Commentary

SALIENT FEATURES

Total Operations
Basic earnings per share increases 70%
Headline earnings per share increases 49%

Dividend declared: 63 cents per share
10th most empowered company on the JSE
according to Empowerdex survey

Continuing Operations
Turnover increases 11% to R2,979 million
Gross profit improves 11% to R1,074 million
Trading profit increases 22% to R342 million
Headline earnings per share increases 52%


INTRODUCTION

The Board is pleased to report that the Group’s long standing, continuing business operations, posted encouraging growth and extremely satisfying profits for the six-month period ended 31 December 2016. Having finally disposed of the Group’s Indian sales and marketing business and the majority stake in the Ghanaian enterprise in this period, and having effectively dealt with all other inherited underperforming assets, since control of Adcock Ingram changed in 2014, the restructured business starts to reveal the positive impact and favourable direction that a cleansed Adcock Ingram is capable of delivering, now under a fully focused leadership team, in conjunction with a restructured and committed management in each of the divisional units.

Under such circumstances, each of the business units, posted solid performances, achieving good growth in turnover, optimally balanced with good cost control. This pattern of activity yielded exceptional growth in trading profits. It is also pleasing to report that the deliberate emphasis now placed on customer service, coupled with the more focused effort on sales and marketing, resulted in meaningful market share gains in many of the Group’s principal brands, regularly measured and reported on by IMS and Nielsen.

FINANCIAL PERFORMANCE OF CONTINUING OPERATIONS

TURNOVER AND PROFITS

Group turnover during the period under review increased by 11.2% to R2,979 million. Apart from volume growth of approximately 4.8%, the remaining components within the turnover growth include two single exit price (SEP) increases during the year, in aggregate approximately 6.4%. The 4.8% volume growth is an encouraging indicator, given that IMS reports market growth in the sector at less than 1% on a moving annual basis. The gross profit percentage maintained a satisfactory level, declining marginally from 36.3% to 36.1%.

Operating expenses were well controlled and increased by only 5.9%, resulting in a 22.4% improvement in trading profit to R342 million (Dec 2015: R279 million).

NON-TRADING EXPENSES

Non-trading expenses of R19.2 million include share-based expenses of R13.8 million and corporate activity costs of R5.4 million. The prior period comparative of R41.0 million included the one-off IFRS 2 charge of R20.8 million related to the implementation of the July 2015 B-BBE scheme.

NET FINANCE COSTS AND HEADLINE EARNINGS

Net finance costs decreased from R38.8 million in the prior period to R17.5 million, following the reduction in the Group’s overall net debt since June 2016.

Headline earnings from continuing operations for the period under review amounted to R241.0 million (Dec 2015: R159.0 million). This translates into headline earnings per share of 144.9 cents (Dec 2015: 95.1 cents), an increase of 52%.

BUSINESS OVERVIEW

OTC turnover improved by 16.2% over the prior comparative period, supported by increased volumes during the winter season and encouraging demand in the tender and export markets. Top brands including Allergex, Citro-Soda, Alcophyllex, Dilinct and Adco-Linctopent, all showed double-digit growth. Analgesic brands containing codeine, achieved very low growth following a change in regulation for these products. This business unit, which focuses on products in pain, coughs, colds and flu, and anti-histamine therapeutic areas through the pharmacy channel, posted growth well ahead of the market as measured by IMS in the categories in which it competes.

Despite the punitive impact of the exchange rate and a detectable change in consumer buying patterns to smaller pack sizes, trading profit increased by 13.2% to R145.6 million (Dec 2015: R128.6 million). The division acquired Brolene Eye Drops and Stop-Allerg Eye Drops from Genop Healthcare Proprietary Limited and commenced marketing these brands in October 2016. These brands will augment the division’s existing ophthalmology product offering. In addition, Asic, Complenatal and Totonik were purchased from Pharmaceutical Enterprises Proprietary Limited towards the end of the reporting period. Asic is a well-respected anti-nausea product for pregnant women.

Prescription turnover improved by 13.0% to R1 008.6 million (Dec 2015: R892.4 million) aided by the SEP increases. This division achieved double digit growth in the private market segment as measured by IMS. A gross margin improvement was realised in this period, driven by an advantageous sales mix. Trading profit of R116.5 million is well ahead (33.8%) of the trading profit in the comparative period of R87.1 million. In July 2016, this division obtained the sales and promotional rights for the Astellas dermatology range, through our partner Leo Pharmaceuticals.

Consumer turnover of R334.8 million is only marginally ahead of the comparable period. The division faced a challenging economic environment, where discretionary spend remains under pressure. According to Nielsen’s, Panado, Compral and Bioplus continued to outgrow the product segments in which they compete. Good cost control in this business unit enabled trading profits to increase by 24.5% to R52.4 million (Dec 2015: R42.1 million). This division has been actively seeking acquisitions and with effect from March 2017, the division will own and market the ISLAND TRIBE range of sunscreen products. Intellectual property has also been acquired for a dermatologist-formulated hand and body treatment range, to be launched under the DERM-A-SOOTHE brand name.

Hospital turnover increased by 5.8% to R662.4 million (Dec 2015: R626.2 million) with all product categories achieving growth over the prior period. Trading profits increased to R27.0 million (Dec 2015: R21.6 million). The division secured the commercial rights to the Pharma-Q range of products in South Africa in December 2016 and has recently commenced marketing the range on behalf of Pharma-Q.

The Group’s enterprises in Zimbabwe and Kenya have for some time underperformed in challenging markets. These entities fortunately constitute a very small percentage of Group assets and collectively incurred a trading loss of R0.9 million during the period under review. The OTC Division has taken responsibility for managing the Kenyan operation and we accordingly expect that the business will stabilise and hopefully improve its performance.

CHANGES TO THE BOARD AND IN DIRECTORS’ FUNCTIONS

On 25 August 2016, Ms Basadi Letsoalo was appointed Executive Director: Human Capital and Transformation and on 24 November 2016, Dr Claudia Manning and Mr Lindsay Ralphs were appointed as non-executive directors.

Mr Roshan Morar retired by rotation and did not offer himself for re-election as a non-executive director.

PROSPECTS

The Adcock Ingram Group is today a well-managed, reliable, reputable and well capitalised pharmaceutical manufacturer, supplier and distributor in South Africa, which is well placed to continue its immediate past trend of performance, fulfilling its potential to maintain its current growth path.

Given the Group’s healthy cash resources, management and the Board will maintain the intention to expand the Group’s product portfolio, through partnership arrangements, acquisition or otherwise, particularly in non-regulated product classes.

Shareholders can be assured of the Group’s intention to continue its effort to enhance the equity of the Company’s products and brands, build its customer relationships and maintain its service levels within each of the operating divisions.

CASH DIVIDEND

The Board has declared an interim gross dividend out of income reserves of 63 cents per share in respect of the six months ended 31 December 2016. The South African dividend tax (“DT ”) rate is 15% and the net dividend payable to shareholders who are not exempt from DT is 53.55 cents per share. Adcock Ingram currently has 175 748 048 ordinary shares in issue of which 149 905 089 qualify for ordinary dividends. The income tax reference number is 9528/919/15/3.

The salient dates for the distribution are detailed below:

Last date to trade cum distribution Tuesday, 14 March 2017
Shares trade ex distribution Wednesday, 15 March 2017
Record date Friday, 17 March 2017
Payment date Monday, 20 March 2017

Share certificates may not be dematerialised or rematerialised between Wednesday, 15 March 2017 and Friday, 17 March 2017, both dates inclusive.

CD Raphiri AG Hall
Chairman Chief Executive Officer

21 February 2017