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

Good morning, and welcome to AfroCentric's Group Interim Results Presentation for the 6 months ended 30th of June 2026. Today, I'm pleased to introduce AfroCentric Group CEO, Gerald Van Wyk; and Group CFO, Thato Moloele. Gerald will take us through the strategic and operational highlights before Thato takes you through the financial results in more detail. The presentation is available on the website. And at the conclusion of the presentation, the management team will address any questions submitted via the webcast. With that, I'll now hand over to Group CEO, Gerald Van Wyk. Thank you.

Good morning, and thank you, Sean and good morning, and welcome, everyone, to the AfroCentric Group's interim results presentation for the period ended 30 June 2026. The first half of the year represents the beginning of a fundamental reset of AfroCentric. The loss of the Bonitas contracts has materially changed the scale and earnings capacity of the group and our immediate responsibility is to resize the business, protect the core and establish a credible path back to sustainable profitability. And I'd like to provide an update on what changed, how the business performed during this transition, what actions we've taken and the milestones against which we are measuring our progress. With the contract loss, the obvious impact was the loss of the revenue and earnings directly associated with the contract. But the deeper issue was that much of the group's infrastructure had been built for a larger business. If you think about it, our technology platform, our management structures, our shared services functions, our facilities and even our supply arrangements, they don't automatically reduce with the loss of a contract because it serves the rest of the organization as well. And that is what caused this structural mismatch between our future revenue and the current cost base. And so the choice between trying to then preserve the existing organization by replacing the lost revenue or resetting the organization for its new scale reality became an obvious one. And so we have set out to redesign the operating model, to simplify the portfolio, to protect the core client base and to also invest selectively in capabilities that will improve our competitiveness. And so I consider the results as transitional as it still contained Bonitas wind-down activity, the restructuring costs and only a limited period of the full contract loss as we still earned 5 of the 6 months of the contract revenue in the reporting period. And throughout this transition, we have also been quite deliberate at maintaining our service delivery, keeping our systems stable and ensuring that we perform against our regulatory compliance objectives. And that's also been a critical part of stabilizing the business throughout this transition because we cannot restructure the business at the expense of our clients or the members that we serve. In relation to the cash flow discipline, the restructuring, the modernization and the implementation of the future operating model will place pressure on cash flow before we'll see the full financial benefits emerge. And this is something that we are managing quite closely. And we have structured the plan around the resources that's available to us and not having to rely then on any speculative future growth assumptions. So really, the plan is built around our new scale and our new reality and making sure we create a sustainable pathway and then seeing growth as additional upside that just accelerates that recovery back to sustainable profits. And then lastly, I think linked to that is to also just call out as an overview that this is a multiyear recovery. Savings will build progressively over the next 18 months, and 2027 will remain a transitional year as the structural benefits annualize. And really, our current objective is to reach a monthly breakeven run rate by the end of 2027. When we look at the financial results, they show that the business remained profitable and cash generative for the reporting period, but they also reflect the initial impact of operating at this lower scale that I've referenced just now. The revenue declined by 5.6% to ZAR 3.485 billion. And the primary driver was the loss of the Bonitas-related pharmacy business following the termination of the designated service provider or DSP arrangements back in 2025, which was in the prior year base. And these numbers still include, like I said earlier, 5 months of the Bonitas revenue together with the wind-down revenue associated with it. When we look at the operating profit, it declined by 8.7% to ZAR 282 million. And this reduction was primarily attributable to the impact of the Bonitas transition as well as the restructuring costs incurred as part of the response strategy. And this was also partially offset by a recovery in the pharma profitability and improved earnings from the Healthcare Africa business. And if we look at the retail business, for instance, the cost of sales reduced by 18.4% as the Bonitas pharmacy volumes came out of the business, but that the business also responded by adjusting the cost base quite effectively. And the Pharma business also delivered a meaningful earnings recovery with improved product mix and the benefits of earlier cost actions supporting profitability despite the lower revenue base. And when Thato take you through the pharma financials, you'll be able to spot that particular improvement. However, looking overall, the employee cost base did increase by 7.6% to approximately ZAR 1.5 billion, which were mainly related to the upfront costs associated with what we call the Phase 1 restructuring as part of the rightsizing recovery plan. And HEPS did decline by 26.9% to ZAR 0.0854. And that larger reduction in HEPS relative to the operating profit reduction reflects, I guess, the impact of items below the operating profit line, which Thato will also point out for us. From an operational perspective, the lives under management reduced by 644,000 to 3.28 million. And the loss of that approximately 657,000 Bonitas lives were partially offset by the addition of approximately 29,000 lives from the Sisonke Medical scheme that came on board during the reporting period as well. From a CCMDD perspective, the monthly script volumes declined by 2%, while private pharmacy script declined by 12%. And despite all of this, the group remained cash generative with cash from operations sitting at ZAR 262 million, which represents a cash conversion of approximately 93%. We also ended the period with net cash of ZAR 84 million, which we will now need to fund the restructuring and to make essential investments and manage the period before the savings are fully reflected in the earnings through an annualized basis. So really, from a financial highlights perspective, for me, the key takeaway from the first half numbers is that the group remained profitable and cash generative throughout this initial transition, but the reported result is not yet the steady-state position as we move forward. And the second half will reflect more of the contract revenue loss, while the benefits of the cost reset will really only build progressively over the next 18 months. And that's the picture that we see as we look ahead. I just wanted to stand still a little bit to talk through the scale of this reset that we are referencing and that's taking shape within the organization. I guess the size of the challenge from this slide is quite clear. The annualized revenue impact of the contract loss is approximately ZAR 2 billion. And at this new reduced scale, we estimate that ZAR 1.3 billion in annual savings would be required to restore the business to breakeven over the short to medium term. And it's not a gap that one can close through just iterative normal efficiencies. Although we saw the benefit of that out of the pharma business because they really have been on that journey for the last 18 to 24 months, and it's starting to come through now in this reporting period. But what it really means is we have to, at scale, take out cost. We have to simplify the operating model. We have to release capital from noncore assets, and we have to invest selectively in capabilities that will protect and strengthen the core business, which is still 3.3 million lives held under our care. And so we are not simply trying to make AfroCentric smaller. We are trying to build a more focused and efficient business that can operate sustainably at its new scale. So what have we done and been able to realize against this plan so far? Well, we've now identified and validated more than ZAR 900 million of this targeted ZAR 1.3 billion savings that we require, which represents around 72% of the target, and we're continuously working on a monthly basis to find opportunities to continuously close that gap. But I want to be clear about what that means. It's identified savings, it's validated, but they're not yet earnings. What matters now is the implementation, the timing of that implementation and then also ensuring that the savings actually come through in our monthly run rate. So it really is about disciplined execution, which is now consuming our focus at the moment. We have already, as you can see on the slide, completed the 2 phases of the rightsizing activities. We have locked in and signed off the future organizational structure, and we have developed the plans and the retention mechanisms to retain the critical skill sets that are required to execute and enable this plan. And at the same time, I think it's important to continuously highlight this as a service business because part of the risk we need to manage is preserving and protecting the remaining client base. And so it's important that the service within the organization through this transition remains resilient. And so far, we are able to do that. If you look at our customer and operational measures, they remain above target. System availability was maintained at 100%, and there were no regulatory breaches throughout the organization. On a portfolio perspective, the Activo disposal has now been concluded, and we continue to assess further opportunities to simplify the portfolio. And where we are investing, we will do so selectively. We are directing the funding towards modernization, data and digital capabilities, customer experience and clinical innovation with clear governance and measurable returns to deploy our limited resources towards. I've sort of alluded to it, but really to -- for this plan to be successful, we need to execute. And there are significant execution risks and these are the things that we are managing quite closely. The savings may take longer to deliver, and we could face some further pressure on our client retention and cash flow management as that will come under pressure before the full benefits of the reset are realized. And we are also asking a lot of the organization at the moment because we're asking them to deliver several major changes at the same time, and that's something that needs to be managed. And how we are responding to these risks is really through disciplined implementation tracking, executive ownership of these key clients, very tight cash governance and cash management and really being careful about how we sequence our initiatives and how we retain the critical skills across the organization. But I think an important call out for me is also that we are still pursuing and we are very much active and aggressive in pursuing new business pipeline of opportunities, but we are not assuming that, that growth will compensate for any of the shortfall if we don't execute well on the turnaround here. So the plan really has to work on the existing revenue base with any of these growth initiatives seen as additional upside. And then from a milestone perspective and what we really track and measure and hold ourselves accountable against is that the recovery is quite deliberately phased. We've had the first half of that now behind us, which was about mobilizing the plan and beginning the reset. We are now in the throes of the second half of that plan, which is about stabilizing the business, completing the organizational changes, beginning to realize the savings and protecting our clients and our cash position. And then as we look ahead during 2027, those structural benefits must then increasingly come through into the earnings run rate as we start realizing those opportunities. And again, the objective being to reach a monthly breakeven by the end of 2027 with a key business like Medscheme we are targeting to reach their monthly breakeven at the beginning of 2027. And in summary, I guess, the 3 measures we will remain focused on throughout as a management team are the savings realization, the client retention and the liquidity management. So yes, in summary, I guess our recovery, again, just for the obvious callout, is not dependent on speculative growth. It depends on delivering the ZAR 1.3 billion cost reset protecting that approximately 3.3 million lives already under our care and management and releasing capital from noncore assets and investing them selectively where we can actually demonstrate value. And whilst we've already identified and validated a significant part of what is now being executed into the organization, we're continuously doing the work to close the remaining gap. And the latest of the organizational reset that's in progress is where we're looking to capture the balance of what is required. And the balance sheet does give us the capacity now to complete this work and the core business, as you have seen through service and operational metrics has remained resilient. But yes, there's still a great deal to execute. But the path at least is clear. The milestones are measurable and our focus now is on turning all of these opportunities into actions to really take us into sustainable earnings and cash generation at our new scale and our new reality while still actively pursuing new business opportunities. I'll now hand you over to Thato Moloele to take you through the detailed financials and where after I'll join him again for the Q&A. Thank you very much.

Thank you, Gerald. Good morning, and thank you for joining us. The first half of 2026 has been a period of transition for the group as we continue to navigate the impact of lower Bonitas volumes across our various businesses while executing a comprehensive turnaround and cost reset program. Despite these headwinds, the group delivered revenue of ZAR 3.48 billion, operating profit of ZAR 282 million and maintained a steady operating margin of 7.9%. Most importantly, we generated ZAR 262 million in cash from operations, representing cash conversion of approximately 93% and closed the period with a net cash position of ZAR 84 million, a significant improvement from the net debt position reported in the prior period. At a high level, the decrease in group operating earnings can be attributed to nonrecurring restructuring costs of ZAR 65 million, severance costs of ZAR 65 million and CPI-related cost adjustments. These downward effects were partially offset by temporary operating service efficiencies in our managed care business unit of ZAR 60 million. Ones-off wind-down revenue from Bonitas of ZAR 65 million as well. Importantly, operating results were shielded from further erosion arising from the prior year farmer DSP terminations being the main contributor to the ZAR 202 million decline in group revenue, which was offset by lower cost of goods and operating overheads. Excluding all the ones-off, normalized operating earnings would have increased to ZAR 360 million, representing a 16.5% growth from the prior year, driven by pharma's recovery. Healthcare South Africa generated revenue of approximately ZAR 2.8 billion and operating profit of ZAR 174 million, maintaining a margin of 6.2% despite membership pressures across several schemes. Membership attrition attributable to Bonitas and other closed schemes reduced volumes by approximately 675,000 lives, partially offset by 15% growth in corporate schemes, driven by the Sisonke take on of 29,000 lives. 2.2% revenue growth was, therefore, mainly driven by CPI-related fee increases across several schemes with the H1 Bonitas impact being limited to a net revenue loss of ZAR 55 million after adjusting for wind-down revenue of ZAR 44 million. Profitability in the admin and managed care businesses were impacted by the severance costs, which I previously mentioned. Excluding these ones-off costs, the underlying operational performance was more resilient than what was reflected in the reported basis, supported by improved managed care earnings of ZAR 60 million. DENIS continued to deliver strong performance, reporting a 4% improvement in revenue, which increased to ZAR 314 million and 55% growth in operating earnings, which increased to ZAR 31 million. Performance in DENIS was supported by membership growth of 111,000 lives, representing 2.8% growth and favorable claims experience. Healthcare Africa contributed ZAR 121 million of revenue and operating profit of ZAR 47 million to the group, translating to an improved operating margin of 39.2% compared to 33% in the prior period. The profitability uplift in the segment was supported by preliminary cost containment and rightsizing efforts following the loss of the NHP managed care contract, which accounts almost entirely for top line revenue regression. The most encouraging aspect of the results is the continued recovery within the pharma cluster. Although retail revenue declined by 16.1% to ZAR 1.1 billion following the prior year Bonitas DSP terminations, operating profit increased by 72% to ZAR 60.4 million, with operating margins improving from 2.6% to 5.4%. Pharma's recovery was a function of our prior year cost optimization initiatives and current year sales mix optimization to more favorable generic and ARV lines. These efforts improved profitability by ZAR 35 million in the Pharmacy Direct Private business, which has attained breakeven 12 months on from the prior period DSP terminations. Alongside PD, CCMDD produced modest earnings growth of 1% due to 6 monthly dispensing, which reduced script volumes by 2%. This was offset by inflation-linked fee increases and operating efficiency improvements. Scriptpharm generated revenue of ZAR 642 million and operating profit of ZAR 24 million, reflecting an 8% decrease in revenue and 27% decrease in earnings. These numbers are predominantly linked to the Bonitas transition, which resulted in the loss of 1 million members split across Bonitas key members and oncology members. Overall, the Pharma turnaround program is beginning to demonstrate tangible results with improved profitability anchored in a lower revenue base. Despite the decline in revenue and earnings, AfroCentric continued to demonstrate strong cash-generative characteristics, generating ZAR 262 million in revenue -- ZAR 262 million operating cash flow and converting 93% of operating profit into cash during the period. This performance reflects the resilience of the group's underlying business model and management's disciplined focus on cash preservation and working capital management. In particular, the cash generation uptick can be attributed to working capital improvements across Pharma following the disposal of Activo and due to prudent stock management in the private business. In addition, disciplined capital allocation strategy, which is also focused on preserving liquidity and prioritizing capital expenditure that supports operational resilience and long-term value enhancement. As we continue to execute the post-Bonitas transition, cash generation is expected to come under pressure as the restructuring advances, strategic initiatives progress and the business settles into a new lower operating baseline. Our balance sheet remains a key source of strength and reflects meaningful progress over the past 12 months in embedding financial resilience in the business following the loss of several client contracts. Pleasingly, the group ended the period with net cash of ZAR 84 million, representing an improvement of approximately ZAR 255 million compared to the prior corresponding period. From a leverage perspective, our key metrics of borrowings to equity and debt to equity have progressed from June 2025 levels following the December impairments of ZAR 1.3 billion. Relative to December, however, these metrics have since improved as a function of our cash generation. While maintaining liquidity remains our primary concern, we have made decisions to allocate ZAR 250 million in capital across 5 critical strategic projects over the short to medium term. In particular, capital will be allocated to the AfroCentric group-wide restructuring project and accelerating funding for business-critical modernization, digital, data, automation and value-based care initiatives. Collectively, these projects are anticipated to exceed our target hurdle rate of 20%, which will support our planned financial recovery from 2028 onwards. Looking ahead, trading conditions are expected to remain challenging as the business absorbs the impact of the Bonitas membership losses. The recovery remains a multiyear journey with management's focus on progressively rebuilding a more defendable earnings base. That said, our priorities are clear. Firstly, we will continue to protect and optimize the group's revenue base through client retention, operational excellence and value-added managed care offerings. Secondly, we remain committed to delivering the next phase of our cost reset program, targeting annualized savings of between ZAR 360 million and ZAR 400 million for 2026. Finally, we'll continue advancing strategic initiatives focused on portfolio simplification, data and digital enablement, value-based care and long-term earnings sustainability. In closing, while the first half results still reflect the preliminary impact of Bonitas transition, they also provide increasing evidence that the group's recovery strategy is gaining traction. The balance sheet is stable. Healthcare Africa continues to defend earnings. DENIS remains strong. Pharma profitability has recovered materially and the benefits of our cost reset program are beginning to emerge. We remain confident that these actions will position AfroCentric to deliver a more sustainable earnings profile, coupled with improved shareholder returns from 2028 onwards. Thank you. That concludes our presentation, and we'll now move to Q& A.

Thank you. Gerald, if you could just join Thato so we could kick it off with the Q&A. At this point, there do not seem to be any questions. So I might just kick it off with 1 or 2. Perhaps just on the gearing front, sort of managing of net debt and covenants. Maybe just refresh us if there are any covenants and maybe just quantify the sort of liquidity on hand and sort of how you're thinking about managing that, obviously, in the next 18 months.

Okay. Thank you for that question, Sean. So yes, there currently are debt covenants in place. EBITDA to net debt covenants of 2.5x and an interest cover covenant of 4x as well. As mentioned, liquidity will come under pressure over the next 12 months. With regards to that, the main areas of pressure will come from the obvious loss of revenue linked to the Bonitas contract. In addition to that, we'll be reinvesting into the business and strategic initiatives. That said, we do have sufficient liquidity to take us through this period, as you've seen with the balance sheet position and net cash which is available to us.

Okay. Excellent. And then just a quick one on CapEx. I think you've outlined that I think roughly ZAR 20-odd million was spent in H1 now, if I'm correct, with the balance of ZAR 250 million to be spent in the next 18 months. How should we think about the phasing of that versus FY '26 versus FY '27?

So I think quite a substantial portion will be spent in the second half of the year, which is what we tried to emphasize. In relation to that, there's obviously the returns which are then anticipated to be then realized from that CapEx spend. In terms of those returns, we then anticipate that from H2 next year onwards, then forming quite a critical part towards the recovery, filling up the gap of the balance between the cost reset and the ZAR 1.3 billion.

So Sean, if I may add, around ZAR 100 million of that is ring-fenced for spend in H2 of this year, predominantly or primarily linked towards the re-platforming of the IT infrastructure. And so that would give you a good sense of how to think about the overall investment over the next 18 months.

Okay. Perfect. And then just maybe a point of clarification, Gerald, around the sort of breakeven commentary. I think it was monthly exit breakeven by the end of 2027 for AfroCentric as a group. But then you made a comment around early '27 for Medscheme. Could maybe just split that out to just give us a bit more insight on that.

Yes. No, that's exactly it. So overall, as we now reorganize the group, we are targeting that monthly breakeven towards the end of 2027, beginning 2028. But within that, given the targeted initiatives, including the strategic spend, we are looking at the core business, that being Medscheme, where we have the 3.3 million lives under care, accelerating their monthly breakeven run rate at the beginning of 2027. And that is really what we are targeting is to ensure that the core business gets to its profitability pathways much quicker than the rest of the group whilst we do the rationalization across the group over the 2027 period.