across those three sort of divisions? Or is it you’re just taking opportunities as they become available?
Ian Page
36:24 I think Andrew, that we’ve always been opportunistic in many of these opportunities. We don’t allocate capital per se to specific parts of the business. We just try and take sensible opportunities when they arise. Is there anything more more you say, Paul?
Paul Sandland
36:40 No. But, particularly in the last so, three, four years with CAP growing as strongly as it has, it doesn’t seem too much of what we do with Equine, Nutrition or FAP. CAP continues to outstrip all of those sectors. So I think in the fullness of time, I don’t think there’ll be any material change to that. And if you look at five years down the line, I think we’d still be very, very heavily focused Companion Animal weighted company.
Andrew Whitney
37:08 That’s helpful. And so it’s reasonable to think that there’s still lots of opportunities in CAP? That’s probably the area where there’s most sort of coming through that you could have a look at.
Ian Page
37:18 Yeah. Always, I mean people still continuing to spend more and more on their pets, particularly in the U.S. market, which is the biggest driver in the world of the Companion Animal markets and the dynamics of the business remain very, very strong.
Andrew Whitney
37:37 Thank you very much.
Ian Page
37:39 And vets can treat more…
Operator
37:41 We will now take…
Ian Page
37:42 Sorry.
Operator
37:44 Apologies. We will now take our next question from Zoe Karamanoli from RBC Capital Markets. Please go ahead.
Zoe Karamanoli
37:54 Hi. Thank you for taking my questions. Sorry, if any of the questions were asked before. I just — my line dropped. So three questions from me, please. The first one, on cash conversion. Is there any normalization of cash conversion expected? I.e., are there any working capital positions, particularly unusual? And then, I can follow up with two questions on white-label product. Thank you.
Paul Sandland
38:19 Yeah. I think we are flattered a little bit to — at the end of half year, Zoe to be honest. The last couple of years — the last three years, I think at least with full year, we’ve been around the 90% mark, but it is getting tougher and tougher to get to our internal target of 100%. Having said that, we’ve had — as Ian touched on the presentation, really good solid supply chain, lot more bolstered it’s been previously. So if you look at our numbers, we’ve not had to invest significantly particularly in inventories.
38:53 And also from a seasonality perspective, we tend to finish the year, June is a big sales month compared to December, which is relatively quiet sales not given the people close down for the holidays. So we would expect to see an increase in receivables, but that would only be it. So something will be closed to 92% or 100% from year-end from a cash conversion perspective.
Zoe Karamanoli
39:18 Okay. Thank you. And then, if I move on to the white label products, what proportion of your current portfolio is currently exposed to white label products and how much do you expect this to increase by year-on-year basis?
Ian Page
39:34 Well, we don’t know that we can’t predict what they’re going to launch about, so at the moment, we’re talking two major products and a couple of minor products where we have white label competition. There is a lot more to this. You’ve got to think about these companies are wholesalers and they are not drug companies. So there are various ways that we create loyalty through brand awareness, through cross-selling across our novel portfolio which these distributors don’t have. So — they are not structural competitors in the same way as we were customers to the other drug companies. And I think there is a limit to how far we can push it because if these wholesalers whose bread and butter is really supplying our products in all the major pharmaceutical companies products, if they start to become a structural competitor, then we have to reassess whether or not we should be supplying through. And while Dechra perhaps doesn’t carry too much weight in the U.S., one or two of these big pharma companies carry huge amount of work with these distributors with these wholesalers. So, I think there’s only a limited way that we can push it. But I think just also, if you bear in mind to justify what I’m saying about not being structural competitor to us, look at the high levels of growth that we’ve had in the U.S. and that is despite these two products that we’re now having competition and so. While it’s more of a new retention than a real structural concern to us.
Zoe Karamanoli
41:10 Okay. Great. And if I may, what — do you — can you share what is the typical margin or revenue pressure, when these distributors launched white label product?
Ian Page
41:21 Well, you bear in mind that the generics in the first place have the slightly lower than the novel products and you’d have to answer that question on a product by product basis. So, a recent product that we’ve launched, called deracoxib, whether a white label products, that has taken margins down to about 35%, 40%. But on the other two products that are referring to the bigger products, we’re still keeping margins sort of in the 60%, 60% mark, despite having had to lower our prices.
Zoe Karamanoli
41:56 Okay. Understood. Thank you.
Operator
42:01 We will now take our next question from Kane Slutzkin from Numis. Please go ahead.
Kane Slutzkin
42:07 Thanks. Good morning, guys. Just few for me, could you guys, just maybe – good morning. Could you perhaps talk to the dynamics in North America this year, I mean clearly North America seemingly take longer to slow. I know it’s all kept in Equine and clearly even more mature. Could you just give us little bit more color on what you’re seeing in those two markets in that sort of divergence in performance? And I just sort of noticed is reading in the comments in the margins were lower in North American, higher in EU, because maybe just sort of give me some color on that?
42:36 And then just on cost, the labor inflation, obviously, the key thing in the market, everybody wants to know sort of what you’re seeing that you don’t really seem to be talking about any impact. I’m just wondering from a sort of ability to pass on any increased costs, what do you see there, I mean vets obviously need to mark up to so, just interested in your thoughts and maybe price elasticity? And then just maybe Paul, one for you on just the tax rate, I think if I recall the guidance is what 22.5% to 23% tax rate. I think I dropped off the call when you were mentioning something about a 25% tax rate. Sorry, you could just maybe just pull me on that, please?
Ian Page
43:12 Yeah. Let’s cover the sort of U.S. versus Europe first. The high levels of consolidation that we’re seeing in Europe are actually driving the down market growth because there is discounting. So if you look at markets like the UK that they are now highly consolidated, that increases the level of discount, which reduces the growth relative to the U.S., although we have practiced consolidation in the U.S., it hasn’t carried the pace that has within some European countries, but also within the U.S. the number of dogs and cats is still increasing, multiple households and the amount of money is increasing faster within USA that spend per pet within the U.S. And across the U.S. is about 2.5 times spends of the European market. So there’s a lot of things that favor that U.S. growth.
44:06 And I think just one other point I would raise on the U.S. as well as you’ve got a huge country that has one product label, one technical support team, one pharmacovigilance. We need that in a small country like Denmark. So the European profile is very different to the U.S. profile. In terms of pricing, you bear in mind, there are a lot of veterinary products, so the cost is passed through to the pet owner and there’s not many products that are actually restrictive on the pets owners actually making a decision not to treat the pet. That would be a very rare event. So the market does allow inflation to be passed on. And the vets of course, make a markup on the product of the drug. So the cost price isn’t always the key focus. So we are able, simple answer is we are able to pass through inflationary price increases into the marketplace. Paul?
Paul Sandland
45:02 Yeah. Then on the tax rate came up. So you’re right, 23% for the full year is where we think will be. Then what I said during the presentation was a number of our countries where we pay most of our tax appear to be converging towards 25% — 25% tax rate. So I think in the medium term that is where I would expect our tax rate to be.
Kane Slutzkin
45:28 Okay. Great. All right. Sorry, guys. Well, I guess you, I mean, just wondering, obviously doing sort of little bolt-ons in product acquisitions. Just sort of thinking a little bit further sort of outside the bulk, are there any sort of areas you would be considering looking at then and now in the long term, things like diagnostics, this other sort of areas where maybe there are some higher growth prospects or anything you feel you could enter to sort of leverage your portfolio?
Ian Page
45:56 In terms of our portfolio, no, we are not — you’ve probably seen people like Zoetis try to move into diagnostics. It’s not a clear area. It’s not an area that we’re — have any interest in at all at the moment. We have enough opportunities within specialist prescription medicines for vets. We don’t feel the need to diversify from what we’re very good at.
Kane Slutzkin
46:25 Okay. Got you. Thanks guys.
Operator
46:29 We will now take our next question, a follow up from Anand Date from HSBC. Please go ahead.
Anand Date
46:36 Yeah. Hi, guys. Sorry, it’s me again. It’s just — it might be a short answer, just slightly dull question. When you look at the balance sheet, you’re doing all these deals, but net debt EBITDA is just falling. You’ve got that target 2 times. You’ll get 2.5 times for the right deal. You’re out traveling maybe a platform deal is more likely now maybe not, but has there been a discussion at the sort of Board level what your preferences would be if you start to look at the undelivered or do you just build up a cash sort of position for whenever that next deal comes — big deal comes?
Ian Page
47:13 I refer you to about a number of years ago when we sold MBS. We suddenly found that we’re getting very close to having cash on the balance sheet and we couldn’t get any deal over the line and five happened all at once. So referring to that is that — I think we have enough things in pipeline. We can’t ever guaranteeing a — we can’t have a guarantee as and when they’re going to happen, but we have enough things in the pipeline, that I’m sure some will happen at some point that we won’t get into the position of having cash that we have to consider what we’re going to do with it.
Anand Date
47:50 Okay. That’s clear. Thanks very much.
Operator
47:55 We will now take our next question from James Vane Tempest from Jefferies. Please go ahead.
Ian Page
48:01 Good morning.
James VaneTempest
48:02 Hey. Good Morning. Thanks for taking my questions. With the strong first half of the topline, just wonder if you can comment on the expected phasing of revenues through this year? And then my last question is just on the U.S. It looks like you had a higher mix of generics. So just wondering if you can comment on the relative strength of your U.S. portfolio composition. And then finally, if we do get into recession, do you anticipate people trading down products? Thank you.
Paul Sandland
48:29 So in terms of phasing James, that the portfolio isn’t really seasonal. Historically, we’ve been a little bit weighted from a revenue perspective towards the second half. Those price rises kick in, but most of the treatments or every day or chronic disease or critical illness. So there is not historically been a lot of seasonality in the business. In terms of the U.S., it’s nothing to bear in mind, what Ian said early on the U.S. business is, with the Putney acquisition, which was entirely generic, there was also a number of profit share agreements in that with manufacturers that we — our long term agreements and because the profit share tends to be a little bit lower margin in the European business, which is not the reason why the U.S. margins would be a little lower than they are in EU.
Ian Page
49:20 Yeah. I mean the Putney acquisition was key, Paul, but you slightly move back to generics there, but in terms of our pipeline, most of the money is going into novel to — not novel to hugely in product to keep that balance right.
Operator
49:37 As a reminder — please go ahead.
James VaneTempest
49:47 Thank you. Sorry, my third question just on recession. Do you anticipate people trading down products and if I can just ask a follow up to your answers on the prior one, is that a proportion of products, which are currently being outsourced, which you could bring in house and how material would that be? Thank you.
Paul Sandland
50:05 Yeah. I think it’s — we’re well on ambition of ours to actually increase the amount of products that we manufacture ourselves. What times it will all get started, is, we’ve been fairly acquisitive in that we’ve been a bit bullets, it’s been manufactured by a third party, so it’s a constant fight to actually do that, but we do have a program of tech transfers, bringing products into have severely depends on the rates of acquisition as to what percentage that gets to, I think it’s about 40% at the moment in house. We’re trying to get it back to 50% where it was a couple of years ago, I don’t understand what you mean by trading down products with regards to recession?
James VaneTempest
50:46 I’m just wondering if consumers feel the pinch if there is a cheaper alternative products, would people take a generic product than a product white label product, which it was available?
Paul Sandland
50:57 Yeah. I don’t think about particularly facet of our industry. It’s not really generic market in the — in the same as human market is that you don’t — you’ve also got to think of the dynamics of the vet making a profit on the sale of this products rightly or wrongly. But big percentage of the profitability of the vet practice comes from the sale of products, so they don’t actually particularly want to rest at the bottom of the lowest price. And I’m sure I get to a question earlier was that — there are really not a lot of products that are restricted in terms of animal welfare. And I can refer you back to 2007, if you look at the veterinary market, it was one of the few markets that wasn’t affected at all by the last recession. And part of — the last part of household income have to be sacrificed from the pet owner’s the money that’s spent on the pet. So I wouldn’t say that we’re recession proof, but I think we’re probably more recession proof than the most companies and we’ve just seen exactly the same during COVID. Yeah, exactly.
James VaneTempest
52:05 Thank you.
Operator
52:06 We will now take our next question from Edward Thomason from Liberum. Please go ahead.
Edward Thomason
52:12 Good morning, guys. Thanks for taking my question. Majority of my question has been answered, but do have one, specifically — we obviously, saw the news flow from CVS on Friday related to market consolidation. And specifically, I know this is obviously market specific to the UK, but are you seeing that trend in Europe as well as in the U.S., and what would be the impacts on a slowdown in consolidation to your outlook? Would that impact potentially your ability to achieve sales growth or maybe achieve margins?
Ian Page
52:53 Yeah, it’s an interesting one in the UK. For those that are the not aware, CVS tried to buy a large practice group and the competition authorities said that that would create a monopoly concern in a number of UK cities. The UK is the most consolidated market. It is probably about half the UK market. So it’s no surprise that we’ve perhaps seen some restriction on that now. Most of the European markets are nothing like as consolidated nor is the U.S. Does a slowdown in consolidation benefit Dechra? I guess you could argue that it reduces the pressure on practice groups getting bigger and bigger and bigger and demanding more and more discount. But you have to bear in mind that a lot of these practice groups are excellent partners for us, and in some countries, they helped us deliver growth very quickly by being able to sell to a new product to one outlook that has a few hundred practices that will start to use it overnight. So there is sort of swings around about the pros and cons to whether or not that saw there any consolidations or benefits on us.
Edward Thomason
54:10 Okay. Very clear. And then just one other question, just talking about Tri-Solfen, and just where you see the market opportunity for that products in — and whether you can break that down by regions as well as in Europe and Australia and Zealand region?
Ian Page
54:28 Well, in terms of sales or where we’re trying to develop?
Edward Thomason
54:32 Sales.
Ian Page
54:34 Well, we don’t break out sales by territory. I think we’ve disclosed what sales in New Zealand and Australia, which is the only place where it’s currently approved, brought there earlier in the presentation. But in terms of what the opportunity Tri-Solfen are, we’ve got it all Medical Ethics, the parent company who have developed, but horses, the wounds in horses, but foot conditions in capital this bidding, for piglets castration, obviously, we’ve talked about for the tail docking in lambs, but also there is — that many human applications and they just got the number of patents granted for human applications of Tri-Solfen, regarding — and I think there was one or two of the patents that can’t come on the human. So there are numerous opportunities for this product. So the piglets concentration…
Edward Thomason
55:37 But you won’t guide to specific market opportunity for Tri-Solfen in Europe and…
Ian Page
55:45 I think we’ve said in Europe that the bigger castration was relatively small, 3 million, 4 million, 5 million, potentially. So it’s more of a disappointment from an animal welfare perspective, from a financial perspective for Dechra at this point. I think we’ve guided sort of globally, this could be a GBP20 million, GBP30 million product in the fullness of time.
Edward Thomason
56:12 Okay. Very clear. Thank you.
Operator
56:17 As there are no further questions at this time. I’d like to turn the call back to your speakers for any additional or closing remarks.
Ian Page
56:25 No other than just to say thank you and we sincerely hope that it will be face-to-face meetings in September when we do intend to revert to face-to-face roadshow. So thank you very much everybody for your time this morning and will capture with you soon.
Paul Sandland
56:44 Thank you.
Operator
56:47 Thank you. That will conclude today’s conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.
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