Creating value through our capitals

celebrating 20 years Financial
capital

   
   
   
Financial capital

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

   
Financial Capital Banner

       

INPUTS

KEY INITIATIVES

OUTCOMES

 
       
  • Pool of funds available to Aspen through capital and debt funding
  • Cash flow generation capabilities
  • Reserves
  • Maintenance of strict financial discipline and controls
  • Deciding on deployment of available capital
  • Measurement of financial performance, value creation and cash generation
  • Active engagement of providers of capital and debt funding
  • Seeking out investment opportunities to increase revenue generation, profitability and shareholder returns
  • Focus on organic growth
  • Generation of synergistic benefits from acquired businesses
  • Conclusion of the “amend and extend” restructuring exercise in respect of the Group’s debt portfolio with its primary lenders
  • Focus on working capital management
  • Focus on increased tax reporting requirements and tax transparency
  • Economic value creation for Aspen’s stakeholders, including its shareholders, employees, customers, providers of capital, governments and business partners
  • Distributions to shareholders
  • Sustained earnings growth to Aspen’s shareholders for 20 consecutive years
  • Delivered a CAGR of 28% in returns to shareholders from listing until 30 June 2018
  • CAGR in excess of 34% for revenue, EBITDA and NHEPS since listing
  • Funding opportunities at competitive rates
  • Strong operating cash generation enabling strategic deployment
  • Implementation of state-of-the-art tax reporting systems and developing tax transparency policies and principles
Composition of capital

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

Change
%
2018
R'million
% 2017
R'million
%
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
Investment income 343 2 287 2
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
Deferred tax 21 0 (9) 0
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
Withholding taxes 70 17 10
Net value added tax paid 27 719 568
15 1 919 1 670

* The number of employees who joined Aspen from acquired businesses during the year has been weighted and included for the number of months since the effective date of acquisition.

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.



Working capital

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
(cents)

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.


Composition of R46 780 million net borrowings
(R'million)

KPI: Leverage ratio
(ratio)

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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