Financial review | Adcock Ingram (2023)

"The Group is pleased with the resultsdelivered operating under the currentdepressed and unpredictable businessenvironment, exacerbated by the globalCOVID-19 pandemic and consequentialweak exchange rate, global supplychain disruptions, declines in demandfor certain categories of medicine andproducts, and low levels of consumerdiscretionary spending."

Gross profit of R2,739 million is R50 million lower than the comparative year.

Gross margin of 37.3% ended below the prior year (39.4%), adversely impacted by:

• unanticipated costs related to COVID-19 of R23 million, incurred in the factories;
• production inflation in wages and utilities running significantly ahead of selling price increases;
• poor factory recoveries at Clayville and Wadeville; and
• the weaker currency.

During the year the following material foreign currencies were bought in the South African businesses:

• Euro 50 million @ R16.91, a 3.8% weakening over the prior year (R16.29); and
• US$71 million @ R15.07, a 7.6% weakening compared to the prior year (R14.00).

With approximately 55% of FEC's in US$ and 44% in Euro – the cost of our weighted basket of all currencies increased by 6% in 2020, compared to the prior year.

Operating expense discipline has been outstanding,ending R39 million lower than the prior year, inclusiveof R8 million spend on COVID-19 in the distribution andadministrative facilities and an average 5% salary increasegranted in December 2019.

Trading profit of R944 million ended R11 million below:the prior year.

Non-trading expenses of R82 million include

• retrenchment costs of R34 million;
• a loss on de-consolidation of the owner-driver companies of R19 million;
• the impairment of intangibles of R16 million; and
• an ex-gratia payment of R10 million made to the shareholders of Ad-izinyosi Proprietary Limited.

Operating income of R862 million ended 2.4% below the prior year.

The net finance cost for the year is R34 million, which includes the IFRS 16 finance costs of R29.7 million.

Equity accounted earnings for the year of R97.5 million increased 7.5% over the prior year, and 4.7% on a like-for-like basis. It includes the result for:

• National Renal Care (NRC), the joint venture with Netcare; and
• the manufacturing plant in India, the joint venture with Meiji of Japan.

The prior year also included the Group's share of the Ghana associate until it was sold.

Profit before tax for the year is R930 million, 3.8% lower than the prior year.

The effective tax rate, adjusted for equity accounted earnings is 29.8%, with non-deductible expenditure causing the increase over the statutory rate.

Headline ernings per share from continuing operationsdecreased by 1% to 417.5 cents (2019: 421.7 cents) followingthe unwinding of the B-BBEE scheme which resulted in a lowernumber of treasury shares. The R10 million ex-gratia paymentwith the lower number of treasury shares, on a combined basis,adversely impacted HEPS by 18.1 cents (4.3%).

Turnover of R892 million ended R105 million above the prioryear, the result of consistent strong performance throughoutthe year and price realisation of 7.5%. Volumes increased 2.5%,bolstered by an exceptional sales performance in March,and mix contributing 3.4% supported by the inclusion ofPlush in June. The last quarter witnessed subdued demand,albeit not to the same extent as the rest of the Group, due torestricted movement during the national lockdown, as well asconsumers having stockpiled in March.

The gross margin ended marginally ahead of the prior yeardue to excellent negotiations with suppliers.

Operating expenses ended above the prior year as a result ofhigher marketing spend to adapt to the change in consumerbehaviour due to COVID-19, and ensuring online visibility ofmajor brands.

Trading profit of R155 million ended R21 million above theprior year.

Turnover of R2 018 million ended R35 million above the prioryear, which needs to be seen in the context of the impactof the difficult trading conditions and the absence of a fluseason in South Africa which normally starts in May. Cough,cold and flu preparations represent almost 40% of the OTCportfolio. Price realisation in this business was 4.4%.

Gross margin ended below the prior year, adverselyimpacted by the weaker currency and additional costsrelated to COVID-19 and lower factory recoveries in the firsthalf of the year.

Operating expenditure has been extremely well controlledand ended below the prior year, including the rapidresponse to the impact of COVID-19 on normal operatingactivities, with a reduction in certain selling and marketingactivities.

Trading profit of R426 million ended R38 million above theprior year.

However, the segment benefitted from the inclusion of theBayer portfolio in the current year contributing R133 million.

Gross margin ended below the prior year, adversely impactedby the weaker currency, inventory obsolescence provisions,additional costs related to COVID-19 and poor factoryrecoveries at Wadeville.

Operating expenses for the year were well controlled, ending7% below the prior year.

Trading profit of R218 million for the year ended a verydisappointing 29.8% below the prior year.

Turnover of R1 628 million ended R173 million ahead of theprior year. Price realisation was 2.1%, with volumes increasing7.1%, as both the Renal segment and the Adco-Hygienebusiness within Medicine Delivery benefitting from buy-insrelated to the COVID-19 pandemic. However, in the lastquarter demand for hospital products was subdued, withprivate sector hospitals running significantly below capacity,with almost no elective surgeries, and fewer trauma andmedical cases.

Gross margin ended in line with the prior year, driven by anadvantageous sales mix, and excellent throughput in thefactory, which compensated for the weaker exchange rate and additional costs incurred in the operations to ensurecontinuity of supply during the COVID-19 crisis.

Operating expenditure ended above the prior year, withhigher selling and distribution expenditure consequent tothe increased sales, as well as the launch and operating costsof the Sports Science and Rehabilitation business.

Trading profit of R141 million ended R28 million above theprior year.

Balance Sheet

The movement of R10 million in Property, plant and equipment since June 2019 is mainly a result of:

• additions of R154 million;
• the take-on of the Plush business (R6 million);
• offset by:
• depreciation of R147 million; and
• the loss of control over the owner-driver entities (R18million).

Right-of-use assets in accordance with IFRS 16 had a carrying value of R264 million, after depreciation charges ofR39million.

Intangible assets, including goodwill, now have a carrying value of R929 million and comprise of Generic, Consumer and OTC trademarks, brands and licence agreements. This amount includes the goodwill and intangibles of R342million recognised on the acquisition of Plush in June this year, as well as the goodwill and intangibles of R285million recognised on acquisition of Genop in the 2018 financial year. Intangible assets include a charge for amortisation of R10million and impairments of R16 million in the year.

Inventory of R1.9 billion (2019: R1.3 billion) is stated at the lower of cost and net realisable value, after provisions of R236million (2019: R199 million). Days in inventory increased to 137 days compared to 108 days at June 2019, mainly arising from:

• the investment in active pharmaceutical ingredients related to the ARV tender;
• on-boarding of the Bayer dermatology brands;
• the launch of the Sports Science and Rehabilitation division in Critical Care;
• the take-on of Plush; and
• higher inventory held to address global supply constraints as a result of COVID-19.

Trade accounts receivable of R1.4 billion (June 2019: R1.6billion) are shown net of provisions of R42 million (June 2019: R32 million). Days in receivables are 66 days, marginally up from the 64 days reported in June 2019. Government debt is 20% of the total gross debtors' book.

The Group had cash resources of R317 million at 30 June 2020, after the settlement of the Plush acquisition which resulted in a net outflow of cash of R309 million.

The Group is comfortably able to service its obligations in the short-term with R1 billion of working capital facilities available.