Adcock Ingram Holdings Limited (AIP) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to the Adcock Ingram Investor Conference Call. [Operator Instructions] Please note that this call is being recorded. I would now like to turn the conference over to Andy Hall. Please go ahead, sir.

Thank you, Claudia. Good morning, ladies and gentlemen. Welcome to the results telecon for Adcock Ingram for the year ended 30 June 2020. We appreciate you taking the time to listen to the results and what's going on at the company. We're going to follow our usual format. I'll take you through an overview of the results, which we consider to be satisfactory for the period, particularly, I guess, given the depressed economy, the market very unpredictable at the moment, obviously, and everything all compounded by the COVID-19 pandemic, which as you know resulted in significant weakening of the rand, for the economy, which affects our cost of goods. We've had numerous global supply chain disruptions during the pandemic, and we've seen declines in demand for certain categories of medication and products, whereas for a couple of others, we saw increased demand but a general decline in consumer discretionary spending. Once I'm done with that overview, I'll hand over to Dorette Neethling, our CFO, and she'll give you some detail on the financials. Before proceeding with my normal overview, I think it's important to give an outline of the impact and response that the company has had to the COVID-19 pandemic. And just to let you know that the current COVID-19 statistics for our company run as follows. We've had 262 positive cases across our workforce. Fortunately, 253 of those employees have fully recovered and are back at work. We're currently managing 6 active cases, none of which are hospitalized. But sadly, we lost 3 employees to this virus over the course of the last couple of months. And we express our condolences to the loved ones of those employees. As an essential service provider, our company is integral to the health care industry in South Africa, especially at a time when you have a pandemic raging. The country depends upon essential workers who've worked tirelessly and continue to do so throughout the pandemic. Adcock Ingram applauds and is grateful to the frontline workers and our own employees, who have ensured that we continue to produce and distribute, particularly life-saving intravenous fluids and many of the acute medications necessary to treat COVID-19 patients. Internally, our response was establishing a COVID-19 Crisis Task Team. We did that in March at the company. It's led by the Executive Director for Human Capital and Transformation, with strong support from the Medical Director and various other specialties within the organization. Effectively, that committee was established to provide policy guidelines, which we align generally to local and global standards to ensure the health and safety of our employees here in the workplace. We also implemented protocols to curb the spread of the virus. This committee was responsible for having testing and tracing of high-risk or at-risk employees and also supported and managed employees while they were in isolation or quarantine. Despite the pandemic, all of our factories and our distribution network and departments critical to the continuity of the operations remained operational throughout the lockdown period, notwithstanding the challenges that I've mentioned before. Effectively, we had 75% of our workforce permanently on site, and the remaining 25% that were able to -- were encouraged to work from home, but with the ability to come on to sites when necessary. We've prioritized the employees over the age of 60 and those who were willing to declare comorbidities, and we continue to encourage those employees to work predominantly from home where possible. The nonexecutive and executive directors of the Board and some of our senior managers voluntarily donated 20% of their fees or salaries for a 3-month period to the Solidarity Fund. The company helped raise funds for employees who do an in-house carwash service at Adcock Ingram because obviously, they weren't allowed to operate during lockdown. So we've made sure that those employees have been taken care of, although they're not employees of the company per se. Through our corporate social responsibility program, we assisted with a financial contribution that was used to purchase additional hospital beds and respirators for a couple of hospitals in the public sector. We distributed food parcels and face masks to communities in need. And then in order to assist our small to medium enterprise suppliers, we arranged to pay all of them early during the course of the pandemic and continue to do so. We collaborated with the South African Depression and Anxiety Group and The Healthcare Workers Care Network in order to offer health care workers access to support, therapy, resources, training and psycho-education through the Adcock Ingram Depression and Anxiety Helpline. If you look at the financials, we spent approximately ZAR 33 million during the financial year pertaining to COVID-19-related operating costs. These include provision of meals and transport for employees during the very strict stages of the lockdown, the implementation of additional hygiene protocols across the business, disinfecting and decontamination procedures at all our facilities whenever we had infections and then the cost of pathology tests for our employees. If you just look at our Indian operations, as you know, we have a joint venture in India in Bangalore with a Japanese pharma company called Meiji, and we also operate a regulatory business there for our own account. In early March, the Indian government restricted the exports of 13 active pharmaceutical ingredients and formulations, including paracetamol. So effectively, all of our imports of those products, whether active ingredients or finished formulations, effectively ceased coming into the country on the 7th of March. And our joint venture in Bangalore effectively does virtually all of our capsules and tablets for Adcock Ingram for the South African market. That restriction was lifted on the 6th of April, with the exception of paracetamol and hydroxychloroquine. And as you all know, paracetamol is a COVID-19 critical medicine. And with the unprecedented demand that we've seen for paracetamol, particularly for Panado, the securing of consistent supply of active ingredient and finished goods out of India was a significant challenge for the company. We did, however, manage to maintain stocks of both the active and the finished formulations throughout the pandemic, partly by securing additional supplies of raw ingredients here in South Africa through good relationships with suppliers that we have here as well as commissioning, manufacturing of some paracetamol-containing products back in our facilities in South Africa. The paracetamol restrictions were lifted in India on the 28th of May. So effectively, we're now back to normal in terms of our supply chain. Our joint venture factory closed for about 3 weeks in late March and early April. Karnataka state has had some very strict lockdown, similar to what we've had in South Africa, at various stages during the pandemic. And unfortunately, it was unable to operate despite being a pharmaceutical operation in that period from late March through a couple of weeks in early April because of staff, health and safety concerns. And effectively, we couldn't get deliveries into or out of that factory for about a 3-week period. Generally, by the end of April, the situation was back to normal from that factory, but we have seen a spike of infections in Bangalore again in August. Currently, that factory is operating with about 400 people either in isolation or in quarantine, which is close to about 1/3 of their workforce. So they've had to reduce shifts, but we're still getting product out of there. I'm pleased to say that our regulatory operation in Bangalore operated throughout the lockdown periods, and we've remained infection free at that administration building, and the staff were virtually all able to work from home when it was necessary. Just looking overall then at the performance for the year. Considering the factors that we've mentioned around COVID-19 and the depressed consumer environment, we're satisfied with the results of it that have been delivered for the year. Trading profit did decrease by 1% despite turnover increasing by 4% and operating expenditure being lower than the previous year. The deleveraging that you see from revenue down to trading profit effectively happened at the gross margin level, where we've seen a decrease there of about 200 basis points, adversely impacted by the unfavorable exchange rate, inflation in wages and utilities and the COVID-19 expenditure that I mentioned earlier. Our OpEx decreased by 2% despite average inflation in the country being about 4% over the course of the year and a 5% salary increase that we gave our employees in December 2019. Looking at our rest of Africa model, you'll see a decrease in turnover there in the Kenyan operations, and the reason is that we've moved our operating model from having a physical presence in Kenya to the appointment of a distributor, in line with our strategy of not investing in any fixed infrastructure outside of Southern Africa. On the regulatory front, you will all recall, we got a 4.53% Single Exit Price adjustment in early 2020 calendar year. That was pretty much in line with consumer inflation at the time. Our current problem is that in the absence of further relief on the Single Exit Price, margin compression in the group is going to be inevitable given the current rates of exchange. The Pharmaceutical Task Group that represents most of the pharma industry in South Africa has met with the Department of Health's Pricing Committee in early July. They presented a rationale to the department for urgent relief on SEP and effectively have requested an SEP adjustment on an interim basis in the low single digits, but we wait to hear from the department on the matter. The operations within SAHPRA, our regulator, have also obviously been negatively impacted by the COVID-19 pandemic. It's affected mainly what we call the sort of business-as-usual operations at SAHPRA, including the backlog project. And we now know that, that backlog project won't be cleared by the end of July 2021, as was the original goal. However, as a company, we must compliment SAHPRA on its response times on matters relating to COVID-19. We've seen excellent cooperation between the regulator and the industry. Approvals for applications on post-importation testing exemptions were done quickly, and Section 21 applications have also been fast-tracked, and we've had very little or nothing to complain about in relation to their performance on anything related to COVID-19. In June 2020, a gazette was issued indicating that there are going to be significant fee increases for the activities conducted by the regulator, effectively trying to mirror what international regulator bodies do. We were a party to the PTG, or Pharmaceutical Task Group response. Our view is that we're not opposed to increases, but in the current context, we can't support increases unless they come as part of a revised -- part of a definitive review of time lines for applications and other performance metrics. So it's common in overseas countries to have the fees effectively linked to performance metrics so that people are getting a return on their investment with the regulator. I'll move quickly into the divisions to give you an idea of what's happened within each of our 4 operating units over the course of the year. Our OTC division, which generates the majority of profit in the business, focuses on product portfolios for pain, cough, colds and flu and antihistamines in the main. It's effectively a pharmacy channel business, although it does do some public sector work, and it does do some export into sub-Saharan Africa. The first half of the fiscal year was pretty challenging for them due to our own voluntary temporary suspension of the sales of BronCleer with Codeine, which effectively ramped -- started up again in November. So there was about 4 months of -- that we didn't supply that product into the market. And we did have some general stock supply challenges from the factory during half 1. During half 2, we saw very strong March sales in that business, particularly on the winter basket. But during the fourth quarter of the financial year, the impact of the pandemic has had a negative impact on the cough, colds and flu portfolio due to the absence of the annual cold and flu season. I'm sure you've all seen what Dis-Chem and Clicks have reported on that matter. So it's impacting them to the same extent that it impacts us. This lack of demand for cough, colds and flu products has effectively persisted into July and August. So we've seen no change. So we think you can pretty much bank on the absence of a flu season in 2020 in South Africa, bearing in mind, in this division of ours, cough, cold and flu medicine is about 40% of their portfolio. And despite these challenges, turnover for the division did increase by about 2% year-on-year. And 4 of the top 5 brands, including at Adco-Dol, Allergex and Alcophyllex showed very good growth over the prior year. Corenza C and Allergex have exceeded revenue of ZAR 250 million for the first time. And Corenza C, though, we must say, was assisted by the COVID-19 pandemic. There was a run on that product in March panic buying spree for some reason. Alcophyllex did ZAR 100 million, so it's also nice to -- every time we get a brand to ZAR 100 million, we feel that we've got a brand that's got real sustainability and traction. The gross margins here were obviously adversely impacted by the weaker currency, the COVID-19 cost at the Clayville factory and the difficulties in factory recoveries only during the first half of the year. We saw a much better performance from the Clayville factory over the second half. So we saw an excellent increase in trading profit there. Despite the contraction in the gross margin, trading profit increased by 10%, effectively achieved through very good operational cost control and reengineering of the selling and marketing infrastructures and activities in that business. So we were very satisfied, relative to what's happening in the market, with how that division has performed. Our Prescription business was really hit the hardest by the pandemic and the nationwide lockdown. We've reported an increase in turnover there of 1% year-on-year, but volumes did decline by -- organic volumes did decline by 7% in that business. Effectively, the volume decline was offset by onboarding of dermatology brands from Leo Pharmaceuticals, one of our big European partners, the 2 big brands there being Advantan and Scheriproct. And then we had a number of launches with -- particularly in the generics portfolio. So at the top line, we managed to keep it steady. The decrease in volumes that you've seen or that I've alluded to were mainly attributable to the ARV business where our private sector sales are down about 40%. We've lost our formulary status with one of the big funders there, which has severely impacted one of the brands. And then the challenge around the extremely slow rollout of the new tenofovir, lamivudine, dolutegravir combination in the state sector, where that product really has not got much traction under the tender. COVID-19 hit all of the acute medicine portfolios and the medical equipment portfolio here. So as you've probably seen in the media, there's been a reduction in the number of patients consulting health care practitioners during COVID-19. We've seen low dispensary traffic in pharmacies and postponement of elective surgeries and reduced trauma and medical cases. And all of that has a knock-on onto our portfolios that are in acute medicines like analgesia, urology, dermatology and the like. The generics portfolio though improved over the course of the year. So we're seeing good traction in that portfolio. We've had a couple of nice launches. They reintroduced a product called Scopex Co to the market, which is effectively a generic of a product called Buscopan Co. And within a couple of months, we've got more than 20% share of that product back. And we had a launch of Adco-Etoricoxib, which is a product for moderate-to-severe rheumatic pain, a generic of one of the innovator companies. The Genop business, in general, has done okay. It was adversely impacted by the pandemic because about half of its sales move through ophthalmologists and optometry practices on medical equipment side. So effectively, didn't do any sales for around about 3 months of the second half. But the Epi-max brand there continues to grow and has done very well. This division, not Genop, the Prescription division has also launched its first biosimilar in August, a product called Remsima. It is infliximab, which is indicated for numerous conditions, including ulcerative colitis and Crohn's disease. So that's our first entry into the biosimilar space. So we're quite optimistic about what we can do with that product. We have a partnership with a Korean company -- South Korean company called Celltrion. And this division still continues its multinational partnerships with companies like Roche, Takeda, Lundbeck, Novo Nordisk, Biocodex and Leo Pharma. But all that having been said, it was a disappointing performance at the bottom line. So trading profit, you'll see there, is down significantly over the prior year. And we're hoping that with the launches and effectively when doctors get back to business, that, that business will start turning. In the Consumer division, they delivered a very strong performance throughout the year. Reported an increase in turnover of 13%, and that 13% includes the impact of the Plush business, which we effectively consolidated from the beginning of June. Plush is a well-recognized brand. It's been around for over 50 years, offering a range of home care cleaning and leather care products. The COVID pandemic did result in a lot of panic buying of medicinal and immune-boosting products in March and April. But as I mentioned earlier, we did have reduced demand for personal care and energy products during the pandemic. So it was a little bit of swings and roundabouts for them. However, Panado really did well, partly assisted by COVID-19. That product up almost 20% year-on-year and has now exceeded sales of ZAR 400 million in the fiscal, which for us, is a very big brand. 4 of their top 5 brands are in growth in that division, and those 4 brands, in fact, contribute 80% of their revenue. So you can see why their top line looks fairly strong. The Island Tribe brand that we bought a few years ago, which is a sun care brand, now ranks in the top 5 sun care brands in the South African market. So that product also with new packaging and innovation continued to do nicely. It all resulted in a trading profit increase of 16%, which we thought was really an excellent performance. On the innovation front, they've also had some launches in that division. They launched ADCO CBD in February 2020. It was our entry into the cannabidiol market, effectively available in capsules and drops. We've done the Plush acquisition, which we're delighted to have done. And we've also acquired a small company that operates out of Cape Town called Lulu & Marula, which is our entry into the natural skin care sector. We continue, obviously, to look for acquisitions in this space in personal care and baby care in the main. Our critical care or hospital division is the leading manufacturer and supplier of critical care and hospital products in South Africa. They managed to increase turnover by 12%. They had good demand for renal therapies and intravenous fluids. Some of that affected -- assisted by COVID-19. And then the ADCO Hygiene range did particularly well in that division. So as you know, everyone went for hand sanitizers and hand soaps and the likes during the heat of the pandemic, and we did very well there on the ADCO Hygiene range. However, during the peak of the pandemic, we did see a decline in demand for hospital products with most of the public and private sector hospitals already having stocked up pre-pandemic and many of our intravenous fluids get used in elective surgeries and trauma and medical cases. So with low hospital occupancies, those -- the demand for intravenous fluids tailed off in the latter part of the -- effectively in the fourth quarter. We still -- this division still holds a market leadership position in intravenous fluids, in renal therapies and blood transfusion therapies. It's still the largest supplier of blood donation bags to the South African National Blood Services. In January '20, they expanded into the sports science and rehabilitation sector. To be honest with you, in January and February, we thought that business was getting really good traction, started off nicely. We put out a field force. We invested in inventory and a marketing strategy. But unfortunately, it came back to a standstill during the national lockdown with many of the physiotherapy practices closed. But we're back with that business. We're doing quite a bit of work online to see how we can sort of reengineer the demand in that portfolio. Trading profit then for this critical care or hospital division was up 25%. So again, we thought a very good performance. Looking at our supply chain. Our Clayville factory, as I mentioned, had some difficulties in the early part of the fiscal, mainly around water supply. But overall, throughout the year, the facility did push through more volume than it did in 2019. Our ophthalmic facility is completely finished, but it will only begin operating for commercial purposes once we get approval from SAHPRA, and we are hoping to get that inspection within the next few months. Obviously, SAHPRA being focused on COVID-19 products as opposed to ophthalmology. At Wadeville, our liquids, creams and ointments facility has also done well, increased output year-on-year. However, the oral solid dosage facility there remains a source of frustration and significant under recoveries for us. We've done some automation upgrades over the last few months, and we're hoping that will provide a more consistent supply of quality medicines, particularly around the triple-combination ARVs. But we're doing some test batches at the moment. We'll then move into validation and should know by the end of the calendar year whether our automation upgrades have solved our problem there. At Aeroton, which is the factory that supports the hospital business, that factory has had a fantastic year, operated at full throttle throughout the year. And part of the reason for its good operating profit leverage was the fact that it had held its gross margin year-on-year because of the good factory throughput. Obviously, all our factories were impacted, though, by COVID-19 infections, particularly once the lockdown rules have been relaxed. So the way that these disruptions hit us is if someone tests positive, we obviously close a facility or a section thereof at least. We isolate and quarantine employees who are either positive or waiting for tests. We do test all high-risk employees. We then go through cleaning and disinfective procedures and then open up again. It doesn't impact the large facilities as much as it does the smaller ones because large facilities, we can still move people around and do shift rotations. But in smaller facilities like distribution centers in Durban, Cape Town, et cetera, when a lot of people go down, relatively speaking, with the virus, it does prove problematic and causes some hassles on the delivery side. I would say though that by mid-August, pretty much all our problems in relation to the virus had subsided significantly. So we weren't experiencing too many disruptions in the last 2 to 3 weeks. On the distribution front, that continued to operate throughout the pandemic, and our focus there remains on service levels, regulatory compliance and cost containment. And we thought they did a good job on keeping costs pretty much flat year-on-year when one excludes the fact that the fuel price is volatile. On the transformation side, as previously reported, we still retain our Level 1 Black Empowerment status at the company. There have been some changes in the BEE legislation. And also taking into consideration the pandemic, there will be an impact on some elements of our BEE scorecard, particularly skills development and preferential procurement. So our view is that we won't maintain our Level 1 BEE rating after November this year, but we're hoping to come in at a Level 3, but that we'll only know in a few months' time. So that's an over -- general overview of the business. Dorette will give you a more detailed look now at the financials.

Thank you, Andy. Before I get into the details on the results, I'm going to start off to explain just the impact on the group following the adoption of the new standard for leases, IFRS 16. For those of you who have downloaded the booklet, we also disclosed this in Note 1.2 on Page 9. And just a reminder, the full set of financials have also been made available on our website this morning. So the group adopted this new standard on leases on 1 July 2019, which requires all material operating leases with a term longer than a year to be capitalized as a right-of-use assets and simultaneously a lease liability. The impact on the statement of financial position on 1 July being the date of implementation was as follows. We recorded an increase in lease liabilities of ZAR 329 million, representing the present value at that time of future lease payments, discounted to the minimum lease payments over the term of this lease. We also accounted for a right-of-use asset of ZAR 300 million on the balance sheet after the balance for the previously recognized straight-lining of leases of ZAR 29 million was offset against this asset. The impact on the income statement for the year between the previous and the new standard was that under the old standard, we would have had an operating lease charge of ZAR 66 million, which we would have recognized in profit or loss in the current year. But this has now been replaced by a depreciation charge of ZAR 39 million following the recognition of the assets. We also recorded a lease expense of ZAR 2 million on low-value assets or short-term rentals as well as the recognition of finance costs of about ZAR 30 million due to the accounting of the lease liability as finance cost. So overall, the profit before tax would thus have decreased by ZAR 5 million as a result of this new IFRS statement. However, the difference between the actual charge we recorded in the 2019 financial year of ZAR 49 million and the current year's charge of ZAR 71 million resulted in an on-cost to the business, negatively impacting profits before tax by ZAR 22 million. Of this amount, the reduced cost of ZAR 8 million is reflected in trading profit and an on-cost of ZAR 30 million in finance costs. The overall increase in lease payments is as a result of the renewal of the Midrand lease, which was effective 1 July 2020 as well as the addition of a new distribution center in Halfway House in Midrand. So in looking at the income statement, which is on Page 5 of the booklet. Turnover of ZAR 7.3 billion is 3.8% ahead of the prior year, with both consumer, which included the ZAR 19 million for Plush for June, as well as critical care growing their sales ahead of 10%, in part, supported by the increased demand for certain products at the start of the COVID-19 outbreak, as Andy also indicated. The gross profit of ZAR 2.7 billion ended 1.8% lower than the comparative year. The gross margin of 37.3% ended below the prior year margin of 39.4% and was adversely impacted by a few factors, including the weaker currency, unanticipated costs related to COVID of ZAR 23 million in the factories, some product inflation in wages and utilities running significantly ahead of the selling price increases as well as some poor factory recoveries at Clayville and Wadeville. So just to give you some indication of the adverse impact of the weaker currency, I'm going to run you through some of the foreign exchange details. During the year, we bought EUR 50 million at an average rate of ZAR 16.91, which was 3.8% higher than the comparative figure of ZAR 16.29. And we bought USD 71 million at an average rate of ZAR 15.07, representing a 7.6% weakening compared to the prior year, which was at ZAR 14. With approximately 55% of FECs in U.S. dollars and 44% in euro, our weighted cost of our basket of currencies increased by 6% in 2019 if you compare this with -- in 2020, excuse me, if you compare this with 2019. And then at the reporting date of 30 June, we also carried EUR 20 million, the open FECs at ZAR 18.77, which is 11% worse than the ZAR 16.91 that we achieved this year. And compared to a current spot of around ZAR 19.90, not a bad situation to be in, although the currency really dropped or weakened quite a lot. We also have USD 33.5 million in open FECs at a rate of ZAR 17.55, which is 16.5% worse than the average rate achieved in 2020. So on the gross margin. If we look at the performance in the factories, at Clayville, poor throughput was a result of inconsistent water supply as well as the shutdown of the HVL plant for cleaning early in the financial year. And at Wadeville, there has been a generally poor performance in the oral solid dosage section throughout the year in terms of throughput and product quality. Operating expenses, as Andy mentioned, the discipline has been outstanding, ending 2.1% lower than the prior year. And this figure included ZAR 5 million of spend on COVID as well as the 5% salary increase granted to the office staff or the supporting staff. As a result, the trading profit of ZAR 944 million is 1.2% below the 2019 financial year. If I move on to non-trading expenses of ZAR 82 million. Included in those are retrenchment costs of ZAR 33.5 million, a loss on the deconsolidation of the owner-driver companies of ZAR 19.3 million and we also took some impairments on intangibles of ZAR 16.2 million. And included as well was the ex-gratia payment of ZAR 10 million made to the shareholders of Ad-izinyosi at the end of July last year. Consequently, operating profit of ZAR 862 million ended 2.4% below the comparative year's figure of ZAR 883 million. The net finance cost for this year is ZAR 33.5 million, and it includes the IFRS 16 finance costs of ZAR 30 million that I spoke to earlier. And obviously, there was nothing recorded in that regard for last year. The income from investments being the dividend income from the Tiger Brands Black Managers Share Trust is just short of ZAR 4 million, pretty much in line with last year. Our equity-accounted earnings from the joint ventures for the year, which arise from National Renal Care, our JV with Netcare; India, we have a JV with Meiji, of ZAR 97.5 million, which is 4.7% above the earnings from those 2 entities in 2019, which was at ZAR 93 million. The prior year also included our share of the Ghana associate until it was sold, which was a loss of ZAR 2.4 million. Profit before tax for year is ZAR 930 million, down 3.8%. And the effective tax rate adjusted for equity-accounted earnings is 29.8%, with nondeductible expenditure causing the increase over the statutory rate. Headline earnings for the year, as detailed in Note 7, amounted to just short of ZAR 710 million compared to the prior year of ZAR 701 million, an improvement of 1.2%. Headline earnings per share from continuing operations decreased by 1% to ZAR 4.175, following the unwinding of the empowerment scheme, which resulted in a lower number of treasury shares. Taking into account the impact of the unwinding of this empowerment scheme, including the ZAR 10 million ex-gratia payments referred to earlier and the lower number of treasury shares on a combined basis has adversely impacted HEPS by ZAR 0.181. If I move on to the segments, the information is on Page 11 and 12 of the booklet. And I'll start with the consumer division. Turnover of just short of ZAR 900 million ended 13.4% ahead of the prior year, a result of a consistent strong performance throughout the year and boosted by an exceptional sales performance in March and the inclusion of Plush in June. The gross margin ended marginally ahead of the prior year due to excellent negotiations with suppliers. Operating expenses in that division ended above the prior year as a result of higher marketing spend to adapt to the changes in consumer behaviors due to COVID to ensure online visibility of the major brands. As a result, the trading profit of ZAR 155 million ended 15.5% above the prior year, a very good performance from this division. If I move to the OTC business. OTC turnover of just over ZAR 2 billion ended 1.5% higher than the comparative year, a commendable performance in light of the difficult trading conditions and the absence of a flu season in South Africa, which normally starts in May. The cough, cold and flu preparations represent almost 40% of that OTC portfolio. The gross margin ended below the prior year, adversely impacted by the weaker currency, some additional costs related to COVID-19 as well as lower factory recoveries in the first half of the year. The operating expenditure has been extremely well controlled and ended 11% below the prior year, including a rapid response to the impact of COVID-19 on operating activities, like changes in certain selling and marketing activities and strict discipline on the selling of [ vacancies ]. Trading profit of ZAR 426 million ended 10% above the prior year, a performance that we are really pleased with. And looking at prescription, with turnover for the year of ZAR 2.8 billion ended almost 1% above the prior year despite significant difficulties experienced in the ARV and brand segments. The ARVs have declined by 14%, impacted by the loss of the discovery formulary listing for Trivenz and the extremely slow rollout of the DLT by the state. The branded segment's performance was negatively impacted by the COVID-19 pandemic and the subsequent lockdown as this resulted in lower levels of patient activity at doctors and pharmacies as well as the postponement of elective surgeries that all impacted demand in the pain, dermatology, urology and ophthalmology segments in the second half of the year. However, this segment did benefit from the inclusion of the Bayer portfolio in the current year, which contributed ZAR 150 million to revenue and resulting in growth of 22% in the branded segment despite all the challenges mentioned. The generics segment was impacted by stock supply challenges earlier in the year as well as pricing pressure but recovered well over the course of the year. Gross margin in prescription ended below the prior year, adversely impacted by the weaker currency, inventory obsolescence, additional costs related to COVID-19 and the poor factory recoveries at Wadeville that I spoke to earlier. Operating expenses for the year were well controlled, ending 7% below the prior year. This resulted in trading profit of ZAR 218 million for the year, being a very disappointing 30% below the prior year. Lastly, the hospital division with turnover for the year of ZAR 1.6 billion ended just short of 12% ahead of the prior year. Both the renal segment and Adco Hygiene business benefited from buy-ins related to the COVID-19 pandemic. However, in the last quarter, demand for hospital products was subdued with private sector hospitals running significantly below capacity with almost no elective surgeries and fewer trauma and medical cases. The gross margin ended in line with the prior year, driven by a beneficial sales mix and excellent throughput in the factory, which compensated for the weaker currency and the additional costs incurred to ensure continuity of supply during the COVID-19 crisis. Operating expenses ended above the prior year with higher selling and distribution expenditure consequent to the increased sales as well as the launch and operating costs of the new Sports Science & Rehabilitation business Andy spoke to. As a result, trading profit of ZAR 140 million ended at very impressive 25% above the prior year. And I think, as Andy mentioned, really a mixed bag of results across our segments. And just lastly, a quick look at the Kenya operation, which is the only part that we report this year. So in the foreign operations, we recorded turnover of ZAR 54 million, which was 22% lower than the prior year, and a small trading loss of ZAR 0.5 million was recorded. If we look at the balance sheet, which is on Page 5 -- 7, and the noncurrent assets. So the depreciation charges to property, plant and equipment amounted to ZAR 147 million compared to ZAR 153 million in the prior year. Depreciation of the new separately disclosed right-of-use assets capitalized in terms of IFRS 16 amounted to ZAR 39 million, bringing the total depreciation charge to ZAR 186 million in the 2020 financial year. Intangible assets, including goodwill, now have a carrying value of ZAR 929 million and comprise of generic, consumer and OTC trademarks, brands and license agreements. This amount includes the goodwill and the intangibles of ZAR 342 million, which we recognized on the acquisition of Plush in June this year. And just a reminder that it also includes ZAR 284 million, which we recognized from the acquisition of Genop in the 2018 financial year. So the big growth in that figure is really relating to those 2 acquisitions. We've recorded amortization of ZAR 10 million in the year, and the carrying value is also after we have accounted for the ZAR 16 million of impairments. If we move to the current assets. Inventory of ZAR 1.9 billion is stated at the lower of cost and net realizable value after we've recorded provisions of ZAR 236 million. Days in inventory increased to 137 days compared to the 108 days at June 2019. This increase was mainly arising from the investments in active pharmaceutical ingredients related to the ARV tender, the onboarding of the Leo Pharma new dermatology brand, the launch of the Sports Science & Rehabilitation division in critical care, the take-on of Plush as well as the higher inventory, which we have to address global supply constraints as a result of COVID-19. Trade accounts receivable of ZAR 1.4 billion are shown net of provisions of ZAR 42 million. Days in receivables of 66 days, dropping marginally from last year's 64 days reported. The book remains well controlled. Despite COVID, the team did a great work and about 82% of gross receivables are due within 60 days or less. Currently, the government debt is 20% of the total gross debtors' book and about 62% of this customer's outstanding amount is due within 60 days or less. The group had cash resources of ZAR 317 million at year end and working capital facilities of ZAR 1 billion at that stage available to the group. If we look at the bottom half of the balance sheet, there was not a lot of movement except for the issued share capital and share premium which reduced by ZAR 154 million following the share buyback by the group during March 2020. And the only long-term liabilities in the group at the moment relates to the leases of ZAR 281 million. Thank you. That's all from my side, and I'll hand back to Andy to close the session.

Thanks, Dorette, for that comprehensive review. I guess, looking forward, our view is that South Africans and corporates are in for a difficult ride in the short to medium term. And we're worried about the probable prolonged negative impact of COVID-19. The 2 issues that worry us the most here at Adcock Ingram outside of the health care effects of the virus are unemployment levels, which obviously can impact our demand, particularly in our consumer basket, and the weak exchange rate. So that's -- those are the 2 areas that really worry us the most in a, let's call it, a post-COVID world or the COVID world that we're going to live with. To protect the sustainability of the business and remain relevant in this economy, we're continuing to examine our structures. We did have a Section 189 process between July -- June and the end of July, which we've just finished with. And we'll continue to look at our operating model, particularly in each of our divisions, to see how appropriate it is, taking into account the customer and consumer behavior that we saw during the lockdown period and which continues to evolve in the relaxed lockdown periods. So we thank you for dialing in. Claudia, I'm happy to hand back to you if anyone wants to register any questions.

[Operator Instructions] The first question comes from Charles Boles from Titanium Capital.

Two quick questions. The Plush purchase price of ZAR 323 million or pretax profit of ZAR 22 million, it's about 15x pretax profit. As a purchase price for a mature business, looks quite steep. Maybe if you could just talk through your thinking around that. And secondly, the stock provision that runs at ZAR 95 million to ZAR 100 million per annum seems high. Is that related mainly to expiries? Or if you could just provide some detail around that, please.

Charles, sure. Thanks for those 2 questions. Yes, the Plush acquisition price, you're correct, was in the region of ZAR 320 million after adjusting for cash. We haven't made, to my knowledge, the profitability of Plush public. So look, when we value businesses here, we do a discounted cash flow relative to what we think is going to happen in the market. We compare that to transaction multiples, both locally and for offshore operations, and then we effectively enter into a negotiation with the supplier. So our view that -- on that ZAR 320 million was that relative to the EBITDA multiple that we can generate from this business, that, that was a reasonable multiple. And that EBITDA multiple was in the single digits. And on the inventory side?

So Charles, I'll deal with the inventory. So that write-off of ZAR 90 million to ZAR 100 million, I think it spiked from last year. It's really not a number that we are comfortable with. I think before that, we always had a figure of more ZAR 50 million. So it does relate to some expired stock, damaged stock or we -- some of the business units decided to cull some brands. So on some of the impairments, we took business decisions to not continue with brands. And then sometimes, we have those packaging material and finished goods. So yes, it's really not a number we're happy with, but that is what it actually includes.

And sustainably, if I'm understanding you correctly, that should run at about ZAR 50 million per annum. Is that a more normalized level?

Yes, that is more of the normalized level that we've seen pre, call it, 2019. So the last 2 years has been disappointing for us.

And if we just come back to the profitability of Plush. I'm just -- Note 2 of your results says that the profit before tax, the turnover of the business would have been ZAR 224 million and PBT, ZAR 22 million. That's where I picked up the ZAR 22 million from. I'm struggling to reconcile a price, and you're quite correct that there would be some cash in the business. But getting from 14x, 15x price to PBT to a single-digit price to EBITDA is hard to see.

Okay. Charles, I can explain that to you. So that figure is effectively based on the profit that we would have taken out of Plush in June. The 1 year -- the 1 month that we consolidated it. It's not a reflection of its historical profit. And the reason that it's low is that you can imagine during lockdown effectively with schools all closed and very few people in hospitals -- I beg your pardon, in offices, the leather care and shoe care part of that portfolio effectively doesn't sell. And even the specialty shoe retailers were closed. So around about half of that portfolio was subject to a COVID-19 impact.

So in other words, sustainably, these kind of numbers are below normal level for the business?

Exactly, working on the assumption that people are going to go back to school and clean their shoes and all of those good things. So this is one of those businesses where COVID-19 has not done it any favors.

[Operator Instructions] Andy, it seems like there are no further questions in the queue. Do you perhaps have any closing comments before we conclude?

Claudia, thanks. We're delighted that everyone could have dialed in. I'm hoping the lack of questions means Dorette answered all the questions in her commentary. But we will be talking to, obviously, some of our shareholders over the course of the next few days, and we look forward to that. And appreciate everyone dialing in, and Claudia, for your assistance. Have a good day.

Thank you. Ladies and gentlemen, that concludes today's conference. Thank you for joining us. You may now disconnect your lines.