Aspen Pharmacare Holdings Limited

Good morning, ladies and gentlemen in the room, and those of you joining us via webcast today. It is my pleasure to welcome you to the financial results of the first six months of Aspen's results, financial year, sorry. My name is Bongagon Gengosi, and I'm the Group Investor Relations Manager here at Aspen. In today's proceedings, you'll be hearing from Stephen Saad, the Group Chief Executive, who will be providing you with insightful overview of our results, taking us through the revenue performance of the group and its segments. Notably, we have revised the segmental reporting both in commercial pharma and manufacturing. These new segments give improved insights, understanding, and more granular disclosure. We've also bolstered the appendices to provide more detailed analysis In the appendices, you will find a comparison of the revenue disclosure between the old and the new reporting segments for commercial pharma and manufacturing. Also included in the appendices is a table illustrating the currency contribution of the group at a revenue and an EBITDA level. This will facilitate a deeper understanding of the dynamics between constant currency and reported performance. In the financial highlights, or as you dive deeper into the financial highlights and the finance cost slides, we've also updated the capital allocation framework, emphasizing that share buybacks fall within the fourth quadrant of our investment options alongside strategic M&A. And in the projected CapEx slide, you will see an uptick in the FY24 numbers. We expect a slight uptick in the numbers in order to meet evolving customer needs and market demands. However, we do anticipate that this will taper down in FY25, and you should see a resulting impact of lower FY25 spend from FY25 onwards. And with that said, I'd like to invite Stephen Sart to provide the overview of the performance of these results, to be followed by Sean, who will dive into the financial review. Stephen will then return to give a strategic overview as well as provide financial guidance. We'll then go into Q&A, and I request those joining us online to post their questions via the Q&A tab, and it's open already. Thank you, all of you. Stephen, over to you.

Thank you, Sabine.

Morning everybody, thank you for all of you that are here in person and thank you for your interest in Aspen and for those that are watching through the screen, welcome to everyone. It's an interesting journey, an interesting position we're in now. You know you start, I was sitting there while I was listening, you start years and years ago and you say you're going to build something and in five years and three months and in March this is where you'll be. And it all looks great on an Excel spreadsheet. All businesses look fantastic on Excel spreadsheets. And the trick with everything, of course, the most difficult part is execution. And for those of you that have followed us, we've just been ticking the blocks, ticking the blocks. And we've got to the exciting part of the spreadsheet. So that part where the merchant bankers tell you the hockey stick effect, you know, the business has done this for this period and they're going to do this for the next period. But we're at the stage now where we're in a position to deliver. We've been patiently building block by block, but hopefully you'll pick up from today and where we position that this is the period for delivery starts, for real delivery and earning starts now. Just to, you know, we don't like to run each presentation as independent of the past. I've just taken you to just... I'd like to just remind you of the links that we had at the end of last year. At the end of last year, we said we had some five strategic objectives. And it will always be an objective organic growth. There's no better growth than organic growth. Organic growth is really important to our business. And we get good organic growth just because of where we are. The absolute number of people in emerging markets buying more medicines and having more access to medicines. We've had this sword of Damocles hanging over our head for a couple of years in China. It's called DBP for those that aren't familiar with what it means. And it effectively is what people in other parts of the world would call what happens post-patent. And we've had some very big products, and we thought would be impacted, some were impacted, and we thought some would be. It all has happened. had to deal with this year after year. We keep coming back here and say, we really don't want to do badly in China and we want to keep our business there. It's a good market for us, but we have these issues. So that was a critical area for us to address. The sterile contracts, I think most of you that follow us know this very well. This is a key, this was a spreadsheet story I was telling you. We're saying we're building facilities and now we've got to get these sterile contracts. A very interesting space at the moment and it's getting more and more dynamic. And from an Aspen perspective, it's moving pretty positively for Aspen. The API business is a very important business for us in that it's very profitable in our manufacturing area. Our finished dose form actually runs at a loss until we get all these contracts in. So we set ourselves the target of getting an uplift on API profits. It had been negatively impacted during COVID, and we needed to drive that. And in emerging markets, we set ourselves targets to achieve some bolt-ons to improve our emerging market footprint or to leverage our market. footprint. So let's have a quick look at some of the highlights of H1. We achieved our financial guidance and very positively our base business grew organically and it was enough to absorb both China and the negative effects of Russia and CIS. If I knew I could read that to you two years ago, I might not have spoken to you about VBP and all of that. I would have been very happy to give you those comments. From a manufacturing point of view, yes, our results were beyond where we had thought they might be. A lot of it was a heparin unwind that we'll talk to you about. We also spoke to you last year about having two shutdowns in this first half to cater for some of the new contracts we have. We delayed one of the shutdowns until March of this year, so that was really a shifting of the profitability overall. And I remind you, in the prior year, we had grant funding at this level. I think it was about $20 million at this point. And we had a couple of hundred million rand of residual vaccine income. So a good performance from manufacturing to be able to sort of match the prior year. And then a major shift in the Heparin business model. It's a sustainable change. It's very positive. It impacts both working capital and addresses commoditization risk. And I'll take you through that in a bit more detail later. Our outlook for H2, we've got momentum from H1. Not a lot's going to change there organically, et cetera. But we do have some acquisitive growth as well. So some of the transactions we did, and you'll see our headline earnings per share were affected by transaction costs, et cetera. Some of those transactions now kick in in this period, most notably the transaction in Latin America and South Africa, which is the distribution agreement with Eli Lilly. We also see the start of material contract revenue, and that's quite an important, you know, the comment we made about MRNA projects. Coming online was an important comment for us. You know, it was not easy. It's not an easy tech transfer. We've achieved that, and so we have a lot of confidence to say the revenue starts, and it's starting in this financial year. And we've got strong cash flows as the working capital unwinds, and Sean will take you through that in some detail. So in summary, you know, this financial year 24 has been a pretty important year for Aspen. We've had to demonstrate the effective management of challenges in the base business. How do we manage China? Do we just write it all down and exit? But we felt there'd be a massive opportunity loss. We needed to demonstrate that we could save it, but not at huge cost to all of us and to all the shareholders. We wanted to realize existing contracts. That's been pretty important in this year. And we want to advance further capacity opportunities, and I'll talk to you a little about those as we go on. And then this year was a really important year. You're setting the table, really. This is the foundation. You've got to have a solid, solid, solid foundation. We set this year for the growth phase that we move into now. If you understand this, and I'm trying to make it sort of easy on the eye graphically, then you'll understand where we are and what we're trying to do and where the opportunities are. I'll take you through it. The top line is China VBP. So the red line means it's negative for 2024. Obviously, it's been a negative impact in the first half. It has a negative impact in the second half. It doesn't have much of a negative impact in financial 25, but I've put the line there because I would like to demonstrate the offsets later on. Russia had good COVID sales the prior year. It was only in the six months, and so after this, it's washed out of the base. We've done a transaction with Sandoz in China, and that should kick in from May, so that you'll see that May of this year. We have base organic growth, which we think we will achieve across the full year. And organic growth is an important area for Aspen, because if you take China and Russia out, we've got double-digit growth in our business. So that's something you want to lever. We've got the acquisitions that I've told you about. In the prior year, we had COVID vaccines and grant funding in the base. But we've had increased heparin sales in this period, in this year, as we unwind this heparin business. And there's a working capital unwind too, which we see about a R4 billion reduction in stock. And then, of course, we've got the sterile contracts, and we've tried to do it graphically, showing them going from smaller to bigger, starting from Q4 of this year, in other words, from April. And so if you look at that and you look at it graphically, where we are is in H1. There's negatives in China, if we go down the page. There's negatives from Russia. There was negative in the prior years, COVID, relative negativity, COVID and grant funding, all set by H1. by organic growth, heparin unwind, and a working capital unwind. Then you move into the second half and you will see a lot more greens coming in. The Sanders China, Lilly and the LATAM deal and the start of the sterile contract. So we're moving from sort of having half red, half green to more green. And then by the time financial year 25 comes in, it's actually all green and almost green because Sanders China comes in, it offsets any China VBP. issues, and then all the other green stock. But the steriles grow pretty dramatically as they go from $500 million of contribution in this financial year to no less than $3 billion next year and no less than $4 billion the following years. And we'll spend some time on that. So effectively, the red line, as I said, in China, DVP, shouldn't be there because sand, for example, will be additive off the space. So with that, let's have a look at the numbers. But I think that's an important slide. I mean, if you want one slide to understand where we're going, what we're doing, it was the previous one. And all we're going to do now is talk about those areas, the greens and the reds. We've had a double-digit growth in group revenue, and it's driven by manufacturing. And we'll show you now within the manufacturing that a lot of that growth comes out of heparin. If currency tails wins, how do you tell currency tails? When you look at constant exchange rate, it's a couple of percent, and then you see our reported, and it's 10%. That difference is the relative strength slash weakness of RANDs against our trading basket of currencies, and that's what we call a currency tailwind. And then you'll see we suffered some knocks in China and Russia around our injectable portfolio. And we were fortunate enough, one, to do really well in Latin America in terms of offsetting some of that injectable losses, and the growth in prescription OTC certainly assisted us there as well. So I think that's one thing you should look at, Aspen, is in terms of diversity, diversity of currencies, diversity of products. So this one, I think, is the advantage of having a diverse product range. This gives you a picture of a diverse geographic range. So you look geographically how we're performing, and you'll see Europe CIS, which is effectively a Russian impact that's negative there, and the negative in Asia relates largely to China and the VBP influences there. But that's offset by the other geographies to be able to give us some growth. So really good to have that geographic diversity as well. So product diversity has geographic diversity. And we're going to have a much stronger second half because we have the organic growth sustained and we have the acquisitions. The prescription business, and this is, I really like this disclosure, and I hope you also like it as well, because it gives you insight. I know when I was an auditor, there was nothing more, the biggest thing that you didn't do with auditors, give them more information, because I asked more questions. I don't know if I was being so wise, I should have taken my own advice in those days, but here it is, it really gives, it's excellent insights into the business, and our whole IT framework, a whole dot-dot and information financial framework keeps improving when I think where we were and where we've got to now. It's been unbelievable. I can tell you from my computer a product in Vietnam, one SKU, one exactly what it does, what is gross margin, how much it sells away and how it sits on your computer in local currency, constant currency. So very, very, very, a lot of good information, certainly very helpful. And we're trying to share as much of that with you as we can. So prescriptions are things where you need a doctor to script for you. You can't walk into a chemist and get it. Once again, a good performance across almost all regions and all geographies here. The negative here was in Australia. We had mentioned in our last set of results that there was an impact from the PBS. The PBS is the authority, the pricing authority, and they had They had made unilateral pricing cuts across the markets. Quite a tricky market in prescription in Australia because of that. The authorities are very involved in pricing. The H2 will be very strong. This is the section when you're modelling, you should model for some pretty large growth here. It will be driven by the LATAM product acquisition. And you will see right through this presentation how Latin America is becoming a bigger and bigger part of the Aspen business and could quite possibly be the largest part of the business by as early as the second half of this year, in the half itself. And a much stronger half from South Africa. We've had SEP increases, which was just over 6%. We have good organic growth there. We've got an ambitious budget for the second half of the year. And, of course, we've got the opportunity to add the Lilly products into the Aspen portfolio. So this will be a drive-up growth for the second half prescription. OTC is a great business. Think about OTC, it's a bit more like a consumer stock I suppose, how you might think of some of the big consumer companies. It's a good business to be in, often not regulated by pricing. So you don't have for example the price cuts in PVS, they don't touch OTC products. We really had a good performance across almost all the regions. Middle East was a strong performer. Their product in the red you see up there, sulpidine is a big product in the Middle East. And, you know, with improved supply, it will get even bigger. And very positive is our European business is on the front foot here too as well. A lot of it driven by the derma products, so the skin products. You'll see we talk about pain and hormonal creams. Emla is for pain. It's something you rub on. It was an anesthetic cream. You rub on your arm, leg, wherever. Even if you're going to have a vaccination, it sort of anesthetizes. Anovestin is a hormonal cream. So we want, our ambition is really to sustain this growth that we've had in the first half into the second half. Injectables is probably the area that we should spend a little bit of time on. We talked about this sort of sword of Damocles over you. And I think what you'll see here is our ability to catch a falling sword. And this is an area, injectables, an area that has to be strong for Aspen. We've pinned our colors to the mask on some of the steroids. And this will be an area where you see some pretty big turnarounds in financial year 25. So it will be a strong rebound here. We'll talk about that now, but the big drop there, you can see that Asia is down 27%. And Europe's CIS is 18%. So it's a common theme. It's the China VBP impact and Russia's CIS. Fantastic performance out in America as we've managed to start making supply. These hormonal injections are not easy to make. So this is like testosterone and products like that. And we've managed to get our supplies up and fantastic offtakes already in Latin America and certainly cushioned the blow in this area because Asia was the largest contributor in this area. It still is. And it took a very, you know, we took a big knock with the VBPs. And I think we will see it will continue into the second half. We'll see. I think you'll see more of the same in the second half. However, for H2, you won't have the impact of Russia in there, so Europe is growing, so it should go back to growth, the Europe part of Europe, CIS, it is. And LATAM is going to be sustained. It's really, we've got our manufacturing up on the hormonal injectables, and we're in a good space there. The real area to concentrate on here is the pipeline here, and We, Munjaro, we intend launching in financial year 25. You know, if we get stock, we think it will be the single biggest product in the South African private sector. Munjaro, for those of you who don't know, is one of those key products in the obesity sector with Eli Lilly and a really, really exciting IP for a company like Aspen to get hold of and to be partnered and trusted with a company that's just short of a trillion dollar market cap. And then we've got the Amgen products for South Africa, which are a lot of injectables. And then we've acquired Sandoz in China, where the two key brands are also injectables. So you should see a lot of Asian turnover restored and some good growths, particularly around Africa, Middle East. In terms of manufacturing, we've had a strong performance in this area, 33% growth in it. And I think when you're looking forward, this is an area if I were in your shoes or trying to analyze Aspen, I'd be looking very closely at that FDF line because that's where the sterile contracts go. As you know, we put all the overheads into our facility. So as those sterile contracts come in, you will have – you will have a very high contribution to profitability. So API growth was important. It was one of the things we set out to achieve, and we've got back to where we want to get to. There's always room for improvement, but it's good to see that business moving forward positively. The heparin sales is a pretty big jump. It's nearly a billion rand in jump, and that's part of the stock unwind. We will spend a bit of time on that. For H2, I think you will see that heparin sales will increase even further. It will be more. We'll sell more in the second half than the first half even. And you'll see the contract sterile revenues impacting finished dose, which we'll cover in some detail later. I think it's worth a separate slide, you know, the resolution of heparin, the working capital and commoditization risks. So what's changed? You know, I was, I think I was on TV yesterday and people get confused. Sometimes you've got a stone and you think it's a diamond and you can gloss it up and you believe it's a diamond and then it creates value because someone tells you that stone is valuable. And, you know, the product that goes into heparin is something called mucosa. And it's something you throw away in the process. It costs you money if you're a slaughterhouse. But because of things like African swine fever, COVID, which used a lot of these heparin products, There was just this incredible demand and the price literally went up fivefold. And as much as you try and talk to someone and say, look, that's just a stone. This is a diamond. This is the new gold. And then it all went away because everyone was stocked up. And now you get this sort of supply and demand story, which everyone's fully aware of. And now we've got from excess demand has changed to excess supply and literally have to throw it away. So we took this opportunity to change the current model. We de-risk from commoditization because we went to those same stores and said, yeah, we'll buy from you and we'll keep buying. But we are not. We are going to share with you on whatever base of formula, whatever we get from our end customer. We're not outlaying money up front. We're not going to, you know, this thing goes from 10 to 50 or 60. And it takes a year to make. So you've got to take a guess at 10 whether it's going to keep going up or go down. We were fortunate. I mean, you've got to know when you're lucky and when you're skillful. But we were fortunate the price kept going up. But at some point, it was going to turn down. We managed to get some long-term partnerships with those slaughterhouses on some profit-sharing mechanism based on the product selling price. From a customer point of view, the people that buy the heparin from us, you know, they've been paying $100 for heparin. And now you say to them, listen, we can charge you $50, but we'll give it to you for five years. You match it with whatever your supply contracts are with the slaughterhouses. So they've got certainty on pricing, which is something I always wanted when we controlled finished ice forms. So it makes sense for them. They're excited because they know. Bear in mind, most medicine prices are regulated. If this thing starts going up and down underneath there, you have no control over your margins. You can't go to Europe and say we're having a price increase. It's pretty hard anyway. So for pricing security, giving that security, our ask of them was we can give you this, but then you must hold the stock. So all the Heparin that we used to hold, you've got to hold. And we just want to do toll manufacturing. You know, Heparin touched, it's just short of 5 billion Rand on our balance sheet. It's a lot of money to have in Heparin stock. So the Heparin business, in short, will go into what we call a working capital light model. And we're trying to do that with all our manufacturing, with more predictable profitability. And Aspen's stockholding will decline materially. And Sean will take you through that. I think, yeah, that's my bit. I'll come back, I'll talk to you a little bit about strategy. But I think a very clear, and I hope those segments made it really clear, but a very clear indication of where the challenges are, how we manage those challenges, and what we need to do going into the second half. So, good luck, Shawnee. Thank you.