AfroCentric Investment Corporation Limited (ACT) Earnings Call Transcript & Summary

Good morning, everyone. I'm Sean Ungerer from Chronux Research, and it's my pleasure to welcome you to AfroCentric's 2024 Interim Results Presentation. Today, I have the honor of introducing AfroCentric's Group CEO, Gerald Van Wyk; and Group CFO, Hannes Boonzaaier. The presentation is available on the website and at the conclusion of the presentation, the management team will address any questions submitted by the webcast. With that, I'll now hand over to you, Gerald. Thank you.

Good morning, ladies and gentlemen, and welcome to our 2024 interim results presentation. I'll provide you with a summary of our performance as well as the material matters that have impacted our results. And I'll also provide you with an update on our strategy refresh as well as our integration with Sanlam, our Group CFO, Hannes Boonzaaier will unpack our financial performance in a bit more detail, and then we will take any of your questions. So please feel free to engage with us during this session. When we look at our operating context, it is still pretty much a story of a tough operating environment that has been characterized by weak economic growth, high unemployment and high cost of living which has had a direct impact on the medical aid affordability. We've also seen a policy shift in support of NHI, which is already impacting medical aid affordability with a 2025 medical tax credits not having been adjusted for inflation and potentially in future being removed. And as a result, we've seen some muted growth coming through in the market with medical inflation costs still remaining stubbornly higher than CPI. And we've also seen a correlation coming through between the higher cost of living and a rise in fraud activities in the industry. And as a result, our scheme clients are looking at us through our expertise, scale and capabilities to actually demonstrate and deliver value for them during these trying trading conditions, especially in the context of what we are able to do to help them manage these risks and navigate these difficult trading conditions. And so we're doing a lot of work in that context by collaborating with our service provider networks to deliver better clinical outcomes for members at the right cost, but also in a seamless experience so that we can help our medical scheme clients to not just grow but also retain their clients in a sustainable way. And then we also have seen with the Council of Medical Schemes having finally released its 2022 annual report that the continuation of consolidation within the industry are still taking place. The number of medical schemes have halved over the last 22 years from 144 in the year 2000 to now 71 medical schemes in 2022. And although we've seen an increase in the number of beneficiaries, which has now just exceeded 9 million, this has been predominantly driven by the government employee medical schemes with the rest of the market still trailing behind and struggling with growth. When we look at our financial performance for the half year, it really has been a period where a lot of effort and focus have gone into recovering from the poor financial performance of the prior year with a focus on revenue growth and cost containment. And our revenue for the group has grown by 1.4%, and which has been mainly supported by good growth in our core servicing business, which has helped to offset the loss in revenue in our retail business, which was mainly affected by the closure of our medical equipment business in [indiscernible] As well as a reduction in revenue in our Department of Health contract in our script dispensing business. From a cost perspective, I think we've done pretty well over the last 6 months to contain costs within the business. And as you can see, with the operating profits at ZAR 464 million at group level, which is now stable and in line with the 2019 levels that we've seen in the pre-COVID environment. And there's also been significant savings that we've been able to realize on the technology front, through a focused efficiency gain initiatives that we've been driving, and we're starting to see those benefits now coming through into the business. And here you can see that technology saving on a year-on-year basis that we've been able to realize over the reporting period. And work continues in this regard, especially in collaboration with Sanlam to find further efficiencies and opportunities to strengthen and stabilize our technology environment, but also to leverage the broader group ecosystem to find further savings and opportunities in that regard. The pharmaceutical cluster, unfortunately, as part of one of the material matters that have impacted on our results is one that has seen a significant shift in the fundamentals. Although we've done pretty well in bringing members and patients back into adherence by having them request and then taking their medicines, which has helped. We see it in the private script environment where the number of scripts over the reporting period has increased by over 17%. The margin erosion activities in this space, however, still remains an area of concern, which has necessitated refocus from a management effort and focus perspective on really driving a rethink around the pharmaceutical business and how we're going to going forward, maximize the value of having this diversified portfolio in a focused way going forward, because the continued pressure from a single exit pricing perspective still plays a significant pressure on the cost of medicine in this regard. And we've also seen, like I will demonstrate to you in the next slide, the revenue decline that we've seen in our National Department of Health contract that has having a significant impact in this space. We've also, during this period, been able to conclude on our final earnout payment on our Forrester acquisition, and that gives us now the opportunity again, as part of this refocus to be quite clear and articulate about how we're going to optimize value across the value chain in terms of the businesses and the areas that we focus on going forward. Speaking of the impact of our central chronic medicine dispensing and distribution business through the National Department of Health. We think this is a very important part of our business. It is the only living example of a private -- public partnership that becomes a significant precursor of what's possible in a National Health Insurance environment, where we are dispensing now well over 1.2 million scripts into the public patient environment. And this is something that we believe can be done in a sustainable basis. But however, our new tender, which came into effect in October 22, has had a gradual impact as the scripts have started to come up for renewal on the revenue that we've been able to generate in this space. Here, you can see a 30% decline from the prior period equivalent in terms of the revenue per script that we've been able to generate in this space with the new contract coming into play at the script renewal period. But positively, we've seen a marked increase in the volumes of scripts that we've been able to generate in this space. And so work is now underway with the department and through the focused management effort to realize this partnership in a more sustainable basis. We're doing work to see how we can operationalize and manage cost base more efficiently. We're doing work to understand where the opportunities are to add more service to this national infrastructure that we've already created, and that has been demonstrating to provide great patient outcomes when it comes to medicine adherence, especially in the communicable diseases aspects, but to look at how we can actually work with the National Department of Health against its health priorities. And we're piloting an initiative within the La Polpa region to see how we can actually deliver an enhancement in terms of the services that we deliver in this space. We are also engaging with the department around the annual fee increase for this business, which is coming up in April. So a very critical point for us to ensure that we're driving this business towards the right sustainability because we feel fundamentally it holds a lot of value going forward in us making ourselves NHI future-proof in becoming a key strategic delivery enabler in delivering some of the key initiatives within an NHI environment as well. And then very excitingly, last time we reported around the Sanlam acquisition. A lot of work has since gone in to understand exactly what the impact and the opportunity will be now that the AfroCentric Group has become a major owned subsidiary of the largest Pan-African nonbanking financial services group on the continent. And through a very iterative but dynamic and collaborative process, we've embarked on a refresh of the company group's strategy. And out of this, we see significant opportunity in how we collaborate with Sanlam to unlock the distribution, the brand, the loyalty rewards, but as well the partnership ecosystems to drive growth within our respective AfroCentric Group businesses. And I'm really excited to start playing back to you some of our strategic ambition and intent in this regard. From a positioning perspective, I think in collaboration with Sanlam, it's clear. We believe we have the scale, the expertise and the potential to become the market-leading player in the market. We are already the largest managed health care organization in the country, but we are now really setting our sites to becoming the leading provider of medical administration in partnership with a fully aligned open scheme that is fully leveraged and supported by the Sanlam broader ecosystem, as I've mentioned, across distribution, across rewards, across the brand ecosystem and as well as the partnership opportunities that come with collaborating with a group such as Sanlam. So from that perspective, really quite exciting. We think our growth levers and the opportunities to unlock will sit predominantly around the ability for us to hyper-personalize and deliver a highly differentiated new winning health offering that will allow us to go and take market share from our competitors in a very accelerated and aggressive manner. We think the other opportunity will be to drive further efficiency in our businesses by further accelerating our hyper automation in this business. Our scale, our dominance and the size at which we do things with over 12 million claims that we process on a monthly basis with over 86% of that already being fully automated. We think the opportunity to close that remaining delta will create significant efficiencies within our business. And then lastly, the opportunity to use our managed health care capabilities to further drive disruption in the clinical space, which will give us an opportunity to not just leapfrog and create a significant gap between us and our competitors going forward, but it will also give us an opportunity to rethink our revenue models from being predominantly a service for a fee type of business to actually one that generates and shares in the value that we create going forward. So really great opportunities and strong alignment with Sanlam and the broader shareholder base to deliver on this, and we look forward going forward as we further iterate and unpack and settle our strategy refresh by the end of this financial period that we are able to share more with you as we start pushing through and delivering on some of these initiatives. Speaking of that, a number of work is already over the last 6 months gone in to integrate ourselves with Sanlam where it makes sense. We have really integrated our entire corporate cluster business to be Sanlam orientated from a look and feel perspective, and we think that's a significant future growth lever for us and I'll give you a bit of insights into our thinking around that in the next slide. We have strengthened the various subsidiary and group boards from an alignment perspective with Sanlam's key executives representing the group at various of these boards and strengthening the expertise and the skills that we're bringing. And that also helps with the alignment back into the Sanlam ecosystem where these representatives are able to drive the narrative and the integration of AfroCentric within the Sanlam context. We've done significant work around close collaboration with Sanlam on the technology front, and we intend leveraging the superior infrastructure capability to stabilize and strengthen and build the resilience around our own hardware infrastructure, and that's an initiative that is prioritized. And although not the cost-saving initiative, it certainly is something that gives us an opportunity to drive growth from a more stable environment where our systems and networks are a lot more secure. And then obviously, the distribution unlock. I think that's really the exciting part is how do we work with and align -- with our aligned open schemes with Sanlam to really deliver a differentiated winning health offering that will close off health insurance to Sanlam and AfroCentric's competitors once and for all. And this is really where a significant amount of our efforts are focused. And then at a corporate level, the opportunities to align with Sanlam from a human capital perspective gives us a good opportunity to drive talent mobility across the group. And to also ensure that we optimize our human capital as we look at our people as key enablers for this highly ambitious future strategy that's starting to emerge in our business. Speaking of the corporate cluster, we really feel with conviction that this is a significant growth lever for us. We've seen some good green shoots coming through in this cluster where our gap cover offering has now grown by 29%. And our primary health insurance business has grown just short of 20%. Although both still [ offer ] small base with gap cover now having about 31,000 policies, and we have around 22,000 policies in our primary health space, but we believe that this is a massive opportunity with a big unaddressable market that requires affordable, high-quality and accessible health care opportunities, and we think the buy-down opportunity that we see from the medical aid perspective creates a further opportunity for us to collaborate even with our schemes as we look at low-cost benefit options becoming an integrated framework into the medical schemes environment and how we go about capturing this opportunity. So a lot of investment and effort and energy is going into this space to capacitate it. And like I said, it's one of the areas where we are fully integrated into the Sanlam ecosystems from a process point of view, from a branding perspective. These products show up a Sanlam gap, and you will soon see us collaborating with the Sanlam Retail Mass, the largest mass market business in the financial services industry in the country, who are now looking at the holistic wellness needs of -- financial services needs of their customer base with health becoming a key priority and an area of focus, which we are quite excited to collaborate with the Sanlam Retail Mass business on. And from that perspective, we've also then prepared ourselves to actually put our effort and energy behind this business. And we have proceeded with acquiring the minority shareholding in the EssentialMED business, which houses our primary health insurance business. And this now gives us the ability and freedom to actually go ahead and invest significantly into this space as a way of unlocking this important growth lever going forward. And then just a few matters worth noting. I think quite exciting on the people side is the appointment of a new Chief Operating Officer in the Medscheme business, Mr. Mujeeb Bray who's joined us from the 1st of January. He brings a wealth of experience when it comes to operational efficiency and client service excellence, which is a big area of focus, becoming extremely thin steam on delivering good quality customer outcomes for our schemes and for our members. And this really gives an important signal for how serious we are with our intent to become the market leader for high-caliber professionals such as Mujeeb to join our business, says a few things about buying into our future ambition and the extent thereof, but also being the kind of people that will come in to help with our existing core teams to actually create the step change within our business, especially when it comes to driving operational efficiencies. And that's also aligned with one of our key priorities in the strategy refresh is this immediate focus on driving operational efficiencies whilst we iterate and settle on the big ticket items through a number of key strategic dimensions on what we're considering to be the long-term growth prospects of AfroCentric Group. And then it's important to also just give you a quick update on the NHA case. Last time we reported on this. We had expected at least a feedback from the arbitration process by December. Unfortunately, due to health concerns by -- of the arbitrator. This has now been delayed, and we're expecting any time between now and the end of April -- is the current projection on an outcome on the NHA matter. So there hasn't been any significant progress since the last time we presented to you on this matter. And then as always, and has become customary, the discourse around NHI is something that particularly impacts our business I think less so than our competitors given the highly diverse nature of our business and the key strategic relationships that we have with the Department of Health. And to the point I made earlier, the CCMDD for us is the flagship private public partnership initiative in the market. And we believe that as custodians of that important delivery enablement that there's great opportunities for us to refocus our business to remain and to become NHI approved by leveraging and accelerating several initiatives that could drive this going forward. But where we stand with NHI is that the National Council of provinces, have now passed a bill, and it's in front of the President, who has the option of either signing it into law or to refer it back to parliament for amendments. And we've, through our various industry bodies have been active participants in driving feedback into the system, both through the NCLP process, but also now through engagements with the President to highlight some key areas of concern from an industry perspective, but also to be quite clear about our support and endorsement of universal health care and just wanting to ensure that the valid concerns raised by the industry around things such as the funding model around things such as the lack of detail on how NHI would be implemented and the role of medical schemes going forward are adequately addressed. And that's where we stand on the NHI matter, very engaged, but again, preparing ourselves with absolute conviction that AfroCentric Group would have a meaningful role to play in a post-NHI environment and preparing ourselves for that whilst ensuring that we take our clients along the journey with us as well. And so as soon as there are further updates from an NHI perspective, we'll also be in a position to communicate that further with you guys. And that's where I'll stop in terms of a quick summary update on our performance. Really, the key takeaway for me is the recovery is underway. We are delivering a credible set of results of the back of poor financial performance from the prior year. And we are really focusing on arresting the margin erosion in the business by driving very concerted management efforts to address these things. We're investing in the business -- and we're bringing in key skills and capabilities to help augment a really strong internal pool of talent alongside Sanlam is a key growth lever and enabler for us going forward in collaborating and delivering against a very ambitious strategic intent to become the top health care player in the market by 2030. And we're really excited for this journey, and we look forward to engaging with you in a whole lot more detail as we iterate and articulate and become clearer on where we're taking the business. I will now ask Hannes to provide you with a more detailed update on the financial performance.

Good morning to all our investor, grouping and stakeholders. I must say, I stand quite relieved to you in terms of presenting our interim results compared to the 2023 year as you remember, that was quite a tough and messy year with a lot of things happening. And I think coming out of that, there was still a tail end of the performance that is still in these results, but hopefully, we are clearing a lot of it. But just to take you back, yes, quite a lot of Sanlam transaction costs. A lot of changes in the balance sheet that we'll talk to a bit later. Closure of our surgical business during the 2023 financial year. Latter part of 2022, a lot of the load shedding impacting our networks and our stability cost that we had to incur in IT. And then again, the pharma trends started showing whereby the peak of the 2021 year was coming down. So I think we are seeing a lot of green shoots coming through this set of results. But maybe just to position a lot of information on screen. I've tried to put down the service business operating profit as well as the health care retail operating profit to show the 5-year trend as well as the revenue. And taking you back to the period of 2019, 2020, we did engage on 2 big acquisitions at that point buying the Activo pharmaceutical business as well as the DENIS, the dental business. So a lot of that annualized revenue was not yet in those results. So stably sitting at that ZAR 4.2 billion level for the past 3 years, which gives you some form of consistency because there's also been in and out and especially in the last year, the surgical business. But when we look at the service business, mainly constituting of Medscheme South Africa, and I'll elaborate a little bit on it. We did benefit during the 2020, '21 year with low activity during the COVID period. And hence, you see that uptick in profitability and then it's kind of stabilizing now. But overall, a good static business that we don't see too many radical trends coming down, and we actually just need to work a lot on our efficiencies, and I'll talk to the membership at the same time. During the 2022 year, of course, as I mentioned, a lot of stabilization costs we had incur. I think we're now with linking up with Sanlam and piggybacking a bit on their infrastructure. We are going to see some improved stability coming through from that side as well. So yes, the Medscheme SA business back on track and I think growing from this point forward. The pharma business, unfortunately, has had its peaks in 2021 year with excessive sales. We were also doing exceptionally good in the pharmacy direct business because at year-end was very high with regards to script renewals and so forth, but that has come down. And I think we need to be realistic where we're standing at now is kind of that 2029 -- 2019 level. as well as some of our contracts have changed. And as Gerald has mentioned, especially on the Department of Health contract, whereby we are seeing increased volumes, but our margins on that business is a little bit lower. Overall, I do think that we're at a much better place in these 6 months than what we were in the last 6 months of the 2023 financial year. Just a snapshot, again, leading on to that from what the 2023 year were in a full perspective of 12 months, and then you see in the middle, the 6 months, '22, 6 months 2023 December and how that stacks up. So the service revenue, again, very consistent getting some good increases from our schemes when I say good increases CPI and then also benefiting from some growth and especially our state medical schemes. But the pharma business as however, its revenue has been impacted by the reduction in that surgical business that we exited in the 2023 year overall. Revenue, up 1.4%. And if you then just annualize it, and I must note that we do have an increased period kicking in from the January part of H2 of our financial year. You can already see that we should be heading the total revenue for the prior year. But ultimately, we don't bank revenue we bank profit, and that's been a case there where we're just slightly down on our operating profit for the year compared to the prior year, and I'll unpack some of that and there is a few million rand that I think we can still shave off to improve that position. But important to note, and this is the operating profit before we take out minority shareholding is that if you look at the 6-month performance for 2023 and you look at the final 12-month performance for 2023 June, that ZAR 294 million versus ZAR 185 million, you can already see that there's going to be a remarkable improvement on our performance for the 2024 financial year. When we now keep in mind that the Sanlam transaction took place on the -- at the end of May, June, end of May 2023, that didn't have a significant impact on the share, the weighted average amount of shares and the minority interest in the prior year when we look at full earnings, it's actually coming through now quite significantly. So you can see that impact of that 29% flip-up of Sanlam transaction is having now a nearly 40% impact at the headline earnings and normalized headline earnings level. However, when we look at the shares, we were slightly not equalizing that. And then you can see there the 2.4% decrease in the headline earnings per share. What does this mean? Again, we're in a transitioning year. I think it's important to see 2024 in terms of transitioning on our balance sheet, transitioning in terms of the whole shareholding structure. And again, a cleanup of a lot of the previous businesses. But at this stage, as you can see, ZAR 0.21 compared to the ZAR 0.36 that we had for end of June 2023. I do think our results, obviously, going to be much better than we've seen in the prior year. But let's maybe just delve into some of the more detailed things that we've been speaking about for the last couple of years, what we've been focusing on consistently. Those were reduce CapEx, make sure that when you develop things, it's probably actually more expensed, but overall reduced CapEx, generate more cash and therefore also be prudent on your borrowing. I think that's reflected in the, can I say, net borrowing costs and the net cash finance income, we're starting to see a stabilization, and this includes the Forrester acquisition that was mainly paid in the '21, '22 financial years. There was a tail end that we've settled now in January. But you can see, even in a hyper increasing environment of interest rates, the group is now stabilizing on its financing costs and intend to stick to that level. When you also look at the asset depreciation and the intangible assets, again, that prudency has now come through, and we're starting to see a decline from the 2022 financial interim period in terms of our amortization of intangible assets. Those are mainly as a result of acquisitions. And our in-house IT system and then also the stabilization of hard depreciation. These are hard assets, mainly IT assets with a small portion of physical assets in terms of our facilities portfolio as well. But I mean, I think that's -- the importance for me at the end of the day is that our prudency and our capital structure is paying off with some good stabilization in these 2 areas. Profit before tax, slightly down. Yes, it would have been nice to just have that extra ZAR 10 million, ZAR 15 million. But I'll tell you now where some of that is actually hiding or sitting on what we're working on at this stage. Let's move into the Medscheme SA business, the service cluster. As mentioned by Gerald, we are, by far, the biggest managed care provider to members in South Africa. We touched 3.9 million lives, and this is through our close schemes, our open schemes and then a large part of those beneficiaries as you can see on the graph to the right, is the GEMS managed care contract that we do have. We've been able to get an average increase from all our schemes based on our value add to them of 6%. Keep in mind that the Council of Medical Schemes is quite observant around increases to medical scheme administrators, not increasing above CPI, and therefore, we've been able to actually engage on these results and the value-add that we've had for our schemes. On the membership side, I mean, it's a great picture to see and luckily, we're benefiting from it. Consistently, the GEMS medical scheme is growing its membership base by approximately 6% to 7% per year. So that unit then linked to a 7% -- 6%, 7% membership increase as well as a 6% CPI increase on the rates is doing quite well. And we're quite happy with that contract that we have, but continuously growing in the market. On our other state medical scheme called POLMED. The membership was actually kind of stabilized. It's actually growing as the police taking a bit more recruits. But we're seeing what I've mentioned here at the bottom is that the average family size is decreasing in many of our clients, and we see that even in the police force. And then as you can see there, the open schemes also decreasing slightly. [indiscernible] have been quite stable for the last couple of years with its membership base. And it's very competitive increases that it puts through every year. Unfortunately, on the [indiscernible] open scheme, we have seen some declines in the membership, but quite happy with where our membership is sitting for the group. And hence, why I'm always saying we don't have a revenue problem. We probably just need to focus a little bit more on some of our cost base, although our biggest thrust and energy at this stage is going into growing revenue, making health care more accessible and especially working with Sanlam in activating the sales force to do that. So on our service business, predominantly Medscheme South Africa, but inclusive of all our operating companies that do contribute to the medical scheme administration business. This is also the first time I've now shown the Africa units a little bit separately to just give an indication of what our profitability and growth in those environments are looking like. But yes, over the years, a good 7% compound annual growth rate on the medical schemes revenue. Unfortunately, that's not matched with the same cost levels of 8.2%. And that is actually in rand terms we're looking at a ZAR 40 million efficiency improvement that I think is quite realistic in that we are banking on and working through for the second 6 months and that also flowing into the 2025 financial year. So the objectives we've set for the team in terms of cost efficiency is quite achievable, although we are, of course, focusing on greater and greater efficiencies to make this number a lot better. But just looking at that ZAR 40 million that we should have maybe reduced our cost base with if you would have added that onto the operating profit of the Healthcare SA line that ZAR 295 million would have been a completely different picture and the highest operating profit level that we would have seen in the last 4 years. So Healthcare South Africa doing quite well. But we must not forget the contribution of our Africa businesses, and these are mainly the Namibian and the Mauritian service businesses, contributing good 15% of the total operating profit. And we've seen, as you can see there on the operating margin, significant growth and margin that we are picking up in those markets. It is very important that we do invest further because although some of their products are a little bit lagging behind on South Africa, they are picking up quite quickly on a lot of that. And therefore, the intensity of our efforts and our managed care capabilities are going to be crucial. But looking at the Healthcare SA business, we are seeing a dip below the 15% margin in the last 2 years. And I think that's where I'm saying, there's a little bit of a push required in terms of cost efficiencies because that service business should be operating at a 15% operating margin for its entirety. Just for noting, sorry, just on the previous page, if you actually just bring that ZAR 40 million back, it gets to a 15.5% operating margin for the Healthcare SA business. In terms of the volumes for the pharma business and especially Pharmacy Direct, a great picture that we've seen in terms of volumes, we spoke about our contribution towards the state and the amount of patients that we are servicing. And with the addition of the Gauteng province that we're also now managing. We are getting closer to that even 1.3 million, if not 1.4 million scripts that we are dispensing to patients every month. Unfortunately, that is coming at a lesser margin, and we are working with the Department of Health on how we can actually just make this a win-win situation for all parties. The department is also very focused on getting medicine to vulnerable patients in a better way. And therefore, the dispensing periods and the amount of medication dispensed is increasing from 2 months to 3 to 4 months. So you might actually be putting down a package that is 3 to 5 months of medicine for a patient. So that drives a completely different model on how we actually do our pricing for the department of health schemes. On the private side, it's a very great picture because we have seen a decline in adherence, as you can see on that trend, when we hit our 162,000 scripts in December 2020, going through COVID, people were a little bit relaxed and the adherence levels weren't that fantastic, but picking up quite nicely now in this 2023 year. It's not just the adherence that's picking up. It's also our drive to mine, can I say a lot of the chronic patients and make sure that their adherence levels are better by using a chronic dispensary like Pharmacy Direct. So a lot of that growth is coming even organically from our own schemes. And important to note in the private environment, we do make 2 sets of profits. We make a profit on the delivery as well as, of course, on the product itself compared to the Department of Health contract, we are purely just receiving the stock and dispensing that to the patient. So it's only a profit component on the delivery. So a good picture in terms of activity, although the profitability is a bit hampered, as we've mentioned in previous slides as well. Again, a good picture on total revenue, compound annual growth, operating costs growing a little bit more than that revenue and hence the focus being on the GP margin as well as the cost base. You can see there from the from the revenue, as we mentioned before, there is a decrease in the 6 months because of the surgical business that's now out of the picture. And when you look at the operating costs for the past couple of years, kept abreast with our revenue growth. But again, that differential of that 7.1% versus 7.7% is, again, about a ZAR 45 million, can I say, cost base issue that we are looking at that's impacting profit. Now ZAR 30 million of that has got to do with the pressure we're seeing on reduction or slower SEP pricing increasing. It's not that the government is not increasing it. It's just that the competition probably bringing out products that is increasing at lesser rates than the SEP increase. We're also seeing a lot of the ARV pricing reducing, and that's mainly driven through the state buying a lot of the ARVs internationally and driving the total market price down. But these circumstances aren't unique. If you do look at the last 2 weeks results that's come out in the market, the pharmaceutical market and the 2 big pharma companies in South Africa. They have experienced exactly the same trends whereby revenue is increasing by -- actually, there's less than inflation. But there's a lot of pressure on the final operating margin because of this pharma market really putting a lot of competition to each other. We do, however, think that we can turn it around looking at our basket of goods that we now rely on, making sure that we can actually drive that GP percentage up and get that ZAR 30 million, ZAR 40 million back into this operating profit. The Department of Health is playing another role, and that is about a ZAR 15 million reduction year-on-year just on that specific issue, that is reducing from what we experienced in the 2022 financial year on the Department of Health contract itself. Ideally, this business unit should be operating at the 8% margin. Again, you are impacted by a high revenue. You've got a standard SEP price. It's not the same margins that you have in terms of the Medscheme business that you have in the pharma business itself. So pleasing results, but there is work to do, again, in the retail environment with another -- between ZAR 40 million, ZAR 45 million improvement on these numbers. Just want to quickly touch on some of the capital management, balance sheet issues you've probably seen in the booklet. Again, focusing on a lot of the things that has changed in the environment. If we go down on current assets, a big reduction from the prior year, and that's mainly driven last year, we had an issue with the Department of Health and long outstanding fees that was payable by them we were able to resolve that matter by April 2023, and you didn't see it so much in the June '23 number. But interim-to-interim comparison, there's quite a big effect. Our noncurrent assets again, comes back to largely being intangible assets, which we're trying to not increase too much. Again, these are self-generated assets. These are goodwill. They're not hard assets. So one's got to be quite prudent on how you review them and how you manage them and how you add on to them. And we've been trying to reduce that over a period. And you can see with the amortization, we've kept it quite intact. The capital and reserves has got, of course, a significant increase from an interim period to an interim period, not so much when you look at the June results. And that is, of course, with the whole Sanlam transaction. whereby those 236 million shares were issued with that transaction as well as the minority component flipping up into equity. So that Sanlam shareholding now sits at 60% listed shares into the group and no longer at a [ PTY ] level. So just a structural movement in our balance sheet. On the current liabilities and noncurrent liabilities, it's just a mirror image of each other in terms of movement. What we did have is that the final payment for the Forrester transaction was previously shown as a noncurrent liability. But as you get closer to paying it, which we settled in January, that becomes a current liability. So the reduction in the one is mainly the reduction in the other one, as well as those current liabilities in December 2022, impacted by the DOH late payment, and that also resulted in a bit late payment on some of the creditors as at that point. Our focus has been on reducing our net debt and just that's the block at the bottom. This is just borrowing costs, borrowing levels, less all cash in the group. As you can see, quite well reduced, and that gives us a lot of breathing room to make these acquisitions. We've incurred close to ZAR 130 million, ZAR 140 million worth of acquisitions to date in this quarter on the Forrester deal as well as the EssentialMED transaction. So it frees up that capability. And at the same time, we were able to also now declare a dividend for this period. On the working capital cycles, firstly, very important to note the differences between December and June. December is usually a buildup period because we are anticipating an SEP increase. And there's a lot of dispensing that takes place at the early periods of end of November or beginning December and then the SEP increase kicks in now in March or so. So it does help to have a little bit of stock on hand if you can afford it and your cash flow can carry it. Whereas a June year-end, you've got a complete rundown of a lot of the inventory because you are actually dispensing a lot of medication into your winter months already and a little bit in advance before that 30 June date. So I think we've made good progress on our working capital year-on-year. And you can see the levels coming down from December '22 to December '23. Just in terms of our outlook. As mentioned, there is price pressure in doing business with the state. We're up for the challenge. A lot of our revenue is state generated. You can say through GEMS and through POLMED as well as the DOH contract. But that also gives us a lot of diversification, not just being in the private market. So we are exploring a lot of avenues in how we can make that contract profitable to the levels it was 2 to 3 years ago. I think our service business, again, is well diversified, but it's just waiting to be launched with the Sanlam integration and the Sanlam sales force and especially the open schemes. And we're balancing that in terms of just the buydowns that is -- has slowed down a bit from prior years and making sure that members are on the right options because even the dissatisfaction of claims not being paid if you're not on the right option is for us important in order to retain a member if he actually gets the correct health care at the right option. The operating environment will continue to be tough. The economy stuff, people are looking at reducing their health care spend. But at the same time, I must say -- there has been quite a lot of resilience in terms of the medical scheme business staying in the private market. And I think it's just, again, the -- the dissatisfaction of many of our South African citizens have with the state medical facility. So it bodes well for the medical scheme business. And then our environment in terms of getting into Sanlam activating the product as well as the distribution markets is progressing and looking forward to actually seeing a lot of those green shoots come through now in the 2024 calendar year. That concludes my presentation, and I'll be back now for Q&A.

Thank you, Hannes, and Gerald. We'll now proceed with a couple of questions from the webcast. The first question is from Greg Saffy from Cast Iron Capital. He would like clarification around the pharma strategy, whether the pharma is core or noncore. It seems it's a bit unclear whether it's strategically under review for him. Thanks.

Thank you. Greg, thanks for the question. Maybe to be quite clear, we think, as I've articulated earlier, for us to be NHI future proof and to evolve our business to be a key enabler in an NHI environment. Our diversification strategy would be key towards that. If anything, we are reviewing how do we actually optimize our businesses and how do we drive further integration between the clusters. We have the largest specialist courier delivery business within South Africa through the pharmacy direct. We have a leading medicine risk management and [ capitation ] business within the country. And from an evaluation perspective, it's to ensure that working with the servicing cluster that we're driving an aligned strategy that's congruent with the schemes objectives that drives patient outcomes and that delivers on the cost objectives that we have in terms of managing medical health care costs across the spectrum and then delivering innovative new clinical outcomes and revenue models for ourselves. So to be quite clear, I think part of what sets us apart is the diversity and the pharmaceutical business in that context does deliver strong value potential for us. And what we are actually looking at now is how do we further optimize that and integrate the right businesses as we look forward.

Thank you. We have another question from Patrice Moyal from Visio. He says the -- obviously, the AfroCentric story is quite encouraging and quite a good comprehensive overview. I guess he would like more color around how you're dealing with the capital structure, specifically addressing the current share price. He also noted there was no mention of any buybacks as opposed to in addition to dividends.

Thanks, Patrice. Yes, a few aspects that we're driving at the same time and probably taking a bit longer, but it's also about stability. I think the first thing when we embarked on this current financial year is let's start getting to a stable performance level. And that's going to be proven over the 12 months. And that's the first year that we're now a full Sanlam subsidiary, and they're also looking at that performance. At the same time, we will also be changing our year-end to align to the Sanlam year-end. So therefore, we'll have a Jan to December year-end for 2024, 2 year-ends at this stage. But again, it's about importance of stable performance. And can we now unlock the potential that there is together with Sanlam that we all believe in. So I think one aspect we've got to look at is performance itself. And is that established? And is that proven and put down. Another important point for us was the dividend situation. As you can see, we've put down a dividend for the 6 months, and in the note, we will only then be paying dividends on an annual basis, therefore, next year, May, when we'll pay a full year dividend. Again, we're feeding into a long-established company that's got a consistent growing dividend. And we as a subsidiary need to flow into that as well. So I think that we've established in terms of what we want to do is not just pay a consistent dividend but actually can you pay a growing dividend. And then when we get to the share buybacks, I think it's important again to note that we don't just make a short-term decision, let's buy back without a long-term decision. And what is the end goal? Where are we moving towards in terms of the liquidity of the share and what is the end goal of actually buying a lot of these shares back. At this stage, small cap shares aren't being appreciated so much in terms of the trading and also with regards to whether we will get the full recognition if we do buybacks. So it's important for us at this stage that the performance of the group is first corrected, and we do have that compelling story of how we sell our products together with Sanlam

Thanks, Hannes. We have a follow-up from Patrice. He'd like to know whether there is approval for the buyback process.

I think we always have, say, a statutory approval that we clear upon. But at this stage, in terms of executing on that, the performance of the group is first monitored before we will start such a process.

Thanks, Hannes. I'm just checking further one from Patrice here. Are acquisitions not better than buybacks on a 7x multiple.

It's like we're dealing a lot with the buybacks at this stage. Again, it's about the quality of earnings that we're looking at. We do want to enhance our capabilities, and therefore, this group has still got a lot to grow as we were finalizing a lot on our capital structure and dividend policy, you've got a mature business like Sanlam and you've got a growing business like ourselves that needs to feed into each other, but it will still entail a bit of investment in terms of establishing these products that we still want to push through to the market.

And if I could add, Patrice, I think for us, it's quite clear, we're obviously committed to creating shareholder value. And the capital allocation is an important area that we need to be quite clear about. And so the work is underway to evaluate the best way in terms of our capital structure. But that follows the strategy. And so with this iterative approach, we're really focused on settling exactly where we're going and what the long-term growth prospects are for this business and where we see the opportunities to invest, which will then inform our actual capital structure in our capital allocation policy going forward. And at that juncture, we'll be able to provide further clarity on this.

Thanks, guys. We have a follow-up from Patrice. He would like to know whether the execs have any shares in AfroCentric.

Yes. I'll also take that one, through our long-term incentive plans, the executives do get share allocations, which for the current financial period will be finalized with the upcoming Board sitting. And so there's a vested interest from the key executives that are responsible for the execution of the strategy, and that is fully aligned with the interest of all our shareholders and stakeholders. So we definitely do.

Thank you, Gerald and Hannes. I think with the conclusion of the Q&A session, I would like to extend our gratitude to everyone who participated in AfroCentric's 2024 interim results today. Should there be any additional inquiries, the management team remains available. Wishing you all a pleasant day ahead. Thank you.