The Aspen business model is being questioned; does it remain relevant?
The Aspen business model remains as relevant today as it has been over the last two decades. The model entails investment to build a product portfolio and then growing the value of the products through our sales, marketing and manufacturing capabilities.
It also entails regular reviews and reshaping of the portfolio through disposals. Product disposals together with the profits from the organic returns generated by the portfolio provide the funding for select new acquisitions. This model has allowed us to grow from a zero base to a global multinational with sales in our last financial year in the region of R42bn and net profits of R6bn. All of this has been achieved with the issue of very little new equity.
The sharp fall in the Aspen share price has been attributed to concerns that your debt is too high and that you have banking covenants which are in danger of being breached. How did that occur and what is the risk of covenant breach?
We acknowledge that our levels of debt are high. It is our first priority to reduce gearing. In any business that grows rapidly, as Aspen has, there are times when the balance sheet gets stretched, particularly when you are not issuing new equity, and this is the position we find ourselves in presently. We see the risk of covenant breach as extremely remote. We have some R10bn of proceeds from the disposal of our nutritionals business expected for receipt in early June. This will allow our gearing to remain within the covenant levels.
There are concerns that the sale of the nutritionals business to Lactalis will be delayed as you have already pushed out the completion date. How can you be so confident?
It is true that finalisation of the transaction has taken longer than we expected. There were several conditions to be satisfied before closing the transaction.
All but one of the conditions which require the approval or consent of third parties have already been fulfilled and we expect to hear very shortly on the outstanding third party condition, being the approval of the New Zealand Overseas Investment Office for Lactalis to invest in that country.
Once this approval is received, the remaining conditions are in the hands of Aspen and Lactalis. Both parties are fully committed to the target closing date of May 31.
Lactalis are working very hard with our teams and excellent progress has been made to enable a smooth change of ownership.
Once the cash from the sale of the nutritionals business is received, does that put you in a position to make acquisitions again?
While technically we could do so, we intend to further reduce our gearing before we consider any additional material acquisitions.
How long do you think that will take?
There are two possible scenarios. The first assumes no immediate material value realisations from our existing assets. In this case we will use the cash generated from our business to complete our capital projects which are currently under way, applying surplus funds to reduce the debt levels. Under this scenario it will take a few years to meet our lower debt objective.
Under the second scenario we will accelerate the reduction of debt through disposals which realise the value we have created in parts of our product portfolio. Any asset disposals will be carefully aligned with our strategy to position Aspen as a niche speciality multinational pharmaceutical business weighted towards emerging markets.
What would it take to achieve the accelerated debt reduction scenario?
We have created significant additional value in our product portfolio through our business model described earlier. We are actively exploring opportunities to realise some of this value that we have created, in a manner which will be beneficial to all stakeholders and which will generate the cash required to make meaningful inroads into the debt.
It has been suggested that the disposal of the nutritionals business was a forced sale. Given the current circumstances, would future disposals fall into this category?
The sale of the nutritionals business was not a forced sale. We announced to the market that we were undertaking a strategic review of the nutritionals as early as January 2018. We have realised a fair price for this business, several times more than we paid for it. Similarly, future transactions will be based on our assessment of the fair value of the assets involved. Because we have created meaningful value in our product portfolio, one should anticipate that these prices will be higher than our initial investments.
What do you think of the comparisons being drawn between Aspen's current situation and the path that Steinhoff followed?
We believe such suggestions are ill-informed. The comparison being drawn is between a company [Steinhoff] which has experienced a share price collapse, reportedly due to alleged financial reporting irregularities, fraud and manipulation, and Aspen, a company which continues to generate substantial profits and which is dealing with no more than a stretched balance sheet. Steinhoff used multiple equity issues to make its acquisitions while Aspen has not turned to shareholders for funding for many years. In addition to being flawed, comparisons of this nature are unfortunate as they undermine the fabric and integrity of a South African company which has proven itself globally.
While expanding offshore, we have continued to invest heavily in SA. Over the last two decades we have built a number of world-class manufacturing facilities in SA, bringing leading production technologies to our country, creating significant skilled employment and investing in a sustainable pharmaceutical industry. We continue to do so and are presently busy building an additional factory in Port Elizabeth at a cost of more than R3bn...