COMMENTARY

INTRODUCTION

The Board of Directors (Board) has pleasure in presenting the Group's audited results for the year ended 30 June 2015. The Board is particularly mindful of the relevance of these results, being the first consecutive twelve-month trading period to be reported on, since the general business restructure was commenced in 2014.

Apart from the financial implications arising from the review process, the Group's comparative 2014 performance unfortunately includes the adverse consequences of certain internal issues and judgements during that period, the consequences of an unforgiving market and generally, a volatile and challenging South African economy.

It was therefore, not unexpected that the outcome of the aforesaid review process, would have resulted in material write-offs and impairments, both to certain of the Group’s tangible and intangible assets in all of the geographies, and broadly across all business sectors.

The aforesaid summary accordingly seeks to provide some context to the relatively positive turnaround trading performance for the year under review, substantially triggered through more focused leadership, a regenerated culture of productivity and divisional responsibility, all contributing towards better customer relations, more effective cost control, improved manufacture and a focus on service delivery of the Group's leading, time honoured product range, from whence Adcock Ingram gained its long standing reputation and for which the Group is well known.

For a better appreciation of the Group's relative performance against a more meaningful comparable period, in addition to the statutory disclosure of the last reported period of nine months to 30 June 2014, a reviewed set of comparative figures has been provided for the twelve months ended 30 June 2014.

FINANCIAL PERFORMANCE

TURNOVER AND PROFITS

While turnover at R5 528 million is only 6.5% higher than the comparative twelve-month period, given the discontinuation of certain uneconomic product lines during the year, the percentage increase in turnover of comparable products year on year is substantially better. These sale values were supported by Single Exit Price (SEP) increases during the relevant period. The impact of increased throughput, improved factory efficiencies, cost engineering applications and savings on raw material cost, resulted in an increase in the gross profit percentage for the year under review from 33% in 2014 to 38% in this year. The effect of this, revealed itself in a significant improvement in trading profit of 119% from R206.2 million in 2014 to R451.0 million in the current year.

NON-TRADING EXPENSES

Notwithstanding management’s best efforts to identify assets and investments for impairment, during the 2014 review and the extent of such impairment, given the continuing disappointing performance of the Cosme business in India, it was deemed prudent to impair the investment value by a further R74.4 million in this year. A total amount of R106.3 million is recorded as non-trading expenses (2014: R1 004 million) and this includes corporate activity costs of R13.7 million and share based payments of R15.1 million.

TAX AND HEADLINE EARNINGS

The high effective tax rate is a consequence of the non-recognition of deferred tax assets on the foreign loss-making entities, and the non-deductibility for tax purposes of certain impairments and other expenditure.

Headline earnings for the year amounted to R270.4 million (2014: loss of R170.0 million). This translates into headline earnings per share of 160.1 cents (2014: loss of 100.8 cents).

CASH FLOWS

Cash generated from operations was R598.1 million (2014: R398.1 million) despite working capital increasing by R126.4 million (2014: R81.0 million). This cash flow improvement has enabled the Group to reduce net debt by just short of R400 million during the year.

DISTRIBUTION

Given the unknown outcome of the initial Group review in 2014, the restructure and reorganisation, the Board resolved to suspend all distributions until the state of the Company’s affairs became clearer. We are pleased to report, the Board has declared a final dividend of 81 cents per share for the year ended 30 June 2015 out of income reserves.

BUSINESS OVERVIEW

SOUTHERN AFRICA

This segment encompasses all of the business units in the Southern African region, namely, OTC, Prescription, Consumer and Hospital.

OTC turnover of R1 454 million (2014: R1 248 million) is 16.6% ahead of the comparable period, supported by renewed focus and more aggressive marketing. This business unit, which focuses on pharmacy in the pain, colds and flu, and anti-histamine therapeutic areas, posted an improvement in market share, with double-digit growth in the majority of its top ten brands. Gross margin as a percentage of sales improved with better volumes in the Clayville factory, cost engineering projects, efficiencies from raw material procurement and the sales mix of products, which supported the increase of almost 60% in trading profit to R260.7 million (2014: R164.3 million).

Prescription turnover of R1 813 million (2014: R1 860 million) is 2.6% behind the comparable period, this the result of a reduction in the low margin ARV and tender portfolios, and repatriation of certain products to multinational partners. Gross margin improvements arose from better than expected production recoveries and a stringent control over foreign raw material and finished goods procurement. This resulted in a trading profit of R148.1 million well ahead of the comparative figure of R95.0 million.

Consumer turnover of R629 million (2014: R584 million) is 7.8% ahead of the comparable period with Panado, Bioplus and Compral all posting healthy growth. However the performance of the complementary and personal care portfolios within this business unit was disappointing. Trading profit nevertheless improved by 25% to R79.3 million (2014: R63.5 million).

Hospital turnover increased by 9.7% to R1 127 million (2014: R1 028 million) in an increasingly competitive environment. Medicine delivery sales, mainly large-volume parenterals have been the biggest contributor to this improvement. The business unit’s profitability was restored during the period under review with a trading profit of R32.8 million having been achieved. Notwithstanding the change-of-control clause in the Baxter agreements, the association between the parties remains sound, with the long-standing commercial relationship having been strengthened and Baxter providing additional support to the business.

REST OF AFRICA

While the Group’s presence in Zimbabwe, Kenya and Ghana individually and collectively constitutes a small percentage of the Group’s assets, business in each of these destinations remains a challenge and preoccupation of management, far greater in time than their relative size should dictate. During the year under review, although the results suggest a positive turn of direction, these businesses still incurred losses of R13.2 million (2014: R29.0 million).

INDIA

The Group's Cosme Pharma business in India was acquired in early 2013 for R822 million. This related industry purchase was justified at the time by the perceived potential growth prospects of a pharma sales and distribution business, with quality, good margin products in a vast marketplace.

As time has evolved, management has recognised the difficulties of operating an enterprise in such a competitive pharmaceutical market, which, in relative terms is sub scale, requiring inter alia, significant further investment. While management have a good understanding of the operational demands of the business and have introduced strategies for improvement and remedial direction, the overhead to sales ratios remain the principal challenge.

In the 2014 financial year, given the losses incurred, after the obligatory internal intangible asset amortisation, the Cosme Pharma investment was impaired by an amount of R278 million. The trading loss of R56.8 million, incurred in the current financial year, similarly after the aforesaid asset amortisation, dictated that a further impairment of R74.4 million would be appropriate.

The Board, after much deliberation, has resolved to dispose of Cosme Pharma and a formal sale process will soon be commenced for this purpose. While there is no certainty on the short term sale prospects, nor the extent of any sale proceeds likely to be received, management will continue to manage the business as before and seek to protect the consensus fair value at 30 June 2015, reviewed and determined by management and confirmed by the external auditors.

PROSPECTS

There is no useful purpose in the Board reflecting on the various past corporate actions and events that have unfavourably impacted on the Company’s more recent annual commercialism and market rating, save to submit, that as a result of these past circumstances, a refocused senior management team, together with the recently structured divisional management, fully understand what needs to be done to restore the Group to its former status in the industry. They have already diligently demonstrated their commitment to that objective and have practically put the Group on a profit path which will hopefully continue as efficiencies and markets improve.

Considering the economic conditions and uncertainties in South Africa at this time and elsewhere, the currency erosion, an erratic electricity supply and an unpredictable market, the Board are satisfied with the direction and progress achieved during the past year. The Board remains optimistic on the Group’s medium term prospects, which view is tempered by the recent material devaluation of the Rand.

DIVIDEND

The Board has declared a final gross dividend out of income reserves of 81 cents per share in respect of the year ended 30 June 2015. The South African dividend tax (“DT”) rate is 15% and the net dividend payable to shareholders who are not exempt from DT is 68.85 cents per share. Adcock Ingram currently has 175 741 348 ordinary shares in issue and its income tax reference number is 9528/919/15/3.

The salient dates for the distribution are detailed below:

Last date to trade cum distribution Friday, 11 September 2015
Shares trade ex distribution Monday, 14 September 2015
Record date Friday, 18 September 2015
Payment date Monday, 21 September 2015

Share certificates may not be dematerialised or rematerialised between Monday, 14 September 2015 and Friday, 18 September 2015, both dates inclusive.

By order of the Board

B Joffe
Chairman
KB Wakeford
Chief Executive Officer
AG Hall
Deputy Chief Executive and Financial Director