Creating value through our capitals
celebrating 20 years Financial
We aim to create value for all of our stakeholders by managing our financial capital in a commercially astute and diligent manner, thereby harnessing opportunities for long-term sustainable economic growth
Aspen Colombia’s strategy to prevent, control and mitigate environmental impact has led to various actions being adopted such as carbon dioxide emission management, organic material recycling, replacing plastic with glass and planting trees along the Bogota River.
Adding economic value to stakeholders
While the provision of high quality, affordable medicines and products directly benefits patients and consumers, a focus on building a profitable and sustainable business model generates economic value for our varied stakeholder groups. The Deputy Group Chief Executive's Financial Review, provides an overview of our financial performance for the year.
Our activities this year have created R18 892 million in wealth. This is calculated after taking into account R24 466 million spent on purchasing materials and services which contributed to the sustainability of our suppliers in the various economies in which we operate. Our employees receive the largest share of the total value distribution (42%) while a significant portion (31%) is reinvested in the Group to fund growth and expansion. Our gross economic contribution in the form of direct tax, paid to central and local governments in the countries in which we operate, amounted to R1 533 million.
Group value added statement
for the year ended 30 June 2018
|Revenue||3||42 596||41 213|
|Therapeutic Focused Brands||9||18 934||17 417|
|Other Pharmaceuticals||0||20 571||20 572|
|Nutritionals||(4)||3 091||3 224|
|Other operating income||419||345|
|Less: Purchased materials and services||(2)||(24 466)||(24 943)|
|Value added from operations||12||18 549||98||16 615||98|
|Total wealth created||12||18 892||100||16 902||100|
|Employees||12||7 925||42||7 046||42|
|Providers of capital – finance costs||(1)||3 548||19||3 599||21|
|Finance costs||2 235||12||2 369||14|
|Capital distribution and dividends paid to shareholders||1 313||7||1 230||7|
|Governments||19||1 533||8||1 292||8|
|Reinvested in the Group||19||5 886||31||4 965||29|
|Depreciation and amortisation||1 372||7||1 267||7|
|Income retained in the business||4 493||24||3 707||22|
|Total value distribution||12||18 892||100||16 902||100|
|Value added statistics|
|Weighted number of permanent employees*||9 965||9 155|
|Revenue per employee ('000)||(5)||4 275||4 502|
|Value added per employee ('000)||3||1 861||1 815|
|Wealth created per employee ('000)||3||1 896||1 846|
|Weighted number of total employees*||10 676||9 905|
|Revenue per employee ('000)||(4)||3 990||4 161|
|Value added per employee ('000)||4||1 737||1 678|
|Wealth created per employee ('000)||4||1 770||1 707|
|Monetary exchanges with government|
|Current taxes (excluding deferred tax)||20||1 364||1 133|
|Customs and excise duty||6||155||146|
|Rates and similar levies||8||14||13|
|Gross contribution to central and local governments||19||1 533||1 292|
|Additional collections on behalf of government|
|Employees' taxes||8||1 183||1 092|
|Net value added tax paid||27||719||568|
|15||1 919||1 670|
Delivering returns to shareholders
We are committed to delivering returns to our long-term shareholders and we have delivered a CAGR of 28% return to shareholders who have remained continuously invested in the Company since listing.
After considering the Group's cash flow and earnings performance for the past year, existing debt service commitments, future proposed investments and funding options, the Board declared a gross dividend of 315 cents per ordinary share (2017: 287 cents per share).
KPI: Return on ordinary shareholders' equity
Growth in attributable profits of 17% arising from the increase in operating profit and lower financing costs is balanced by an increase in ordinary shareholders' equity due to the weaker Rand increasing the foreign currency translation reserve in June 2018. This has resulted in the maintenance of a 12,2% return on shareholders' equity year on year.
KPI: Growth in revenue
Revenue growth of 5,8% (7,5% on a CER basis) was achieved in Commercial Pharmaceuticals with base organic growth in both the Anaesthetics and Thrombosis portfolios and the inclusion of a full year of sales of the Anaesthetics portfolios acquired during the course of the prior year. This performance was offset by declines in Manufacturing and the Nutritionals business. Overall, revenue increased by 3,4% (4,7% CER) to R42 596 million.
KPI: Growth in normalised EBITDA
The increase in revenue with a further margin benefit arising from the acquisition of the residual rights to the AstraZeneca anaesthetics portfolio and lower cost of goods in Thrombosis has resulted in a 5,4% increase in normalised EBITDA.
KPI: Growth in NHEPS
The growth of 9,7% in NHEPS is driven by the growth in normalised EBITDA of 5,4% coupled with lower financing costs.
Maintenance of financial health
To sustain our business model and to generate accretive value for investors, we have a fiduciary duty to our stakeholders to manage our financial capital in a responsible manner. Robust financial controls and treasury management systems are in place to mitigate currency, interest rate and credit risks as far as reasonably possible.
Ongoing focus on managing our investment in working capital has resulted in the level of working capital as a percentage of revenue remaining relatively consistent year on year when adjusted for foreign exchange rate impacts. The working capital cycle for Aspen Oss is, however, higher due to the long production cycle for APIs produced at this site. The Group's working capital, excluding Aspen Oss, as a percentage of revenue for 2018 increased slightly from 33% to 34% after adjusting for exchange rate impacts. Inventory carrying levels remain a focus for the Group, balancing the operational requirements to build stock from time to time to facilitate safety stock levels while territories and manufacturing sites are transferred with the unfavourable impact which holding these higher inventory levels has on cash flow. The growth in normalised EBITDA and the continued focus on working capital has lifted operating cash flow per share to 1 537,3 cents, achieving a cash flow conversion rate of 105%.
KPI: Operating cash flow per share
Funding and treasury risk management
The Group Treasury Committee monitors treasury relevant risks which affect the Group, including liquidity, foreign exchange, interest rate, covenant compliance and counterparty risks, and provides guidance to local management in managing these risks. Local management is empowered, within the relevant approvals frameworks, to make decisions regarding how to manage these risks, as well as taking ownership for the implementation of any related action.
The Group's net borrowings increased by R9 649 million to R46 780 million due to increased funding required for the significant transactions and capital expenditure undertaken during the year, and an unfavourable exchange rate translation effect. During the year, we successfully concluded a multi-currency syndicated facilities agreement with 28 lenders, equivalent to approximately EUR3,4 billion, which refinanced our existing debt facilities.
As a result of the increase in borrowings noted above, our leverage ratio increased to 3,78, within the leverage covenant of 4,00 times. The net proceeds on the divestment of the Nutritionals business, announced in September 2018, will be utilised to reduce our gearing, creating greater headroom and capacity. The net interest cover ratio improved to 6.4 times from 5.8 times in the prior year, well above the covenant level of 3.5 times.
Approach to taxation
We have subsidiaries, branches, permanent establishments and joint venture arrangements in 56 countries around the world, predominantly in emerging markets. These entities are subject to the tax legislation of the countries in which they are domiciled. In addition, the countries in which the Group operates have committed to implement the OECD Base Erosion and Profit Shifting ("BEPS") recommendations, as they have all become members of the OECD's Inclusive Framework for BEPS. These recommendations include certain indirect taxes, international tax, domestic anti-avoidance provisions and transfer pricing. Domestic tax laws, including those dealing with international taxation, transfer pricing laws and enhanced transfer pricing documentation standards ("Domestic Law"), have or will be amended to incorporate the outcome of the BEPS project.
We have prepared for the implementation of the BEPS recommendations by significantly expanding our tax team and implementing tax reporting systems to meet the new transfer pricing documentation requirements. These specialists are required to:
- proactively monitor changes in Domestic Law and regulations published to interpret that law;
- ensure that the Group operates within these Domestic Laws and regulations;
- provide proactive advice to management and ensure that risks are identified in advance; and
- issue the new transfer pricing documentation reflecting both the OECD and the domestic tax law requirements, with the support of management of each entity.
The tax team undertakes this work under the guidance of the Group Tax Executive, who reports those activities to the Group Tax Committee, which comprises the Deputy Group Chief Executive, the Group Finance Officer, the Group Tax Executive and the Group Finance Executive.
The Group Tax Executive is also charged with the responsibility of designing, implementing and maintaining a tax risk management framework for the Group which is aligned to Aspen's overall strategy and risk appetite. The tax risk management framework is based on the philosophy that the Group applies a risk-based approach to tax matters and that all of its tax affairs are proactively managed.
The Group Tax Executive is a standing attendant at the A&R Co meetings and reports on the Group's affairs to that committee. In addition, reports are issued to the Board as decided upon by the Tax Committee or as requested by the Board.
Our tax strategy
Our strategic approach to taxes is to:
- implement systems and policies that provide for sustainable tax positions for each Group entity and that are compliant with the tax laws of the country in which each Group entity operates;
- engage with tax authorities with honesty and integrity in the spirit of cooperative compliance;
- identify and manage tax risks, ensuring that appropriate provisions are raised in relation to identified risks;
- ensure the business objectives are met in a tax compliant manner;
- remain up to date with taxation laws, regulations and trends to ensure the Group's business objectives remain tax compliant; and
- act responsibly with regards to tax positions taken ensuring that the Group's reputation is not negatively impacted by those positions.
This strategy was formulated during the current reporting period and is partially based on the Group's Tax Charter which has been in place since 2013. The Tax Charter was simultaneously modified to reflect the activities of the Tax Committee.
Our tax risk appetite
Decisions on where our businesses are to be located is based on the Group's strategy and the commercial viability of doing so, taking into consideration the Group's need to support its customer base, the location of its investments in specialised manufacturing facilities and the availability of appropriately skilled people who contribute to the overall value chain. Although certain of the Group's entities are located in low tax jurisdictions (as defined by the OECD), these principles are applied consistently and without consideration of the potential tax benefit that may accrue to the Group. When we enter into transactions, the tax laws that affect that transaction are strictly applied within the context of the commercial requirements.
We are particularly risk aware in relation to our transfer pricing strategy. Our strategy is aligned to the OECD Transfer Pricing Guidelines and follows the arm's length principle unless another principle has precedence under Domestic Law. For example, Brazil does not follow the arm's length principle but follows a formulary approach to determine the transfer price for transactions. The Group follows the Brazilian method in relation to transactions that are entered into between its Brazilian operations and other members of the Group. This is balanced against the arm's length principle that is applied by the company that is a counterparty to the transaction.
We are conservative in determining transfer prices by applying margins that are aligned to those expected by tax authorities in relation to both parties to the transaction. In addition, we do not hold any intellectual property in companies that do not actively participate in the value chain. Transfer pricing principles are implemented in a consistent manner by all Group companies.
Our tax compliance
We strive to submit all tax returns and other relevant forms and documents as they fall due, fully disclosing all necessary information that would be required by a tax authority to make an informed decision in relation to the tax positions that are taken in the tax return.
The Group is regularly subject to review by tax authorities. We are fully cooperative with the tax authorities conducting such reviews. These reviews are generally concluded without further taxes becoming payable under the law. Where the reviews do result in additional taxes becoming payable under the law, we determine whether or not we should defend the positions that were reflected in the returns and the information submitted to the tax authority. If a decision is made to defend the positions taken, the appropriate legislative processes are followed.
In addition to assessing whether or not the positions should be defended, we consider the likelihood of success and raise provisions based on this assessment. Those provisions are reviewed by our external auditors who are satisfied that adequate provisions have been raised for potential exposures.
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