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

Good morning, and welcome to AfroCentric's Interim Results Presentation for the 6 months ended 30th of June 2025. Today, I have the honor of introducing AfroCentric's Group CEO, Gerald Van Wyk; and Group CFO, Thato Moloele. The presentation is available on the website. And at the conclusion of the presentation, the management team will address any questions. With that, I'll now hand over to Gerald. Thank you.

Thank you, Sean, and good morning, ladies and gentlemen. Welcome to the AfroCentric Group's interim results presentation for the 6 months ended 30 June 2025. Spring has officially sprung and with it a renewed energy across our teams and partners. And I'd like to extend a warm welcome to our shareholders, analysts and staff. As is customary, I'll begin with a brief overview of our operating context and strategic progress, then I'll hand over to our Group CFO, Thato Moloele, who will take you through a detailed financial analysis. After Thato's presentation, I'll rejoin, and we'll open the floor for questions. As always, we value your insights and look forward to the conversation. AfroCentric delivered a resilient performance in a challenging operating environment. Group operating profit held steady at just under ZAR 400 million, while revenue declined marginally to ZAR 4.2 billion. Our healthcare services cluster, the cornerstone of our business, grew revenue by 8.7% to ZAR 2.42 billion, driven by inflation-linked fee increases across our schemes as well as membership growth across these schemes and as well as disciplined cost management over the reporting period. The operating profit in the services cluster rose to ZAR 320 million with a margin of 13%, which is up from the 8.6% for the comparative previous period, demonstrating a strong recovery overall in the performance of the service cluster. In contrast, however, our retail cluster continued to face significant headwinds with revenue declining by 14% to ZAR 1.86 billion, which was primarily impacted by the loss of 3 designated service provider options in Pharmacy Direct and the continued margin erosion that we've seen in our ARV segment of that business and lower third-party and hospital sales as well. As a result, we've initiated over the last period, several management actions to right size the business and adapt our stock and procurement policies to reflect this reset trading performance. But despite these pressures, we've dispensed over 1.47 million scripts, mainly due to the strong performance in the CCMDD business in Pharmacy Direct, where you'll recall, we had previously also faced significant headwinds, which we had successfully overcome and that business is now really geared towards the growth aligned with what the National Department of Health is trying to achieve. Headline earnings per share came in at just under ZAR 0.12, down from the ZAR 0.19, which reflects what I've just discussed in terms of the impact of the margin pressure in retail, but it also reflects strongly our strategic investments in support of our refreshed strategy execution. And Thato will unpack all of these in a bit more detail. As we look ahead to the next period, there are 3 material areas that are top of mind for us, each with the potential to influence future performance. On the regulatory front, which remains quite volatile, we see the legal challenges to the NHI Act and now the Low-Cost Benefit Options framework, which continues to create uncertainty. Our view remains that a workable solution around NHI is one that involves the private sector and that a private-public partnership is a viable pathway to achieve universal health coverage, and this is the discourse that we are pursuing as AfroCentric. And then recently, we had the Section 59 inquiry. So while it's not legally binding, it has raised concerns about buyers in fraud detection, and it specifically called out Medscheme in that regard. Well, to put simply, we reject the methodology, we reject the misinterpretation of the data, but we remain firm in our commitment to fairness, transparency as well as clinical integration or integrity at least. And the realities are that fraud, waste and abuse is a major issue in healthcare. It cost this industry over ZAR 30 billion per annum. And we are now in the aftermath of this inquiry, engaging strongly with the regulator and our associated industry bodies to ensure that AfroCentric's position is clear in this regard, but that we also continue to work with the industry to strengthen fraud, waste and abuse detection whilst at the same time ensure that the lived experiences of healthcare providers are taken care of and that the right level of flexibility is introduced in the system where it doesn't already exist. And so that is where we're seeing it from a regulatory perspective. If we look at the second material area is that of all these critical client contracts and the life cycle thereof. Firstly, we unfortunately did lose the NHP managed care contract in Namibia, but Medscheme Namibia remains contracted for administration services. And we are now preparing for a multi-provider transition in that market and exploring new revenue opportunities as a result of this. And as is natural for a business of our nature, we are contractual type business. Some of our key contracts, including GEMS, Polmed, Bonitas and the National Department of Health, CCMDD program, are all approaching their renewal periods. And so this is a critical time for us as these engagements are all active. And as is the case with Bonitas, we are in an active RFP process for our administration and managed care contracts. We do remain confident in our ability to retain and grow these relationships in line with the chosen strategic objectives of these respective scheme clients. And then a third aspect that we keep topical is internally, we continue to take decisive steps to strengthen our operating model. We've completed the distribution optimization work through the ADS and Wellworx transition with Sanlam. We are accelerating our integrated pharmacy benefit management strategy with the integration of Scriptpharm, which is our premier risk capitation business in the pharmaceutical sector. And we are integrating this into our services cluster to strengthen our proposition around value-based care and risk capitation. And we are at an advanced stage in reviewing the rest of the retail cluster. We are also scaling up investments in digital platforms, analytics and clinical innovation that you will see come through strongly in the second half of the year. And all of these things are focused on ensuring that our infrastructure supports the next phase of our growth strategy. When we move along on giving you an update on our strategic progress, what I want to do today is just to share with you why we believe so strongly that we must change our business model, and also, how we are shifting and changing the model. As we assess the healthcare landscape, we always share with you 2 trends that stand out: medical inflation, which continues to outpace CPI; and on the other end, membership growth, which remains stagnant. We have not seen significant growth in the industry overall with 9 million beneficiaries having been the case for quite a few seasons now. But the reality is that these things are only the tip of the iceberg that we can see. Beneath the surface, like deep structural challenges that make the problem far broader than just pricing and affordability alone. If we take a closer look at what drives medical inflation, we see that tariff negotiations are already fully optimized. Our internal data shows that tariff increases are aligned to CPI, which tells us that, that part of the system is working. The real pressure comes from utilization, which is being driven by a range of systemic issues, including what you see on the slide here, fragmented care models, regulatory constraints, the increased burden of chronic disease and the aging population, which naturally would demand more care at a lower cost. But compounding this is anti-selection, where we see younger and healthier lives either opting out of healthcare services or opting down in terms of the options that they choose due simply to affordability and their low utilization. And what this does is it weakens the overall risk pool and places further strain on the system. And these are the hidden forces behind the surface, the submerged part of the iceberg, if you will, that we must address if we are to build a sustainable healthcare system. And that is precisely why we are pursuing our strategy to transform healthcare through a value-based innovation. And to address these systemic challenges, AfroCentric is transitioning to value-based care. It's a healthcare delivery model that prioritizes outcomes over transactions. This means delivering personalized, preventative and coordinated care, contracting based on value, not just the cost and leveraging digital platforms and clinical innovation. Already, the problem is severe. Nearly 40% of our members account for almost 80% of total healthcare costs incurred by our schemes. So the chronic disease burden continues to increase. When I joined this business, that 40% of our chronic member base we're sitting at roughly about 33%. So it shows what has transpired over a 2-year period. The situation is simply not getting any better. And so through these initiatives across the entire care continuum, such as auto care for spinal cost management, diabetes disease management and the integrated pharmacy benefit management model that I spoke to earlier, which would look at addressing medicine adherence as well as affordability, we do expect to save nearly ZAR 1 billion by 2030 across all chronic conditions through both claims cost reductions, which could lower claims by as much as 3% as well as through operational efficiencies that could be gained by investing and transforming the healthcare sector and how we deliver healthcare to the market. And so I guess, hopefully, you can sense that for us, this is not just a strategy, it's a bold transformation. We believe fundamentally that for AfroCentric and its partners, value-based care will be our differentiator. We have a right to win in this space with expert and passionate people, and we are investing heavily to deliver on this ambition. And to just quickly take you through the progress we are then making in executing against our strategy, we believe that there's good progress in how we've accelerated the execution of the strategy across the 4 key strategic pillars over the last 6 months. And I'll just quickly take you through some of those initiatives. There are quite a few, but I would just like to highlight perhaps 1 or 2 under each of these pillars. On building a winning health offering, that is accelerating and progressing quite well. We've successfully launched our first phase of the Sanlam Health Rewards platform, which we had seen -- already within 3 months of launching the new healthcare platform, we have seen an increase in engagement amongst our members participating in that program through the Fedhealth medical scheme platform. We have already seen the same number of application downloads to engage the platform than what Fedhealth had seen in all of 2024. So great excitement, and it is a minimum viable product that we've put to the market and towards quarter 4 of this year and deep into 2026. We are going to expand this program quite significantly in partnership with Sanlam to drive the engagement that ultimately will help us with behavioral context to drive down the cost of healthcare going forward. So something really encouraging. And in addition, we are developing the integrated health and wealth corporate solutions, whilst at the same time supporting our other schemes on their chosen strategy with strong operational and clinical execution that we have seen come through. Whenever I come to this session, I'd like to talk to you about servicing. I believe fundamentally that we are a servicing organization, and it begins and ends with the experiences that we deliver when we pick up the phone and answer the e-mail. And I'm glad to report to you that our client effort score, since the last time we reported to you, has increased even more. And that really is a function of how clients experience the AfroCentric Group Medscheme, Pharmacy Direct and all parts of the business when they engage from a servicing perspective. So that affinity is strong, and it continues to strengthen. And that for us is really a key outcome of execution against this strategy. When we look at our clinical innovation pillar, our value-based care programs are progressing across multiple fronts with our oncology VBC program now live and active with 2 scheme clients having signed on for pilot projects, and it's already showing promising initial outcomes in that space. And then we've also heavily invested last year in our disease management, digitization and AI modeling, which is well underway to help us enable better care coordination and predictive analytics. Looking at our data, digital and technology, pillar, we've executed on our data strategy, which was part of the ZAR 96 million we spent last year on our strategic initiatives. And we now have a new data operating model and a new governance framework that's in place and, again, setting the platform for the growth strategy that we are pursuing. We've also completed a large technology project in quarter 1 of this year with our data center migration with 100% of our equipment now moved and recommissioned and giving us the platform to scale the use of data and AI modeling, as we pursue the value-based care strategy going forward. And then just lastly, in terms of our operating model progress, we continue to progress and evolve this in the iterative way that we set out to do, so quite deliberately. We've now completed the sale of our distribution businesses, and we are accelerating the work now on our people and the culture focus with a renewed energy around the adoption of a new set of values that we are adapting for our own context and to ensure that there's strong people enablement and buy-in to help us pursue this bold ambition that we have. So indeed, meaningful progress in reshaping our business and investing in the capabilities that will define our future. But we must remember, this is a long game. The challenges we are taking on are complex. The transformation we are driving is systemic and the value we aim to create will be realized over a period of time. And this slide is just a reminder of what success would likely look like if we execute successfully against our refreshed strategy. We will continue to create value through innovation, integration and execution that is anchored in these long-term ambitions. And we are quite bullish that with the transformational initiatives that we are pursuing now and the uptake of further investment over H2 of this year that we will start making significant progress both across our financial and nonfinancial long-term ambitions despite the headwinds, which we're obviously also quite realistic about. I will now stop at this juncture and hand over to Thato to take you through the financial analysis. Thank you.

Thank you, Gerald, and good morning to all of our stakeholders joining us online to unpack our interim financial results. This is the first set of interim results for the group being presented following the change of our financial year-end to December financial year-end in alignment with that of Sanlam. Accordingly, the comparable period for this set of results from an income statement and a cash flow perspective will be for an unaudited 6-month period between 1 January 2024 and 30 June 2024, which will compare against our 30 June 2025 earnings and cash flows, in line with JSE and IFRS reporting standards. This will mean that the results are not directly comparable, as June '24 was originally a 12-month audited year-end, whereas June 2025 is a pure 6-month interim period. That said, the 2025 interim results mark an improved level of performance against the 6-month period between -- ended June 2024 across most baseline earnings metrics, such as operating profit and net profit. Group revenue regressed slightly by 2.6%. This regression is mostly attributable to the underperformance of the healthcare retail cluster, which felt the effects of lower script volumes, mainly through our private business, thus affecting courier and service fee revenue in our courier and pharmaceutical lines of business. On a combined basis, revenue from retail cluster decreased by ZAR 307 million, which represents a 14% decrease to June 2024. These effects were, however, partially offset by a pleasing rebound in our local admin and managed care and health insurance businesses within healthcare services cluster, which generated an additional ZAR 193 million in revenue in the current period compared against June 2024. In percentage terms, this translates -- this represents an 8.7% increase in revenue against the comparable period. Accounting profits from the continuing operations improved substantially compared to the prior June and December results, mainly due to a combination of improved trading performance due to the absence of impairments relative to June and December 2024, when we recognized ZAR 274 million and ZAR 226 million of impairment losses, respectively. These impairments mainly related to our investments in Activo Health and the Pharmacy Direct private business. As noted by Gerald and announced on SENS, we successfully sold our healthcare marketing and distribution businesses comprising AfroCentric Distribution Services, Tendahealth, AfroCentric Financial Services and Wellworx to Sanlam in July for a consideration of ZAR 15 million. On a combined basis, these entities were loss-making following the termination of the Bonitas marketing contract in April last year as reflected in the loss from discontinued operations line. We are excited by this transaction, as it enables AfroCentric to seamlessly embed its healthcare offering within Sanlam's extensive distribution ecosystem, thereby expanding our market presence and unlocking significant strategic value for AfroCentric shareholders, achieved on a cost-efficient basis. On a headline earnings level, the downward performance since June is mainly on account of the retail cluster, which we will unpack later in the presentation. The services cluster enjoyed a productive opening 6 months to the financial year, which saw revenue increasing by ZAR 193 million relative to June last year. Revenue growth was led by Medscheme South African health, admin, risk management operations, which benefited from inflation-linked fee increases in January this year, higher scheme membership, which increased by 15,000 members -- 15,000 lives, from 4 million lives in June 2024 to 424,000 lives this year. These marginal membership trends were primarily driven by our government-linked schemes, which together grew by 98,000 lives over the past 12 months, mainly underpinned by GEMS, which remains the fastest-growing scheme in South Africa. Fedhealth grew by 6,000 lives, up to 109,000 lives, mainly on account of Phase 1 of the Sanlam staff migration completed in January, yielding a 5.8% increase in membership of the Sanlam Alliance scheme over the past 12 months. These encouraging membership gains were, however, marginally offset by membership losses in Bonitas and our corporate schemes, which decreased by 73,000 lives and 2,000 lives, respectively. These membership losses are mainly attributable to the Boncap termination and external macro trading conditions, particularly negative U.S. trading relations, which have impacted the automotive industry. From a revenue perspective, Boncap generated ZAR 21.5 million in June last year, which decreased to just over ZAR 1.5 million this year, as we wind down our services to Bonitas. Local income was further supported by a rebound in insurance results to ZAR 10.5 million, which benefited from higher gap policy sales, which increased by 5% to 36,000 policies, primary health insurance policy growth of 16%, increasing to 27,000 policies as well as tapered claims experience in the current period, improving to 89% compared to 94% in June last year. Over the next 6 months, we, however, anticipate that claims will realign to 2024 levels, as we further enhance and develop our claims management processes, primarily on our gap cover products. Revenue and earnings from Medscheme Namibia and Medscheme International have improved marginally in absolute terms on the back of muted membership growth, lower claims processing volumes and flat administration fees. On a combined basis, these entities generated ZAR 43 million in operating profit. The now terminated Namibian managed care contract contributed ZAR 15 million to revenue and ZAR 7 million in EBIT to Medscheme International over the interim period. From a profitability perspective, thus far, we have only spent ZAR 9 million on strategic projects in 2025, which is predominantly linked to our digital strategy, which I'll unpack later in the presentation. As a result, our operating profits and margins have increased to ZAR 320 million and to just above 13% this year. It should, however, be noted that we intend to continue investing into digital technology and modernization initiatives during the second half of the year, which will dilute operating profit margins on a full-year basis, similar to what we experienced in December last year. Retail cluster revenue and earnings in the current period trail prior period levels by 14% and 13%, respectively. The main contributors to the downward performance were Pharmacy Direct Private, Curasana Wholesale and Activo, which were all impacted by the Bonitas DSP terminations, which took effect from February this year. The designation loss has decreased private margin -- private market scripts volumes by 50,000 scripts a month, representing a 30% volume decrease down to the current monthly average of 114,000 scripts, which has eroded profitability in our Private Courier and Wholesale businesses. Together, these businesses contributed an EBIT loss of ZAR 34 million against a positive EBIT contribution of ZAR 15.5 million in June 2024. As a countermeasure, the Section 189 restructuring process was completed in April, which has enabled us to restore Private Courier and Wholesale businesses to a monthly breakeven position since May. Within our pharmaceutical, marketing and distribution operations, Activo generated ZAR 51 million less in sales in June '25 compared to June '24. This was predominantly due to a combination of SCP pricing erosion in the hospital channel of ZAR 18 million, lower third-party pharmaceutical sales of ZAR 10 million, down 48% over the period and Bonita's DSP terminations, which affected ARV product sales through Pharmacy Direct channel, decreasing by ZAR 46 million year-on-year, down to just over ZAR 27 million this year. The lessened contribution of these margin-sensitive products and suboptimal channels resulted in a higher level of operating profits being achieved in Activo, which doubled from ZAR 21.2 million in June last year to ZAR 42 million this year. From a management perspective, Activo remains a key area of focus to realign the retail cluster to a more sustainable and manageable business. Further management action will be implemented over the next 6 to 9 months to further streamline Activo from a structural and operational perspective to better manage pharmaceutical, marketing and distribution services within our long-term target operating model. These actions are -- these actions include, but are not limited to, exiting nonprofitable products and distribution channels, finding operational efficiencies through more focused stock procurement and management processes and assessing the appropriateness of Activo's strategic fit within our broader portfolio. These assessments are currently at advanced stage, as mentioned by Gerald. On a positive note, our public courier business, otherwise known as the CCMDD business within Pharmacy Direct and our capitation operations in Scriptpharm produced strong results in the opening half of 2025. CCMDD doubled its EBIT contribution over the comparable period from ZAR 13.8 million in June '24 to ZAR 26.4 million in June this year. These results were achieved off the back of higher public script volumes averaging 1.4 million scripts per month; higher active patient levels, which increased to just over 2.4 million active patients at the end of Q2 this year; CPI-related price adjustments on scripts effective from April and a mix of packaging and delivery-related efficiencies, successfully implemented by CCMDD management team. The performance of CCMDD is especially pleasing, considering that these results were achieved notwithstanding PEPFAR's funding withdrawal from the National CCMDD program earlier this year. Taken on a collective basis, our Courier and Wholesale business, including CCMDD, Pharmacy Direct private and Cura Wholesale -- I mean, Curasana Wholesale traded at a marginally positive profit margin. Scriptpharm produced good operating profits relative to June and December 2024. This was primarily driven by profit shares from oncology capitation services, which exceeded our expectations. This was the primary contributor towards capitation operating profits increasing by 20% in the current year, reflecting positive momentum in the development of our value-based care-driven capitation strategy within risk management. To build further on this momentum, we intend to better align our risk management offering through the integration of Scriptpharm into the services cluster over the next year to further enhance and streamline our value-based care service model with the view of attaining greater operational efficiencies and achieving a more harmonious strategic delivery model. Our balance sheet remained in a relatively stable position at the end of June 2025 despite marginally higher levels of debt, mainly attributable to the accumulation of interest on our local utilized banking facilities, which at a capital level remained flat at ZAR 609 million and the acquisition of the offices in Namibia for a total consideration of ZAR 75 million. The acquisition of this building was financed partially using proceeds generated from the sale of our older building in Namibia of ZAR 35 million and partially by raising a 10-year mortgage bond from the bank of Windhoek. Accordingly, this transaction has had a marginal effect on our gearing ratios, which moved from 57% debt to equity to 64%. Similarly, our borrowings to equity ratio increased marginally from 19% in December to 20% at the end of June. From a disclosure perspective, the combination of the Namibia property transaction, together with the ADS-related entity disposals are presented as discontinued operations in our unaudited interim financial results, in line with IFRS financial reporting standards. Our short-term liquidity ratios remain within a comfortable range of 1.5x over current liabilities. This was supported by improved operational performance from the services cluster, lower stock purchases through the Pharmacy Direct as an immediate response to lower Bonitas volumes and disciplined creditor management measures implemented in the retail cluster. These working capital measures collectively contributed towards approximately ZAR 50 million in cash flow management efficiencies over the last 6 months, which speaks to our now established, but still evolving working capital management processes. At an overall level, the group's ability to generate strong cash flows from operations remains one of our core strategic priorities, strengths and value drivers. In the past 6 months, we generated over ZAR 298 million in net operating cash flows from operating earnings of ZAR 398 million, representing a conversion of 75% of our accounting profits into cash. This cash conversion ratio is consistent with the cash conversion ratio achieved in December last year, supported mainly by the services cluster, which effectively operates as a cash in advance business. Last year, we spent a combined sum of ZAR 96 million, which marked our initial investment into establishing deeper clinical risk management expertise and establishing our data insight capabilities to support our first-to-market innovative risk transfer initiatives. This led to the establishment of our Orthocare unit that addresses the increased burden of musculoskeletal and spinal disease, which is showing good progress in terms of cost containment and improved quality outcomes. This project was rolled out on a pilot basis with Fedhealth and Medshield with more of our client schemes being engaged for 2026. Building on our value-based care strategy, we intend to accelerate our investments into digital healthcare and artificial intelligence expertise. Our digital AI strategy is built around leveraging and scaling our clinical risk management capability using predictive modeling, real-time analytics and detailed insight assessments to deliver shared value contracts across additional chronic diseases. This will require an additional investment of ZAR 70 million in digital and IT system upgrades and ZAR 150 million in clinical skills, which we anticipate to generate an IRR of between 20% to 25% per annum commencing from Q4 next year. These returns will take the form of improved operational efficiencies, improved claim savings and shared value contracting with our schemes. That said, I'd like to thank you for joining us for our presentation. We will pause for a brief minute to collect your questions, after which Gerald and I will return to address them. Thank you very much.

Thanks, Gerald and Thato. There seem to be no questions on the line. So I'll just ask one question from myself, if you don't mind. Just referring back to the presentation material, I'm just trying to understand the bridge of -- or shall I say rather the journey from the current EBIT margin levels of, say, around 4% to the guidance of 24% to 28% through 2030. And I'd just like to understand a little bit further how much is reliant on self-help versus sort of the market itself perhaps in terms of membership growth.

Thanks, Sean. I think we can both give input to that question. From my perspective, I think it's quite clear and obvious the key efficiency unlock comes from the digitization journey that we are on. A big part of our overheads relate to clinical expertise as well as administrative capabilities through the people resourcing. And we believe going forward, we need to drive a strong sense of efficiency gain in that regard by increasing the automation that happens in the business and deploying our people into work that's more meaningful and addressing some of those complexities and remove the easy processing work from people's hands. So that is a key unlock for us is the efficiency gains through how we change the cost matrix in the business. The second one is obviously quite anchored around the value-based care unlock. As you can see, this is a transitional model for our revenue modeling as well, shifting from a transactional fee basis to a value-based care and a shared value model. So when we speak about that ambition to realize over ZAR 1 billion or close to 2% and 3% of the claim savings, currently, the model doesn't allow us to participate in that value creation. Going forward, the value-based care contracting will allow us and many others in the broader healthcare ecosystem that delivers that value to actually share and participate in that value creation. And we think that will have a significant impact in bridging that. But also, I need to state that the long-term targets that were set, as you know, were set when we developed and established the initial strategy, Refresh. We've always maintained it will remain highly iterative. We're quite clear about where our core differentiators will be and where we believe we have a right to win fundamentally, and we're pursuing that. But we are also reviewing the reset in trading performances across the pharmaceutical sector, and that could potentially also impact not just the extent of the value we can create as what we've put out, but also the target range as it relates to the EBIT that you've mentioned. So for me, those would be the 3 key areas where we believe we'll transition and bridge from the current trading performance into those long-term ranges going forward.