Ascendis Health Limited (ASC) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to our results presentation for the year ended 30 June 2022. I will be taking you through the results of our operations and performance for the financial year, and Carl will take you through our plans to accelerate the turnaround for the group. It has been an eventful but constructive year for Ascendis. The first half of the year saw us complete the group recapitalization, where the ownership of our European assets, Remedica and Sun Wave, was transferred to LetterOne and Blantyre. This transaction together with the disposal of Animal Health and RCA saw us reduce our debt balance by ZAR 7.6 billion. Our AGM was held in December, bringing with it a change to the Board in heralding a more shareholder-driven approach to our strategy and the harnessing value in the operations of the group. The second half of the year saw the debt trade hands a few times, a process that we leveraged to enable us to renegotiate more favorable terms with each subsequent lender. In addition, the second half of the year saw various changes to the Board and the constitution of the different committees in the Board that ultimately resulted in a leaner, more stable government structure that is aligned with shareholder interests. For years, the group has been settled with crippling debt levels. And I'm proud to say that we have made significant strides towards de-gearing the business. Our closing senior debt at the end of June was ZAR 498 million compared to ZAR 7.6 billion in the previous year. That ZAR 7.6 billion comprised the SFA-related debt of ZAR 6.7 billion plus the outstanding deferred vendor liabilities of ZAR 841 million. In addition to this, there is a tangible pathway to resolving the remaining debt. Our rights offer from August 2022 was oversubscribed, demonstrating to us the support that we are receiving from a shareholder base that sees the potential and value in the remaining businesses. We are confident that there is deal certainty with regards to the disposal of Pharma. The shareholders have 2 options to choose from. The Pharma-Q/Imperial offer sits at ZAR 375 million, and the Austell offer sits at ZAR 432 million, ZAR 57 million higher than the Pharma-Q offer. On the assumption that shareholders vote in line with the directors' recommendation for Austell, this transaction plus the rights offer provides a solution to the debt. Carl will unpack this in more detail, also looking at other levers that are at the businesses' disposal to ensure liquidity. The work performed this year has created a foundation for the next phase of Ascendis evolution. And as this slide demonstrates, there are certainly green shoots that will continue to evolve. As I've already indicated, we raised ZAR 101.5 million in an oversubscribed rights offer. We've reduced our senior debt to ZAR 498 million, and we no longer have any deferred vendor liabilities on our balance sheet. The various transactions have enabled us to achieve an accounting profit on the disposals of ZAR 1.013 billion. We have defined our existing operations as those that we controlled as of 30 June 2022. So that would be Medical Devices, excluding RCA, Consumer Health, excluding Skin as well as Pharma. And you'll see that the revenue from our existing operations increased by 4% to ZAR 1.943 billion. Our normalized EBITDA from those existing operations also increased by 136% to ZAR 66 million. When we look at it from an IFRS perspective and look at continuing operations, i.e., excluding Pharma, you see 154% recovery in the normalized EBITDA line to ZAR 13 million. In addition, we've managed to reduce head office costs by a further 24%. I'm going to spend a bit more time just focusing on the operations. The 2022 financial year will continue to be challenging for South Africa. We saw the pervasive impact of COVID, the looting that took place in July 2021, ongoing supply chain disruptions, the flooding in April 2022 and a deepening energy crisis. This has an inevitable detrimental impact on South African consumers with a reduction in real earnings impacting consumer spend. Despite this challenging macroeconomic environment, the business produced a resilient performance with both Pharma and Medical, reflecting an increase in revenue; and Consumer, the business that is most impacted by consumer spend, only reflecting a marginal 2% dip in revenue. The improvement in normalized EBITDA from existing operations is driven largely by strong bottom line performance in our Pharma business and ongoing interventions to curtail the head office cost base. The numbers for Medical Devices include a once-off tax-related provision of ZAR 17 million. If you bake that back into the numbers, you'll see that the closing normalized EBITDA for Medical Devices would have been ZAR 62 million, a 3% increase from the prior year. Just working through these results by business and starting with Pharma. Within our Pharma business, we are seeing a growth of 24% in year-on-year revenue as well as a 130% improvement in our normalized EBITDA, closing at ZAR 53 million compared to ZAR 23 million in the prior year. The business was well positioned to take advantage of COVID-19 normalization. We saw the return of the flu season, and there was certainly very strong performance by our 3 key brands being Reuterina, Sinuend and Sinucon. That demonstration of consistent growth in this business was a key value protection mechanism during the disposal process and contributed to ensuring that optimal pricing was obtained from bidders. The disposal of Pharma is at an advanced stage and the shareholder vote for this transaction will take place in October 2022. If we look at our Medical Devices business, it's experienced a mixed bag of trade. Both our Surgical Innovations and Ortho-Xact businesses reported double-digit revenue growth of 15% and 26%, respectively. They benefited from the resumption of elective surgeries post-COVID. And then Ortho-Xact, in particular, we've seen a very focused growth strategy and the transition to a more capital-light business model, especially with the introduction of new products in the nailing and sports medicine product portfolios. Within SI, whilst we see an increase in growth, the focus in this business is really around rightsizing the operating model to ensure it is profitable and cash generating and to ensure that there's robust capital allocation and the methodology that's defined and embedded into the business. Carl will unpack this process in more detail. The performance of Surgical Innovations and Ortho-Xact was tempered by the scientific group, where full year performance was negatively impacted by a combination of delays in tender awards, the reallocation of donor funding in the rest of Africa and the loss of the SANBS tender. The resultant impact, as I've indicated, was a normalized EBITDA of ZAR 45 million or if you bake in the ZAR 17 million, ZAR 62 million compared to the ZAR 60 million of last year. Looking at our consumer business. As I've indicated, this is the one that most typically mirrors the impact of the macroeconomic conditions of consumers. And you see this coming through the numbers, 2% dip in revenue and an 8% dip in normalized EBITDA. However, the Consumer team has a strategy to take advantage of the countrywide trends that we're seeing towards localized manufacturing and this growing industry trend to have private label products. In the compounding pharmacy, we have the privilege of only one of the few functional medicine facilities in the country. And there's opportunity in this business to optimize and expand both the product portfolio as well as to increase in scale geographically. And in FY 2023, we'll see that team focusing on increasing the product portfolio in the vet and skin space. Whilst in Chempure as a leading importer and distributor of specialty ingredients in the health and wellness space, and we're well positioned to take advantage and bridge the supply chain shortages faced by the industries that we service. Our guidance for FY 2023 is that the performance of Consumer will continue to be impacted by the decreasing consumer wallet. And therefore, we will be working closely with that team to remediate performance. In head office, we've seen a further reduction of 24%. The reality is the head office cost base is not yet aligned to the size of the business that we currently have. And as Carl talks through the turnaround and the acceleration of the turnaround, we will also touch on the future steps with regards to head office and how we are thinking about head office. Once-off costs have come down quite significantly, and I'm quite confident that they will never reach these levels again. They will wind down as we finalize the ongoing corporate activity. And as the group stabilizes, we should see minimal numbers coming through in terms of this line. If I move across to the financial results, as you'll find them in the financial statements prepared on an IFRS basis. The income statement that I'm presenting is for continuing operations. And in terms of IFRS, that includes just the Consumer Health and as well as the Medical Devices. There is some noise in the numbers for 2021, as we explained last year, in terms of IFRS 5, we have had to carry Dezzo numbers as continuing. And in 2021, the revenue included for Dezzo was ZAR 268 million. If you strip that out, what you'll find is that there's been flat performance in revenue, largely driven, as I indicated by the mixed bag of trade improvements in SI and Ortho as well as a slight dip in TSG as well as Consumer. Our gross profit despite this has improved to 40.9% and that's largely as a result of the mix of products within Medical Devices. Other income for last year is impacted largely because it had -- it included a combination of 2 once-off costs: One is a remeasurement of certain liabilities that we no longer have on our balance sheet; and secondly, a once-off legal settlement that we received in the last year. The majority of what we see in the 2022 other income relates to rental of anything other than medical equipment, that ZAR 17 million. Our operating expenses, you see the reduction in operating expenses, really reflecting the focus on cost optimization. We have no doubt that we have not yet fully rebased the cost base of the business because it also includes the ZAR 96 million related to head office costs, and it includes the once-off ZAR 17 million that is a provision for Medical Devices. Just taking that into account, if you look at our normalized EBITDA, there's been significant improvement in the current year. But you see the opportunity that sits, if one just assumes that this business can at least get to an EBITDA margin of 10%, you can already see the impact it would have on a normalized EBITDA for the business. Our transaction and restructuring costs, as I've indicated will continue to reduce significantly. And included in our depreciation and amortization number of ZAR 249 million is ZAR 170 million related to goodwill that we've written off for TSG, the scientific group. But look at the pivot to this next slide, and if we can focus on the middle column, which reflects our normalized headline earnings, excluding the transaction costs, you see that our operating loss at a normalized level is ZAR 236 million. However, our finance costs -- even though they've reduced significantly, the finance cost for this year are still too high for what the group can carry. We've got a tax credit in the current year, and we believe that there is some room to improve tax efficiency in the group in an appropriate manner. If we look at the headline loss for the year, we closed on a headline loss for the year of ZAR 528 million, and that translates to a loss per share of ZAR 1.45 compared to ZAR 3.00 in the previous year and the headline loss per share of ZAR 1.094 compared to ZAR 282 million last year. As I've indicated, there has been a structural change in our finance costs. You'll see that the bulk of our ZAR 431 million of finance costs in the current year was incurred between the period July to October and really reflected the impact of the group recapitalization. So ZAR 365 million related to the interest up to that point of the group recapitalization. And as I've indicated, at each progressive change in lender, we've been able to negotiate more amenable terms. The default interest rate at the moment is not baked into the Austell facility. We don't have a default -- retrospective default interest rate and the raising fee of ZAR 19 million related to the Apex/Pharma-Q transaction, and that in itself would also be a once-off cost. So if we look at the numbers going forward, and if you look at guidance in terms of how to think about finance costs in the business, our current run rate in terms of our interest, taking into account both our cash as well as our PIK interest is about ZAR 6 million per month. Looking at the balance sheet and starting with our assets in the balance sheet, as I've indicated, our intangible assets have come down largely because of the impairment of goodwill of ZAR 170 million related to TSG. We do not have any goodwill left on the balance sheet. So that intangible assets number reflects brands, trademarks as well as customer relationships that sit in the remaining businesses. Both our trade and other receivables and inventory have seen improvement in terms of management of those 2 lines. Our debtor days improved to 71 days from 77 days. Our inventory days improved to 153 from 174 days. Our property, plant and equipment includes CapEx additions in Medical Devices of ZAR 49 million compared to ZAR 29 million in the previous year. And our cash and cash equivalents reflects the cash available at a point in time, but it does include ZAR 64 million of restricted cash, and that restricted cash relates predominantly to cash-backed facilities that we've got in the group. Our right-of-use assets is a reflection of the leases that we've got in the group. And the majority of that reflects a ZAR 96 million relating to the Kya Sands Boundary Park Facility that we have for Medical Devices. We've continued to take a conservative approach to recognition of the deferred tax asset and despite the fact that our total assessed losses in the group exceed ZAR 500 million. Our other financial assets include the Animal Health escrow that is now sitting at ZAR 51 million, including interest. And it also includes the Section 12J, B, E related investments that we've got with WDB of ZAR 4 million. The held-for-sale assets here and the held-for-sale liabilities that you see on this next slide relates to the Pharma-related assets and liabilities. Just going through the last slide from a financial and operational performance perspective, which reflects the liabilities and equity. Our borrowings, if we set aside the ZAR 498 million related to our senior debt also includes a total return swap, which was a hedging arrangement for a historical share scheme that's now underwater. That facility is fully cash backed. So there's no additional financial exposure to the group. It is repayable over the next 2 periods in July of each year. The borrowings also include the remainder of the Phillips lease of ZAR 9 million. Our trade and other payables still reflect the historical trend where we are paying our creditors at a much more accelerated pace than we would like. However, we do believe that once we have finalized the Pharma transaction that we are in a better position to renegotiate credit terms with -- and credit risk ratings with credit agencies. And that process has already commenced. Other liabilities comprise predominantly lease and contract liabilities as well as certain provisions of ZAR 18 million. In conclusion, I would like to extend my sincerest appreciation to Team Ascendis. I think the last few years have tested our grit, resilience and the ability to navigate uncertain waters. As I pass the baton to Carl, I know that there is demonstrable value that's left in the business. I will be cheering from the sidelines. And I'm excited to see what the next season has installed for this group. Thank you. Handing over to Carl.

Thanks, CJ. I'd like to start off by thanking you. You've been a pillar of strength for this group. I think you've been the mother hen to the staff and iron lady to the Board. You stood tall during several periods of adversity. And I often stood in bewonderment on how you managed to do it. I think this group owes you a debt of gratitude that we will never be able to repay. Just know that we are immensely thankful for everything that you sacrificed for the group. You will be sorely missed. I was looking forward to working with you. And I envy the group that will have the privilege of working with CJ in the future. This part of the presentation is not intended to be a strategy session. So I think I'll try and keep it brief and high level. We will have ample opportunity to engage with the shareholders going forward. We will have an engagement in October with a shareholder vote. We will have an AGM in November. And we are likely to have engagements in between those sessions as well. So I will try and keep this brief. Suffice to say, this has been a whirlwind introduction into the trials and tribulations of Ascendis. I've been lucky enough to have a transition team to support me. I'm sad to see our company secretary, Mpeo, leave the company as well. She has been of immeasurable value to the group. I think I want to start off by saying that our focus will be on superior risk-adjusted returns. I think it would be naive to assume that Ascendis does not still hold risk. I believe that risk is factored into the market sentiment and the share price, which, by default, means there should be a reasonable amount of upside for all the stakeholders. We have already salvaged a significant amount of value since the changes to the Board in May. I think what we've done in a short space of time with the support of CJ and her team has been immense. The process will be a calculated one. It will be a determined one where we will take decisive action where necessary. The 3 areas that we're going to focus on will largely be in 3 different buckets. It's a stabilization, then optimization and growth. These are interlinked, and without the one, the other will not succeed. The stabilization will primarily revolve around the balance sheet, solving the debt in its entirety. I think solving a debt in its entirety is just as much a psychological victory for the business units as it would be a balance sheet victory for this group. This will lay the foundation where we can set the culture of accountability in the group. We intend trying to promote transparency and improve the way we communicate with our stakeholders. Optimization, we will have a separate slide on it. It is a core focus to rightsize the group. I think, as much as I'm sad to see CJ go, CJ is destined for greater companies. And I think Ascendis being a small-cap company now would probably hold CJ and her aspirations hold her back. During this cost-cutting exercise, we need to ensure the resilience of the group maintain that. And lastly, we need to start focusing on the growth. It has been encouraging to see that the businesses that we've retained are extremely resilient under trying circumstances. CJ has touched on the debt as well. I think it's been a primary focus. That's why we probably both talk about it. But I think what we've already been able to achieve, we've retained Medical Devices. These are estimated figures, but it was -- it looked like when we were going to sell Medical Devices, the net return that we were going to realize was going to be around ZAR 270 million for the group, which I think is significantly lower than we could achieve. We are hopeful that in the coming years, Medical Devices, as a group, would be able to achieve values that exceed ZAR 450 million. I think there is a caveat. It is -- I would need to retain the deal team by my side to help us unlock that value. We've been able to negotiate material interest savings in an annualized amount of about ZAR 25 million. We have been able to negotiate extended repayment terms that have allowed us to retain Medical Devices and that have allowed us to increase the sales price within Pharma and have allowed us to conclude a rights issue during the time frame that we did. We are sitting with a rights issue cash amount that we are intending, allocating on a fact-based way more than on an as-need basis. I think the business has been in a crisis for far too long and has been reactionary. We now have the luxury of making informed decisions in a calm and collected way. So if we look at the debt at the date that the anticipated Pharma close would be, we -- with the interest roll up, we think we will be at about ZAR 514 million worth of gross debt. If we apply the rights offer proceeds to that and the Pharma proceeds on the Pharma-Q and Imperial transaction, we are very close to a cash flow neutral position. If the Austell incremental value increase of ZAR 57 million is approved, we will then eventually dip into a cash flow or a cash-positive position. We are busy negotiating the release of the escrow funds that is held by means of the Animal Health transaction, which is ZAR 51 million. And then we have cash back securities held by the banks because we have no ability to have further indebtedness in the business. We would then have an estimated net surplus in the business of about ZAR 100 million. There will be costs associated with the implementation of all these transactions. So I don't think the ZAR 100 million would be there for too long, but we will be cash positive going forward. I do want to use this example -- opportunity to thank Haroon Kalla and Amka, Imperial and Dubai World for the way they've dealt with us. They've been exemplary in their actions towards us. I want to thank Suhail Gani from Austell for his support of this group. Unfortunately, we only had one Pharma to sell. And the shareholders will ultimately decide what happens in October. But to both groupings, I want to thank them for their support and the interest in our assets. Then we'll go to optimization in the business. I think there's been a serial underinvestment in the group and management teams, and this is where CJ's been a pillar of strength has been, perpetually distracted from corporate activity. It's resulted in many of the remaining businesses operating far below the potential. I think it's critical to understand that the challenges we are facing are significantly worse than we had anticipated and significant work will be needed to right the ship. That being said, the opportunities to regroup and grow this business is extremely exciting, and it is the reason why we are here today. We have established a dedicated value creation group. They are called the transition team. They are actively managing to accelerate the derisking and the optimization of the businesses. We have identified, in a short space of time, several divisions that are not profit-making or cash-generating businesses that -- or divisions that have been operating for several years. We will be decisive in closing down the noncash-generating businesses and aggressive in providing capital to the growth areas that are value accretive and cash generating. On the group head office structure, we are undertaking a process of decentralization. It's part of a way to provide the business units with autonomy and also enforce accountability. We've discussed the group balance sheet. I think the payroll and the staff structure is probably one of the hardest positions here. We need to be mindful of the people that were loyal to Ascendis and remain loyal to Ascendis and weigh that up against the interest of our shareholders and our stakeholders. It is never an easy decision, but it is something that needs to be done. The business is smaller than it was, and we need to have a fit-for-purpose group. We are at an early stage of investigating an incentive structure that would align senior management and the people that would make the difference to the bottom line with shareholders. How that would look is still undetermined, but we are intent on putting in some incentive structure that would align our management teams with the shareholders and the return of the shareholders. We have done extensive diagnostics on the business units. We have found significant improvement opportunities. We have flattened the structures within Medical Devices. We have closed on the Medical Devices division and allowed the individual business units to report directly into head office. We are in an advanced stage of a business model review of every single business in this group to determine the future. Part of this is a growth focus. Part of this is a focus to ensure that we are focusing on the correct businesses. Lastly, I think -- probably second last, the primary goal at this stage would be to convert and transition Ascendis Health from a corporate head office to something that looks closer to an investment holding company. We had a costly corporate head office. We still have a costly corporate head office. We are losing value that should accrue to shareholders by a burdensome head office. We intend having an investment holding company that would have a value-accretive role, adding value to the business units and adding value to the stakeholders. It will be a smaller unlimited function where we determine capital allocation, where we assist with reporting, and it will be largely a finance function. We are looking at streamlining governance and reporting. We are looking at streamlining the structures, as we've mentioned about the decentralization of the business units of closing down unnecessary structures like the Medical Devices structure. And then we are looking at promoting ownership and entrepreneurship within these groups. We are also looking at decentralizing the cash management structure. I think it will allow the portfolio companies to run autonomously. Lastly, and I think more importantly, about things to come, we have a horizon where we'll have a de-geared balance sheet with a right-sized cost base. It will take time to fix everything. There is a lot to fix. It will take time to optimize operations. I am very, very fortunate to have an incredibly capable and loyal and hard-working team. But Ascendis is a smaller company than it was. I think shareholders underestimate the value that CJ was able to retain and protect in this group. And I think shareholders underestimate the heavy lifting that is currently happening in order to retain value for our stakeholders. In this process, the culture will need to change, the way working will need to change. This group needs to become a family, family where we look after each other, where we promote loyalty, accountability, transparency and pride in the group. We need to stop throwing stones and use those stones to build our empire. We are here to help our stakeholders, and we are hopeful that our stakeholders will help us. We will have an open-door policy. We will engage actively, and we will do what we need to do to enhance and protect shareholder value. Lastly, I would again like to thank CJ and Mpeo. They have provided us with the building blocks to grow from. They haven't given us a perfect house, but they've given us something that -- to work from that we can be proud of. And somehow, I think in 12 months' time, we will look back and ask CJ to come and attend the next AGM when things are where we believe it can be. Thank you, CJ. Over to you.

Thank you, Carl. We can open up for Q&A.

We've got one question. And that's around the SANBS tender. What caused the loss of the SANBS tender? And is there a danger of losing more tenders for the same reason?

So the SANBS tender was up for renewal. The TSG business is a tender-driven business. The main reasons are not -- for losing the tender, we don't believe, are replicated in the rest of our tender base. And in actual fact, we won a tender this year from the National Health Laboratory Services precisely because of our positioning in the market.

Thank you. I'm just waiting to see if there are any more questions. That was the only one that had popped up on my screen. Does not seem to be any more questions. I think that was it. Your presentation clearly explained Ascendis' position. Thank you both.

Thank you. Thank you to everyone.