Aspen Pharmacare Holdings Limited (APN) Earnings Call Transcript & Summary

Good afternoon and welcome. I am Roy Campbell, and I am pleased to announce that I've recently joined Aspen in the capacity of Investor Relations, working closely with Stephen, Sean and Sanelisiwe. It is good to be on board, and we look forward to interacting with many of you going forward. This afternoon is an opportunity to engage with the market and to walk you through a transaction that was announced on the 29th of December, being the divestment of Aspen APAC. Stephen and Sean will take you through a transaction overview, the rationale and some key focus areas. There is an opportunity to ask questions you can submit via the webcast. Please include your name when you do that so we know where it comes from, and we can follow up on that. And yes, we look forward to interacting. We'll deal with that after the presentation or later on in the presentation. Thank you again for joining us this afternoon. I'm going to hand it over to Stephen to open up the discussion. Good afternoon, Stephen.

Good afternoon. Good afternoon, everyone. It's coming a bit like those family meetings with Aspen. We take curveballs, we give curveballs, but it's all happening. It's certainly no lack of excitement. But if I think about this APAC divestment, I've almost got to go back 25 years in 2001, Gus and I arrived in Australia. We were in our and we had a check of ZAR 10 million, and we bought some products, and we thought we found 2 people, Trevor and Greg, Trevor is still with us, and we bought 2 laptops. And we thought we were really smart and we're going to do something big in Australia until we came back home and every analyst on the other side told us every South African company. There's no reason why you shouldn't fail every company. And we got put under such pressure that we never expanded the business beyond 2 laptops and 2 people, and we outsourced everything in case we had to leave in a hurry. So it's quite a story to come here and tell you that actually that little ZAR 10 million has grown to ZAR 26.5 billion. And for many of you, you're used to either putting a BN or an MN after the numbers. And so these are things that you do every day, and it's just a spreadsheet. But for those of us who started with 0, it's quite hard to conceptualize what that number means. And I had to put it into a way that only I could understand. If we were running who wants to be a millionaire competition at Kings Park Rugby Stadium, and we had 26,500 people there. That's a lot of people. The stand is pretty full. And we're running the competition. We could actually say to each one of them guys, we can -- you're all -- we can make each one of you millionaire. And being the type of analytical person I am, I try to work out if we announce each person in a minute. 1 minute between each -- giving each person his million, it would take us 18 days and 18 nights. And that started with one little trip and a little suitcase and a very small relative amount of money. So an unbelievable achievement from what was an incredibly asset-light start because on day 2, we lost both our laptops. They were stolen and that really made us think twice about why we're there. But I'm glad we stayed the distance. Sean will take you through the financials on the business. But I do just think before we start and go into all the numbers, I've got to stress that Australia is a tough market, but our team there has proved tougher I can give you a resume of the achievements. The -- in the course of their history, they became the largest generic company. 1 in 5 of every medicine dispensed in Australia was an Aspen product. Think about that 5 people in the chemist getting an Aspen medicine. We also have to -- we found that regulations tightened -- tightened up quite a bit in Australia, and it became quite a tricky market from a pricing perspective. Our team adapted, they divested products, they've changed course. And the last 5 years have been particularly tough as the team tried to pivot towards OTCs, but they determined team, and they built a business that was a top 5 OTC company. And I've really got to congratulate Trevor and his team on all they've achieved. I mean, from a startup to ZAR 26,500 million, incredible, an incredible, incredible achievement. And for everyone, I mean a lot of it came centrally, but so much came from the team on the ground, so well done. You're going to get all the numbers. I want to talk to you beyond commercial, and I will speak to a little bit about our growth drivers, et cetera, at the very end of the presentation. But if I go beyond commercial only, I'll tell you why this transaction makes sense. I think Aspen has achieved much of what we can achieve. I think it's a chance for a very good team in APAC to enjoy a singular focus. They're likely to become a central team, a head office team and from which that they're likely to expand from. So I'd say good luck to the team for their next phase, and thank you for all you've done to achieve what has been achieved in the APAC region. Really congratulations, and thank you to all of you. And with that, Sean, I'm going to hand over to you and just take the people through our ZAR 26,500 million, what it looks like. Thank you so much.

Good afternoon, everyone. Thanks for your attendance and support today at this very exciting juncture of Aspen's evolution. What I'll do, first of all, just take you through the presentation outline, give you a sense of what we're going to cover, and then we'll go into the details. So we're going to cover the overview of the transaction. We'll talk through the strategic rationale and the time lines for the transaction. And then I'll hand over to Stephen, who will talk to you very importantly about the group's growth drivers and the heightened focus on that. And we'll end the session with a Q&A session. And just please ensure you follow the protocol, as mentioned by Roy earlier on in the presentation. So if we then click to the transaction overview. I think the word that you must -- if you forget everything I've said, just remember these words. It's a very compelling value proposition. I think that's the key theme that we would like to leave or the input that we'd like to leave in your head this afternoon. That's an absolutely compelling value proposition. And we'll take you through all the building blocks to prove that statement as I go through the detail. From a transaction summary perspective, the transaction involves the sale of 100% of the APAC entities and the related intellectual property. The gross unadjusted consideration is AUD 237 million. That's just under ZAR 26.5 billion. That's at the spot rate on 24 December, which is the date we announced 24 December when we did the deal. So a sizable value. Importantly, on this transaction, there are no deferrals or earn-outs. So there's nothing that we have to do in the future to -- that there will be a clawback. From an overall multiple perspective, it represents an enterprise value to normalized EBITDA multiple based on FY '25 EBITDA multiple of 11x. However, I'd like to just pause there. And if you reflect -- and those of you that watch exchange rate, the Australian dollar has taken a heavy beating probably over the last 9 to 10 months. So if we have done this transaction based on historical AUD rates, the multiple would have been way ahead of the 11x that we speak about. It is an opportunity to realize a compelling value for Aspen APAC. If we look at the multiple, it's 11x. We take the group's enterprise value multiple based on historical EBITDA for FY '25. I think we were around 7.6, 7.7 pre the transaction and post the transaction around just over 8x, so still well below the multiple that we've got for this specific deal. So you can see the compelling value and the fact that it's way above our current enterprise value for the group. When we look at the proceeds, the net proceeds for this transaction will be used primarily to reduce debt. And importantly, it will be able to enhance our balance sheet flexibility and give us optionality in future capital allocation strategies. In terms of the transaction, we will have the standard contractual adjustments for debt and working capital. We do not anticipate these being material at all. They are pretty standard based on the movement from signature date to effective date. From a transaction and other related cost perspective, we see that value coming in at less than 5%. So I know those -- all of you are interested in what we think the net proceeds are going to be. So based on a 5% or less than 5% will be the net proceeds will be in excess of ZAR 25 billion. If we then look to the right, we've got 2 pie charts there. We've got a revenue pie chart and an EBITDA pie chart. These pie charts represent the numbers for FY '25. What we have done is we have put them into constant exchange rate, bearing in mind there's been quite a lot of volatility in the rand and the Australian dollar and all the other currencies over this last period. So putting those into constant exchange rate using the November 25 month year-to-date average, that's where we've come up with these numbers. So looking to the revenue, you can see that APAC, if you look at the top right, APAC is the turnover for FY '25 is just under ZAR 7.8 billion, and it makes up about 18% of the revenue of the group. When moving down to EBITDA, the APAC EBITDA is ZAR 2,445 million, making up 26% of the group. If you look to the left and you look at the group EBITDA, you'll see our reported EBITDA in brackets there of just under ZAR 9.6 billion. However, if you look at that number in constant exchange rate, it comes down to ZAR 9.3 billion. So you can see the exchange rate does have quite an impact on our reported results. And so we wanted to give you a sense of the potential dilution on current rates. However, very importantly, if you look to the Australian reported number on the right, so the ZAR 2,445 million and then you got the ZAR 2,603 reported, you can see that more than half of that dilution actually comes purely from Australia. So a lot of the dilution in our overall group number is specific to the Australian dilution. I think another important point to note is that as all of you know, we had a very lower manufacturing performance in FY '25. and that reduced the mix of manufacturing profit relative to commercial pharma profit. So as a result, commercial pharma and then consequently, the Australian business have a higher profit weighting from an EBITDA perspective relative to the group. All right. I think then I'll move on to the strategic rationale. In terms of this, coming back to the word that I mentioned earlier on compelling value. The first thing is this is really a tangible demonstration of the value created within the group. I didn't copy Stephen's notes, but the 2 things that stuck in my mind, and obviously, I've been around a while, but the 2 things that stuck in my mind from a value creation perspective, we developed a very strong, consistent management team in the APAC region. And that doesn't come along with a lot -- without a lot of hard work and you heard Stephen mentioned all the things that achieved over time. And a very important milestone that they did achieve, and you saw that in Stephen's presentation in the FY '25 results was a shift of our OTC sales mix and increase of that derisking that business from pricing pressure. So you just take those 2 examples, a strong management team and the shift towards OTC, just 2 examples of the value creation on top of what Stephen has already mentioned at the start where we started this business. I think I was also in my 30s. So I think Stephen and I are pretty similarly aged, although I might look old enough, my beard's a bit grayer. The next point to make that this is very consistent with our group strategy of unlocking the sum of the parts. You will recall from the first slide, I mean the multiple for the Australian business is 11x. It's way in excess of our group. our group enterprise value. So we are firmly of the view that the sum of the parts of this business way exceeds the current market value of Aspen. And this is not a new theme. I mean you go back to our FY '25 results and you read through it the theme that resonates throughout that presentation was the value unlock in terms of sum of the parts. That's a critical part of driving this compelling value. Very importantly, the next pillar is balance sheet flexibility. With this deal, it does improve that flexibility, and it does give us the opportunity to look at our future capital allocation strategies. We'll obviously wait for this deal to bed down, obviously reduce our debt levels, and then we'll reconsider our capital allocation probably after the end of FY '26. From a foundational perspective, it gives us a very enhanced foundation to deliver strategic -- on our strategic objectives to drive value and returns for shareholders, and that's a key thing. We really want to drive value and return for our shareholders going forward, and that's something that's top of our list. And then a real important lever here is that the reduced debt levels will materially lower our financing costs. So if you remember from our first slide, we anticipate proceeds -- net proceeds of north of ZAR 25 billion. And if you remember from our presentation at the end of FY '25, I think our interest rate at that point was 4.9%, and we guided that it would come down by at least 30 basis points. So if you apply the 4.6% to that, it will give you a sense of what the interest saving is, but it's more than -- way more than ZAR 1 billion, and it will pretty much wipe out most of our interest going forward. On the growth drivers, this transaction does enable us to have a much more heightened focus on our growth drivers. And I'll just cover the key headings here. I think these aren't new growth drivers. We've been pushing these hard for the last 12 to 18 months. First one being the sustainable organic growth in commercial pharma. The second one being the reshaping of our sterile FDF manufacturing facilities, which includes commercialization of contracts, vaccines and GLP-1 generics and very importantly, a focus on stronger free cash flow generation. I won't steal Stephen's thunder. He's going to cover those and other strategic matters in a lot more detail in subsequent slides. On to the anticipated time lines. We have got JSE dispensation to publish the circular to shareholders by the 20th of March. And assuming that, that's the date we do publish the shareholder vote will then be on the 22nd of April. Should we achieve an earlier date of posting the circular, the shareholder date will then move accordingly. But based on these dates, we anticipate this transaction completing at the end of May and then moving forward. So on that note, I'm going to now swap chairs again and hand over to Stephen for the strategic growth drivers. Thank you.

Thank you, Sean. Okay. So I'm going to just touch on the growth drivers. I'd like to just go back to the point on sum of parts. The one thing that Aspen hasn't reached -- so let me be clear, we've never ever asked a shareholder for $0.01. We've never done nothing -- please understand how we built Australia, how we built the whole of Aspen. We've never asked -- we never issued a share to a shareholder say, we need financing. But with all that said, we've never been shy on corporate activity over the years, including numerous divestments. I cannot think of one and we never sold the Family Silver in any of those divestments. I cannot think of one we didn't do it at a double-digit EBITDA multiple. And over 20 years, there's seldom if ever I've commented until last year on a mismatch between the share price and what the underlying assets in the business look like. And I've left that to others to do because I don't think that's my job to do, but it seems so disparate to me that I raised the sum of parts this year. And I said there was a clear mismatch. And I want you to say too because ultimately, I bought a lot of shares afterwards. But we've got valuable assets. And I've got to stress to you, we keep demonstrating in commercial pharma and in manufacturing. And we told you we would consider a value unlock if we got fair value for some of the assets we consider it. And this is a demonstration of we have fair value, and we have considered and we have accepted it. And I just want to add that even at the current price today, we're still well short of what the balance of the summer parts are. And have a look at those growth drivers, they are not in this area predominantly. And we will continue to look for ways to value -- to unlock this value. Turning to the growth drivers themselves. I was very clear, hopefully, in the last presentation. I mean, we had such a curveball hit us that we weren't anticipating. And sometimes in life, you get those things. And from an Aspen perspective, it was very sad at the time, but it's really helped reshape the group and it helped give focus. And we're not a team that's get to roll up our sleeves and maybe we got a little bit away from rolling up our sleeves, but we've rolled up our sleeves, and we just simply went back to those areas that we could control. And that's where our focus was. It was -- to deal with the GLP-1 opportunity we created. It was to fix China to reshape our manufacturing because we -- and to realize and commercialize contracts and the capacity we have. If I go to the commercial pharma growth drivers, let me be very clear, Aspen has taken a very big bet on GLP-1s. We've added -- maybe before I start, let me talk about China. China is -- it is a reshaping, but I'm not -- it's not going to necessarily give us growth internally. All we've done is we've turned it into something profitable. We still got to work on a strategy to grow that profitability. It's not a drain on the business. We've had to deal with all sorts of EP1s cancel products, but it's very nicely profitable, and it will contribute very well to our -- into this financial year's profitability. But in terms of growth drivers, future growth drivers as well, not just for 1 year, we took a really big bet on GLP-1s. We allocated significant capital to develop product to try and get to market early to be at the forefront to have the right manufacturing capabilities. All of this took a lot of time and effort and human resource. So let me give you a little update where we are because there's been quite a lot of movement. In -- on the semaglutide, the shakeup is going to come in Canada. Whoever performed there is likely to perform across the rest of the globe. It's public knowledge, what I'm telling you now, we're one of a handful or less than a handful of products in -- we're in the shakeup. Bottom line, we're in the shake up. We might be first, we might be fourth, but we'll be there for market formation. The patent goes in January, in our opinion and having dealt with the regulators, nobody is coming to market in January, and it's highly unlikely anybody is going to come in the first quarter of the calendar year. At best, we're going to see Q2 launches, and I'm really proud of what the team has achieved. There's no doubt that we're going to be in the shake. I can't tell you we first or fourth, but we know we have a dossier that's registrable, and we're in a good position. Mounjaro, which is our other GLP-1, the brand Mounjaro, which we've got from Eli Lilly, it's absolutely shooting the lights out. I can't tell you anything. It's way beyond. It's reached #1 in the market. It's -- and the market is growing. It's -- whatever numbers we've shared with you, and we'll obviously update you in our half year results. But whatever number we gave you, it's wrong, and we've missed by a massive margin on the positive side, sorry, just to be clear on that. And I think '26 calendar year is a very big year for us there for a couple of reasons. One, we're getting a whole lot more stock. We've been battling to get our stocks in and getting a whole lot more stock in. It's already -- it's arrived. And we start our regulatory process and registration process in Africa. Remember, we haven't just got South Africa. We've got sub-Saharan Africa, and we start those launch process and expect the turnover and registrations in '26 calendar year and hopeful that, that will also be a very big growth driver for Aspen. So yes, we've taken some big bets in this region, and we're confident that we're going to get some strong delivery out of it. Under manufacturing, we talk about reshaping the sterile facilities and to get them to breakeven. So let's understand what we're actually saying there for financial year '27. We're saying we've got in our -- embedded in our '25 numbers is a positive on an MRA contract of ZAR 1 billion. So we've got to make ZAR 1 billion more just to get back to where we were last year. And we've got sterile losses in our business, which would take us to sort of over ZAR 2 billion of losses that we are saying. So what we're saying to you from the position we're in now, we're going to make -- we need to get ZAR 2 billion. If we achieve a breakeven , we would have delivered ZAR 2 billion. And how did we say we were going to achieve it? Once again, the things in our control, reshape our facilities and do the contracts. Now reshaping facilities, it's been -- you can never be certain, you're never certain how things are going to come out, et cetera, and it's been a really, really tough 6 months. And for us, reshaping an Aspen environment is really painful. It's difficult and to be candid, an incredibly stressful process. From that perspective, I'm happy to tell you that we've been -- we have successfully accomplished most of what we hope to achieve, and we're more than 90% done as I speak to you now. Under contracts, we've made progress with our insulin contract out of South Africa. That's a big swinger for us to get to the numbers as well. We've started commercial production. What does that mean? It means Novo and Aspen are comfortable that we've had the regulator come to our factory. We're pretty comfortable. We're in a good space that both parties feel they can go into commercial production as soon as the approvals received, we can start releasing stock and that approval is expected in Q1 -- during Q1 of this calendar year. The others are the vaccines, and it was almost this is scripted, but we've had the serum, the pediatric vaccines. We have -- we've now had 2 products registered. In fact, the one I just got a message about an hour ago, and those 2 are rotovirus and PCV. The PCV has been registered by SAPRA. And so that's positive for us because SAPRA is a South African agency to be able to submit to WHO, we first had to get SAPRA approval. So we've got that. We're hopeful that WHO will have a fast-track approval now with us. But even if they don't, we are no longer dependent on that's one big block tick having registration under your own regulator. I think we should also expect some positive GLP-1 impacts on volumes as they come into both of our factories. When I spoke to you last, I apologize, but it was the truth at the time, we were -- it was an incredibly negative time for facilities, particularly our European facility. There was a lot of uncertainty on tariffs at that stage, it was 100%, 200% if you made in Europe and particularly to take European manufacturer into the U.S. I'm happy to say that, that's settled now. There's several tariffs. The environment is more benign. What you're seeing, by the way, is people are becoming a lot more nationalistic about where you manufacture and people in Europe want their products in Europe. There are a lot of multinationals in Europe. There is a lot of production that's being installed in the U.S., but there are a lot of people now who say well we better make in Europe as well. So we're starting to see a movement where there was none. So that is positive for us. Just trying to think there's anything else I've left out there. I think that's it. And so -- and we'll keep you appraised as we move along. In terms of -- sorry, the WHO time lines, et cetera, please don't ask me any question time. Literally, I had an hour ago. As soon as we know, we're on a fast track and we're slow track, we'll give you updates on those as well. Under free cash flow generation, there's been a lot of focus here. We've got -- we always had a very strong operating cash flow conversion, and that's great. However, we've had more CapEx than depreciation and working capital has increased a bit, which has meant we've always had pressure on our free cash flow. Sean mentioned to you in the last presentation that there's a desire to get our -- our depreciation, our CapEx to match and to have simply a lower working capital in absolute terms by '27, '28, and that would unlock our free cash flow. That said, Sean, I don't know 27 years. I'm going to leave one last thing to. We're getting a whole lot of money in. We've got a debt burden. We've got a total debt that's not looking too bad. And I mean I'm going to leave you that by the end of this year, we get to a situation where the first time in our history, we have net cash. We have a company that we've never taken from our shareholders, we've taken from banks. And that's your best way of telling if a business performs or not. I mean you can give me any formula you want, but if you can take money and pay it back, it can be hidden in taking capital from others. But nothing is hidden in Aspen, so you get all the surprises, the bumps and lumps with us. But Sean, I think I'm going to leave it to you to get us into a net positive by the end of the year. But thank you all. Thanks for your patience with us, and it's an exciting journey for us. And as a group, sometimes there's quite a lot of momentum behind us at the moment, and we're moving forward positive. Roy, I think that's all I could say.

Thank you, Stephen. Thank you, Sean. Thanks for the presentation. So we've got a couple of questions that have come in. I'll just go through them. Some of them are repeat. Some might just be kind of -- or just shoot them off and get answers. And some of them are asking quite a lot about margins and what the impact is going forward. So we've got to be careful of guiding over here. But let's just start with Ander from Standard Bank. She's got 5 questions, around about 5 questions. quite detailed. I just wanted to know the EBIT contribution from APAC. There is the 18% revenue, 26% EBITDA and EBIT contribution. I don't know if you've got that on hand, Sean, or we should get back.

No, I think you can apply similar number at the EBIT level.

Okay. Talking about GP margins post deal. I don't know if we are able to talk about GP margins post deal.

I can talk to that. I think the Australian GP margins are lower than overall group margins. So from a GP margin perspective, there should be a bit of an uptick. But from an overall EBITDA margin perspective, the Australian business does have a higher EBITDA margin, very efficient from an expense perspective. So from an EBITDA margin, they are slightly higher than. And manufacturing, obviously has dragged us down as well. And also they had some impact on manufacturing as well.

Are the manufacturing facilities in India and Australia included in the deal?

The manufacturing facility in Australia is very much commercial pharma facing. So it's very, very low third-party facing the third-party business for Australia is purely to service overhead but not India at all, is Australian factory.

Okay. The 1.16 billion profit after tax for APAC you're referencing your S, does that exclude China?

Yes.

Okay. I think we've covered that. Then Alex from JPMorgan. Are there any raw material supply contracts? And are these at market prices? Secondly, the net after-tax amount cash that you expect to receive? And again, why did you not exit China as well?

I think in terms of the net after tax, I think Sean gave that there was less than 5% of that come out of it. Why didn't we exit China? China doesn't fall under that management team. China has always had a separate management team. So that team with the region that they manage. I can't remember the first question. What was the first question Roy?

The raw material supply contracts and...

Yes. So we do have supply contracts, but then they are not -- there's no loss on those contracts. We often have products that are -- the contracts with Aspen where we've often got common product. So it's very good to have the absolute volumes. But there's no onerous contract or anything like this.

A couple more from Alex. Any plans for share buybacks? And what are the interest charge and tax rate going forward?

So I mean the interest charge, I mean, you can see we're going to extinguish most of our debt. So from there, it might be ForEx losses and that might be on the finance structure. So the -- I don't think there's a material shift in tax.

Rates and cap rates. there's one question.

What question did I leave?