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Aspen’s focus on cutting debt pays off

Paying a dividend might send the wrong message, says CEO Stephen Saad.

NOMPU SIZIBA: The Aspen share rose as much as 11% today [Thursday], and that’s despite them declaring that they won’t be giving shareholders a dividend.

Earlier my colleague, Ryk van Niekerk, caught up with the company’s CEO, Stephen Saad.

RYK VAN NIEKERK: The pharmaceutical group Aspen Pharmacare reported results for the year to the end of June today [Thursday]. The group’s roots date back to 1850 in South Africa, and today Aspen operates in 56 markets around the world.

Read: Aspen: are the execs drinking their own Kool-Aid?

Total revenue from continuing operations rose by 1% to R39 billion. The normalised headline earnings per share decreased by 7% to R14.14. The big news – net borrowings decreased by R14 billion to R39 billion. And, for the first time in many years, Aspen did not declare a dividend.

On the line is Stephen Saad, the CEO of Aspen. Stephen, welcome to the show. Why are you not paying a dividend?

STEPHEN SAAD: Well, I think we’ve got to think of our message, a very clear message to all our stakeholders in terms of our election. You know, we had borrowings – and I know we’ve done a fantastic job in the last six months to decrease them by R14.5 billion – but it’s a clear focus for us. We really are focused on de-leveraging. Bear in mind, management are big shareholders and the income we get is dividends. So, it’s a real focus to send a message of our focus to get our organic growth up and to de-lever, and de-lever fairly aggressively, over the next period. I think paying a dividend would just send the wrong message.

RYK VAN NIEKERK: The net borrowings currently stand at R39 billion. What is your target? To where do you want to reduce it?

STEPHEN SAAD: It’s a gearing. To get to our earnings, it’s at about 3.6 times, and our focus is to get it below 3. Remember, because we made just over R10 billion or close to R11 billion of earnings, you’ve got to probably bring it down about R10 billion more, roughly, to be in the ballpark of where we’d like to be and feel comfortable.

RYK VAN NIEKERK: During the period you sold off assets – the formula milk asset being one. Are you going to continue with selling non-core assets?

Read: Aspen gets boost as delayed baby-milk deal wins approval

STEPHEN SAAD: Yes, we are in the process. We are looking at several avenues. The one advantage we’ve had is that the acquisitions that we’ve made are worth substantially more than what we’ve paid, as we demonstrated. And I think we’ve got similar opportunities around our pharmaceutical business. We are in an active process in Europe with advisors to find the right partners. But we are looking for partners. That’s not just valuation. We’ve been offered quite big sums in a previous transaction in Europe. But, what is important for us is to be able to find a partner that can grow the assets, because we need them to plug into our manufacturing facilities. We are only going to do things that make sense for us, though.

RYK VAN NIEKERK: But Aspen has had a few tough years recently. The share price has fallen by more than 60% since September last year, for example. What message should shareholders take from these results?

STEPHEN SAAD: I’m not an expert on share prices. I can talk about what we’ve delivered. This is the first year we’ve ever had a decline in headline earnings in 20 years. Last year we actually grew our headline earnings by 10%.

I think if I were to tell you what we as management perceive, and what we are doing, if you look globally there was a massive push for generics – and generic pharmaceutical companies grew and had very big share price [increases]. I think globally what we did was we exited generics at that sort of high point, and we focused our business in steriles.

The opportunity to go into steriles is a very large one. It stretched Aspen and people may be caught – do they or don’t they think we are going to perform in the sterile business? But, I will tell you this much: we will correct on the commoditisation of generics. The prices have performed significantly, particularly in the US. And the only key area that has held margin in that area has been steriles. So, I think we’ve got the right strategy, and so much now is going to depend on how we execute on that strategy.

RYK VAN NIEKERK: Stephen, what are steriles?

STEPHEN SAAD: Steriles are products that are injectable in nature, and they go directly into your bloodstream, so it could be day injections, basically, and they require very specialist manufacturing technology, different from tablets and capsules. What we’ve tried to do as a group, and where we are right now, is to [have] very expensive manufacturing and efficient facilities that will give volumes. I think we’ve got all the assets. That was the expensive bit, acquiring the assets.

And we are number one in the world in anaesthetics outside the USA, and we are number two in the world in injectable anti-coagulants. So we want to use the volumes that we now have globally to create a global business that really has a lot of sustainability for many, many years to come.

RYK VAN NIEKERK: At the current share price have you been approached by any international firm for a possible takeover?

STEPHEN SAAD: Absolutely regularly, it’s a regular occurrence. If you think about Aspen not issuing any equity, we started from zero and we’ve got to nearly R11 billion of Ebit now, and that’s with almost no equity. So, it’s sort of crazy for us to be listed, really, if you think about it. What’s the advantage of being listed if you don’t have equity?

But from an Aspen perspective we’ve got a lot to deliver to people who have shown faith in us over the time, and I can’t entertain any of those discussions at a personal level. Of course, they can do want they want with the shareholders, and they want to buy it out. But to those who come to me and ask “Do you want it?” I say, “No, it’s not morally right. We’ve got a strategy and we know the value. We think the value is very different from what we are seeing, and we need to deliver on our plan. But if it doesn’t, then of course I’m going to sit and have a discussion with somebody else. But, for now, the total focus is to deliver to the base of people that have shown tremendous faith in us over the past couple of decades.

RYK VAN NIEKERK: In the results you say the manufacturing business did not perform too well. Revenue was down 11% in that unit. How many factories do you have, and where are they?

STEPHEN SAAD: I think we’ve got factories in every continent, apart from Greenland, literally. We’ve got numerous facilities across Europe, across Africa. We’ve got facilities in Dar es Salaam, Accra. I don’t even know the number of facilities that we have, but we have numerous facilities to match our global footprint.

RYK VAN NIEKERK: What was the reason for the decline in activity levels?

STEPHEN SAAD: We had a strike, and there was a tender that one of our partners lost. And then the biggest fall in price in our chemical business was that we stopped selling Heparin. We stopped selling Heparin because we were worried if it goes into our own product, and we were selling to a third parties; and we were concerned that third parties, with African swine fever, that we might not be able to access the raw materials. So we held supplying to third parties to keep for ourselves. It was a good decision. I know it put the stress on the working capital the first six months, but it has proven to be a good decision because the chemical has increased substantially. And so with that that we held back we now have an ability to sell in this next period, at a higher price as well. We’ve got over two years’ worth of stock.

So, we effectively held sales last year, but it’s likely to release sales into this new period.

RYK VAN NIEKERK: NHI is back on the agenda. There are widespread concerns about the impact it may have on the whole medical industry. How do you think Aspen will be affected?

STEPHEN SAAD: We are broadly positive. I think anyone who knows Aspen – yet in that space any opportunity for broader access to medicine and medication has got to be positive. So, there will be an increase in volume, and then people might ask, “What will happen to the price? Will the prices come down?” Yes, they might. But, remember, Aspen has got its roots very much into understanding, into facility that understands volume and pricing discussions. We’ve got very strong generic roots that we retain in our South African business and structures.

RYK VAN NIEKERK: Stephen, thank you so much for your time.

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When this crosses ZAR100, it’s a good time to buy.

End of comments.





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