Aspen Pharmacare Holdings Limited (APNHF) CEO Stephen Saad on Interim 2022 Results – Earnings Call Transcript

Aspen Pharmacare Holdings Limited (OTCPK:APNHF) Interim 2022 Earnings Conference Call March 10, 2022 1:30 AM ET

Company Participants

Stephen Saad – Group Chief Executive

Sean Capazorio – Group Chief Financial Officer

Conference Call Participants

Sean Capazorio

Good morning everyone. Good to meet all of you today, great to see a lot of you face-to-face for this Interim Results for Aspen. I made a promised to Gus that I wouldn’t smile, because finance people aren’t allowed to smile. But it’s going to be very, very difficult for me to do that because we’re really presenting some exciting results. And I’m really proud to be the person presenting these results today and also to acknowledge all the hard work over many, many years to culminate in the results we are presenting to you today. So thank you for your time and hope you enjoy the presentation.

I think just to draw your attention to the disclaimer and the restatement slides just take those for noting and you can read them in your own time. And then I think we’ll kick straight into the presentation. You will recall from our meeting at Investor Presentation that we had in December 2020, seems like a very long time ago but at that presentation we did guide the market that we were going to be targeting to shape our business in a shape where our earnings would exceed our EBITDA growth and our EBITDA growth would exceed our sales growth. And I thought I’d put the pyramid shape on the screen just to give sense of what that shape would look just from a supplemental perspective. And I’m very proud to say that we are delivering on this commitment and you’ll see that coming through in all the results that I present to you today.

I’ll take you through all my key insights now. I’ve got about nine key insights, really just little things that I think will, you’ll see will – that those themes will be prevalent throughout the detailed financials. I thought it’d be better just to take you through these themes upfront and then once you get into the heavy financial nuts and bolts, these themes will come hitting you and you’ll be able to resonate with you and you’ll be able to come back to the themes that I’m putting on the screen.

Also, just to put the point out that we measure our business in constant exchange rate, so all of my comments will be in constant exchange rate. As Stephen always says, if you’re running a business in Europe and you’re earning euros, if the rand strengthens against the euro, the Europeans won’t be able to deliver more sales, they can only deliver the same euro growth. So that’s how we measure our teams and that’s how we measure our group performance and our management performance, so all my comments will be around constant exchange rate.

So kicking into the insights, I think sticking with the good shape, and I’m very pleased to announce that Aspen is in good shape and we’re lean. We’ve got robust gross margins, we’ve kept our expenses in control, we’ve – in fact, we’ve reduced our expenses by 2%. And those in the face of an increasing sales growth of 10% have given us very strong leverage for our EBITDA growth, and put us in a really good position. And so you can see from December 2020, our reshaping plans are starting to be realized. And that shape, the pyramid shape that you saw on the first slide is taking shape. And that’s our sort of guiding pattern, going forward.

Very importantly, we are delivering on our organic sales growth targets. If you recall back again to the 2020 presentation, we guided that we’d be growing our base turnovers in our segments between 3% and 7%. And if I can just take you through the segments that make that up, Commercial Pharma growing at 5% and that’s an increasing trend over prior year increases. Our Manufacturing business is growing at 30%. That does include what we call finished dose form transaction related sales.

Just to remind you what that is, those are the sales in terms of supply commitments relating to the European thrombosis disposal and the Japanese business disposals in terms of which we had an obligation to supply those vendors with product for a fixed contract term post disposal. They do – they are supplied at no or low gross margin and do distort our numbers. So when we’re looking at our base performance, we always exclude them from our sales growth and from our margin growth to give you what’s like – what our base operational performance is looking like. So stripping that out, our Manufacturing is still showing a very healthy growth of 10%. Again an increasing trend if you go back to prior base growth performances on Manufacturing.

And then if you throw it all together and say, what is the overall base growing at? If you take Manufacturing, Commercial Pharma and you strip out the FDF transactional revenue and you also strip out, if you remember, we’ve been – we did have dilution from the Europe oncology portfolio. So we also do strip that out when we look at our base growth. So if you exclude those two elements, our base growth is at 7%, again, a very impressive growth and as you can see, right at the top end of our guidance, which was 3% to 7%, growing at 7% and, again, an increasing trend. And I think Stephen will show you some of the historical comparators against that 7% in his presentation.

Gross margins, yeah, I mean, as you say sales is vanity but you got to bank the profits. And we’re very pleased to show that our gross margins have improved over this half, despite all the challenging headwinds of pricing pressure and the selling price pressure in the market, cost inflation, which is an ever increasing challenge. We’ve been able to grow all of our gross margins, again, when you exclude the FDF theories, revenue across all of our segments. And I’ll take you through some more detailed analysis in later slides but really a pleasing performance.

Coming back to this the pyramid, we’ve also been able to achieve double digit growth in normalized EBITDA and normalized headline earnings. And also the double digit growth not only in constant exchange rate, we’ve also managed to achieve it in reported, so a really, really proud achievement. From an EBITDA perspective, we’ve grown our normalized EBITDA by 15%. And perhaps just to put that in perspective, so you can sort of see the journey that we’ve taken, if you look back to FY20, the year ending 2020, our EBITDA growth was only 1%. And if you go back a further year to FY20, June ’20, our growth was 3%, so 3%, 1%, 15%. So you can see a quite a quantum leap in our EBITDA growth and coming back to the shape that we want to put into our business going forward.

Then, also just to alert you that the rand has strengthened over this period relative to the comparable period, and that has had a 5% dilution, which you can see in the EBITDA growth, they are 15% and our reported growth is at 10%. And we will unpack a little bit of that in later slides. Also, I think for a lot of people who have been waiting for returns to start showing some day light. And we really, this half is, if we analyze our return on invested capital, this half has shown an improving trend over the last two years.

So we’re very pleased to see that improving trend. And that’s really a combination of both a very strong EBITDA margin at 29.5%, it is the highest over the last five years. I didn’t go back prior to that, but certainly over the last five years, it is the highest. And then also our capacity full strategy has started to gain momentum and those two combined are really starting to drive the return on investment. So we are really proud to be able to show that to you today.

However, it hasn’t all been plain sailing. Our manufacturing operations have had a really, really tough first half. They’ve had to endure the brunt of COVID. I mean, in terms of shifts, one person getting sick, the whole shift has to go off. We had to work in alternating shifts. Absenteeism has been an absolute high, I think with the Omicron, before people knew what the impact of Omicron was, there was quite a lot of contact and isolation that we had to comply and that really played havoc with our factory’s efficiencies.

And not only the factories, but the people that supply those – the suppliers that supply those factory’s components and materials all at the same challenges, so all of those really culminated in a really tough performance. Notwithstanding that, if you go back to first slide, we grew our Manufacturing at 10%, still a commendable performance. But I think now that we’re hopefully into a more normalized COVID period in the second half, we do see that manufacturing also stepped improvement in the second half and contribute further to the EBITDA growth in this half too.

Coupled to that, our South African operations were hit both by COVID and if you remember when we first announced Omicron in South Africa, all the flights were delayed, etc. So people weren’t able to fly in and technicians couldn’t fly into our facility in Qhubeka, couldn’t get materials in. So they had that challenge plus the normal COVID challenge and then on top of that, if you recall we did – I think we did disclose it in our financials in June that our facility in India at Alphamed had a fire and it stopped operations. And we were embarked – we had embarked on a strategy of moving a lot of our small scale production to Alphamed to decomplexify our Qhubeka production lines.

And with the fire we had to realign all of those products back to our South African business. And that also then impeded our ability to supply South African Commercial Pharma business. So on our South African Commercial Pharma sales, they were also indirectly impacted by the supply constraints and the COVID impacts in our South African operations. Notwithstanding that, and Steven will take you through that later, they still grew their turnover at 6%. But we could have, I think we could have gone double digit on our South African business had we had all the supply that we wanted.

On the inventory side, we have – you’ll see it in our cash flows and our working capital, we have increased our inventory investment this half. And this was really deliberately done to ensure that we have sustainable commercial supply to our end markets. Just going back to the COVID impacts, we did anticipate a lot of shortages in the market, so we stockpiled on strategic materials, critical materials, things like glass syringes, we were able to get just under a year supply of glass syringes, because of the shortage of glass, driven by both COVID because of the demand for vials, and also just generally from supply constraints in China.

And those, all those initiatives, we’ve been able to get our stock levels at a point that we can ensure sustainable supply to our customers going forward. So it does, it does crump your first half free cash flow. But you know, I’d rather have that challenge and then have the, make sure that the patients are getting their medicine into the future. And so we’re quite comfortable with our investment in inventory. And you’ll see it being unpacked in later slides, when we get to our working capital, we do have a very seasonal cycle. And we are quite comfortable that the working capital cycle will reduce in the second half. And we’re still targeting to achieve a more than 100% cash conversion rate over the full year period.

I won’t steal too much thunder on this one. But I have to be a little bit excited that we have got this exciting development that’s going to really enhance our future prospects. And that’s the signature of the conclusion of the Aspenovax agreement, really proud, a momentous moment for Aspen, for Africa and its people in a drive to have – to improve vaccine self-sufficiency for the continent. So we’re really, really proud and we’re also very grateful to Johnson & Johnson and all the efforts that they’ve put into it collaboratively to help us get to the step. And Stephen will cover that element in a lot of detail in his part of the presentation.

The last insight that I’d like to take you through really is that we do have, we’ve also ended or we’ve managed to get to a point where our balance sheet is now in a very strong position to support growth. Our leverage ratios are well below our targeted level, our internal targeted levels which are conservative. This gives us stability for capital allocation decisions that gives us flexibility in looking at acquisitions, potential share buybacks, dividend policy and the like and gives us some headroom for all of those thoughts and strategies.

In addition, you also would have read in the results that we’ve concluded our deal for the sale of portfolio of products in our South African business to Acino, which is a Swiss based company. And that was done with proceeds of R1.8 billion. And we did do that at a very, very healthy profit. So that also certainly helped us going forward in our strategic growth. And then obviously, the obvious benefit of the lower borrowings and the strong balance sheet is our finance costs. And you’ll see that leverage coming through in the normalized headline of earnings growth.

Right, I think then just a flip to some of the overall highlights. So on the revenue, you can see we’ve grown double digit in CER 10% and a really commendable performance. On the normalized EBITDA, we’ve grown at 15% in constant exchange rate and 10% in reported, so if you go back to what I said, double digit in both reported and constant exchange rate and a step improvement as – if you remember from the prior two financial years.

This is really my proudest bar chart. And you can see there, if you look from left to right, the EBITDA margin in 2020, that was before we were supplying product to Viatris in terms of the FDF commitments, supply commitments, we were running at around 28.6% EBITDA margin. With the advent of the Viatris, which was embedded in FY21’s numbers for, I think, seven months that margin dropped down to 26.3%. And now with – even with Viatris embedded fully in our six months results, we still have managed to achieve an EBITDA margin of 29.5%.

And if you recall back again to December 2020, when we rebased our margins, they said, what would our margin look like in the new shape with all the disposals done, with the fully – a full supply to Viatris and Sandoz in terms of FDF, that base margin was 25.8%. So quite a nice jump from 25.8% where we started and where we thought we would be for a while to the point where we are now at 29.5%.

On the normalized earnings, that you can see that steps up from the normalized EBITDA, the 15% grows up to 26% in constant exchange rate, and the main lever there is the lower borrowing costs giving rise to lower financing costs, so quite a nice steep benefit on that. And then last on the borrowings, if you go back to last year this time, we’ve dropped our borrowings by 30%, quite a significant drop in borrowings. You will note that from June to December, our borrowings have jumped up about R3 billion. And that, we did alert you in the commentary to what are the drivers, the EBITDA drivers are including the weak closing rand rates, about R1 billion impact, so that’s really just because the rand got weaker. And we know that it’s now stronger, again, so that one is out of our control.

We’ve also – we’re set to make some deferred consideration payments in terms of prior deals of about R1.8 billion. And you’ll also see in the results, we’ve put some quite detailed disclosure in there, on what is our future cash outflows from these deferred considerations. And the net cash flow, outflow going forward is for R0.5 billion. So this R1.8 billion is really the sort of final big lump of cash, we expect to go out from deferred considerations. And then the and also we had to – we declared dividends in this half of R1.2 billion, so just to give some color to that.

I thought I’d quickly show you our currency mix. This table just to give you time to sort of settle and understand the numbers. It’s comparing our first half currency mix for our top currencies, which make up more than 50% of our profit, comparing this first half to the full year last year, and then on the right is just showing the exchange rates of last year’s first half versus this year’s first half and you can see the rand strengthening against all the currencies. So you can see just on an overall level, there is always a lot of swing between the euro and the ZAR and the USD, and those are the ones that are in circles. And you can see that Australian dollar and Chinese renminbi remaining relatively constant, but those do shift around.

So I mean, I wouldn’t put a stake and say, Aspen’s running at x% on euro, because as the regional performance changes, so that mix will change. For example, if you take the vaccine business, the turnover is all in euro but the costs are all in ZAR, so your cost sit in the ZAR bucket and your revenue, so all of those mixes do impact these things. But when you throw all of that into the pot, and you look at this first half, it’s sort of around, as we mentioned before about a 5% dilution effect between constant and reported rate.

We did an exercise, it’s probably in the history books now. But we did an exercise where we took the exchange rates to the end of February for the two months. And we say, what is that rate compared to our first half rate and versus last year’s half? And based upon that, it looked like our second half performance is going to be very much aligned between CER and reported. Obviously, with the advent of geopolitical tensions and the volatility that’s caused since March, that volatility could play some impact on that judgment call we’ve made but we’re pretty comfortable that if rates stabilize, we should see a lot more alignment in the second half with the caveat on the ruble.

Now on to a normalized EBITDA income statement, I’ll just walk you through the structure. Here, again, yeah, we’re comparing our first half normalized EBITDA to last year’s first half in reported. We then show the percentage change reported followed by the constant exchange rate reported and working your way down the income statements, we’re starting with revenue. The gross profit does include depreciation so we do measure our businesses with depreciation embedded in our gross margin percentage, and then we add back depreciation to get to EBITDA at the bottom.

So in terms of revenue, I’m not going to cover that at all, but we’ve grown 4% reported, 10% CER and Stephen will cover that in a section when he goes through all the segmental analysis. So I’ll start on the gross margin, you’ll see that total gross margin level we’ve had a slight dilution in our gross margin percentage. And that’s driven by two factors. One is the FDF supply being there for a full six months, last year we only had one month of FDF transaction supply. And the second fact is that our mix of manufacturing relative to the overall basket has increased from 22%. So 22% was Manufacturing last year and this year, we got Manufacturing max of 26% of our total revenue base. So that’s also caused some of the dilution.

So if you strip out the FDF element, and you look at the underlying gross margins across Manufacturing, and Regional and Sterile brands, they’ve all improved. So we’re very comfortable that we run a very – we’ve reported a very strong gross margin percentage, which puts us in a good place, given the inflationary waves on the horizon.

Very pleased to announce, on expenses, we’ve managed to come in at around about 22% of sales, percentage of sales relative to last year, which was at 25%. And that has been through a lot of focus. And Aspen philosophy is return on investments, we treat every cent as our own from the top down and we really put a lot of effort into containing our expenses in anticipation of inflation coming down the road, and that we’re really proud to announce that percentage for this half. And you can see the impact of strong margins and declining expenses then gives you that kick on your EBITDA margin percentage of 29.5% versus last year of 27.9%. And that gives rise to a 15% increase in EBITDA in constant exchange and 10% in reported.

But just to quickly go through the gross margin percentages, just on the trending basis. There’s a lot to absorb on this chart and I think you’ve all got copies of the details. I’ll just take you through the high level trends. If you look at the top two bar graphs, the one on the left is the Regional Brands, one on the right is the Sterile Focus Brands, those are the two segments making up Commercial Pharma. And you can see both have shown a steady improvement relative to the last year first and second half and full year numbers of the prior year. And that’s a function of both focused portfolio mix.

We’ve done a lot of work on looking at our portfolios and what the right mix is and what the right products are to focus on. And also we’ve been able to enjoy some supply cost savings through efficiencies in our facilities. And those two together have driven the improving profile. This is not withstanding, if you recall, we’ve had some pressure on Naropin in China, which has put us under pricing pressure there. And we also still got some residual – the last residual impact of the oncology price cuts in the previous half, first half. And notwithstanding those two headwinds, we’ve still managed to show a very strong gross margin profile, going forward.

On the manufacturing side, if we look at the shaded, it’s the bottom left. If we look at the shaded part of those bar charts, which is the numbers which exclude the FDF TRS transaction sales, as we know, they distort the margins. You can see also quite a nice trend over the half. And this half we ended at 26.8% versus last year’s half one at 24.6%, so a really good improvement. And that’s notwithstanding, if you go back to one of my themes that we’ve had a really tough first half in Manufacturing. So once the manufacturing engine kicks on full steam, we should see that margin ticking up, hopefully closer to the 30% mark over time.

Right, we’ve got to talk about tax. Because tax is another big expense and tax falls right through to the bottom line. We do manage our taxes very carefully in a very compliant manner. And it’s one of the areas that receive a lot of focus given that we are a multinational group. And you can see just the two lines, the top line is the – is what we call a total tax rate. That’s the one you’ll see in your income statement when and if you do the math. And the one below that is our tax rate on our normalized profits. And you will see that we have had an uptick in this half up to 17.7% from versus FY21 of 16.9%. And that’s predominantly a result of an increased mix towards Manufacturing. Manufacturing obviously contributing more to profits in this half and we see their tax rates being maintained for the balance of this financial year.

Just to summarize all of that into our normalized headline earnings bridge. At the top you’ll see the 21%, that’s the growth in reported versus the prior year. Normalized earnings this year to prior year and the 26% growth is at constant exchange rate. And there you can see, again, the 5% dilution that I’ve been mentioning. The key drivers of our normalized headline earnings growth, driven heavily by the EBITDA, R758 million and that, as you saw was a combination of improved, good sales growth, improved gross margin profile, and controlled expenses. And then the other big kick has been on the net financing costs, as a consequence of our lower debt levels. And then we’ve had some dilution from a tax perspective, so in that R221 million, around R60 million of that is because of the higher tax rate relative on the profits. And that gives you, if you put all of those together that give you the components making up our normalized headline earning growth.

Onto working capital, my favorite topic, it’s really an area that we focus on heavily and we look at it both ways. We want to make sure that we’re investing wisely in working capital at the same time making sure that we manage our cash flows efficiently. And just to give you a sense, we ended up for the half year our working capital ended up just under R17.4 billion, with the heavy weight. You can see a lot of our weighting of our investment is sitting in Manufacturing at 63%.

If you crossed your eye to the left to the line graphs, we’ve got two line graphs; one is our working capital percentage of revenue all inclusive. And the green bar – the green line underneath that is the same ratio, but obviously excluding Aspen Oss, which is a much longer production cycle relative to the rest of our business. So we always look at both ratios when measuring ourselves against competitors and ourselves. And comparing this half to last year’s half one, you can see there is a slight uptick in that ratio 44% last year to 45%, 35% to 38%. And that is driven mainly by the investment which I spoke about earlier on in terms of strategic inventory to ensure supply to the market going forward.

If you look to the middle, you’ll see, wow, look at that middle, June ’21, that drop down. That is that is a normal cycle for Aspen, as we do have a very seasonal working capital cycle and always second half, you always see the ratio improving. And I don’t think it’ll be any different this second half. So we see the second ratio improving and we also see the benefit of increased or better manufacturing output, better manufacturing sales also depleting our stock levels in the second half. So we should see a steep drop in that percentage in half two.

Onto operating cash flow, if I just crossed your eyes to the cash flow table on the right, the first, line the cash operating profit, you can see we’ve grown that at that 9%, that’s pretty much in line with our EBITDA growth. On the working capital that you can see we’ve invested R2.3 billion this half versus R1.4 billion and I’ve covered that already in terms of inventory investment, and in the working capital seasonality. You can see quite a nice pullback down that page there on the net financing costs which have dropped by 56%.

And if you look at cash generated from operating activities, it’s relatively flat at 1%. However, recall last year, we had five months of discontinued cash flows in our numbers. So if you strip that out, and you just look at our continuing business, we’ve shown a 26% increase in cash flow relative to last year which is pretty much in line with our earnings growth.

On the left hand side on the bar chart, the little saw teeth there, that really that gives you the sense of how each, it compares the cash flow ratio for each half. And you can see in the first half of every year, we’re always below 100% and in the second half, you’re always above 100%. If you look at the green line which is a 12 month rolling average of our cash flow ratio, we’re always – we’re consistently above 100%. And we, as I said earlier on, we targeted, again, exceed 100% cash conversion over the 12 months.

On to CapEx, CapEx has been a really tough period in terms of projects. I think COVID has impacted us quite significantly since 2020, when we had the first wave. And the negative of that is, all of our projects to drive efficiency, they’ve all been delayed and keep moving to future financial years. So that’s just really just to give you that background and you can see 2020 and ’21 we spent R2 billion. We did anticipate in both those years to spend more than that but we – you get this domino effect of COVID delaying your projects and not different in this half, particularly with Omicron being, a lot of panic around it.

At first, you can see our CapEx spend in the half was only R726 million and that was heavily impacted by delays because of COVID. And so we do anticipate to catch up that under spend in the second half. And our plan, our guided spend for this year is around R2.3 billion for FY22. But embedded in that R2.3 billion, if you recall, we had the fire at Alphamed in India, and that factories had to be rehabilitated. And that’s going to cost somewhere in the region of R200 million or thereabouts. It is actually cash neutral, because we will get payout from insurance for that rehabilitation.

But unfortunately, obviously the CapEx sits in the cash flow and the insurance benefit will sit in the income side, and I think under Other Income. So they’re two different elements. So that’s cash neutral. So if you take that off, then you’re at R2.1 billion. And if you remember, we have started to embark on our vaccine CapEx expansion strategy. And that also has been embedded in these numbers. If you then look at FY23, we are – our planned CapEx, the green part of that bar is still planned to be around R1.6 billion. But on top of that, we have put in another R800 million for potential CapEx on related to the Sterile Capacity strategy expansion.

On the IP development CapEx, I haven’t put a bar chart in here but the guidance last time was around a billion for this year. And we are on target for that, it’s heavily weighted towards digitalization projects. And those are driven – some – the key projects in there are driven towards improving manufacturing and supply chain efficiency. So we will see good benefits coming out of those in future years.

Onto borrowings, just so if we go back one year and FY20 borrowings was sitting at R35.2 billion, at the end of this half, we’re sitting at R19.3 billion, 18 months later, R16 billion less borrowings and you can see what that does to your income statement. And we really, really are in good shape. If you look at FY21, you’ll see that the makeup of the borrowings is very much current weighted. If you recall, the term debt at that point, we had a term debt which was due for repayment in June 2022. So as we published the June 21 accounts, it was all sitting in current borrowings. And then we did extend that term to June 2023, which has then moved it back into non-current borrowings.

So if you look at our half one profile of debt, you’ll see it’s very much weighted to non-current again. If you look at that non-current portion, it’s just under R20 billion, around R10 billion of that relates to our DFR funding that we got last year and that’s only due for repayment, I think, from March 2024 onwards on an amortized basis, and the other R10 billion, the bulk of that will part of a refinancing initiative, which we hope to complete by the end of this calendar year.

I’d also just like to draw your attention and I think that has been published in our accounts, but just to draw your attention, we do have a loan owing between Aspen Oss and Merck of €188 million. This is due in September 2023. In terms of our term debt facilities, this is not part of the borrowings, but it is something just to alert you that we will be – that is the loan that is due for payment in September 2023.

I think, then on the future, you might be asking what does H2 look like for borrowings. We see borrowings being well benefited from the seasonal working capital cycle which you’ll recall from our working capital and operating cash flow sites. It’s also going to benefit from improved Manufacturing performance, as you remember; the Manufacturing is a heavily weighted part of our business. So when that segment starts to perform, it generates, the cash benefit is immense because of the fixed costs embedded in there. We’ve also got the proceeds from Acino R1.8 billion and as we sit here, now the rand is quite strong and most of our debt, 80% of our debt is in euro. So I think those three factors combined with good operating performance, we should see a strong benefit to borrowings in the second half.

If you crossed your eyes right to the bottom, and our effective interest rate, we’re in a healthy position. If you strip out the costs that we had to pay in terms of extending the term loan debt from June 2022 to ’23, that 3.47% in H1 ’22 is about 3.2%. So there is a nice declining trend on interest. However we’re not, we understand that this is another wave of interest increases coming in the future and we were not, we’re obviously aware of all of that and as most companies are. Fortunately, as – if you remember, because we’re quite weighted, we’re 80% weighted to the euro, we have got quite a strong buffer against future interest rate hikes because a large portion of our debt is fixed at zero base interest in euro and other, the floating element, although it’s floating, given the negative interest rate position of euro rates, it will be quite a while before they break the 0% barrier, probably between 18 and 24 months. So we think we’re quite well positioned to buffer ourselves against interest rate hikes in the short to medium term.

What I thought I would do then is just in this slide, going back to those nine themes that we spoke about at the start, just so you can sort of go back to and I hope going through the presentation that all of these themes have been coming through and you’ve been able to identify with each of them as we’ve gone through the detailed financial numbers.

And thank you for your time for listening to me. And I’ll now hand over to Stephen for – to take you through the performance review and the prospect section.

Stephen Saad

Well done, Sean. Hope all your – hope you’re – we’ll go first to performance and I hope all the results was as pleasing to produce as and to announce. So well done and thanks everyone. It’s been a very strong performance and if you just saw the numbers on a standalone basis, that’s great earnings up by such big percentages and all of those good things that one looks for. But as I was talking earlier to some of the team here, what’s going on below the surface is scary. It’s not easy managing a business in these times, particularly manufacturing businesses. And it’s not often, I can’t remember ever, we have seen the develop markets with high inflation rates currently in developing markets. So world is in a bit of turmoil.

And what I’ll do in performance is we’ll talk a little bit about Aspen, we’ve got simple philosophies in life. We like to have balance in life, and we like to have balance in our business. And we try and mix what we do commercially with what we do for society as well. And we – our business has clearly reshaped and on track, we’ve had good growth which Sean has taken you through. And we’ve got it across all our business. So these are things we strive for. These are things people who’ve been following us will know, we’ve been working and saying, this is where we’re going to get you and we getting there.

We got a strong balance sheet. We’ve got fantastic capacities. And hopefully it’ll be better understood when I talk a bit on. And then of course we’re at the forefront of equitable access. I don’t think there’s too many companies that are as committed in delivering, not talking delivering equitable access. We’ve made a massive contribution to COVID. We’re a small company by global multinational standards but when you look at what we contribute to society, into the world, very proud of what we’ve done across COVID.

Aspenovax is definitely the crowning glory, I think of all the things that we’ve ever done in Aspen, this must be must most right for write up, there is one of the really big things and we’re excited with what Aspenovax will and should bring to Aspen. And I’m going to speak a little bit about our capacities because for us that these capacities that we put a lot of effort in five, six years ago to build these capacities and capabilities. It wasn’t always apparent to everyone what we were doing and where it was going. But I’m going to – it’s becoming clearer and hopefully bring it into focus for all of you now.

We see ourselves of course we – across all of ESG. But we really see ourselves as the capital S in ESG and particularly with what we try and achieve for Africa. We were the first company as you know to bring out an ARV within with multi drug resistant TB into Africa and we had over a million patients a month for HIV and AIDS with the antiretroviral for years and years and years.

We’ve made over 180 million doses for Africa. Not all of them are in patient’s arms yet, but I do – I’ll do point out to you that’s about as many doses as the whole of Africa is received to-date. So that’s a massive contribution from Aspen. We’ve made contributions globally in dexamethasone and anesthetics, particularly in the European environment, where it was particularly desperate.

Aspenovax was, is something that I can’t tell you how excited the whole of Africa is by Aspenovax. The support we’ve had, the ambition, Africa has stood absolutely united behind us. I must have been, I don’t know whether it’s World Health, World Trade Organization, World Economic Forum, World Bank, anything with World on Aspen is there. And we’ve got such fantastic support from all of Africa. And then these capacities so we told you, we could make anesthetics in the facilities and that’s what we were going to do. But these don’t discount what Aspen does with multinationals. If you’ve followed Aspen over the years, we’ve shown you all those nice pictures, where showed Manufacturing has been a platform for our relationships with multinationals.

We pivoted very quickly into vaccines, into a COVID vaccine. We produced the COVID vaccine in six months. That is incredible. Normally a vaccine takes a couple of years, we got it out in six months with J&J. So we were able to pivot our capabilities into vaccines. And we can take those same capacities and same capabilities, we can move to insulins, we can move into oncology, we can move into narcotics and of course, it’s there for anesthetics. So this base and see, when you look at this and I like the little stepping stones, when you see this, understand that Aspenovax is a demonstration of some of the capacity and capabilities we have. And you should expect more.

In terms of revenue growth, great, we’ve had organic growth across all the regions. Internally, we measure ourselves and our performance, which we put on Investor Presentation, we say what have we achieved internally, and we make a couple adjustments for oncology and for the manufacturing related transactions. And then you’ll and we although we’ve shown a constant exchange rate growth of 10%, our internal measures that we believe we’ve got a 7% growth. And Sean took you through the numbers but the adjustments would show Manufacturing at 10% and Commercial Pharma at 6%. So it’s nice when every cylinder is firing and a very important part of what Aspen business is about is how we deliver this organic growth.

In terms of our business, we’ve got Regional Brands, these are brands that are big in the regions, and they separated from us, [indiscernible]. And another – been another very good performance from these Regional Brands, particularly led by Australian business. And I’ll talk a little bit more about how they achieved that. Interesting though, out of here is that when oncology was in the prior period and at a higher price, that was the last period, this time last year where it was. If we take it out, you will see Europe has declined at 10%. If we make an adjustment for oncology, which we will have in the next half and forever going forward, Europe actually grew at 7%. And I think this is really showing the advantage of a narrower focus and a team being able to manage what they’ve got in front of them.

Australia has grown its OTC portfolio. And we have had tremendous struggles with our Africa Middle East business. Sean has taking you through the struggles in South Africa. And they’ve done very well but it’s been quite hard managing even third party suppliers for anesthetics, glass. Many glass manufacturers – many manufacturers won’t even make ampules anymore. Do now we’re making vials for the COVID vaccine, you know this. So on top of all of the COVID pressures you’ve had real demand for glass and vaccines and part of the reason we were so desperate to stock up with whatever we can that’s got glass in it.

So and Latam just keeps chugging along for those that have been watching it. It just keeps on growing, we’ve very strong, good team in Latin America, and they just keep producing. The Sterile space was, I did guide you last year that you could expect this maybe to fall a bit and might not grow because it had grown so much in the prior period. And we thought a lot of that was COVID related and it was but it’s continued to perform. And that’s in spite of having some fairly strong stock outs in some of the lines around the anesthetics.

Europe in the prior period had a very strong really very strong performance in the Sterile business and but it continued to grow. So I think that was a very good sign for us in terms of really getting on top of that region. The supply chains, I’ll talk to you a bit more about COVID. It’s been a problem for us in so many respects. And Asia, we also guided that, although we knew volume based pricing would impact one of our products in China, we felt we had such good momentum across the whole portfolio, that we would continue to see growth in spite of volume based pricing. And we are, we’ve seen 11% growth there, so and our strong performance across both Steriles and Regional Brands.

When we talk about, I was on the TV or radio last night, and someone said to me, you talk about really battling in Manufacturing, and you’re up 30%. So what are you really saying? And actually, we did battle. We did battle because we sort of know what was going on underneath it to keep it open. And then we – you make certain adjustments but clearly, this has been a fantastic area for Aspen, if you look it on a relative basis. But it didn’t meet our internal expectations and targets.

The COVID vaccine was important for Aspen, it’s a good contributor to finish dose form. And then when we look at the API, because API is down here, both the chemical and biochemical, is we had, we’ve got – really the API business is quite a simple business. You really almost know your turnover in advance because your turnover is contracted. You’ve got clients that say we want to buy 10 kilograms from you. It takes a long time to make, that’s not a month to month thing. And so you – and your orders are underpinned by contractual commitments. But then those clients are saying, please don’t send it to us now, because we can’t get that component because we can’t get it out of a Chinese port. And we are saying, sorry, we can’t deliver stuff to you because we’ve got people sick. And we couldn’t make what we were supposed to make because the production shifts were down. So it was a – it’s been very, very tricky to manage.

But the reason we feel confident is we know we had the orders in hand, we know what we have to do. And so we expect, although we’re down at the half on our API businesses, we expect to be not only up in the second half but actually up and growing that business by the end of this year. So that will make a pretty big impact to the growth rates in this business. If you take – if you adjust as Sean did for manufacturing, showed us 10%, imagine having your API business growing as well. So this has got very strong weighting to the second half. Also, it carries a lot of stock and working capital.

So by growing in the second half, you reduce your stocks, your working capital and cash flow improves as well. And we’re targeting a very strong half year, and very happy to be able to say, listen, we’ve got quite a bit of COVID turnover in here as well, about R800 million. Okay, so that’s the performance at a revenue level. I’m just going to talk to you a little bit about our strategy, just remind you what we really said, a couple of key points. We talk about organic growth. This is the most important growth that, in my opinion, any business can have. You’ve got to deliver organic growth of your base business.

Then we’ve got a capacity fill, we built all of this capacity for anesthetics but we’ve got a lot more capacity. And it was simple because if you built for one, it cost one. But if you built for 10, it costs three because you had a footprint. It’s like putting extra room into your house rather than, there’s a lot of foundation setup. And so there’s a real opportunity with available capacity and the capacity is relevant and needed.

The acquisitive opportunities, Aspen hasn’t made many, any acquisitions that I can think of in the in the recent. So everything you’re seeing here, even the growth rates, we’ve actually divested things. We haven’t made adjustments for those. So our growth rates a little bit higher. But there’s acquisitive opportunities that we look at all the time. And improving financial metrics, which is what we wanted to show particularly on earnings and Sean took you through his pyramid or triangle.

And then the Sterile build. This is the stepping stone to our future growth opportunities. This is probably, if I had to pick one slide, this is the most important slide for me in terms of how I look at the business. It’s, how is our organic business growing? What is the base business doing? It’s quite interesting when you look at the slide and you look at us in terms of global pharma. If you look at big multinationals, I’ve got the new chemical entities in an area and they show you how they’re growing. Then they’ve got their products that are post patent. They might call them established brands, post patent products and those are declining or tend to decline.

We’ve been quite good. W we are trying to identify those products that are declining in their portfolios. And we say, listen, hey, can we acquire some of these products and do something different too? Is it, look, if they’re declining at 5% and we can start growing the 5%, everyone can do a discounted cash flow and say a 5% decline there. We’ve got a look at it and say, we’re going to put a bit more expense behind it but if we can turn it into 5% plus, you’ve got that, that asset is now worth more than double what you’ve paid for it.

So this is very important to us. And I think this is the differentiator in our model compared to anyone else’s that I’ve really seen in global pharma is our ability to manage post patent products and to show this organic growth. And we’ve had been in it for over two decades. So we have over 20 years here, we’ve really only had a period of a hiccup and this has been sort of consistent within Aspen. A hiccup was around about ’17, ’18, ’19 around about that period. And to be candid, and that was really a thrombosis impact on the business and was almost like you take. I went through a post presentation, which show you results without thrombosis. So we’ve taken it out and you’re starting to see this important base business.

But does it just grow because it grows? No, we do things. We add little products to it, we – if it’s a cream, we bring out a tablet or a drop. We just continually tweak. And it’s interesting. We’ve got what we call an OTX strategy, which really is a novel approach. It’s you take products that are OTC in nature and you detail them behind the doctors. And these doctors recommend them and the products get credibility with the pharmacist because they see they script it. And I just want to show you in our Regional Brands business, which is a lot in South Africa and Australia, what we’ve achieved.

So in Australia, we’re trying to reshape this probably. Of course, there is some tailwinds because OTCs were done in the prior year from COVID but nothing like this growth rate. Australia is a problematic market from a pricing perspective. You’ve got a single buyer, government, generally. And so that’s why we reshaped our business heavily because we felt in a generic business, we want to trade more. We were fixing our costs and someone just kept bringing your price down. And so that’s why we exited it. And what I want to show you is that we are a 40% of our brands in Australia, Regional Brands are now OTC brands, and then not impacted by pricing. So this is quite important for us as it’s not impacted and you’ll see some top brands in there. And we’re category leaders in these particular markets and that’s from detailing. And we take the same strategy, and we’ve put it into our South African market, which has also grown at 25%.

You know, pain was a market that Aspen really didn’t have a good place in. It was a big market, it was completely actually dominated by Adcock Ingram for all the years that I remember. And now Mybulen is the leading brand in that category. And we did things like Stilpane, we changed the taste. We did taste masking. We actually haven’t got enough capacity for how much Stilpane syrup we’re selling. I mean, we’re talking about selling if we had demand, if we could make everything we wanted to make today, over 600,000 bottles of Stilpane syrup, a month. So it’s and growing and its growing at 42%. Products like Hyospasmol, when you think about brand leaders in that market, like Buskopen and things like that. Here we got a category share of over 49%, so good work there. And this is a very nice product, this an iron product.

Takeda headed in South Africa for [Wafu] and [Wafu] have moved this and the other products to Aspen in both South Africa and Australia. We took it from negative growth rates into positive and we’ve got pretty good market share in that category already in Iron. So just some very practical examples, just to show you some of the key brands and how they’re performing and strategies we do to keep pushing our base business.

So we spoke about our capacity. We spoke about getting to R2.3 billion in capacity contribution by the year 2024. We got there, of which R1.5 billion was going to come from filling half our capacity and R800 million from anesthetics savings. We’ve combined that number, we no longer talk internally about each because quite – they often use the same line. So if you put a COVID vaccine on the line, you are going to displace an anesthetic saving because it would stay with the third party. So we want to look and weigh up, is this an opportunity deferred versus an opportunity lost? And so we look at that number as one and we’re on track to get to the R2.3 billion. In fact, we expect to get half of it in this year. And it’s going to be weighted towards the second half.

We’ve had – I can’t tell you that has gone exactly to plan because it hasn’t. It’s come in different areas. The take on in our facilities in Qhubeka have been quicker than our facilities, for example, the impacts we’ve had in some of our European facilities, NDB in particular, a lot of COVID impacts. And what you’ve got up there is a growth rate of absentee rates, and that’s number of heads. So we’ve got about 600 to 700 people in the facility, can you imagine in December, having an absentee rate of 150, that’s one in four people. That’s, half in the lab, half on the line. It’s just very hard to keep your doors open, and to do it. And there’s no way, on a line you want to bring a new product on but you need to make Arixtra. And you say, so what do you do?

So just like the API business, we focus on the operations. Everything else can follow. Let’s just deliver the products that we have to deliver now. We had spoken to you in the last presentation about hoping to have contracts that we thought were fairly advanced, and we hope to sign 80 million doses in France, I’m happy to tell you, they have been contracted, some will fall in ’22 and we hope to get the majority in calendar year ’23. We’ve shifted that out a year given the challenges that we’ve faced. So some of that shift, some have come a lot sooner. But on balance, we are on track to deliver the savings that we had suggested.

What is interesting is that’s only related to half our capacity fill. We’re pretty comfortable that the rest of the capacity will be utilized. We’re starting to see a lot of inquiries or very interesting inquiries. And really, people are going, and the next question is, when are you going to fill that extra capacity? And a lot of it’s going to depend on COVID outcomes. I mean, you know, Aspenovax tomorrow, we get an order for 100 million, 200 million, whatever number of doses, that’s going to be a quicker capacity fill. But also, more COVID, another Omicron variant, etc., it’s really having an impact on both capital projects and ability to fill. And we’ve done well keep on track here.

In terms of acquisitions, and acquisitions are important to Aspen and have been very – and something I think that we’ve done pretty well. A lot of people say, oh, acquisitive companies always mess up and all that. And I hear you, if you, I like to think that the management in Aspen have got skin in the game, we’re not doing this to move on to the next venture. And I’ll also remind you that there are people that do acquisitions pretty skillfully around there. There’s whole private equity world out there that does pretty well out of acquisitions. So I don’t like these general pictures, or general comments around acquisitive, etc.

We are a strongly acquisitive company and acquisitions we’ve made we paid for with cash, never with shares. And those acquisitions are fully paid for now and look at the business that we’ve got now and the growth prospects we’ve got. What are we looking for here? Are we looking to do major transactions? What’s on our radar at the moment is robot. So we spent a lot of time getting Aspenovax aspect. I can’t tell you it’s been incredibly time consuming. But it’s been a huge focus area here. Because it goes beyond signing a transaction, was getting the regulatory path right, there’s a whole host of things we had to do.

Our focus here is really around brands, portfolios of brands. And should we say, look, we’ve done all of this work to build this geographic footprint manufacturing, how do we use both? And so we’re looking at opportunities and there are opportunities in Latin America to be able to plug onto into a very successful team. In Africa, there are many people who’re saying, can we put a business together with you? How do we leverage this footprint you’ve got across emerging markets in Africa and the credibility that you have there?

Australia we’ve shown, you’ve seen now how well they are doing in the sort of OTX space and that’s clearly going to be an area that we want to build and grow on. And then the Sterile opportunities, there are really diverse opportunities, multinationals, non-multinational companies, and many of them are linked to how they could plug into both our manufacture and our geographic footprint, that emerging market footprint is something that is of interest to many.

We all know the COVID challenges and Sean highlighted some of them, so I’m not going to going to repeat what you already know, but they really fall in three buckets. They affected productivity, you’ve seen a graph on that. They affected costs and cost is a key issue. And then there’s supply because you simply couldn’t get stock. So when you could get stock, you may be bought more than you could just to get it. But just to give you some anecdotal stories, if you take some of our facilities, take a Sterile offer, you need a filter in each time, and just to get that filter, we sometimes couldn’t get them. And then you’re borrowing from neighbors, literally. Hello, GSK, have you got filters for us? Yes. And they’ve finding us too. We were actually sharing as an industry to keep our factories running. So those are the things that bubble under the surface behind numbers there. Of course, Omicron was South Africa specific initially, and so that was a bit messy because no one was flying in here. And the shortages have, and the glass shortage put quite a bit of pressure on our anesthetic business, particularly throughout third parties.

Just a few little charts underneath there. You see things like the containers going up a 1000%, you’ve got aluminium at 130%. What has aluminium got to do with the pharmaceuticals? Well, you know, when you take your pills out of those, well they’ve got aluminium there. There is plastics, which and there’s a lot of things obviously in plastic and forms. And even the pallets in your warehouse, the timber price goes up by 125%. The COVID impacts to productivity are profound and we’ve gone through it again and again. But it really was the fundamental reason for withdrawal from the API divestiture process. Because, as on the price that’s delivered the numbers, you can’t go the declining and battling to run your business and try and run a process. So that was the fundamental reason for the withdrawal from a process.

We’ve had challenges. And I don’t have to tell you that these challenges I’m talking about are before Russia and Ukraine. This was before. So and now, I mean, I don’t have to tell you, we are in the middle of it. And this energy crisis is a big issue even before the issues we had in Russia and Ukraine. So we’ll sit and say, yes I can give you one year, this as your tariff for the year. And we sort of got that out of our gas pricing in that in Europe. But what’s happened in our German facility, we get weekly energy price updates. So that is what it’s getting to. And of course, this is causing a fundamental inflation. And they’re talking about European inflation between 6% to 8%. It’s very big – that’s a very big increases in inflation. And of course, ultimately, that’s go to somehow impacts salaries and wages.

We are – these are the challenges that we are dealing with in the business because it’s hard to work out the duration, is this temporary? Is that a spike that goes up and down? And then you’ve got to look and say, where can we pass on these increases? Because we don’t, we work in a regulated world for lot – for many of our products. I know that OTCs might not be and you might be in a tender world with anesthetics or we may be not as – we’re not as exposed as many other pharma companies. But I think this is not a – this is a world problem. And I’m sure they’re people taking a lot bigger issues. But I think this is something that we, if you say what keeps you awake at night? What you worry about? It’s the inflation that’s coming through across these – across the world, just from COVID. And I was hoping it would pass through but certainly Ukraine, Russia is a major issue here and something we got to watch very closely.

The last thing on performance, I think, was the financial matrix. We had a base target of 25.8% in 2020. And we want to measure ourselves against this. We had 29.5%, that was that’s a little ahead of our and even our internal expectations. We’ve grown EBITDA more than revenue, HEPS more than EBITDA, all the things that we promised in the presentation. And we were asked, which we hope to have a leverage ratio below 3x. We sitting with probably close to R1 billion a month and R19 billion of debt that’s going to come down quite a bit in the second half, so there’s a lot of headroom.

So that’s our performance. That’s really a performance, really proud of. I’ve got to thank all the people in Aspen who have worked so hard to deliver under extreme circumstances. If you see the Head of Operations and she’s sitting here. She’s got her hands full, every day is a new challenge and it’s got, so there’s a lot going on but we’re managing them but every day is a new day.

Let’s talk about sterile capacity. It really is a valuable and strategic capacity. When you look at new chemical entities that are being developed, the general oncology and all of them, almost all of them are in a sterile space. Ironically, that sterile space and the value sits in prefilled syringes and preservative free blow fill seal. So when you go to a blow fill seal, even in anesthetic, you can get it in a big syringe and you can push up to five patients. They like it in a blow fill seal which has just got no preservatives in it, one shot, throw it away.

And these are capacities we have at NDB and I see NDB’s capacities as very, very valuable within Aspen. And we’ve got a quality, diverse sterile capacity and it’s – this quality is a critical area because when you’re dealing in steriles, you can’t afford to make any mistakes at all. And this is very important to the multinationals that we partner.

We’ve had headwinds in past years and so we – and then we now we’ve had some tailwinds. We were – a manufacturer in Africa has been absolutely catapulted onto the global stage. That’s what people talk about everywhere whether it’s for [indiscernible] or AstraZeneca, they –anyway we’ll trade and they’re talking about Aspen’s capacity. We’ve got some additional vial capacity, that’ll come on next year. We’re hoping to be by, within the next few months up to about 35 million doses a month. And we will probably increase that by another 250 million to 300 million in a year’s time. And this is just needed for anesthetics and vial products.

Remember when we first built our capacity inspected, it was for anesthetics. So at the moment, we’re not making any anesthetics on our vial lines. I think this is probably something that’s probably our most profound statement and one I’m going to remind you, I hope in time to come. I think that this investment in our sterile capacity will prove defining for our growth prospects in Aspen. We wouldn’t have Aspenovax if we didn’t have these capacities. And so that’s the easiest way to say it but it’s also needed for anesthetics and some of the other opportunities.

But one thing that is frustrating, but in a way it’s a barrier to entry is that the transition periods of taking a product, moving it on to a line and getting global regulatory approvals take a very, very long time. So when you get contracts and they’re hard to lose but bringing them in takes time. And we’re getting so many more business opportunities and inquiries. And they are around brand areas like oncology, insulin. And so this is quite an exciting period for Aspen to be able to contribute further.

If we look at our base business, because the base business, I told you is absolutely fundamental and probably the single biggest focus area. We’ve got challenges in this business that we see. And we say, what are these challenges? Well, we’ve spoken about COVID. And we’ve also spoken about the knock on in Russia and Ukraine. And when you look at Russia, just so that we quantify what this impact is to Aspen because Aspen’s got a – we actually had a great business in Russia, a lot of investment, a lot of reaps. No fixed assets, no factories, but a really good team there. And we those sales of a billion rand were at the exchange rate before. Now I can’t look, every day the exchange rate changes.

At one time, I worked at a billion rand of sales in Russia, at the old exchange rate, it is worth R400 million today. So it’s a – but if I just go back to it was, say, in the first half we did about R500 odd million in sales round about. Our return, it was on the low end of our returns because it had largely the thrombosis portfolio in there, closer to 20% and 30% and roughly 2% of the business. And it was almost 2% all the way down. So if you want to make adjustments, you should maybe look at a 2% factor of all the EBITs and gross profits and all of that thing.

So those – that’s it and I can’t make any calls on that business, going forward. And the bigger issue is not Russia. I mean, it’s very sad to lose 2% of your business, it’s not going to push Aspen off the edge of a cliff or anything, sad to lose it. For me, the bigger issue is the impact this has on exacerbating a really increasing inflation rates. That’s what I think we should be – that’s what we as a company look at more closely.

We’ve got volume based pricing in China. We really want to rights to register our products against volume based pricing, very happy to say we’ve launched EMLA, it’s in the market. Ovestin is to follow and there’s a pipeline to follow. And it’s a juggling act to get there quick enough but we’ve got good management, a strong team in there now and we’re going – it’s going well but there’s always risks.

In Australia, there was talk of further unilateral price decreases, which might impact in 2023. We wait to understand what that might be. And Sean’s taken you through the fact that we’ve had a fire in our facility, which has impacted our – has certainly impacted our South African growth and our new product launches, sadly, as well. And we hope to be back on line in August of this year.

In terms of tailwinds, while you’ve got to, it’s like tuning a big steam engine around. When you’ve got momentum in your base business, it’s a good position to be in and it’s a really good position to have growing margins because that’s all the work that we’ve done into fixing factories, fixing portfolios. It’s something that you can’t ignore and very important, going into potential headwinds around inflation.

Aspenovax could drive a very material income stream for Aspen. And maybe we can try and cover some of those points just now. But it’s an important – we have a nice pipeline to support. We’ve got no blockbuster new chemical entities, but we’ve got nothing going off our tail. We’ve got a very safe business, if you want to call it that. There is lot of products, but we don’t have any single product that could – that would expose us. But we do have a single product that could really make a really big number. I mean, Aspenovax, even with just half performance would be the largest product we’ve ever had in Aspen.

And this pipeline, the little tweaks we do is what really help sustain our growth rates. Because you’re always discontinuing products, divesting a few here, so to keep that growth rate momentum you need that in there. We’ve got great capacities. It’s starting to add to our profitability already. It will continue to add to profitability over the next few years. So that’s something we also look at closely and these approaches that we are getting from vaccine companies, companies in steriles who wants to leverage our distribution footprint, this is something that is probably is our most exciting development internally that we look at is what’s now going to be – what’s next for us on this platform.

I want to talk to you a little about Aspenovax. I know everyone’s wanted, I’ve had – all the questions I get as Aspenovax. And I think this graph – this map tells it all. That’s the world. The greens are the people that have had 40%, 50%, 60%, 70%, 80%. That’s where people have had less than 10% in red, and orange is less than 20%. You can’t help but notice it’s all in Africa.

And the media are happy to say the developed world took all their vaccines. And then it’s said and these are – that is a reality, that’s true, they did. But what media don’t point out as aggressively is that actually COVAX was meant to support that developing world. And COVAX relied almost exclusively on Indian manufacture. So it’s not about developed world or developing world. It’s about having manufacturing capability. And there is no manufacturing capability of any quantum besides Aspen’s on the continent. So to be able to produce this and that is why there’s such a push to get African manufacture.

Aspen’s Regional Manufacturing, you might have seen the announcements, all the people that have commented on the manufacture. They are the aid agencies or people with COVAX, AVAT, all of the buyers, multilateral buyers are excited to have the capacity. Now that’s important. Now, how many vaccines can you sell? Well, Africa has got 1.3 billion people. The target was to get to 900 million people. Given a boost, even if it’s only one because why bother? Why bother if you are in the world vaccinating Africa. Besides you get a few bad headlines and all of that.

Well actually better vaccinate Africa because we don’t want to get, where’s your worst gearing going come from? It’s going come from the unvaccinated and it’s going to come from those that are immunocompromised. And Africa is the least vaccinated and got the most immunocompromised people. So if you want to stop this pandemic, you’ve got to deal with the problem in the middle. And that’s, you know, if you look at it, this 900 million people times two, to 1.8 billion. In theory, you’d want to give 1.8 billion doses, only 200 million less and 200 million doses have been given.

Now, whether you get your 70% is another story, we don’t know but there’s big gap that’s needed to be filled here. When we look at how we got here, we committed ourselves to sterile manufacture. We, J&J came inspected, they saw it, they trusted it, they came with technical transfer support. We moved the vaccines within six months. We had it and we were recognized as a top contributor to J&J, one, in moving it the fastest, and two, having the largest output. And it became apparent to us that we really needed our own vaccine. We needed as a continent to be able to say, this is our vaccine, and we control where it goes and how it’s sold.

And we were very fortunate in that having performed for J&J and they saw the value as well. They worked together with us. We signed an agreement this month. And if we had an audit tomorrow for Aspenovax, the next thing is we need to get an order from somebody. You can’t get an order until you’ve got a product and we have a product yesterday. So it was on Tuesday. So and if we had – if we could get a multilateral order tomorrow, we are hopeful that we could get something out by June of 2022. So that’s our hopeful part for Aspenovax.

And we can – the next question everyone is going to ask me is, what are the financial outcomes? Well, we’re going to look to these government’s, AVAT, COVAX, for volumes ordered. And I think the multilaterals are the ones with the sort of big volume buying power here. What are we going to sell the product for? Well, it’s going to sell for somewhere between $5 to $10, that’s the sort of range that these are selling most of them. What is the cost per dose? We’ve got a formula based arrangement because J&J sell us the drug substance, and it will be very influenced by the yields that we do.

When we look at the volumes, we think there’s going to be some short term volumes for Africa, definitely, as I showed you on that map earlier, to turn that red into green. And there’s quite a bit of work going to be needed to stimulate demand because Africa has been without vaccines. They said, well, why do I need a vaccine? Governments haven’t pushed the vaccines because there’s not in their interest of push vaccines, they haven’t got supply. So there’s a need to stimulate demand and there is administration across a lot of these health areas that also needs some work on.

The vaccines are pretty important to us because if you think about what we’ve done, we’ve built all these sterile factories, we put all the costs in, because you got to put people behind the lines, 100 people here, 200 people there. They’re all sitting there and you’re not generating even revenue, but they are generating costs. That is what’s called an under recovery. Now you start putting vaccines in, they start absorbing those costs in the end, so that that will have a very positive impact on our absolute margins in manufacture. So just having more volume means that our base manufacturing margins get increased instead of having to allocate 10 to this product and none to this, you know so I can put five and five. So suddenly, your whole, your base manufacturing business margins go up.

And we’re hopeful and obviously, everything’s going to depend on what price we set it at and how we get the yields but we are hopeful that our GP percentage on Aspenovax will be incremental to those increased overall base margins. I’ve been speaking quite a bit about this, and I’m sorry if I’m sounding repetitive, but Aspenovax is an enabler for us. It’s contributed to global equity. It’s really given people a sense of our capabilities and expertise. And many of you would be really proud to hear how people talk about us on a global stage.

I mean, we have people like President Macron, Angela Merkel, and they said, no, it’s that Aspen company in Africa, they’re incredible with what they doing. And J&J talking to global markets saying, this is the company that just takes things on and does it so brilliantly. And it’s given us a profile that we couldn’t have got ourselves in this timeframe that we’ve got it. And so it’s certainly accelerated our plans.

And as I’ve told you, there’s an opportunity now to extend this further across many of the other different dosage forms. And when we look at people who want to partner us, many of them are certainly saying, I’ve got this product but I only could sell this COVID vaccine, I’ve got these other products with these but I’ve got no ability to sell them because I was just a developer and government’s bought my COVID vaccine. How do we do this? And so it’s given us an opportunity across all our platforms to the extent that we get orders for Aspenovax, and these are profitable to us. It’s really is our commitment to try to try and increase capacity and improve a vaccine pipeline within Aspen. So those are areas we’d really like to be able to utilize so we get some gains out of this to be able to put it back into creating a capacity and a capability, a broader capacity and capability.

And that aligns, well I told you, we like to be all-rounders in Aspen, that aligns with our purpose to improve health and quality of life for patients. So an important little chart there. So in summary, and so thank you very much for listening. And I must say it’s very nice to actually be here in person. But it’s been challenging but a really rewarding period operationally. We’ve, we get – we were doing meaningful returns, I think that our decisions to go into sterile manufacture, when I think back in time and think what we had and what could have happened if we just stayed in the generic space, I think that we invested ahead of the curve. We’ve got really good products, we obviously selected products well, generally from the ones we present. That’s showing in the margins and the retention of margins in difficult time and in fact, the expansion of margins.

Aspen is, will be impacted by relative exchange rates. As Sean said, he expects H2, at the moment H2 could be in line with the prior year. So you might see your actual, your reported growth more in line with your constant exchange rate growth. Of course, the ruble is going to be an exception. I mean, its Russia is going to be a problematic there. We’ve got challenges to operations and we’ve got inflationary pressures that we have to manage day-to-day and are managing, and we’re try to play what’s in front of us and every day is a new day, literally in the world for all of us and for Aspen too.

And we’ve got some acquisitive opportunities under review with Aspenovax behind us. There are some that advanced and I think you should expect that maybe that we’ll do one or two things in this next period before we speak to you the next time. We’ve done – when we look at our business, our Commercial business has performed well. But there’s some adjustments that I think you need to consider for H2, one, the divestment of products out of the South African businesses about R300 million. And I don’t know, I’m not going to give you advice on what to pencil in for Russia and Ukraine, etc. But my sense is, I wouldn’t be penciling in too much.

So a great first-off from Commercial Pharma but we expect maybe a sharp shift in balance. So we see the Manufacturing expected to have a much stronger H2, and Aspenovax could also, with a bit of luck contribute to this half. But let’s not assume that happens. We expect the manufacturer maybe to compensate for some of the headwinds that Commercial might fill in H2. We’ve got cash flow, operating cash flow conversion, and Aspen has always been a standout feature in Aspen. And we targeting more than 100% operating cash flow conversion. So that means some – we expect some significant cash inflows in the second half of the year.

So, I always get nervous to talk at halftime. Someone who follows sports, many things happen between half time and full time. But if we have a look at where we are, if we sustain where we are, if we replicate H1, H2, which is what we’re hoping to achieve. And I go back to where we started this process in 2013, we really had the similar amount of debt. So similar amount of debt, so if you take debt can push your earnings up but you’ve got the debts. You’ve got this debt burden there and so we’re looking on a like-for-like, we’d have double the size of our business.

And now we’ve and we’ve only got a foundation, really. I think this is the foundation we can really grow off. So if we do double, if we do get H2 in line with H1, it will be the highest net HEPS per share in our history. So this is not discontinuing, continuing, all those fancy accounting terms. Very simply, we’re going to be in a good position there. And I think the only obstruction for us between then is what might happen politically across the world.

And for those that know Aspen and followed us, well, at the end of the day to get second half we’re going to need to execute and so that means there is really no time to rest and for those will give you no chance to rest. So that’s – and that’s our story, so an exciting time. And thank you for taking the time to listen to us. A lot of work to do, a lot of work has been done. And thank you, once again, to our teams that have put tremendous efforts into getting us into the strong position. So thank you. [Paulo], is it, are we going to do questions?

Question-and-Answer Session

Q – Unidentified Company Representative

We’ll take our first question from Anuja Joshi from Absa. How much of your capacity you plan to dedicate for Aspenovax versus other vaccines in 2022 and 2023?

Stephen Saad

I think where we are now is that until we bring our next line on, which will be February, March of next year, almost all our capacities would be dedicated to both the J&J and Aspenovax vaccine. So there could be about probably about 35 million units a month. And that split would depend on, we don’t have any orders for Aspenovax. So it would depend on the orders, we get to Aspenovax, what happens to the J&J volumes, etc., together, and that’s something we would be working together with J&J through. But there isn’t, there just isn’t enough capacity to bring on any other anesthetics or any other new products right now, trying to stay focused, eyes on the prize kitty.

Unidentified Company Representative

Right, the next question comes from Siphelele Mdudu from Matrix Fund Managers. Well done on a good set of results. How are you managing cost inflation? Are you able to pass through some of these input costs shown in Slide 33, given SAP and NSA? And the second part of this question is, what are your plans to offset these inflationary pressures?

Stephen Saad

We try to understand what these – are these prolonged because we’ve been through, I think, it was in 2008, I think we’ve had similar, we faced – the world has face similar challenges around oil pricing and energy prices around about then. And it was a spike and it was going to go to $200 a barrel and $300 a barrel and it came back down. So you’ve just got to be careful, you don’t adjust things for a permanent change. What we are looking at internally is, yes, we do have portfolios because some of them are tender based, as I said, some of our anesthetic, so our sterile portfolio, but we – regulated price increases are not always easy to achieve. Fortunately, a lot of our Manufacturing business, you can’t pass on some of these. But before we go to the simple thing, which is passing on, we’re trying to understand how to manage the situation. So what are your base business? What are your base costs? In Europe, we have had 1% to 2% or zero to 2% inflation. And we would like to try and keep our increases to that level, and rather pay a one-off benefit or say that we understand because you can’t say to people who live in 8% inflation branch has 2%. But we might have to say, here is a COVID allowance or an allowance for this period and just understand how this how this pans out. It’s a very dynamic and very fluid situation. We are fortunate in that, we’re in a period of margin expansion and operating costs, but we don’t want to be taking all the hard work we’ve done to get all these synergies and great results, to spend it all within an inflation. And ultimately, it will – some of it will have to be passed on if it stays at these levels, that’s for sure.

Unidentified Company Representative

Right, the next question comes from Luresha Chetty from Ashburton. CapEx in FY 2023 includes R800 million from – for potential sterile production. Can you comment on where this capacity will be added? Will this be vaccine specific or general sterile capacity? And how many additional doses will be achieved with this CapEx?

Stephen Saad

I think we’re looking, we’re waiting. the reason Sean put it up there is bit cautious, we are waiting to see where Aspenovax and Aspenovax volumes come, how sustainable they are and some of these new opportunities that we’re looking at, what that might be. So I think the likely spend is around about in our Qhubeka facility shown, I think it’s what your – you spent in Qhubeka, and it’s to understand the opportunities. It would be that we’ll pull the trigger when we understand the opportunities.

Unidentified Company Representative

Alright, we’ll take one more question online before we pass on to the floor. We have our next question from Adrian Wu from Truffle Asset Management, three questions. Could you please elaborate on the impact that a weak euro versus USD will have on your margins? I’ll take that first question.

Stephen Saad

A weak euro versus USD, so let’s just talk about a weak euro full stop. Aspen has a lot of sales in euros because we tend to sell a lot of our manufacturing [API] sales tend to be in euros but we just have a lot of costs in euros. We have a lot of factories in Europe, and we have a lot of costs as well. So we think we, I think we’re relatively neutral, Sean. You’ll be better to answer that and would be relatively neutral in euros. But against the dollar where it’s problematic is when you, we also sell, we don’t sell a lot into the US but what we do sell is around API’s which would be positive because you tend to have a euro cost against the USD cost but USD with, let’s be clear on it, it’s more than just a euro impact. The USD is a currency that one uses across many raw materials. Businesses are run, and if you want to import APIs into South Africa from India, they don’t give it in rupees they charge in US dollars. So understand the US dollar is an important currency. Obviously a strange thing, rand has been incredibly strong. So you might even have an increase in margins in South Africa. But I don’t know that a euro/USD is a massive influence to us. Some a lot of our Heparin, mind you, is important in the basis in US dollars. But I don’t – I think we’re relatively neutral on US. We are very, if the Australian dollar is strong, if the Chinese renminbi is strong, that’s positive for our results because they don’t have a lot of their own currency costs against it.

Unidentified Company Representative

Alright, the next question is, what cost inflation can we expect for selling and administrative expenses going forward, given the 2% decline in CER in H1? Is there more cost savings to come?

Stephen Saad

Your there are more cost savings to come. You know, these things, you know, you just don’t, you don’t fix them in a short space, there are more cost savings to come. And we would, we’d like – we’d have to balance it up with what might happen with inflation. But I think you’ve got to weigh that operating expense decrease, also look at in terms of a 10% increase in your sales. There’s some things that are variable, you can’t change, 10% more on moving trucks and variables. And so those savings are achieved in spite of having increased turnover and increased variable costs. But there is more to come. I think there’s more operating costs to come. I’m not going to give you an overall absolute percentage right now. Because I actually don’t – I’m not prepared to go out on a limb just yet on what that inflationary increase might look like on the balance of the expenses.

Unidentified Company Representative

Okay, the last question. What happens with the full and finished contracts given the Aspenovax license?

Stephen Saad

Yeah, the full and finished contracts we talked, don’t impact the Aspenovax. There we’re talking largely about our French facility, which is a prefilled syringe facility. We don’t have, we just don’t have capacity for extra work to be able to offer extra work our key facilities. And we also at some stage want to bring our own anesthetics across there as well. The contracts are signed, as I said, in France and those, we’ve used about 80 – we’ve signed up for 80 million, but we could we could go up to as high as 200 million in that facility. So let’s just say it’s 80 of 200 million.

Unidentified Company Representative

All right. That’s it from online attendees. We’ll pass it on to questions from the room, if there are any.

Stephen Saad

Okay, well, thank you. Thank you all for attending. It’s such a pleasure to be here in person. And hopefully we build from here, business wise and audience wise. So it’s good. So thank you everyone. Thank you.