Aspen Pharmacare Holdings Limited

Good to see you all here today. And welcome to Aspen's full year financial results for the 2024 period. In today's program, we're going to have Stephen, who's going to start us off with the performance overview. Sean will then follow with the financial highlights and review. Stephen will then return, and he's going to give us the strategic review and some outlook. And then we'll move on to questions and answers. The attendees that are joining us online are requested to put their questions in the left-hand side of the screen, and that question box is already open. For our attendees in the room today, we'll be using a roving mic. Thank you all. Over to you, Stephen.

Good morning everyone, lovely to be here and thank you for your attendance and for, I believe there are many, many more online, so welcome to all that are listening. I think if we reflect on where we are and where we're going to, this second half was a really important half for Aspen. We flagged it over a year ago as being a critical inflection point for Aspen and indeed it was. We had some very, very important deliverables. know after the last seven to eight years we've we've had pretty much uh you know we building this and this might happen and if we operationalize successfully or take transfer then this will happen For the last few years, we've been flagging, for example, the VBP risks in China. So there were lots of risks. So it was always, this is where we're going, but these are potential threats to the business. I mean, to quantify these type of things, the commercial farmer business had a couple of billion rand, over a billion rand in gross margin at risk between China and Russia. And in fact, China was even worse. So that's a challenge we had to choose. We had to work out what we deal with. It's one thing dealing with the commercial challenge. I mean, the absolute number challenge. Probably the bigger concern from our perspective was what happens in China sustained because China is a good market for what Aspen does. But would we still have a model that could work in China after all of this? From a manufacturing perspective, You'll see that on the next slide when you'll see even geographically how we perform. If you looked at China, if you took Asia and you pulled it aside out there, you'll see we have double digit underlying growth in the business. And that just gives you, but it also gives you a sense of the geographical diversity. So yes, we didn't perform in Asia, but fortunately we performed in the Americas. in Africa, etc. So we have a very balanced product portfolios between injectables, steriles, and OTCs. And we also have a very good geographical balance as well. What you will see too here is that the Americas are now larger than Australasia. So that Latin American region is really an exciting region for Aspen. And for those that have watched you for a long time, we had to persevere, but we had We had problems worse than China in those initial days. And certainly I remember the board telling me, please exit Brazil. And I said, no, it will be an opportunity loss for Aspen. And we persevered and look where it is today. And it's really one of the most exciting, if not the most exciting region within the Aspen business at the moment. Russia, we took a big loss in the first half. So, yes, it's got an annualized decline, but it wasn't much in the second half. There's not much left, to be candid with you. What is heartening to see is that the European business and the Europe CIS is growing and continue to grow. And we've got a portfolio and a team in place that are delivering results across Europe. Prescription has been the biggest section for us now and it is the fastest growing. It's accelerated. In the half we were at 7%. We're now growing at 15%. So there's some strong growth in there. Some of it driven by currency. The difference between the 15% reported and 11% is currency related. Some of it is also the products required in Latin America. We've had good organic growth across most of the sections. And what you'll see in prescriptions and look at it when you see Australasia, these are products that are regulated. We have price cuts in the area and we battled a bit on the pricing in this period. And you'll see a decline here. What is worth looking at is when you turn over the page, you'll see that the OTC business in Australia is nearly now the same size as the prescription business, and it grows, and that's less regulated. So that business is shifting from being in a regulated space to being where we have some freedom with pricing around OTCs, et cetera, and it's now nearly a 50-50 split, which is, for those that followed us over the years, it's a massive jump. We're almost exclusively an Rx business. The South African business continues to deliver and the women's health products are also really assisting and the anesthetic creams in the European business. And we've got steady growth in OTCs across all the regions. And to do this, you need good teams of people. Of course, and because they've got to position them correctly on the shelf in the consumer's mind, but also the brands have really good brand equity and their brand equity builds where we grow. So you've got almost a good performance across the board in the OTC space. The injectables are where you'll see all the issues that we faced in Russia and China. You'll see how Asia's down 35%. It's a big decrease from the largest contributor towards injectables. And you'll see also that the decline in Europe is exclusively related to Russia. The positive, if you can see it like this, unfortunately it's not a good place to be, but we used to have a business in Russia that did a billion rand. It does very little now. So it no longer will have an impact on results, a downward impact. And we've had really good growth in Latin America and in South Africa. And this is an area that we've dropped a lot of turnover, and it's been the area that we had to address. And there's... There's some really good news coming into this section. And we'll talk about it when we talk about strategy and prospects. But aside from the obvious launch of Njaro in South Africa, there's some other wins that we've managed to achieve. And so this is an area that's going to bounce back strongly. Manufacturing was all about how we deliver on our sterile contracts. Finished dose for manufacture, which is where the steriles are, was sometimes the smallest or close to the smallest segment in here. And the value of those contracts coming through now shows you that it is, you'll see what a large, it's now become the largest contributor and will accelerate relative to the other sections over the next few years. And If you want to get a sense of how big the second half was, you'll see that we grew at 33% in finished dose form, which is a great number. However, we were only 10% up at the half. So understand how much we achieved in the second half. We had an onerous contract in the API business, which resulted in us getting lower revenue. Unfortunately, those concepts are beyond me. I mean, I think when I was a chartered accountant, we had one statement, so this is something that the accountants can explain. Heparin, we sustained the elevation, the elevated sales are explained by the unwind, the sale of the stock. And that's unwind as a permanent unwind. The future model is really working capital light. And effectively, we've got about a billion rand of stock on the old model that we really need to move. So the. The positive on that is that if we move that it's a billionaire and ultimately a billionaire and more reduction in our stock without needing to be replaced. But we also need to sell it over this period. And that's something that we that we need to work on is how we actually shift the stock out of our system so that everything relates to what is officially almost a consignment model in terms of sales. Oh, and that's it. So that's me for now on operations. I think it's a pretty simple story to tell. We've got good underlying growth in our commercial pharma. We've got some good kick-ups to come, and we had issues in injectables, and hopefully I'll show you how we can address those going forward. And manufacturing is really going to be something that powers us going forward. So with that, I hand over to you, Shawnee. Thank you, Steve.

Thank you. Thank you, everyone. And thanks, Steve, for those performance insights. When I was sitting preparing my notes this morning, I looked out the window and I saw the Springbok bus on the other side. They definitely in our corner, but also made me feel very proud that we are a South African company. Our roots are global, but we're still firmly planted in the South African economy. And I think that's a really, really proud thing for Aspen. And I think similar for the Springboks, making us proud on the global stage. And we're hoping that we'll emulate them and make us all proud for many years to come as Aspen being a major global player. I'm going to kick off with two financial highlight slides, which will just give us a really high-level view of where we've performed. Some of it Stephen has covered already, so I won't sort of go through that again. But if we look at the first slide on the left, you'll see that our revenue is up 10%, and the big driver there is our manufacturing business growing 25%, commercial pharma growing 4%, and bearing in mind we had very strong growth in prescription and OTC to over – to offset the decline in injectables. So a good performance from commercial pharma withstanding the VBP impact. The standout performers, I think, from a half perspective are our normalized EBITDA and our normalized HEPs. And I promise we didn't do this on purpose, but both numbers you can see have grown by 17% in the second half, so quite a strong growth. You can see both in our EBITDA and our INEPS from half one to half two. And that really gives us the foundation in building momentum to go forward with our new strategy underpinned by our new de-risk commercial pharma business and also our sterile foray to fill our capacity. I think also important, if you look at the EBITDA up 1%, that's 1% after absorbing a billion rand, as Stephen mentioned, in the manufacturing side of the grant funding and the loss of vaccine, the last vaccine benefit in the prior year and some onerous contract, and also withstanding the impact of VBP. So we had to overcome all of that and grow by 1%, but you can see the second half is testimony to where we're aiming to go going forward. So standout performer for me, obviously on the finance side, our working capital. Big underpin there is the unwind of our Hepron inventory, which we dropped by $3 billion, which we did guide in the first half when we met that guidance. And I know a lot of you have always watched this ratio, but if you look at our working capital ratio as a percentage of sales in FY23 at 55%. At the half, we're at 49%, and we end the year at 45%, and we aim to keep that ratio at that level and perhaps down going forward. So a strong performance there. That obviously is a good segue into how we ended on our operating cash flow. We exceeded 100% cash conversion rate at 103%. Up from 88% in the prior year and if we go back previously FY22 we were at 81%. So a really nice trajectory back on a positive cash generation and supported by a permanent reduction in our working capital investment. On our normalised net financing cost, which is the third graph on this page, you'll see that in total we were relatively flat at $1.2 billion. but it is the tale of two stories. The one is, you can see in the dark blue, our interest has gone up from 800 to about 1.2 billion there, about 400 million up on interest, and that's driven by the higher interest rates, which we'll unpack in a later slide, and also our higher average debt levels. The counterbalance is that we have had a significant reduction in our foreign exchange losses this year. If you remember last year we took a hit of about 400 million on our foreign exchange losses because of the volatility in emerging market currencies and that has been squashed pretty much down to below 100 this year. So that counterbalances the impact of the increased interest cost and puts us in a pretty flat trajectory for the year. From a net debt perspective, net debt grew from 22.2 up to just under 27 billion, an increase of 4.7 billion. We'll unpack that in a later slide as well, but that's driven by our acquisitions during the year, the main one being the one in LATAM. And our leverage ratio ended at 2.3 times, slightly above what we guided, but very comfortable and still well within the range of 1.5 to 2.5, depending on where we are with our acquisition journey. On to gross profit percentage. On the gross profit percentage, if I start off with the commercial segments and I'll start off with prescription, prescription being our largest business segment, supported now with that Viatris Latam transaction that we did and was effective from last year, November. You'll see if I just sort of take you through the bars to navigate. We start with the FY23 margin on the left. We then talk you through the two halves, and then we show you the full year margin on the right. For prescription, you can see we ended the year pretty much in line with the prior year. There was a bit of mix between the two halves, but overall a pretty steady margin. And if you remember, that's after having us all price cuts in the Australian market, but we have got quite good margin benefit in our new Latam business. that's also helped to drive our margin for this year. We do anticipate the prescription margins are growing in the new year because we're going to have 12 full months of the late-term business. So I think from a guidance perspective, you can look at an increase in the prescription margins for the year ahead, a marginal increase there. On the OTC side, we ended last year at 58.2, this year at 58.7, so a nice trajectory there, a nice jump. Our enhanced portfolio sales mix has ensured that positive trend, and we obviously continue to refresh that portfolio and drive and optimize the gross margins. For OTC, we do see this margin staying pretty steady in FY25. So from a guidance perspective, you can take that as a steady margin going into the new year. Then we get to injectables, and there you can see the impact of VBP. We started the year at 59.7, 59 in the first half, and then with the prevent coming into the VBP net in the second half, our margin has dropped down to 57.3 with an overall full year margin of 58.2. We do anticipate that the half-two margin will be the margin that you can expect in the year ahead for the injectables, obviously as the VBP now is out of the system and that seems to be where we expect it to be in the new year. But the power of a diversified portfolio, I think Stephen spoke about it in his sales slide, where you've got a very even split, obviously more weighting to prescription and OTC now than injectables. Injectables is now number three in terms of segment size. When you put all of those three together and look at the... increased sterile contribution we do anticipate this margin lifting into the new year into the double digits uh we're going to have less you know your hip will be now at a much lower trajectory now that we've unwound into the toll model and obviously with the sterile contribution coming into play we do see quite strong margin growth coming from the manufacturing division in the new year um From an overall group perspective, you'll see that our margins have dropped from 46.2% ending there at 43.5. And that is predominantly a function of the mix of manufacturing being a much larger mix, a proportion of sales than commercial pharma. Because if you look at commercial pharma, if you recall, the margins are relatively flat year on year, and it's just really the mix of the business that's moved us into this lower margin trajectory. We do anticipate a gain for FY25 with the heparin now at its new lower level, the increased sterol contribution coming into play, the steady commercial farmer margins going into the new year with a slight increase potentially. We do anticipate that the gross margin for FY25 will at least get to what we were in FY23 and perhaps a little higher. Onto normalised EBITDA. I think maybe just to navigate this slide. So what we've got here, we've got revenue, gross profit going all the way down to normalised EBITDA and we're comparing our current year's performance versus FY23 at a reported and then on the far right at a constant exchange rate. So, first of all, I think we've unpacked the gross margin already, but you can see that our 10% revenue growth translated to only a 3% gross profit growth, and that was a function of the mix that we covered in the previous slide, and also some impact from the China VBP on the commercial farmer margins. Very proudly on the expenses line, if you look at it from a constant exchange rate perspective, we only grew our expenses at 4% relative to 5% of turnover growth in CER. And you can see our expense ratio running quite tightly there under 23% of sales. From a normalized EBITDA perspective, as we've already gone through, we've grown at 1%. You'll see our EBITDA margin is down at 25.2%. relative to FY23 of 27%, and that purely is a function of the increased manufacturing mix this year. For FY25, with the improved gross margin mix from sterols and the lower heparin sales mix, we do anticipate EBITDA margins returning back to the 23 EBITDA margin percentage levels of around 27-odd%. And I think just again to emphasize that this EBITDA being up at 1% is after having absorbed a billion impact from our manufacturing and another probably around a billion from the impact of VBP and Russia in the current year. So I think overall we've de-risked the business and I think we've got a solid platform going forward. On to finance costs. If we look to the right of the screen, you'll see the evolution of our interest rates over the last period of time. starting from 2023, half one, and you can see how it's jumped up 2.8 in 2023, first off, up to 3.6. We've then put the average for the year, so last year we ended at 3.2% average, and then you can see how it's hopped up this year to 4.4 at the half, up to 5% in the second half, and ending at 4.7%. If you remember, we did guide that our interest rates would go up between 120 and 150 basis points, and then we've pretty much come in on that guidance as we've As we said, going into the, going into the new year, we do anticipate our finance costs to, to, to increase. I know it sounds counterinsurative because we know that the interest rate cycles at a peak and we, are going to start seeing and we have started to see interest rate cuts but obviously going into the new year we still we've still got the residual carryover of the high interest rates from this year you can see that in half two we ended at five percent so that'll carry through into the new year and we'll only start to see interest rate benefit i think from fy 26 onwards in addition we've also started to repay the the ifc loan um that if you remember was at the zero percent base rate so we've We expect to pay 120 million euros of that back in the new year, and that will then be replaced by interest-bearing debt. So that will also put some pressure on the interest line. So from a guidance perspective, we expect interest rates to increase between 60 to 80 basis points from the FY24 closing interest rate. Very proud to announce, and I can see we've got one, we've got the IFC representation here, and thank you. We've managed to raise a secure funding of 500 million euros from the development finance institutions, of which IFC is one, Proparco, DFG and DEG. They've really been supportive, and this financing will be used to enhance our capital structure mix, and also it provides a lot of support and confidence in our sterile capacity journey in Africa for Africa. So we're very happy to have announced that, and it certainly puts us at a very strong position from an overall funding mix perspective. So thank you to the DFIs. for that support. And, you know, from an ESG perspective, a really big tick. We've got to go through a lot of hoops. You can't just get this funding and you've got to go through a lot of ESG hoops and commitments. And I think we've ticked all those boxes and worked in a very strong and collaborative way with the DFIs. So we're hoping to use that money wisely going forward. From a foreign exchange perspective, you'll see the drop in the foreign exchange losses from the $434 million down to the $64 million in the current year. So that's what's counterbalanced the high interest increase. And that little graph on the right, you can see how less volatile. I didn't put the previous year's one, but that looked like spaghetti compared to this year. If you look just towards May and June, you can see that little blue line, for example, and I think the... And the grey line is starting to pop up there at the end. And that's the PESA and the Brazilian Real starting to weaken against the Euro. So we do anticipate. And obviously, if you also notice, the Czar has also got stronger. In in the last period of time, so, you know, with the strongest, and we do anticipate there could be some weakening of our reported results. If the continues at that strength, and that would be the, that's the main underpin while all of our guidance has been provided in in so that we can give you proper guidance without the impact of currency volatility. On to, um, probably my favorite slide, the accountants. I love this slide, but it certainly was my least favorite slide for two years, but definitely my favorite slide now. So if we perhaps just look at the graph on the right, I think you saw it on the very first page, but just to show it in a little bit more detail, that depicts our networking capital as a percentage of revenue. You can see how we've dropped from FY23 down to half one to 49 to 45. And if you recall, our API business has got a much longer working capital cycle. So for those of you who want to benchmark us against other pharma, if you strip that out and exclude the API business, we're down at 36% at the end of the year. Still not where we want to be. We want to probably be below 35%, but certainly a big step. I mean, if you look at it from 36% from 44% last year, a big step in the right direction. If you look at the graph on the left, that's our operating cash conversion cycle. The light blue line there just shows what the ratios were in each of the halves. So you can see that in H222, we did 117. Last year, our first half was 58. We then came up to 115% in half two last year. 89 in the first half and now at 115%. The red line is our target of 100% cash conversion rate, but the most important line is that very dark blue line, and that takes our 12-month moving average of our cash relation. You'll see for the whole of this financial year, you'll see that dark blue line is above the red line, which means we've been over 100% on cash conversion for the full 12 months rolling for this financial year. The big underpins there, obviously, are the heparin unwind. We do also see further opportunity to reduce inventory levels. I think Stephen's mentioned that we've still got a billion rand of what's called old model heparin that we want to liquidate. And we've also got opportunities within the broader business, both in manufacturing and commercial pharma, to drop inventory levels further. So that will be an area we're going to focus on quite a lot in the new year. So I think the big takeaways from this slide are the operating cash conversion ratio exceeding 100% at 103% and the net working capital ratio returning to FY22 levels of 40-45%. From a guidance perspective, we expect to at least be at 45% next year and hopefully slightly lower. Onto net debt. Just to sort of talk you through the moving parts here. On the left is our net debt at the FY23 of $22.2 billion. And on the far right, we ended the year at $26.9 billion. If you look at the bridge between, we've generated operating cash flows of $8.3 billion. If you're wondering why that's different to what you're seeing in the operating cash flow, we have also funded $2.1 billion of the VRTIS transaction through operating cash flows. So what we do is we add that back in that block and we put the funding in the block on the right in the acquisitions block. So if you take the net of the 8.3 and our capex spend for the year 3.8, a positive free cash flow there of around 4.5 billion. We've obviously got our dividends, and then you can see the big outflow for the year is our acquisitions of 7.7, of which the big one is the Viatras Latam. We've obviously got Sandos in there, and we've got other smaller Bolton IP acquisitions sitting in there as well. From a leverage perspective, the... We ended the year, to be precise, 2.28 times, but we rounded it up to 2.3. And for FY25, based on the strong cash flows we're expecting, we do expect our leverage ratio to dip below 2 into the FY25 period. I think the other point to make on this slide is that we funded all the debt this year, but we haven't had the full benefit of those profits in this financial period. So that cash benefit will come through next year on the profit line as well. Onto intangible assets. You'll note that we have quite a big increase in our impairments for the year. It's gone up. If you look at the graph on the left, this is our net impairments, gross impairments, less reversal of impairments. And you can see in FY22, we were 1.2 billion of impairments, slightly down last year at 1.1, and that's gone up to 1.6 billion, a 49% increase in impairments. The big driver there is the VBP impact that we've picked up on Fraxi, Perrine and Dipravan, which was not anticipated either at the half or at the prior year. We knew we had VBP impact. We didn't anticipate the impact of it at this level. We have got future risk mitigation strategies in place, and if those come to fruition, then we do not see any further impairment risk. However, very unpredictable. If something does change in the market, then we'll have to look at our view on these impairments going forward. But just to put it into context, I mean, impairments at a total level are 2.2% of our net book value of 72 billion of IP, so only 2%. of our IP is impaired. The other thing to note is if you do a full valuation of your intangible assets, we've got 60% headroom above the $72 billion. But unfortunately, as accountants do, we can't write anything up. We can only write things down. So the focus is always on impairments and never on, you can only write things up to the original book value or original cost, but not above that. So just to bear in mind that, you know, if you look at our whole portfolio, we are well valued. It's just, unfortunately, you only look at negatives when you look at impairments. I think the positive is that we have, and probably similar to what I said in the interest rate slide, we do anticipate interest rate softening going forward, obviously, which means also risk-free rates and discount rates will start to soften. And so that will have a positive impact when we do our impairment assessments going forward. We do see that discount rate softening over the next two to three years. From an income tax perspective, we ended pretty much in the range we guided for the year for our normalized tax rate between 16 and 18 and our all-in tax rate of 22.9%. That went up because of the impairments, because impairments aren't tax deductible, so you do have that increase in your all-in rate. but certainly well within the guidance. Obviously, with the increase in our sterile contribution, we do anticipate tax rates lifting a little bit in the new year. And then we all, as everyone is, there's a lot of global uncertainty around BEPS pillar two and its impact on the business. So we're going to be going through a full assessment of that in FY25 and come back to you on that into the future. But it's certainly very uncertain at this stage. You speak to anyone about BEPS pillar two and they all got very different answers. From an ESG perspective, Aspen is fully committed to running a sustainable business in a very responsible manner. As one of our KPIs in FY24, we had to come up with goals. So we've put all of our sustainability objectives into a pot and we've come up with 16 sustainability goals, which we feel will give meaningful impact to the way we run the business into the new year. And we've put those in four pillars, patient pillars, our people, society, and environment. And within those, we've also started, we've set KPIs, which I think will be published in our integrated report, which comes out, I think, at the end of October. And so we will start to measure ourselves against these goals and also link it to remuneration outcomes. So we certainly are fully committed to sustainability and sustainability goals in terms of our overall balance scorecard approach to running the business in a profitable but a sustainable manner. Perhaps just a little snippet on our renewable energy projects. If you recall, we did guide you that we were going to be – launching our plastic waste to energy project early calendar year 25. I'm pleased to report that that is still on track. And following that, our Quebec site will be fully off the municipal grid. As we sit now, 18% of our electricity consumption is from renewable energy, which is up from 11 in the prior year. And obviously, this new project will have quite a big impact on that ratio into FY25. And you can imagine the benefits it's going to have on carbon emission as well. So we're very proud of the initiatives. And if you look at the far right picture there, you'll see all those solar panels. That's not in South Africa. That's at our NDB. You might have seen it there when you visited and it was snowing. But the sun does sometimes shine in France, and they also generate solar power in France when it's sunny. Certainly during the Olympic period, they had a lot of sun. Our projects across the globe are progressing to plan. We do have some nice slides in the appendix around how we're providing access to medicine for all of our patients and the journey that we've followed over many years. And we've got some little snippets there on how we've reduced our water consumption and electricity consumption, just to give you a sense of how we're going to be measuring ourselves going forward, but just overall fully committed to sustainability and all the objectives around it. So, on that note, I'm going to hand over to Steve for the most exciting part of the presentation, which is the strategic review. Thank you, Stephen. Thank you, Sean.