Ascendis Health Limited (ASC) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to the Ascendis Health interim results for the 6 months ended December 31, 2019. Before we kick off with a detailed review of the financials and some of the business unit drivers, I thought I would just check in again and give you a lens on the last 6 months. I've been at the helm for just under 5 months now, and I was looking for an appropriate euphemism to describe my experience to date, and all I could come up with is a rather dreary, particularly high-intensity period. I think that is a gross understatement. And I think it's been high-intensity for all our stakeholders, certainly the underlying businesses, given the challenges around liquidity and some of the macro broader impacts, but also as important, our stakeholders, long suffering shareholders, lenders who've walked a journey with us for a considerable period of time. And then our customers and suppliers, all of whom have had some interactional impact or felt the impact of where Ascendis currently finds itself. The good news is that the results for the 6 months do confirm my initial thesis that we're a collection of largely good businesses with a bad balance sheet. And how do you demonstrate that? Well, the first way is, obviously, revenue. Revenue for me demonstrates franchise value. People are buying the things that you're selling, and they're doing so more than they did in the prior period. The second thing to note, without trying to steal Kieron's thunder, is that, that 12% growth is split 14% in Europe. And given where the rand is trading at the moment, the rand hedge qualities are certainly helpful. 58% of our business now comes from Europe. The growth in South Africa are at 8%, certainly below Europe's, but still not bad given the macro we find ourselves in, and South Africa contributing the balance of that 42%. So again, I think franchise value intact, continuing businesses all continue to make profit. We have a couple in the departure lounge, which we'll speak to a bit later, but if you move down the P&L to EBITDA, the 6% up in EBITDA, the leakage between the top line and EBITDA, Kieron will speak to it. But it's largely exchange rate driven and a revenue mix issue with more tender business. The following points speak to the impact of a balance sheet with too much debt. So the first point is, we've had one-off costs of ZAR 74 million which related to a number of the restructuring initiatives as well as the Remedica process. The point around Remedica is twofold: one, it's a disclosure point, we are including it back into continuing operations; and secondly, I think more importantly for me, it gave me a chance to have a strategic reset. When I came in, I was told, in no uncertain terms, Remedica wasn't part of the future. It's still the single biggest asset to repair the balance sheet, but it did allow for a deep dive into the mission or the purpose statement for Ascendis. And I'll come back to that at the end of the presentation. The unintended consequence of higher debt levels is liquidity. And in the business, it's like driving a car with the handbrake on. These are good businesses, and when we get to a point where we have a balance sheet that has a bit more flexibility in it, I think we'll really start to see the businesses trade well. The last point is, we are, of course, committed to what I call an appropriate sequencing of asset sales. There are some that are more disposal-ready than others. And we are, of course, committed to materially reducing the debt and maximizing value for all our stakeholders. So let me pause there. I'll come back at the back end to talk a bit about strategy and purpose, but I'll hand over to Kieron.

Thank you very much, Mark. Before I start on the financial review, I just would like to extend my appreciation to the finance teams across all the business units as well as the group finance team for compiling these sets of results. And especially my thanks to the management teams in all the business units. I think we've shown a tremendous amount of resilience coming off a very poor H2 2019 to recover in H1 2020, and you'll see in the results, as I present them in the following slides. Just a note on how we've accounted for our different business units. In this set of results, the big change from the results that we presented in October, is that as Mark mentioned, we are now reflecting or classifying Remedica as a continuing operation. And post the failed sale of Remedica, they now come back into our continuing operations. The Biosciences 1 and Biosciences 2 businesses continue to be reflected as discontinued operations, as well as our SA-based direct selling business. Moving on to Slide 6 to look at the revenue growth for the 6 months of this financial year. Overall, on a pure organic basis, we see improved revenue by 12%, so up to ZAR 3.9 billion for the total group. That's split between SA and Europe, with Europe growing very nicely at 14%, and the SA businesses growing at 8% on a continuing operations basis. We now see that Europe contributes to about 58% of our total group revenue. Some of the things that we're growing, driving that growth in Europe, some of the businesses, you see Remedica growing very robustly at 30%. That's driven by some new tender business that they rewarded in Mexico. And Sun Wave continues to perform, since acquisitions business had double-digit revenue and EBITDA growth, and we see that again in this half. It's another 30% growth over the prior year. In SA, we also are quite pleased to see some good organic growth, and the consumer environment is tough, but some of our other businesses performed very nicely, namely our Medical Devices business. There was the acquisition of a new agency business in the scientific group, which is one of the businesses within Medical Devices which helped drive a lot of that growth, as well as some strong sales into the RT2 tender in our RCA business. We also saw a recovery from prior year supply issues. Just to remind you, last year this time, the MCC or SAHPRA had shut down some of our suppliers based in India. They're back up and running, and we saw a recovery in our revenue because we could get stock now. Moving on to our segment performance. We see the revenue growth by the different segments. I won't go into them in too much detail. I just wanted to highlight a couple of issues. On the Bioscience side, you see there's a decrease in revenue, and that's because, obviously, the sale that happened in July 2019. We sold Efekto, Marltons and Afrikelp, and that accounts for the decrease in both revenue and EBITDA. And then on the -- if you're looking at the EBITDA, we have seen a decrease in our pharma EBITDA. Despite a pleasing 8% increase in revenue, we saw some EBITDA issues in our Farmalider business. Just to remind you, we own 49% of that business. We account for 100% in our revenue and EBITDA, and we removed the noncontrolling interest portion below the EBITDA line. But that business went backwards. There was some once-off license fees that, from a timing perspective, will most likely only be recognized in H2. Some delays in the Spanish health authority, and then there were some provisions we needed to make for some legal cases that affected some of the operating expenses in that business. Moving on to the income statement on Slide 8. This income statement shows all the continuing operations as I described them earlier. And again, I won't go through every line. I just wanted to highlight some of the -- some points, namely on gross profit. We see the gross profit growing at 10%, although our margin has decreased by 0.8%. We see that as a result of some of the pressure that we've come under because of the weakening rand. So the Medical Devices business imports all their product from overseas, and as a result, we saw a decrease in the gross profit margin there. Other income, we did note last year -- or we did record a profit on the sale of our Isando building that was about ZAR 17 million, which obviously did not repeat in this year. And then overall, once we normalize for some of the once-off transaction costs and the D&A, our total expenses grew by 11%. Just to give you a little bit more color on that expense growth, we saw a 37% increase in marketing in businesses like Sun Wave Pharma, where we use medical marketing to drive that top line. Scitec saw an increase in marketing with the launch of their new endurance range of products, and Remedica also saw some marketing increase. And you can see that our marketing investment has paid off from a revenue growth perspective. The other expenses have increased. As I mentioned earlier, the Farmalider legal case with a supplier resulted in an ZAR 11 million increase in those legal costs in that business. And we have a timing issue around R&D capitalization. We capitalized some of the new product developments in last year that hasn't repeated in this year, and that's also a timing issue and should be capitalized in H2. So roughly ZAR 34 million in Remedica and ZAR 16 million in Farmalider. So overall, once we adjust for some of the normalizations, which I'll talk about a little bit later, we see normalized EBITDA coming in at ZAR 611 million, which is a 6% increase over last year. EBITDA margin, however, has declined to about 15.8%. Looking at our earnings. So we've seen a nice increase in EBITDA, 6%. Although we've seen an erosion in earnings, big driver of that erosion comes in 2 major areas, one being interest. So we did see a 21% increase in our finance costs. Couple of things driving that. We currently have an interim stability agreement with our lenders, and there was an increase in margin for that agreement. The impact of IFRS 16 has meant an increase in EBITDA, but an overall decrease in earnings of about ZAR 16 million, and that's split roughly between depreciation and finance costs. So increase in depreciation and finance cost because of the implementation of that new IFRS statement. And then in depreciation, we saw an increase in depreciation because of a catch-up in CapEx. We spent very little CapEx in H2 2019 because of the liquidity issues that we had, and there were some nonnegotiable CapEx that we had to do in H1 2020, which we did, which accounts for growth in the depreciation. So overall, our headline earnings down by 9%. So headline earnings per share, ZAR 0.222. Once we normalize for the once-off costs, that increases to ZAR 0.351, and compared to last year of ZAR 0.387, that's a decrease in -- of 9%. Just wanted to show the impact on Slide 10 of the discontinued operations and restatements. As I said, we have accounted for the Direct Selling business and the Bioscience business as discontinued operations. Just to remind you, last year, we had sold -- had already sold the Sports Nutrition business. And then we have made one change to the comparative figures around how we accounted for the operational loss that we're experiencing in Isando. Previously we had added the loss back, but in June 2019, we changed our accounting policy in that regard, and we no longer add those types of losses back. So those are the adjustments that we made to the prior year figures. Moving on to Slide #11. Just to -- as I mentioned earlier, we wanted to show the impact of IFRS 16 on all the operating leases. So on our balance sheet, we've now recognized the right-of-use asset for about ZAR 211 million, with the associated lease liability of ZAR 231 million. We saw EBITDA increase by ZAR 26 million, but a hefty increase in depreciation of ZAR 25 million and interest of ZAR 17 million which saw a net decrease in earnings of about ZAR 16 million. And obviously, those will unwind over the term of those various operating leases. Going on to Slide 12, just a bit more detail on the transaction-related and restructuring costs. We are in talks with the -- our partners in Farmalider to potentially buy or sell in terms of the put/call option that we have on that business. So we incurred some costs there. We also had some disposal costs, obviously, related to the failed Remedica deal. Those came in at about ZAR 25.7 million, the majority of those being legal costs. All those lawyers were based in London. And those costs come to about 0.5% of the proposed deal value at the time. So, those are costs that we had to incur. Other sorts of costs -- once-off costs that we've adjusted for, we had some retrenchment costs in Scitec. Part of the turnaround in that business, which we'll talk to you a little bit later, resulted in a reduction in the production facility and warehousing facility, about 61 heads across those 2 groups, which resulted in ZAR 2.4 million worth of settlement costs. And then the current project that we're working on to restructure our debt and our balance sheet has seen an incurrence of cost of about ZAR 40.1 million between the restructuring advisers and the legal advisers. So all in all, once-off costs that we've adjusted for in terms of the definition in our accounting policy, totaling about ZAR 74 million. Just a quick note on the head office expenses. We have chatted to the market at the last presentation about reducing our head office expenses. And we wanted to show that we've made some inroads in that in this first half of this financial year. We have removed the head office -- the EU head office structure that was put in place. So no longer any overseas-based head office resources. So that saved us ZAR 6 million in the year. And then we've also, in South Africa, reduced some of the shared services, the marketing team and eliminated the COO role as well. So that's ZAR 10 million worth of savings, which helped negate some of the additional consulting and tax consulting fees that we incurred in the group of about ZAR 7 million. And as we're on track, we have now increased our bonus provision for the head office for about ZAR 5 million. So overall, we saw an increase in head office costs of about 10%. Looking at the other big cost driver, which, as I mentioned, impacted our earnings figures. Finance costs on Slide 14, an increase from ZAR 204 million to ZAR 247 million driven by 3 areas. One was the increase in the stability margin, which has come up to about ZAR 20 million. The second was we were due to pay some deferred vendor liability related to Remedica, Sun Wave and Kyron in the last 6 months. Fortunately, under our terms of our interim stability agreement, we were not able to pay those, but we have been paying some interest to compensate for those late payments. So that resulted in about ZAR 9 million of interest. And then as I said earlier, the impact of IFRS 16 into recognition of additional ZAR 17 million in finance charges. Overall, our total weighted average cost of debt increased to about 6.9%. Moving on to the balance sheet. Just to give you a view of what's happened to our cash over the last 6 months. So we had cash on hand in the balance sheet of about ZAR 454 million. At June 2019, the cash generated by our operations, excluding any once-off costs, came to about ZAR 234 million. As I said, we've -- we take the once-off cost off there, we're all cash paid. So ZAR 74 million. The cash paid finance costs of ZAR 201 million. And then we had a catch-up in CapEx of -- CapEx and R&D. So roughly, ZAR 100 million related to PPE and ZAR 43 million related to intangible assets in Remedica and Farmalider. We saw in July the successful sale of our Bio1 division, which saw an increase or an inflow of cash of ZAR 424 million, and the proceeds of which went out to our lender group. So we see an outflow of cash there. So we finished off the 6 months with about ZAR 204 million worth of cash on our balance sheet. Looking at our net working capital. So the net working capital, we saw a pleasing decrease from December 2018 to June 2019. We have seen from 2019 -- June 2019 to December, an increase in working capital. Two main areas there. On the inventory side, we saw an increase in inventory in Scitec to help with the new endurance range launch. The investment in the new Medical Device agency, Qiagen, saw an increase in inventory there. And then we are busy in the process of moving our suppliers for our Animal Health business, and we are stocking up to mitigate any out of stocks that may occur in that process as well. Looking at our big increase in debtors, that's driven by two areas: one, we continue to have some overdue payments from our South African Government, so from some of the Medical Device sales into the South African Government still need to be paid. We expect, as we've seen in prior years, a large portion of those payments to come through in April and May. And then in Remedica, the Mexico tender I mentioned earlier saw a big increase in debtors there. They've given us quite generous terms under that tender contract. And we're starting to see those debtors start to repay us now in February, March, and will continue all the way to June. So overall, we finished our net working capital to about ZAR 2.8 billion. Then moving on to Slide 17, which displays our gearing. And so I just wanted to give a view of what our current gearing was, including deferred vendor liabilities and excluding, so we're pretty much the same as where we were in June 2019. Just to note, we've changed the way we calculate this gearing ratio for this particular presentation. Previously, for our interim results, we used to double up our EBITDA and divide that into our total debt, but that didn't show a realistic picture, in our view. It showed a much lower gearing ratio. So we have now used the last 12 months, which is very similar to how we report our covenants to our banks. So that comes out at ZAR 6.2 million. And overall, if we include the Remedica and Scitec DVP, that's about 7.6x. As you can see, 71% of our total bank debt is in euros, and 83% of the DVL is also in euros. We currently have an interim stability agreement in place with our senior lenders. They have pledged their support for the business and are also in the middle of a negotiation for a refi of all the senior facilities, which we expect to be completed in early Q4 of FY 2020. Under those restructuring negotiations, we do foresee there will be further asset disposals in -- within the next 18 months to reduce our leverage. I think that's everything from my side. So I'd like to hand back over to Mark to look at the strategy and outlook.

All right. Thanks, Kieron. So look, I have already set out my view on one, the strategic context; and then two, I suppose, more importantly, who Ascendis is and where to from here. So it's on Page 27, which talks to the strategic context. If I look at the history, I think with the best intentions of the world, the business was set about as a collection of complex entrepreneur-led businesses. Good businesses, operating in various jurisdictions. so we've got businesses in Spain, Budapest, in Hungary. We've got businesses in Romania, Cyprus, South Africa, and all of them sell to over 100 countries in the world. Perhaps a more important revelation is that there are limited cost synergies throughout the group. And when that is the case, you shouldn't spend an inordinate amount of time trying to capture those. There are certainly revenue synergies on the product side, which can be used in geographies such as South Africa, where you take the ibuprofens, the paracetamols, sildenafils out of Spain, and certainly some of the HIV and onco portfolio out of Remedica into this part of the world. But then you don't need to own in order to have a relationship. You can simply contract for that. So if you don't have a lot of synergies, don't waste too much time getting them. And if there are top line synergies, well, those can be done outside of a big corporate entity. Importantly, these were primarily debt-fueled acquisitions. 1/3 of the debt was typically vendor finance. So that would introduce certain complexities. One, when you have an arrangement where you pay the person you bought the business from over a period of time, and then you did fail to pay them, that creates operational issues, which need to be solved. And similarly, when the growth or the, let's call, this cost synergy thesis isn't brought to bear, your ability to service that debt that you've built up also becomes compromised. So we kind of find ourselves in a world where because of the gearing position, liquidity is continually swept to the center. And if there's one key shout-out from each of our businesses is, as soon as we get access back to those bank accounts and have that unique path to market that made the businesses the best version of themselves, that is certainly a platform that we can start to put some speed behind. Then we run to 2019. Things got really tough and then Remedica fell over. And I think for a lot of our suppliers, our customers, of course, lenders and shareholders that will -- the next question is, where to from now? Remedica were supposed to be the entity that, if sold at a decent price, would have materially reduced the gearing across the business. So when that no longer is a short-term option, it is for sure an option in the medium-term and one that we are working very hard against. And I'll come back to that a bit later. What you need to do is get an amend and extend with your lenders. So where we are at the moment on that is working very closely with the lenders to look at putting some breathing space into the system to allow us an orderly exit of businesses that have been identified. I think then if you flick to Slide 28, we all know the context, and I do go back to that long-suffering comment I made upfront. I do think there are a number of shareholders who are fatigued. There's certainly fatigue in the lender base, and there's absolutely fatigue within the business units. And I would just like to reiterate Kieron's comments. A big thank you to all of you for staying the course, for allowing us to set a path to balance sheet stability. And I put the strategy in 3 pillars to try and reflect that. The one is stabilized, then you move to optimize, and then monetize. Typically, I like growth, third pillar. But given where we are on debt, monetize is a strategic imperative. Stabilize is just is look at what we have and who we are. We are, in my view, a listed holding company of a collection of very exciting assets. But that's who we are. If you are a listed holding company of private assets, then you've had a period in which to invest. You now have a period in which to return value back to shareholders and lenders. So part of that is restructuring the debt or amending a profile of the debt to allow some flexibility, which removes the forced seller label, and that was part of the issue we had in the sale of Remedica. For sure, while the debt is still high, you've seen us potentially [ straight ] seller, but once you are forced within a particular timetable to sell something, a forced seller is never good in terms of value maximization. With a bit more flexibility on the balance sheet, I can also then move into what I call the optimize pillar, and that's getting the businesses either exit-ready, or taking them back to a time where they were the best versions of themselves, which was owner-managed, entrepreneur-led businesses that have control of their own destiny, and where the head office provides a support service to the project office. That project office's primary objective is going to be to ensure that we do the exit due diligence appropriately and to make sure that efficiencies and margin management are put front of mind in each of the business units. It also means we have to start to create this owner-led culture again, and the best way to do that is to incentivize accordingly. So instead of running incentivization schemes that sit at the top curve, go back to the areas or the provinces where you have ultimate control, and that's in your own businesses. So look to reset the culture of accountability and owner-led back inside the businesses, and a reward structure that aligns with that. And then lastly, you're into that monetized piece, which is not sell everything, but sell things that are ready to naturally get moved on. You always have to ask yourself as a business, are you the best owner of an asset? And if there is another entity that is potentially a better owner of that asset and can provide for a meaningful de-gearing opportunity, then we have to step into that window. And that's the kind of focus on value maximization pillar that I've set out there. So I suppose in summary, to say where we are is an acknowledgment that we are not an integrated global pharma company. We own various businesses in different jurisdictions that do different things. So in Spain, for example, we are outstanding at 1 milligram paracetamol, intravenous ibuprofen and, liquid sildenafil. You move over into Hungary, where we have the Scitec Sports Nutrition business. Further right into Romania, where we are #1 in nutraceuticals and #4 in OTC. Flick over to Remedica, where you are a world-class producer of onco, HIV, cardiovascular and antibiotics that services a market that extends as far west as Mexico and as far east as the extremities of Asia. And then into South Africa, where you have an Animal Health business, a Pharma business, a consumer business and a Medical Device business. I think just the name should give you some hint that the ability to extract synergies is somewhat compromised. I'm going to just hand back over to Kieron to go through the numbers, and then I will just talk, and again, given that context, around some of the short-term focus areas. So if we can go back to Slide 19.

Yes. Thank you very much, Mark. So just looking at Slide #19, we give a little -- as we have in the past, a lot more detail around our different individual business units that make up the different reporting segments. And here, we have the revenue analysis by business for the 6 months ending December 2019 versus December 2018. As I mentioned earlier, we saw very, very strong growth in our international businesses, driven by Remedica, 30%; Sun Wave Pharma at 30%. We've even seen turnaround in revenue at Scitec. So we do see a 1% growth there. And Farmalider going backwards, so that's a number of issues there, one being some supply issues on the supply side and some timing issue on some license fees where we're waiting for some health authority approvals. So overall, on a constant currency basis, international growing at 15%. When we translate that into rands, it goes down to 14%. Then looking at South Africa, and overall, including all the discontinued operations, 8% -- going backwards 8%, but if we adjust for the discontinued operations that actually is an 8% increase in revenue across the board. And that's, as I said earlier, recovery in Pharma on some of the supply issues. Medical, the new agencies that they have on board have driven that business by 10%. Consumer Health care, we saw a 5% decline. There was some -- with the South African economy, some pressure there as well as some of the issues that we've experienced, strikes at the port, at the Durban harbor. And that's negatively affected our Chempure business. Biosciences, we saw go backwards because of the sale, and then Animal Health, slightly 2% backwards on a revenue basis. But if -- we see on an EBITDA basis some nice growth there. So I'd like to speak to EBITDA in the next slide, Slide #20. We see the strong sales growth in Remedica still translating into good EBITDA growth. You saw an increase in marketing investment there. So they're growing 21%. Also an increase in marketing investment in Sun Wave Pharma, so there EBITDA growth of 28%. And it's quite pleasing to see some good growth, albeit of very low levels. But Scitec, after some of the changes they've made, some of the reduction in heads and some improvements in GP, we see an increase in the EBITDA of about 33%. Disappointing results here, Farmalider, they make no EBITDA for this 6 months. As we -- as I said earlier, I think that's a timing issue. Some of the license fees, which are 100% gross profit will come through in H2. So overall, on a constant currency basis, a 5% increase in EBITDA. If we exclude Farmalider from the calc, we see the EBITDA growth at about 26.2% for the European businesses. Looking at South Africa, Pharma, fairly flat on last year's performance. But we know that in H2, that's -- during the winter season, that's where most of the EBITDA is made. In Medical, despite the good performance on the top line we saw some pressure because of the weaker rand on the gross profit percentages, so only a 3% increase in EBITDA there. Biosciences obviously goes down because of the sale as well. Consumer Health care, we see an increase in their EBITDA, 17%. And that's primarily because of some of the discontinued operations, sports and Direct Selling businesses, which sports is no longer in our numbers in these 6 months. So if we adjust for the head office costs and take out the discontinued operations, we see total continuing -- EBITDA growth of 6%. So just going to the various different business units, a little bit more details on Slide #21. Just to start with Remedica. As I mentioned, strong revenue and EBITDA growth. We saw a big increase in revenue with that awarding of that Mexican tender. So that was about EUR 11 million in 6 months, fortunately that came at a bit of a lower GP margin than what they normally used to. As well as the introduction of the NHI in Cyprus, it saw a big increase in the local Cypriot sales, again, with a bit of a dilution in the gross profit. Priorities for the next 6 months would be to collect those debtors related to those Mexican sales and a reduction in some of their inventory levels. Looking at Farmalider, I think I've spoken quite a lot about Farmalider. So there's a timing issue there on that license fee revenue, which we do expect to come through in H2. But besides that, the revenue and EBITDA related to the supply business was still somewhat disrupted because of the EU serialization regulations that came into the market in 2019. And then some once-off costs around legal fees. There was a reversal of legal fee provisions in the prior year, which helped boost the prior year numbers, but then we've also had to increase the provision related to another case in the current year. So Farmalider, focusing on of adding some alternative manufacturing sites in China and India, and then also closing some agreements with some major multinational customers for some pain management innovations. On to Slide 22, you get the Scitec performance. As I said, we're starting to see a turnaround in the Scitec business. There's new leadership in that business. So -- and I think they're doing a great job in turning that ship around. And quite pleasingly, we saw not only an increase in sales volumes, which we have seen in the past, but also an increase in sales growth, albeit quite small, and that's with the backdrop of having lost quite a major customer in Portugal. A lot of that growth is also coming in the online space. We're developing a bit of a bigger presence in Amazon, in the 5 major European regions for Amazon. We also saw better utilization of the factory and an increase in some of the contract manufacturing business. And as I mentioned earlier, the cost reduction with a 61 headcount reduction that was done in H1 2020. The focus areas for the next 6 months, again, we have launched the 2 Scitec -- new Scitec endurance brands. That's slowly trickling into the market, and we expect that to steadily increase over the next couple of months. And then the team is also focused on further COGS and overhead reductions. Looking at summary of Pharma, our business in Romania, they continue to outperform our expectations of both revenue and EBITDA. We saw quite a substantial increase in marketing expenses, mostly in the medico-marketing space. We had an increase in sales heads last year, which is starting to reap fruit now and a successful launch of new products, which we launched in FY '19, which we're seeing the revenue and EBITDA come through in this year. We do expect in the next 6 months, the launch of additional products and some more consumer campaigns to boost their brand equity. Moving on to Slide 23. So this is going into our South African businesses. Starting with the Pharma business, we saw revenue increase 7% and EBITDA recovery. There was a loss recorded last year. So they finished off the year at ZAR 3 million -- sorry, the 6 months at ZAR 3 million, and that's a recovery from the supply issues that we had last year in the state and tender business. We have seen, because of discontinuation of some of the lower-margin products in their portfolio and increase in the GP margin and with the sale of Isando, some decreasing in some of their fixed costs. Their focus areas for the next 6 months will be to grow some export sales into SADC and West Africa. And again, focus a bit more on some high-margin private sector and OTC brands. In our Medical business in SA, they didn't have a good H2 in 2019. And this is quite a pleasing recovery from our perspective. So we saw their revenue growth over quite a strong H1 last year, 10%. We saw an increase -- despite quite a big increase in revenue, fortunately, with the weaker rand, we have seen the GP margins decline with the increase in the price of the imported goods. And we have seen investments in sales heads with the addition of the new Qiagen agencies and they're all -- all 3 of those business moved into one premises in October '19. So we haven't quite seen the full effect of some of those cost savings, and those cost savings should come through in H2 2020. Their focus areas are twofold. The government debt -- is to reduce the government debt levels, which we expect to happen in April and May, and an overall a decrease in some of their inventory levels. We believe that business is overstocked at the moment, and we're looking to reduce and optimize those inventory levels. Also to see a ramp-up in sales in the Qiagen agency in some of those -- particularly in East Africa, where we -- there was a handover from a previous distributor that's now taken place. So we expect to see those sales come through. And then in the RCA business, the new RT2 tender has just come out, and we'll be focused on getting some of that business in the next 6 months as well. Moving on to Consumer Health. Just to note, this picture here includes the total Consumer Health business for some of the businesses that are -- have been classified as discontinued operations, i.e., Sports Nutrition in last year, which made a loss in Direct Selling, which we still own. So overall, despite a 5% decline in top line, we see a pleasing increase in EBITDA. And I think the management team has done a great job there in curtailing costs. We integrated the Wellness, Skin and supply chain business. And as a result, we have seen some great savings in payroll costs. There's also a strategic move to discontinue some of the lower margin brands which affected the top line, but at the same time, has helped improve the GP margin. We see quite a challenging environment in our Skin business, which forms part of this division, and -- especially in the SA market, which has resulted in some lower sales in the Skin division. Priorities for next year. We see an improvement in procurement and manufacturing service levels. We depend quite heavily on some third-party manufacturers to supply some of our products, so we're trying to improve the service levels from them. We see a resumption in some of the advertising and the promotional activities, and continuing to drive sales in our U.K. markets, particularly for the Skin business, which we have seen growing quite nicely. We've also launched the AgeWell product that was previously only in Foschini's, is now being launched into the online channel. And then going on to Slide 25. Looking at the operational performance for the Animal Health business, we saw a slight decline in revenue for this business, but quite a big increase in EBITDA. This business has been very well managed. And despite some sales impact from the -- from some suppliers in our production animal space, we have managed to see an increase in our EBITDA. So the companion animal space is doing very, very well. The Kyron business and the vet business have contributed to increasing the market -- the GP margin. And priorities for next year's continue to drive sales in that space. We've also been awarded a tender in H2 2020 in the production animal space, which will help boost sales for the full year. Also looking again to expand into other markets in SADC and to East Africa. Then on to Biosciences. So this is the businesses that we have marked for sale. The remaining businesses that we have here are Avima and KlubM5. Unfortunately, these businesses have been hit by some compliance issues. So some of the products in KlubM5 were removed from the market last year. Thankfully, we have seen some of those issues being cleared up and reregistered. So there were some sales recorded for some of those products in the first 6 months and -- although in our Avima business, we did see that some of the products were -- some of the pesticides have been banned, which were previously sold into the Zimbabwean tobacco farming market. Priorities for next year. We're looking to reregister some of the KlubM5 products and then a relaunch of Dicorzal. I think that's everything from my side. So just to hand back to Mark for the short-term focus.

Thanks, Kieron. So just look, in summary, I think it's pretty clear what we need to do. We've got too much debt. So the first thing we have to do is agree with our lenders, an appropriate period of time to restore the fortunes of the balance sheet and introduce some financial flexibility and optionality. So I think getting the deal done with the lenders is number one. Number two, we have identified assets available for sale, and we are progressed on a number of those processes. I can't give you more detail than that because they're subject to NDA and all host of things that are germane to an M&A process. It will also be important to make sure that throughout the portfolio, if we are a listed holding company, that we make sure that the businesses, at some point, are exit-ready. And in order to do that, you need to adopt this business-first operating model. So when you change your philosophy and your purpose, you need to make sure that you are structured appropriately to deliver on that owner-led or owner-managed culture. But equally, without compromising governance and compliance. We are the listed entity with a myriad of companies in a number of jurisdictions. And so for a while, we will require certainly financial and governance resource to make sure that we discharge our obligations to regulator shareholders and lenders appropriately. There's also the self-help bucket. We will continue to look at costs and anything that isn't necessary. We will look to continue to drive run rate savings of between ZAR 50 million and ZAR 100 million. And then importantly, Remedica has been spoken about a lot. That is a significant tool that we have to delever. We have commenced due diligence process on the dossiers. We've appointed an adviser. In the next couple of months, we will have the results of that exercise. And there are other things that we are currently engaged in to look at a value-maximizing strategy for Remedica. That concludes it from us, ladies and gentlemen. We'll just maybe flick through some of the questions.

I see we've got one -- I can't say names here, probably not. All right. So the first question is, what is the impact of interest rate cuts in the EU and probably South Africa in your finance costs and EBITDA? So look, I'll hand over to Kieron but my experience with the sort of things, so you're finance costs are generally referenced with the base either JIBAR, LIBOR or EURIBOR. And when the base falls, your base theoretically falls. Your margin is the one that you've got to be careful of because that's how banks price risk. If they think you're more risky, that rate could actually go up. If they think you are as risky as you were previously, that margin stays the same. And if the risk -- overall risk profile drops, then you could actually see a reduction in that spread. So I'm afraid it's a very wishy-washy answer, but it's largely in the hands of the lenders at the moment on that particular one. All I can say is with factual accuracy that the base rate will move down. #2, impact of coronavirus. Now this is a question that's vexing everybody. So in South Africa, we haven't seen the full impact yet, but we've got a macro that isn't helpful. So all our sort of customer-facing businesses. So in consumer, where you are selling sort of higher LSM products like Solal into the big pharma or the big pharmacy chains. That is something where people trade down, they may look to some other nutraceutical to fill out the basket. We do have defense in the portfolio through Bettaway and VitaForce. They're sort of mid-LSM, vitamins, minerals and supplements business. So that tends to be a bit more recession-proof. In the Pharma business, well, half of the ZAR 800 million or ZAR 700 million of turnover is state and dispensing doctors. So that's largely tender driven. That is on auto pilot. Your tender's typically up for 3 years, and I think we've got 2 years to run on, on that business. As it relates to the other half of the business, it's 3 products. It's the Sinuend, Sinucon and Reuterina, all of which are winter or flu-based products. So we expect to bounce in H2 there. And I don't think corona will have a particular impact there. Medical Devices. Interestingly, the way you test for corona is typically through a swab sample. One of our Medical Devices suppliers actually does the technology, but because of the demand globally for this testing kit, that's gone elsewhere. But there is a longer-term angle where potentially we could bring that technology into South Africa and be at the front end of the diagnosis. But that won't be in any of the near-term numbers. So don't -- please don't put those into your models. If you flick to Europe, your biggest impact will be on API supply. So paracetamol, ibuprofen, that comes from China, the raw ingredients. There are delays in getting some of the stuff out. There's impact on logistics because with the delay and having to meet obligations to customers, you tend to have to fly stuff in. So I think you'll see a spike in some of the logistics costs. And the delays are anything from 2 weeks to 9 months, but nothing that would give me pause to say this is a wholesale reset in the business, but it's definitely not helpful, let's put it that way. Interestingly, on the nutraceutical side, in Romania, you could expect potentially to see some uplift as people look to prophylactically protect against any virus for that matter. But very hard to quantify in numbers. Next one. Kieron, do you want to...

Yes. So the next question we have is how's the bonus of ZAR 5 million for the head office justified, given some of the cost increases across the board, the working capital increase, unsuccessful disposal and the costs associated with that. And the answer to that is, the short-term bonus that we've provided for, which is an increase over last year, is aligned with shareholders as well because a large portion of that bonus relates to achievement of, one, EBITDA targets against budget, so not just growth over last year, but it's quite steep budget targets and an improvement in working capital. So that's the method that we're using to try and improve the situation from an EBITDA and a working capital perspective. Second part of that question is, should bonuses only be paid if shareholders get a dividend? So there's an alignment of the objectives of management and shareholders. I suppose that would speak more to a long-term bonus scheme that we have in place where as the share grows, then from a long-term perspective, the management also get to participate in that share growth. Unfortunately, that's -- a proposal that we had at the AGM was voted against, so we don't actually have a long-term share incentive scheme in place at this point in time.

Yes. And I think maybe just the other thing on bonuses. So as it's an accrual, that head office, there are tons of people throughout our businesses that are busting a gut in a difficult macro. So we do need to make sure that we pay-for-performance and where you are driving a business with the handbrake on, that there is some light at the end of the tunnel. So look, these are discussions we will have during the course of this week and next with a number of shareholders and stakeholders. But I fully agree that there needs to be alignment on restoring the fortunes of the ballot and the balance sheet in the business. And those that are in the purview of management. We have a question about supply issues faced by numerous businesses. Our supplier is not willing to extend credit due to troubled balance sheet. How to restore supplier confidence? So it's a mixed bag across the supply base. Some suppliers are up to date. Certainly, in terms of the creditor stretch, we are better than we were this time last year. But there still is some stretch in the creditor base. And so part of what I've been doing in addition to getting certain businesses exit-ready is to engage with certain of our key suppliers to explain the plan to remedying the short-term balance sheet issues or, more particularly, the liquidity issues. So the agreement on this amend and extend with lenders is currently underway. By June, that should all be restored. So the message to our major suppliers is the journey that you -- that we're asking you to walk with us is one that is less strenuous than the one we had in the past, but it is round two. So that gives pause to test the relationship. But more importantly, there is a path we can see to restoring the liquidity of the business in relatively short order. And in large part, when you're just open and transparent about the plan, when one have one, we have found that suppliers have been very receptive to that interaction, particularly when it comes from head office, who has perhaps more color on the issues relating to group balance sheet than perhaps some of the underlying business units. All right. Ladies and gentlemen, that's all that's come through. Thank you very much. We will be engaged in one-on-one with our key shareholders over the next 2 weeks, and look forward to catching up in person. Thank you very much.

Thank you. Bye.