Aspen Pharmacare Holdings Ltd

JSE:APN

Earnings Call Analysis

Aspen's Mixed Fiscal Year Results and Outlook

Aspen's fiscal year saw Regional Brands increasing their gross margin from 56.5% to 59.6% and Sterile Focus Brands ending at 60.6%, highlighting a recovery trend. Manufacturing bounced to 15.7% margins in H2 from a low of 5.2%, yet annual figures fell from 20% to 11.4%. Overall, Group gross margins dipped marginally from 47.2% to 46.5%, paired with a revenue increase of 5%. Operating expenses were contained, rising only 2% amidst inflationary challenges. Normalized EBITDA concluded at ZAR 11.1 billion, slightly above the prior year's ZAR 11 billion. Forex impacts flipped from a ZAR 184 million gain to a ZAR 434 million loss, and effective interest rates are projected to rise between 120-150 basis points from 3.2%.

Overview of Financials and Recovery Efforts

The company reported that revenue decreased by approximately 10%, even when considering a constant exchange rate. The closure of facilities in the first half of the year had a significant negative impact. Despite this, the company pointed towards a much stronger second half, fulfilling the guidance it had set for itself, showcasing an increase in revenue by 13% over the first half and a record high in both revenue and EBITDA for the half-year period.

Operational Efficiency and Dividend Growth

Operational cash flow per share increased by 5%, a modest achievement attributed to the company's measures to control operational expenses, which grew only by 2% despite inflationary pressures. Additionally, the company announced a 5% increase in the dividend declaration, citing strong future cash flow projections.

Strategic Investments and Manufacturing Gains

Significant investments in inventory to support future contracts, such as the Viatris deal, are expected to influence a reduction in inventory levels in the future, positively affecting cash conversion ratios. In the manufacturing segment, margins have improved to 15.7% in the second half, recovering from earlier lows though still below the prior year's performance, with the loss of COVID vaccine revenue partially to blame.

Gross Profit and Margin Improvements

The gross profit percentage has seen consistent growth in different business segments. Regional Brands, for example, drove up their margin to 59.6% thanks to cost of goods savings and product sales mix. Sterile Focus Brands margins recovered to 60.6%. The company is optimistic about maintaining and increasing these margins over the medium term with targeted strategies.

Commitment to ESG and Access to Medicines

The company emphasized its ESG commitments, underscoring efforts like the reduction of Scope 1 and 2 carbon emissions by 23% since 2018, and initiatives ensuring patient access to high-quality, affordable medicines. The Serum contract for vaccine distribution represents a significant accomplishment in this regard. Furthermore, success in enhancing female representation in top management has been a highlight, with the percentage rising from 19% to 53% over the last five years.

Focus on Emerging Markets and China Strategy

Aspen sees significant opportunity in bulking up its emerging market footprint, with a particular emphasis on China, projected to become the largest territory in the Aspen business. The company's strategy hinges on leveraging partnerships and a strong existing presence in regions like South America and Africa. Pharmaceutical giants such as Lilly and Amgen have established long-term relationships with Aspen, signaling trust and the potential for game-changing growth.

Earnings Call Transcript 2023-Q4

[Sibongakonke N., Investor Relations Manager]

Good morning, everyone, and welcome to Aspen's financial year 2023 results. I'm Sibongakonke, Aspen's Investor Relations Manager. For today's program, we will have Stephen who will do the performance highlights, and then he will hand it over to Sean who will take us through the financials, and then hand it back over to Stephen before we open the floor up to Q&A. Thank you, Stephen.

[Stephen Saad, Chief Executive Officer]

Good morning, everyone. Good to be here. When you sit in the -- you sit back there and you suddenly see 25 years up there. 25 years. Sure. It's an irony though that I feel I've got as much energy today as I had on day dot. And I think that's the advantage of having a purpose-led organization and having the passion for it. And just reflecting a little bit from really a little house near Greyville Racecourse to having South Africa's most global company in 25 years. And you'll see the benefit of that. You'll see the tailwinds of the currency hedges that we've created. I think in those 25 years, it's never been a straight road, and the road never is straight. But it hasn't been a roller coaster, because we've never gone back to base. And we've built a foundation and we've consolidated on new foundations and built from there. And I'm hoping you'll see where we are in our journey at the moment. It's a very exciting part of our journey.

The thing with Aspen is you never get time to celebrate milestones. And it's simply I mean; our motto is very simply that rest is rust. It's always been the way we've carried ourselves. We look forward. History belongs to those that write the books. And I mean, if you speak to Rassie and the Springboks’s team, they -- yes, they beat the All Blacks convincingly last week, but it actually means nothing for the next game. So that is why people -- why you have to -- you can't have time to celebrate in times like this. But I tell you this because I'm worried because I've had a few comments that's been made to me in the last couple of days about celebrating or not celebrating. And there's been a particular concern from investors about the episode of treating ourselves here. And I want to be clear and categoric that this is not a reflection on the company or management. But there is no message in the fact that we have acquired both Mounjaro and Viagra. So this is something that has been put out today. I mean, I had another expression, which I think it's probably a better use of cameras. So it's on a very -- on a much more serious note, I think what you should get out of these results is Aspen is a company you can go to war with. We take knocks, very big knocks. For those that remember H1, we were down nearly 20%. We got down and we were down at the half but we get up. We get up. We learn better for our experience and what do we do? We produced a record H2 for you.

Over 25 years, I would think that there's been no more than 5 occasions that I feel we were in the position we're in at the moment. It's a very exciting position that we're in. We've built that foundation and it's not an accident. It's not by accident that we are here. We made calls, we made very bold calls at the time years ago and I think this is -- when it's far away, it's hard to conceptualize that even when you've got it and you've got the ideas but what -- where we are I believe is that we are in the position, and it's so tangible now. It's coming up in this next financial year as we're starting to see the fruits of some of that labor. We -- it's in our hands to make bulk calls into exceptional calls and that's something that we're determined as a team to do. The most positive thing about the calls that we have is that really the destiny is in our own hands. We've got the assets, we've got the agreements, what's the -- it's a thin line between success and failure. And the thin line between success and failure is executing on everything we've achieved. So I think that's if I can talk -- if I can digress just for those 25 years, that's what I'd tell you.

And so I'll move on to what I think most of you are here -- to want to hear. And that's about our performance. As Sibonga said that Sean will do finance and I'll come back and talk about where we are after that.

So when we speak about performance, we had a pretty bold guidance around EBITDA. We talked about the prior year performance and in H1, we had EBITDA down to 11%. So there was quite a big percentage we had to pull back on. And we had big losses from the prior year to take a COVID vaccine out of our business and Sean will show you in the margins the impact it has in losing things like that. What you should also read into when Sean talks is if that's how bad it affects you when it goes out, what happens when you put products in, because that's obviously the inverse -- the converse. So this was a negative impact in China. And I don't have to tell you about what went on in Russia. And we had divestments which affect EBITDA as well. And in spite of these challenges, we had increased normalized EBITDA of to ZAR 11.1 billion and we also got our revenue above and up in the prior year.

So I'd like to just speak about the second half a bit because it's a pretty important half. It's been a pretty important half for us to realize our ambitions and what we were trying to achieve. We achieved ZAR 21 billion in sales, which represents our highest achievement of H2 sales. Our normalized EBITDA for the period was also record of over ZAR 6 billion. When we look at the figures, and what -- you'll see there's a very -- every area has grown considerably. Commercial Pharma is up 11%, manufacturing is up 15%. And it was up 45% in H1 which was something we guided to you was that we were -- we had some closures to make for our contracts. And so we were going to have a much stronger H2 and that's exactly what we had. And of course, some strong currency wins. Now when you think about manufacturing being up 15% and in constant currency, it was relatively flat, bear in mind that in the prior year, we had a COVID vaccine and we lost that. So as I say, we take our knocks, but we make our comebacks.

Revenue in both Manufacturing and Commercial Pharma are up on the prior year and the gap has really been closed by strong organic performance, and some strong currency benefits as well. We'll look at the parts of our business. We've got obviously the group and then we will look separately at regional brands, sterile brands, and manufacturing before I hand over to Sean. There's lots of numbers on these slides, but I think that when you look at it, our revenue was boosted by a strong H2. Result in Commercial Pharma moving up from plus 2% to plus 6%. So to cover that gap, you've got to sort of double there to work out what we achieved in the second half. Manufacturing was bounced back in H2. We were, I'll remind you we were at minus 10% and it's gone to -- it went into plus 3% at a reported level and the improved heparin product sales offset the COVID losses. We had a negative impact from the COVID vaccine loss and of course, we had positive tailwinds. And you can see that tailwinds between the difference between constant exchange rates and reported exchange rates.

Regional Brands, this is the biggest part of our business. And it's a business that -- it's sort of -- it's grown across all areas, which is really positive. And it's important for us to do well because this is sort of at the heart of the business and our Commercial Pharma business. And it's shown the resilience, stability and sustained growth in a tricky global environment. And if you run through it, you'll see Australia is up. Everywhere, it's up except Africa Middle East. And really that's because of the impact of the divestment loss last year. We had products in South Africa. We divested it for ZAR 1.8 billion. And with our debt, if we adjust it for that, our Regional Brands would have been up 11% and the African Middle East would be up 3%. There was also impacts to our South African business of a SAP implementation, but the bigger adjustment was for the prior year divestment.

The Sterile Brands had a really interesting and good bounce in the second half. We -- and the reason for that is that in the first half, we -- and even in the second half, we -- obviously, the Russian business fitted very large into the steriles and you'll see that impact in Europe CIS. And the China business -- the business in China was -- it had a very bad first half because of the COVID shutdown. So that bounced back too. And so what you'll see here is the reported revenue is up. H2 was particularly strong. That's up 14% on the prior year, and the even in constant exchange rate, it was up 2%. Unfortunately, Russia, which was ZAR 1 billion turnover business for Aspen is significantly smaller than that. And our projection is that it will continue to decline. We'll be at now for a much smaller base. And of course, Asia is up as a result of the China lockdowns being suspended. So a good very strong comeback from steriles as well.

Manufacturing. Manufacturing is probably going to be some of the more interesting parts of our business going forward. It's going to play a bigger part. It continues to grow as a part of our business and probably, it's anticipated to be a bigger and bigger contributor towards revenue and particularly profitability going forward. In the first half, we had revenue down 10% and 12% in constant exchange rate. And you can see what -- where we are now. We're at 3% and a minus 6%. The heparin was key to our growth driver here. We closed the heparin business. We had closed our facilities in the first half and closed off our French facility to upgrade for the manufacturing coming into the business that we guided towards a much stronger second half. So that was really, it's as guided. The other thing that's happening in the heparin business, and I'll talk a bit about it later was during the year, it continued to increase in price. It just was -- it was -- also, it relies on power, and some of the -- it was treated as one of the commodities. The result was higher selling price but also high-cost prices but that was to help drive the revenue there. And of course, to finish those form of steriles is a really -- it's literally hard and a pretty big knock on profitability as well. And that was from the loss of the COVID vaccines. The positive of course, is that other contracts which are outside of these contributed to earlier contracts that we signed in our French facility. It contributed to a ZAR 300 million offset from steriles.

And with that, I'll see you now on the broad -- the guidance and prospects and I'll hand over to Sean to give you a financial review with some hunger.

[Sean Capazorio, Chief Financial Officer]

So we're going to make it bigger. Okay, no worries. All right. We're going to talk off of a small screen. Thanks, Stephen. That was a good overview and it gave us a good sense of where we've gone on the revenue side. Yes. So it's safe to say that it's been a very challenging but a very exciting year. And we're really excited about the period ahead.

I think just to sort of start off throughout my presentation, and I think you've also picked it up from Stephen but we're going to refer back to the guidance we've given you previously. And if you look at that, we've met all of that guidance. And I think we take our guidance seriously. So when you look at the 2024 guidance that we'd take you through in the presentation that's in the commentary, just bear in mind what we've achieved to date in terms of guidance, and with -- the fact that we do take it very seriously and take cognizance of that. We're very excited about the future. We believe the business is in really good shape and is poised for a very, very strong medium-term growth.

Right. Now, I've got a blank screen.

On the financial highlights, we've had a record H2 as Stephen has spoken about to both on revenue and on the EBITDA. So if we look at the revenue, you can see if I just explained these bars quickly too. if we start with FY '22 on the left moving to the FY '23 on the right with the 2 bars in between. So if I start with revenue, we were up 13% in the second half versus the first half, a really, really strong revenue performance. EBITDA was even stronger. If you look at the next bar, we climbed up 18% in the second half from the first half, ending the second half with just over six ZAR 6 billion. It's a really, really good achievement. On the -- sorry. Can we just pause and please fix this? The screen keeps going blank on my screen, yes. Can you make it full-screen, please? Thank you. All right. It's better. Thank you. All right. So, thank you so much. Right.

Just to digress quickly, just to get back on [indiscernible], last year, when I was doing my presentation, we had load shedding. And as I was talking, I looked at everyone's faces and they weren't listening anymore. So I said, I must be saying something really bad. And then I realized that the power had gone down. So this year, we had the IT problem, but fortunately, finance fixes power and then it fix the IT problems. So we're back on and so on [Sonia]. So going on to the normalized headline earnings, you can see even there, if you look at our second half, a record just under ZAR 8.2 for the half and up 20% in the second half. You will also notice that the NHEPS has declined 8% relative to the EBITDA growing by 1%. And that impact is heavily influenced by foreign exchange losses which are embedded in our finance costs. If you take the impact of that, it's ZAR 1.41 impact, a 9% impact. So if you had to assume last year's finance costs in this year's results, we would have had ZAR 1.41 improved NHEPS. So certainly quite a significant impact and I'll cover that in a lot of detail in a separate slide but this is certainly something to something to bank that operationally we've driven a very, very good performance, but we have been impacted by foreign exchange.

On the financial side, on the borrowings, if we look at these graphs on the one on the far left, you can see our borrowings is -- it's come down 1%. What we've done in that growth, we've restated the FY '22 at CER because we have quite a lot of the rand -- the rand has weakened in this period. So we restated borrowings last year from ZAR 16.1 billion back up to ZAR 18.6 billion to get a comparable and you can see a nice drop of 1% in our borrowings. You can see a covenant ratio at 1.9x holding steady. And if you go back to FY '21, that covenant ratio is sitting at 2.1x. So a very nice trajectory, very comfortable. We're really proud of our operating cash flow per share. That's grown 5%. Bear in mind that EBITDA only grew at 1%. We've seen a 5% grace growth in the cash flow per share, not where we wanted it to be. We wanted it to be higher than that, but certainly, it's still a very proud achievement of 5%. That also flowed into our operating cash conversion rate where we ended the year at 88%, below our target of 100% but still an improvement on this year. And I'll take you through a slide later on where we can show you that in the second half, we actually achieved 115% cash conversion rate.

All of this supports our dividend declaration, which we've increased by 5%. And we're also very comfortable and I'll take you through some detail on that a bit later that our future cash flows are very strong. We do see an improved profile in our working capital investment and our cash flow is going forward. So we do see strong support for future dividend declarations going forward. But certainly, we stand behind a 5% dividend declaration for this financial year. This -- I thought this is quite an interesting slide and perhaps just to explain it before we delve into the detail. So the blue bars there are our revenue numbers in the second half from 2019 to 2023 and the little dotted line that sort of goes at the bottom is our EBITDA over that same time period. And you can see that from 2019, we've gone from ZAR 15 billion turnover up to ZAR 21.6 billion, and our EBITDA has gone from ZAR 5 billion up to ZAR 6 billion over that period. And both of those numbers in '23 are record numbers. We've gone right back to the little house in Greyville and this is certainly the highest number we've achieved to date. So it's certainly a very proud moment for Aspen and something that we did guide to in the first half interim results.

And just sort of some sound bites out of that, if you look at our H2 revenue, I think Stephen already covered it, we're up 12% on last year's H2 with Commercial Pharma up 11% and manufacturing up 15%. We did have the benefit of currency tailwinds. So what I did put here is also what it was in CER. So even in CER, we were 1% up on last year's H2, and that was after absorbing more than ZAR 1.3 billion loss in the COVID vaccine revenue as well as the product divestment in South Africa. So on a CER basis and on a reported basis, it's certainly a very strong H2 performance that we are very proud of.

On to gross profit percentage. If I look -- I'll just explain these. These are the 4 segments of the business, Regional Brands, Sterile Focus, Manufacturing and then ending with Group. And what we've analyzed in each of those bars is the FY '22 gross margin going through the halves of '23 and then ending with the '23 gross margin. So if we start with the left quadrant, you can see our Regional Brands last year at the end of FY '22, gross margin was 56.5%. And throughout this year, we've driven up that margin and ended the year at 59.6% and both halves were very consistent at 59.7% and 59.6%, driven by cost of goods savings, good product sales mix. And I think the important thing to underline is the resilience of our emerging markets to be able to fight inflation. We have got pressure in our businesses, but emerging markets provide us with quite a lot of opportunity to manage this in a very, very constructive way.

Onto Sterile Focus Brands. If you recall, we had the VBP of Naropin in FY first half or second half of FY '22 and we can see the margins again starting to recover quite nicely. You can see at the end of last year, we ended at 60%. And this year, we're consistently growing at 60.5% in half 1, 60.8% in half 2 and ending the year at 60.6% and recovering -- a good recovery trend, obviously, underpinned by our site transfer savings that we've been guiding you on and also a lot of portfolio optimization initiatives that we've undertaken. Down to the bottom left quadrant, which is our manufacturing. Very happy to end up to be able to say that we achieved a double digit. If you remember, we guided double-digit manufacturing margins in the second half. We achieved 15.7% relative to 5.2%. But we're not padding ourselves on the backyard. That's not a great margin. And you can see that at the end of the year, we ended at 11.4% versus last year's 20%. That delta of the 20% to 11% is heavily influenced by the loss of the COVID vaccine, which is one line in our Gqeberha facility. So you can see as we start to build on that volume in our Gqeberha facility and in our French facility, you can see it's going to have a massive exponential benefit to our gross margins going forward to lose 10% on one line, you can imagine how it will -- I think from a medium-term perspective, we look at good growth on our manufacturing gross margins.

If you throw all of that into the wash for the Group. In Group gross margins, we've had slight dilution between 2022 and 2023 of 47.2% down to 46.5%. That obviously is underpinned by the improved gross margins in Pharma offset by the loss of the lower Manufacturing margins. But going forward with our medium-term guidance, we see this margin trend turning to a positive trend over the medium term based on our Sterile manufacturing strategies.

Onto what the accountants like, the income statement. This is just an income statement showing our normalized EBITDA. So quickly just to explain the table, we've got revenue, gross profit going all the way down to normalized EBITDA. In the columns, we're comparing FY '23 to FY '22 reported. And then on the far right, we're just also comparing it to our constant exchange rate, which is the way we measure ourselves. On the revenue side, we've already spoken through that. So I'm not going to go through that in any detail, but 5% up in reported terms. In gross profit, we've also covered slight dilution, but we know why and we know that there's medium-term opportunity to grow that. If we then flip down, I think the thing I really do want to highlight on this slide is if you look at our operating expenses in constant exchange rate, we've only gone up 2%. Notwithstanding all the inflationary pressures in the business, we've managed to cap our expense growth to 2%. We've also had the benefit of some operating income. A lot of that has come from our one-off compensation in the fire we had in India. So that has given us some benefit.

In terms of normalized EBITDA, we ended the year at ZAR 11.1 billion versus ZAR 11 billion last year reported. And going back to what I said at the start, this is exactly in line with where we guided. We did -- we actually came in slightly ahead of guidance. So again, going back to the guidance and the fact that we take our guidance very seriously.

I think this is the slide that will take -- have the most discussion on. It's our net financing cost slide. So perhaps just to go and talk you through the table. This is our normalized financing costs and it breaks the financing cost down into its components, being interest paid and Forex losses and some notional interest and then giving us the totals. So perhaps if I could just focus on the interest paid line first, which is the first line there. And if you look at the table, we're comparing FY '22 on the far right, half 1, half 2 coming through to FY '23. I know it's normally the other way around, but I got convinced by the IR team that people do look from right to left sometimes. So we -- I decided to be different on this slide. So you can see last year, we ended -- our effective interest rate was at 2.9%, first half, 2.8%, that was slightly down in the first half. And we ended the second half with 3.55% which is 73 basis points up on half 1, and we did guide between 60 basis points and 80 basis points. So we came within the guidance and ended the year at 3.2%. Again, having -- this wouldn't have been possible without the protection of the IFC loan of ZAR 600 million at a 0% fixed rate. That gave us a lot of protection against these rising rates. So the IFC loan certainly was a big factor in keeping our interest rates cap at these levels.

I think you might have to put your sunglasses on for this next slide, but I'm going to put it up there. Yes, the big challenge we had this year was on foreign exchange losses. If you gain, if you look to the table first, last year, we had a foreign exchange gain of ZAR 184 million. This year, we ended the year at a loss of ZAR 434 million with equal -- pretty much equal losses in each half. So a swing of over ZAR 600 million, which, as I said, has heavily impacted our normalized headline earnings per share. If we now glance to the right, if we first look at the graph at the bottom, what these graphs are depicting on the access that's got the 1, that's the euro and all the other currencies, the emerging market currencies are based against the euro because a lot of our intergroup trading is euro-based. And so we -- that's why we measure ourselves against the euro, and that's where all of our foreign exchange volatility sits.

If you look at 2022, you can see relatively stable. You can see it on the right, there's a sort of light blue line at the top there, that's the Russian ruble weakening against the euro -- sorry, strengthening against the euro if you look at that dark blue line. Sorry, I'm just looking at the Russian ruble. The dark blue line that goes underneath the trend, you can see the ruble strengthening there and going below the 1, and that was quite a big factor in driving our foreign exchange gain last year. If you then flip to the top, you can see the volatility that we've had this year. All of the rates have weakened against the -- or most of the rates have weakened against the euro. And you can see the Russian ruble going from that dark blue line at the bottom being under 1 is now way above 1. So a lot of volatility. You may well ask, well, is this what we're going to see going forward? We know that foreign exchange volatility is not something we can control. But certainly, we have acknowledged as a team, we can do things better. So we've sort of done a lot of introspection on how we can do that. And we've made a -- we have done -- we actually had this decision quite some time back. We are going to be implementing a centralized treasury system across the group, which is going to give us much better visibility of our foreign exchange positions.

It's going to help us to do more advanced than effective hedging techniques and also help us to manage our intercompany transactional flows and to make sure that we're not sitting exposed in any one currency. It won't eliminate the risk, but certainly, we've got these plans in place to try and reduce this risk going forward because certainly, it has been quite a disruptor to an otherwise very strong operating performance this year. I think the ZAR 753 million that we've covered there already. And then for guidance purposes, we do see our interest rate -- effective interest rates going up between 120 basis points and 150 basis points versus the prior year endpoint of 3.2%. We're hoping that the interest rate cycle is topping out and that things will improve after that.

On to working capital, quite a busy slide, but I think quite a lot of nice messaging on this. So I think if I could take your eyes to the top left first, which is our operating cash conversion cycle, you can see the dark blue line is our sort of 12-month moving average. And you can see that both in 2022 and 2023, we ended below 100%. And the last time we were above 100% was in 2021, where you see the dark blue line is above the red dotted line. However, you can see that we've achieved 115% in the second half versus 58% in the first half of this year. So it's certainly a big improvement in our cash conversion rate in the second half, and we do anticipate this -- and we are targeting to achieve over 100% conversion rate in the future. And I'll take you through that when we talk about working capital.

If we then go to the bridge on the right, that really is bridging our working capital values from reported to the current year. So if we start with the number on the left, ZAR 17.3 billion, that is our reported number. You might say, wow, working capital has gone up quite significantly, but you've got to add ZAR 2.7 billion back first because that's the foreign exchange. We have to restate all our working capital at closing rates. So if you do that, your working capital is then at ZAR 20 billion rather than the ZAR 17.2 billion. And the big driver of the increase this year has been in our inventory levels. One of the -- and what we've done in the block of inventory, we've broken it down into components. And if you look at the middle block there, which is the heparin, we've invested about ZAR 1 billion in heparin this year. And that is done deliberately to support the Viatris check transaction, which we announced recently, which will -- we do expect to unwind as that transaction becomes effective from October next year. So certainly, we've built up that to be able to support that contract, and we do see a liquidation of that investment over the FY '24 year.

On the other manufacturing, our API business, the unwind there was slower than anticipated this year. We do see some opportunity of better revenue growth in the API business in the year ahead, and we do anticipate that inventory to also unwind in FY '24. Unusually, and it's one that we're quite irritated about, but we had to do it but in Australia for their regulated products, they sprung a surprise on us and said that you have to have minimum safety stock levels for all your reimbursed products. So we had to go and build up to 6 months' stock on all our reimbursed products in Australia in the second half to comply with this legislation. Otherwise, we would have been fine. So it's a one-off thing that we've had to take a knock on in our Commercial Pharma, but it's certainly something that wasn't anticipated but is a one-off in nature.

On the receivables, we've had a big increase in receivables in the -- particularly in the last quarter, and that was driven heavily by the improved manufacturing performance in our second half, which is very much Q4 weighted. So we do see those receivables also liquidating in Q1 of 2024. So if you throw all of those into the mix, you can see why we're quite confident that we will -- we aim to achieve over 100% cash conversion ratio in 2024. And then maybe going to the block in the bottom left corner, net working capital as a percentage of revenue. You can see that's also increased over the period, but we do anticipate with all of these measures that those ratios on the right will be below FY '22 over the medium term. I think quite an important message, and it will come through in Stephen's presentation, but all these new sterile agreements are all toll manufacturer, they're really working capital light. So you're going to get a lot of revenue with very little inventory investment. So that will also have a big impact on the net working capital to revenue ratio over the next 2 years to 3 years. So it's certainly one that we're confident of turning the cycle on.

It would be remiss of me to talk just about profits and finance without ESG. The ESG really is -- we're absolutely committed to all of our ESG commitments, all 4 pillars of them. Sorry, I'm just moving my pages around here. I'm not going to go through all the detail on our ESG but it is a cornerstone of our strategy. I think the key area that we always focus on, which is our biggest focus is giving -- providing patient access to quality high -- high-quality affordable medicines, and that really is the cornerstone. I think the Serum contract that we signed last year is a good driver of that strategy, and we're quite excited that with those 4 vaccines being rolled out over the period going forward to support that initiative of providing access in addition to all of our other measures that we do on access. The other thing perhaps to call out is on the people side. We've launched the global talent management program, which also includes improving gender representation. And quite importantly, we've managed over the last 5 years to increase the top -- women in top management positions from 19%. It's now sitting at 53%. So it's certainly quite a big achievement. But we are big on talent management and succession planning. So quite a big driver in our process.

On the society side, we've got a whole lot of measures there that we're driving in terms of maintaining our B-BBEE status and supporting socio-economic activities. And then I think some sound bites on the environment one. We have achieved a 23% reduction in our Scope 1 and 2 carbon emissions, which is a big achievement since 2018. And also, I think if you recall last time, I think there was quite a lot of interest in our Gqeberha facility and how we're going to be saving power, et cetera, going forward. We've made good strides there. We're about to implement a steam from what's called biomass from wood chips from the offcuts from the timber yards that we're going to be using to drive our steam generation. And on top of that, if you remember, we've also got the recycling process. I'm going to try and pronounce it pyrolysis where you convert the recycled plastic into gas, which drives electricity. And we did guide that, that project would put us fully off the grid, and we -- that's still on track to be launched around about January 2025, at which point the Gqeberha site should be then fully off the grid.

I think underpinning all of these ESG commitments, it's not just talk on a piece of paper. All of our business units are measured on these things. It's all in their scorecards and at an executive level, it's a key driver in terms of our balanced scorecard that we need to achieve, and you'll see this embedded in our KPIs. So we do take ESG seriously, and it's a key driver underpinning all of our financial objectives.

So I think on that note, I'd like to hand back to Stephen. Stephen, you now got the big screen back. Well done, Seanie. Thank you very much.

[Stephen Saad, Chief Executive Officer]

Thanks, Sean. That was well presented. I think on ESG, Aspen is recognized globally for what we do to access to medicines, which is really positive, whether it's with United Nations, even at the latest BRICS Summit, we -- Aspen presented on pandemic preparedness. And when you see the number of multinationals that are going through our Gqeberha facility also just to see what they can do with us to create access. It's a very exciting position that we're in, and it's very great to be in that position. And of course, and I'm not biased because I've got 4 daughters, but women are much better than men in business at the end of the day. And that 33% is not good enough till it's beyond 50%. So that's something that we're committed to keep moving and moving forward.

On the strategic review, if I try and visit every Aspen operation around the world, I'd run out of lifespan. So it's that many operations. I would never be able to get to every operation practically. So I'm very clear. I said, look, we're an African company. I'm an African, and I really can only understand the big 5. So please don't give me more than 5 things, not 100-page power presentations, 5 things that move the needle for you. The 5 things that if you get right, your business goes forward. The other 95, of course, they're important, but they might not change -- if they don't change the needle for you, what are the 5 things that you need to get right? So in fairness to the investing community, I'm going to tell you about our Big 5 and the 5 things that keep the exco driving forward. And in our Commercial Pharma, there's 3 areas we've got to drive organic growth. The Commercial Pharma business, if you look at it over the last 4 years, it has been allocated no capital. We've obviously allocated to building our sterile manufacturing. So driving organic growth has been really important and the fact that we have had organic growth over that period on a like-for-like basis. It gets you very positive on the business. If you look at other companies with post-patent brands, they certainly aren't showing growth.

So that tells you about the execution, the markets we plan and our commercial expertise in the market. The VBP impact in China. So that's where there's a sort of a price reduction and a tender process, you don't lose all your volumes, but we -- I experienced it as you can lose around about half of your volumes. And mitigating that is very important for us which we've done particularly well in China. And China is an important part of our strategy going forward. We have said it before, and I'll say it again, and we really think that China is a market which should be the largest territory within the Aspen business if we get it right. And then, of course, we need to supplement our base growth by bulking up our emerging market footprint. And having that footprint is important because it draws in partners, bigger multinational partners who are important to Aspen and have always been very important to Aspen's progress. They always have focus and they focus on their key markets, U.S., Europe, Japan, et cetera. And so to have somebody credible that can meet compliance requirements and give a financial results makes -- as it would make Aspen a very important and a valuable partner across emerging markets.

For manufacturing, well, in manufacturing that we really -- we've got contracts, we have to close the contracts because there, we are a material contributor to the group. We've built a very relevant global sterile footprint on many who had questioned and doubted, have you got a sterile? Is this the right strategy? I think we've got a very relevant strategy. And events now in the market are making it even more relevant, and we'll talk a little bit under manufacturing about that. And understanding that we spent a whole lot of money on CapEx with that comes all the related depreciation and you've got your HVAC, your air conditioning system that you keep them on 24/7, you've got your people doing OpEx there, who are really part of your OpEx incurred. So putting contracts in is very, very incremental both to profitability, which is now expenses and to cash flow. And our API business took quite a knock during the COVID period, and we want to restore profitability to pre-COVID levels. And when you look at our business, manufacturing business, we have a profit in API business, and we have -- which more than compensates for the losses that we have in our factories while they run at these losses at the moment, and I'll take you through that under manufacturing.

So let's talk about the footprint that we've -- I often put, last time I put a picture of, I think there were toes in a footprint and see what the value of a footprint really is. And I think the value of a footprint is probably best demonstrated in South Africa. We've got a respected team here. They're a very professional team, and they're very capable across Southern Africa. And so -- and it's demonstrated by the multinationals who partner with us. As you know, we've had a long-term relationship with GSK. And what is the value for a partner and what is the value for Aspen? The value for the partner is that you have a very competent team. We're absolutely focused. We've got much more headcount on the ground, and this -- these are our core territories. And this is what moves the needle for us. For them, it's a small entity. They don't invest too much. Our product comes on patent, off patent, they can hire and fire people all the time. They know with Aspen; you've got this presence on the ground. From an Aspen perspective in a market which is volatile for pharma markets or moving markets, generic markets can be tough, who knows what NHI brings, et cetera. But you have access to new chemical entities, biosimilars, branded products, research-based pipeline and there's no commoditization risks.

And particularly, when you're starting to get the pipeline, not just a one multinational, not 2, but not 3. It's a real -- it's really going to be a game changer for our South African business. The sales from Lilly and Amgen are sort of ZAR 750 million. But I think that number is a number that we actually believe the pipeline is worth a whole lot more than that base value. The Lilly pipeline is one of the strongest globally. Lilly is the largest pharmaceutical company by market capitalization in the world. And I think products like Mounjaro, we're hoping to launch in Q1 of next year. We've got -- they've got products and they've got 5 products. I think it's -- there was 5 novel products to be launched in the short term, then in oncology, immunology, pain, diabetes, and some -- and Amgen too is also a $100 billion-plus company. And they've got new chemical entities. They've got biosimilars, also in oncology, immunology and ophthalmology.

Now we battled in oncology, and we battled in some of these areas because those areas are really -- there's so much new innovation coming in their new products that our products tend to be older. And there's no time to almost get a generic in those markets because as you get a generic, there's a new product that comes online. So we're on the front foot here with these companies. And I think one thing you should think about here is the trust that big companies are placing in Aspen with their intellectual property and managing their intellectual property tells you not just about the commercial expertise I spoke about it, but the compliance within Aspen. And to have that type of compliance in the business and to have it across areas like Latin America, et cetera, are very valuable in having these discussions. I will not -- you could be the best executors commercially but if you haven't got compliance, you can forget about doing a transaction with any of these companies.

So that's the benefit of the footprint. Now I'd like to speak to you about Latin America, where we talk about building this footprint. Our Latin American team is a team that has performed brilliantly within Aspen. It's one of those regions, which has -- we bumbled along and we had lots of issues and many of you said, get out of Brazil and get out of here. And I always said to you, I understand we're battling, but it will -- and it will have no impact on our income statement to get out, but there would be an opportunity loss. And I think we've been proven right here because LATAM has just done brilliantly for Aspen. And we've had double-digit growth over the last 7 years. Fantastic team, settled, understand their market. And we really -- they've really been rewarded. We've given -- there's some key household brands that bolted on to this business and it has given us increased exposure in countries like Ecuador, Colombia, Peru, Chile, Argentina. And by having this broader footprint and big footprint, we are hoping to attract further partners on the products themselves. These are growing products. They are post patent lifestyle brands, and there's some pretty loyal support for these products.

So many of you will recognize those names, and I hope that some of the products is there. And there are opportunities to combine some of them is line extend coming with the different dosage forms, which are things that Viatris too are looking and for which we have access. You might say why. Why I look at these products? Well, we actually -- we acquired these products in Australia. We've done very well with the products. We understand them well. We understand the manufacturing opportunities for these products as well as well as the positioning of the product. So a good position for us to be in and why would Viatris exit? Well, Viatris had no presence in these markets. In standalone, there were products they acquired from Pfizer. So it's quite a nice opportunity for us, particularly given that they're growing in spite of the fact they've been in a vacuum.

The sales are $92 million. And as Sean told you, we've got the cash, but a big part of the funding here is a reduction in the heparin stockpile. So there's cash and stock, if you could see it that way. LATAM will be a material contributor to Regional Brands now. And also, it will improve our profitability ratios across the group. So a very exciting transaction for us and for the group and one that hopefully we're going to be spending some very positive time. Of course, there's a competition approval required, and we think that will come through in October or November of this year.

So China. China is what I call a strategy for our future footprint. If you speak to people on China, there's so many different views on China and opportunities. So I think I read last night or the night before, I think someone from the U.S. called China uninvestable and someone from the U.K. said it's potential to have more investment. So it's a market that, from an Aspen perspective, we did in lots of markets. We've been in Venezuela. We crossed many of the emerging markets. We've also sat in Europe, we probably had our greatest challenges, particularly when you're in inflation, noninflationary environment and with the war. But China is a country that suits the Aspen model, growing middle class, strong growing middle class, like branded products, prefer. And so it's a country that we really believe an Aspen model has to succeed in. In the same way, we're adamant about Latin America. We feel similarly about China. And we really are trying to work out how we can get this in the short to medium term. So that's a 2 -- within the next 2 years to 3 years to become a larger and the largest contributor into Aspen.

We've got our [lawsuit] but it also has the last wrinkle that we've got in Commercial Pharma. We're expecting VBP impacts in 2024 and the sales of about ZAR 2 billion will be affected. We don't have -- the VBP hasn't been declared yet on some of our key products, but we -- our insight and our instinct is to say this is the year that it will be impacted. And with this, we have factored in a dilution of these sales and some of the related profit contributions against that in China. As I told you before, numerous other countries or companies are impacted by VBP and many are exiting and looking for partners. So some people only got one big product, they say maybe we can do something with Aspen. The way I see VBP and lay people's terms, it's China's way of having a patent exploration because post-patent products continue to grow in China. And that's not healthy for a system where you don't have generic penetration. So it's almost an enforced generic penetration.

The Aspen model is taking brands after they've had generic penetration. So post-VBP model is what Aspen does and does best or post-patent models where we have expertise. So we're not uncomfortable in the situation. You're just uncomfortable if you have it before it goes off-patent or to VBP. But post VBP, we see opportunities with others. Maybe so that's our only product, and we're leaving, which need very big sales teams behind here. So there's a cost base attached to that. So we've been speaking a bit about looking at opportunities. I'm happy to say we're in advanced negotiations and some pretty exciting opportunities. And we're hoping that VBP is as we anticipate. We think we've got potential to at least mitigate the financial year 2024 impact of VBP. I do just want to stress that is not -- that assumption is not in our guidance. Our guidance is even if we don't achieve those.

If I look at manufacturing, and I'm just going to give you a little bit of a background because that was -- that's the commercial. So we've dealt with Commercial Pharma, and now, we move on to the second part, manufacturing. The API business is important to us, as I told you earlier, around profitability. And it's approaching pre-COVID levels and the rebound that we're seeing, we believe will be sustained. The heparin business, we expect -- we are seeing for the first time in, I don't know, 2, 3 years, the price just didn't look. It's supposed to be a commodity, which is going up and up and up, but we are starting to see downward pressure on pricing in raw materials, and this will drive down cost and selling price. It's a bit of a strange business, the heparin business. From an Aspen perspective, I think it's best for us when the price is lower. Why? Because if the heparin price is ZAR 10 and your markup is ZAR 5, you get ZAR 50. If the heparin price is ZAR 50, that will still give you a markup of ZAR 5 when you're selling at ZAR 55. I mean that's sort of roughly what it is. So your markup is relatively flat. So -- and with your base input costs. So coming down is great. The problem you don't want to be doing is stuck with stock at the top of the cycle that's expensive when the price comes down.

And certainly, having the -- building up our stock, we obviously were aware we were going to do this transaction with Viatris. We built up our stock. We know what we're selling it for. So we -- if there is that type of curve, we are covered. That said, it takes about a year to convert the product. So when the pricing comes down now, you really only feel the impact in about a year's time. So you might buy it now cheaper or the inputs, but it takes a year to convert it into your finished product. I think if there's one area to focus on in the presentation, I would think that it's this section, the sterile volumes. I think they're absolutely imperative for material growth, really material growth to our EBITDA and our lines in the Aspen business. When you think about what our sterile business is, we have vials, water vials and cartridges in our Gqeberha site. Vials are once you've got a COVID vaccine out. It can take 1, 2, 3, 4, 5, to take an injection, but an [arc] to throw away the injection.

The French site makes prefilled syringes. So that is one injection is already in the syringe with the needle and they throw it away. We've told you before, and we still -- we're aligned with it, and we'll update you if it does increase, but our contribution has potential for at least ZAR 8 billion and under recovery in our factories is about ZAR 1.1 billion. Now other people might want to capitalize these numbers and so we've got this capacity for the future. I want to be clear. We expense that number. So that is expensed on our income statement at ZAR 1.1 billion. And what is an under recovery because there's so many jargon and so much term. It's really the cost of your installed capacity and your OpEx, what I referred to earlier, your depreciation, your expenses in your factory that you incur versus the recoveries from your product. So you've got this under recovery. It's effectively a loss in your factories. And if you increase the volumes, you'll have a material impact on group profitability because there isn't a lot of cost that goes at incremental cost you need, but you get -- someone said, I want 100 million vials from you. Even if you're charging them at ZAR 5 a vial or ZAR 10 a vial, whatever it is, it's 10, a very big increase. It's ZAR 1 billion of revenue with very little cost attached to it.

So if I was sitting on your side of the desk or sitting where I sit, we have a huge focus on the volumes, the values and how we fill these facilities. And it will have a material impact I've told you on group profitability for those reasons. And I'll unpack that a little bit more in the next slide. We have agreements in place, and as I told you, and many more discussions in progress. Discussions in progress are hard because to me, those are very binary discussions. Once people are doing tech transfers into your factory and that you get a much higher degree of confidence, yes, they will stay with you providing it works. In the South African facility, we are seeing quite a high degree of interest from multinationals to work with Aspen in Africa and beyond. We are pretty advanced with insulin arrangements, and we advance with the tech transfer there. And hopefully, we will be able to give you more announcements later.

The Serum Institute is a transaction that you know and there, our focus is on Gavi for volumes for Africa. We -- if you look at the transaction and the different values, the values out of our South African facility are higher volume, lower per unit cost, the French factory, lower volume, higher per unit cost. And I think that's logical. In France, we've had 3 agreements signed with multinationals. They cover things like vaccines and mRNA. It's quite hard because it was interesting in doing these transactions why companies were a little reticent about when you mention or if you can mention their names at all. And it was -- we spent so much time on the contract. So the tech transfers were really important, but we spent a lot of time on the contracts around IT. It seems a crazy thing, but there's a real concern. During a tech transfer process, many of them are very comfortable to have their names mentioned after the tech transfer process. But during the tech transfer process, they feel there's a very high risk around cybersecurity. And you can't believe the checks and balances we've had to put in around our IT systems to cover for that in that process.

But as I say, we will have those discussions at the time. One of the big -- when we did steriles and we did -- so we had no idea of COVID, of course, and that was an opportunity, and we showed you how quickly we could harness that opportunity. We also had no idea of the impact. So this market is impacted by flu and people taking more flu vaccines and RSV is going to come and respiratory vaccines and COVID vaccines also are now in this space as a sort of annual volume. So there's just been those type of things and ARV is going into injectors. And just my logic is going into prefills. So it seemed logical, but I think the one that's really taken us globally by surprise and it's been very beneficial to Aspen, and we hope we're going to be able to harness a lot of these benefits is the diabetes weight loss markets.

So I have many, many of you in the audience and outside asking us, can you make an autoinjector. Now why are you asking us why we can make an autoinjector because all the obesity products are sitting in autoinjectors. What is an autoinjector? An autoinjector very simply is either prefilled syringe or cartridge, which we make both with a plastic over it and device over it. All the works in filling the syringe of the device, where you -- if someone said, Aspen, can you make an autoinjector? Yes, we can, but you're going to pay for the packaging. Why do we say you're going to pay because it is bespoke. So if I'm a company ABC and I put that they're particularly packaging over my product, then it's only valuable while you have that contract. So either your contract must cover you forward for that period or you simply make the cartridge and the prefilled syringe, you send it back to the innovator and they put it into an autoinjector.

But the weight loss market is causing quite a big pressure on the volumes in the business and its volumes for those products and also those products are displacing other volumes in the market. So it's something we're working quite hard on. It's quite a neat opportunity for us, and that's been quite -- it's been one of the key areas that we're looking at in terms of future volumes. And as I told you, these things are binary and so we're not making any promises, but there certainly are opportunities there and related opportunities for both of our facilities. And as those progress, we'll update you. But for now, our focus has to be on executing the contracts that we have.

In terms of guidance, at the half year, we guided ZAR 2 billion of contribution for calendar year '24 and ZAR 4 billion for calendar year '25 and contribution conversion of at least 70% to EBITDA. So that's quite important. We took contribution. What is contribution? It's really sales and it's the materials of it. So it's the money that goes towards labor overheads. And if it's components, it would be like for the vial, the actual cost of the vial stopper. So a very high portion of that contribution turns into EBITDA. It's something I've sort of spoken to you about in terms of OpEx, et cetera. So that guidance is maintained, and we're working positively to grow the space with additional contracted volumes. We expect gross margin to be flat with the prior year. Why would it be flat if you're getting new contracts? In NDB, we have to close our site both in July and October to cater for some machinery adjustments and regulatory requirements need a full support for mRNA vaccine manufacturing. In the prior year, we had grant income. Grant income is to cover some of our expenses. We don't think we're going to get grant income this year. That was $30 million. So it's just over ZAR 500 million.

The volume -- we expect the contracted volumes to come up in H2. That's absolutely consistent with what we guided, which was in calendar year 2024, which is the second half of this year. The -- and I think the value, it's very hard to pin a number on the value because we've got seasonal vaccines that come in May and June because some of these are for flu and those type of seasonal areas. So it's hard to give you a number. But if I had to, we're probably looking at it from our contracts, probably about ZAR 500 million, if I had to give you a roundabout number of turnover that we expect in that very short period. The potential for Serum sales is in -- also in Q4 '24, and that's our first to be looking at as a Hexavalent and Pneumococcal vaccine. And that -- we have less certainty on those. The others are very -- a lot of the variables are in our hands. In that one, we are dependent on a regulator and we're dependent on Gavi orders.

So with that, let me just -- we've had -- you've had quite a long discussions with us on -- and I hope it's very clear the picture we've built with our commercial footprint and our manufacturing footprint. I'd like to just give you a quick summary here, and then we got a couple of more pages on guidance. We've got very strong short to medium growth prospects for both Commercial Pharma and Manufacturing. We expect double-digit growth in reported revenue, and that's driven by the organic growth and recent transactions in LATAM and in Sub-Saharan Africa. Remember, LATAM, I told you we expect to come halfway through this half. The Lilly transaction will be in the second half of our financial year. We have assumed that China will negatively impact growth in H1, and we're hoping for a positive -- a possible acquisitive offset in China, which would further enhance revenue. Manufacturing is all on the focus of execution of the sterile contracts. We've got ZAR 8 billion of potential contribution, which is really our target to try and see what we can get to there, signed agreements, we will achieve ZAR 2 billion to ZAR 4 billion in financial years '25 to '26. And we've got additional opportunities under review.

But you've always got -- I've always had this vision, I've always -- a lot of people think where are you going and when are you going to do your next contract? And I always just look at our team and I say, I watch that baboon in the sugarcane field there. He takes one piece of sugarcane and he takes another piece of sugarcane and then he said, "I want the third one". And he drops the first one. So this is about execution. I want to make sure that what we do, we deliver and we deliver properly. This is an important slide, I believe. And for us, it's a very -- as I told you, things are 5 years away, and you think, sure. It's a long time away, then it's 4 and then it's 3 and it still seems a long time. And it's really feeling really tangible. And we believe this is the year in which we will have our inflection point as a group. I spoke to you about in the 25 years, we built onto our foundation, and then you've got a period of strong growth that comes and then another foundation in a period of strong growth. And if you look through the years, you will see that track.

And I think this is -- this H '24 is that point. So we see growth for financial year '24 projected led by double-digit revenue growth from Commercial Pharma. The results are heavily weighted to H2. H1 is in line with the prior year results. And we're talking there really about at an EBITDA level. At a revenue level, we see growth and that growth could approach double-digits as well. It would probably certainly be in high double digits. And the reason we are more -- we are a little more cautious on the EBITDA line is because in the prior year, you had grants, you had China VBP impacts. And both of those go straight to profitability. You're just taking -- you take profitability away. So you could have revenue growth, but a lesser profitability growth. And so that guidance with the prior year, it doesn't relate to revenue but rather to profitability.

In H2, and bear in mind, we've had a stronger H2 in record. And so we are projecting even stronger H2 than the prior year. Acquisitive growth, obviously, is -- will come through in H2, and we're also hoping to achieve some potential China offsets in H2. And manufacturing revenue will also begin in H2. So that obviously means -- I mean, when you read all of that, it's obvious why I tell you now we think H2 is a pretty important inflection point. But it's not just an event. We see that as a foundation, and it's a strong foundation for future earnings growth because when you look at our projections going forward for '25 and '26, these are periods of accelerating growth. We've got annualized income -- annualized value of commercial opportunities. So a lot of them come in the second half, so next year, they're for the full period and then the positive of the sterile is secured. Because also on the sterile contracts, you start also smaller batches, you make 500, then you make 1,000. And so those volumes even in the contracts we have, they increase in the subsequent years.

So that is a real opportunity for us as is, of course, opportunities from securing future manufacturing contracts. So all in all, a pretty exciting time for Aspen, as I would say, and I'll say again, execution is key to deliver here. So thank you very much, and thank you so much for your attendance.

And Sibonga, are we going to move to Q&A now. Thank you.

[Sibongakonke N., Investor Relations Manager]

All right. Thank you very much. We will now move on to the Q&A section of the program. For those who are joining us online, you're requested to type your question on the far left-hand side of the screen. Sam will be taking the questions from the floor first. Sam, if you can help me with that?

[Stephen Saad, Chief Executive Officer]

Sam, you're not going ever go answering. I had threatened Sam with the TV interview loss yesterday.

[Christella Muligande, Bateleur Capital]

This is Christella from Bateleur Capital. I have a question on the Commercial Pharma products, generating revenue of USD 100 million. Just a better understanding on what that revenue means for Aspen. Is there like a take rate that you get on those products, how do you book the sales? Just some explanation on that?

[Stephen Saad, Chief Executive Officer]

Sure. So when you look at where that $100 million sales come, so they come from really 3 areas, a couple of contracts in South Africa with Amgen and Lilly and then the transaction in Latin America. We expect in Latin America to be booking revenue in -- from October or November, it's our best guess. Amgen, we're really booking revenue, and we're doing fantastically, by the way. Our growth already off the base that we achieved has been exceptional. So that's Amgen. And I think I put ZAR 750 million sales for South Africa. That's Amgen and Lilly. The Lilly sales are dependent on the competition tribunal. There isn't an overlap of product, but just the size of Aspen acquiring this relationship because this relationship is effectively a 20-year arrangement. It has meant that it needs to go to higher because of Aspen's revenue to higher. So it's a period there. Those -- I don't know. I don't want to guess for you but I would say it would if I had to have a guess, it's somewhere between January and March of next year. My very best guess, but it's just a guess. Sean?

[Sean Capazorio, Chief Financial Officer]

Thanks, Stephen.

[Stephen Saad, Chief Executive Officer]

Sorry. Does that answer your question, Christella?

[Christella Muligande, Bateleur Capital]

Yes. I would say so. So what would be the revenue that you've got, that USD 100 million, are you taking a percentage of that, that's the total revenue generated from those products and you're receiving these products essentially as finished goods if I'm understanding correctly?

[Stephen Saad, Chief Executive Officer]

No. So what we do is we've acquired the product. We will now sell those products for ourselves in the period and the guidance we gave you of the $90-odd million. So we should do $90 million of sales in Latin America times by however months, we have 8 over 12. That will be the revenue we book and we would be acquiring the products at a cost of goods that gives us money. Okay? Sorry for the confusion.

[Charlie Le Quelenec, Ashburton]

Charlie Le from Ashburton. The ZAR 1 billion of heparin that you've added to your working capital. Can you just talk to the commercial terms for the sale of that? Obviously, you're looking back with the Thrombosis deal in Europe. There with sale of heparin was done at a very little contribution to the group as part of the sale process deal. The new sales for Viatris are those more on commercial terms or are they at similar terms to what we've been using during the past?

[Stephen Saad, Chief Executive Officer]

No. The commercial, that's why you will -- we've given no negative guidance on heparin profitability, et cetera. Okay? If there was an issue there, then we would have given you that guidance. But we had to get the stock because we didn't know if the price is going to go up or down. And that's the risk. So but we knew we had a fixed sale price. So that's why we sort of locked in that profitability.

[Mohamed Loonat, Mianzo Asset Management]

It's Mohamed Loonat from Mianzo Asset Management. I've got 4 questions, if I may. Just your comments on the opportunity in China. How will that play out? Would you have to acquire products and lines and businesses there? So you'll be paying out something to get that product similar to the other acquisitions you've done? And then the second question is on the growth in manufacturing, the potential. What's the working capital impact on that? What's the working capital cycle in the manufacturing? Would you have to stock up ahead of that? And what would the cash flow impact be? And then the third question, I mean, you mentioned the ESG and the focus of -- unaffordable medicines. And globally, particularly in emerging markets, there's still an issue of medicines not being affordable. So how concerned are you, if at all, about pressure on your pricing? The latest acquisition you did in LATAM, you mentioned that the gross margin is higher than your group gross margin. So is there a risk that there's pressure on that to come down?

[Stephen Saad, Chief Executive Officer]

So I'm going to try and remember all of those. Now, Mohamed, you might just have to just lead me through them one by one. I'm not sitting like those politicians with the notepads, yes. So let me start with your last one because I remember that one pressure. These are branded products. So people are the doer and done predi. There's a really significant generic competition in the market. So there's Viagra, there's 10 Viagras, people still buy the brand Viagra. So that isn't -- we don't see the on-pricing pressures. Those people who are buying it for price have it really moved off the product. They're not -- so you -- so that's that one. The manufacturing comments, a very good question, I mean, a very logical question. And that's why we often refer to contribution here. So when you deal with multinationals, without exception, they -- and so let's just take Serum of the thing with. For the rest, they come, they say, here's our secret ingredients, here is our portion. All we want you to do is to put it into a syringe for us, a prefill syringe. So our costs would be limited to either building or to putting -- buying a prefilled syringe or vial but the real value adds a labor and overheads and the process of your laboratories, et cetera.

So I see them as being working capital light, very light compared to the other things. So you asked 4 questions.

[Mohamed Loonat, Mianzo Asset Management]

And China is the...

[Stephen Saad, Chief Executive Officer]

Yes, China is going to be a bit of a mix. There are people leaving and they might want some of your products and you want some of theirs. So there might be that. But there will largely be product acquisitions. Our focus on China is we've got a big focus on hospitals. Hospitals are quite easy to regulate for a government that can say, all our hospital tools, we want you to do this. Whereas if you're in the retail pharmacy, you have less of that exposure because people like they do with Latin America, who want to buy the particular type of brand or product. So our focus there is to look at a slightly broader range within our own anesthetic baskets. We are launching things like EMLA creams, things that are -- you could use for tattoos, Botox in hospitals, in a pharmacy if you've got the insect bites. So we're looking at that, but we're also looking for product ranges in that region. So it's likely to be -- there will be product acquisitions required.

[Mohamed Loonat, Mianzo Asset Management]

I just had one more and that's some guidance or color on the finance cost line because the debt has gone up quite a bit, the finance costs have also gone up quite a bit and also the acquisition posted.

[Sean Capazorio, Chief Financial Officer]

Yes, so I think on the interest rate line, I've given guidance about 120 basis points to 150 basis points on the interest line. On the Forex, we've got mitigating steps. So we will try and manage that as best we can. But unfortunately, Forex is a challenge for most especially if you're exposed to emerging market currencies, but we certainly see a lot more optimization and focus on the Forex plan. So those are the two guidances that we provided in the income statement.

[Stephen Saad, Chief Executive Officer]

By centralizing treasury, let's just be clear. We're never going to eliminate foreign exchange issues. What you are going to do is cap your downside and your upside. So in the previous year, when we made ZAR 180 million or ZAR 200 million profit, and this year, we made ZAR 600 million, you make less profit and you make less losses, which is something we're not traders in foreign exchange. So we really prefer to have that out of our income statement.

[Unidentified Analyst]

If I can just further on to the question on VBP for China and acquisitions that you're doing, I know historically, you've given us a sense of where leverage could end up with these acquisitions. Can you give us an idea of where you're looking for leverage to go with the new acquisitions coming on?

[Stephen Saad, Chief Executive Officer]

We've got covenant limits and then there's our internal limits. And generally, our internal limits for Aspen in this phase of where we are where with there's nothing majorly strategic that we're doing are building factories, et cetera, we tend to not want to go beyond 2.5x. And if it is, it can't be for more than 6 months. That's sort of our internal limits. And I hate saying, the thing is when you get some pins on it, but that's roughly where we -- if you say to Sean, where are you, that's what Sean would now tell you.

[Unidentified Analyst]

And then just one more question for you and one for Sean, please. On the donor sort of discussions with Gavi and et cetera, can you give us maybe an update on that? And then, Sean, on the Merck loan that is coming to you, I see you gave us a note in the financials, what happens to the inventory portion of that agreement? As far as I understand, there was inventory on the reverse amount.

[Stephen Saad, Chief Executive Officer]

Yes, you want me to go first?

[Sean Capazorio, Chief Financial Officer]

Yes.

[Stephen Saad, Chief Executive Officer]

Yes. So the inventory is not linked to the line. I think, originally it was, but the inventory is there to support the distribution agreement with MSD. We have now spun off into MSD and Organon. So that'll be supporting. We've signed a new distribution agreement for the next period of 5 years. So that agreement will support the inventory level. So that's decoupled from the loan. And effectively, the line we've managed to get an extended payment terms with an interest rate benefit as well, a net interest rate benefit.

[Sean Capazorio, Chief Financial Officer]

In terms of donor and donor funds, I'm not a lover of donor or donor funds. I think it's very bad for Africa, and for anyone and for business. I think it makes you lazy. So I think that we have the Gates Foundation, we have CEPI, the houses at our factory. I mean our factory is like a tourist spot. I think they can just put one plane to Gqeberha for Aspen people. But it's -- so in terms of donor and donor funding, what my very blunt comments are that we want the orders. So we'd like you to make sure that you help us through these processes. And because when people need things urgently, lots of things can happen like COVID vaccine. Everything can happen. We'd like to see that same urgency for African manufacturer for Africa. And these are strong heads of Africa in within the Gavi Foundation. In fact, the interim here is a South African at the moment.

So -- and we had Africa CDC with our factory last week. So we -- so there's a voice coming here. It just can't just be lost. There are problems over. We'll focus as one problem at a time, when it's COVID, then you go to Ukraine, sorry, listen, we need to be talking about this year. And the African voice is getting stronger within Gavi. But as I said, I can't talk for them. But certainly, in interest there in the factories, there's lots of exciting new chemical entities that for infectious diseases where clearly, Aspen is getting first chance at it our first ability to do it. So there's some positives for us.

[Ken Osei, IFC]

Ken Osei from the IFC. You announced in the sense a couple of days ago, the Lilly partnership where you're taking on distribution rights for South Africa and the rest of Africa. Will there be any manufacturing associated with that? What's the impact of that on your working capital?

[Stephen Saad, Chief Executive Officer]

Sure. Ken, in terms of the distribution agreement, no manufacturing attached to it. In terms of broadly Lilly, I'd rather not comment. But thank you for your support, Ken, and I'm going to be coming to visit you again soon. So just a heads up.

[Sean Capazorio, Chief Financial Officer]

Again on the working capital, that guide through that normal cycle that we have in our commercial business and it's in the same sort of cycle as the rest. So no big impact.

[Stephen Saad, Chief Executive Officer]

The Lilly transaction, you should see -- because we've got lots of -- and we've got economies of scale and lots of synergies, you should see the returns on the transaction in Amgen in line -- with in line with our broader South African business. These are not like 5% in distributor products. But the assumption is there's some quite big volume growth relative. And in fact, we are outpacing that already on Amgen.

[Junaid Bray, Laurium Capital]

My name is Junaid Bray from Laurium Capital. Just to clarify on the agreements with the multinationals regarding the French facility, are those all included in the ZAR 2 billion, ZAR 4 billion and ZAR 8 billion contribution that was previously guided?

[Stephen Saad, Chief Executive Officer]

So let’s get that right. ZAR 2 billion and ZAR 4 billion, we’ve guided because the next thing we’re going to be told we committed to ZAR 8 billion, we’re committed to try to get to the ZAR 8 billion but it’s in the guidance of the ZAR 2 billion to ZAR 4 billion.

[Sibongakonke N., Investor Relations Manager]

All right. I think I'll move on to -- okay. Sure.

[Nancy Bambo, Excelsia Capital]

I'm Nancy from Excelsia Capital. So just on the ZAR 2 billion and the ZAR 4 billion, which is already conservative, just based on how you've put it out, I just want to know what would the risks be to that not being achieved, if any?

[Stephen Saad, Chief Executive Officer]

So you’ve got long-term agreements and you’ve got what’s called a take-or-pay. In other words, if you don’t use the capacity, you still pay for the capacity, which is not something you can do during COVID because someone comes to you and says, “Hey, would you make this vaccine?” I don’t know if this vaccine is going to work or not, but you need to take the risk with us. But – and they’ll answer they’re fine. We’ll take the risk with you, but then you need to pay all our capital costs, et cetera, along the way, but you can’t say we want a 5-year and 10-year agreement. So there are no contractual risks from that perspective to do. Your risk is that you don’t deliver or you don’t get it right in that process. Those -- it’s what I said, it goes down to that one single word, execution. That’s it. I don’t think there’s no financial risk attached to.

The only one with variability, it’s not that contract, it’s a Serum deal where you own the intellectual property and you’re going to get your own orders from Gavi and you are dependent on getting a registration on getting your own orders. Will we get registrations? Yes, we will. For me, the issue is timing. How much time will WHO going to need? We know Serum have the registration. So why shouldn’t – we’ve got the same product at the same ingredient. So it’s not whether it will be registered. It’s when. And then it’s how committed you are to Gavi to buying in Africa for Africa. Lots of nice words on podiums, but I’ve heard lots of nice words during COVID. So let’s just say that I just make sure – we’ve just got to make sure it happens at the rate and the scale that we would like. That there is a commitment to buy is clear that the African CDC has got a big voice is also clear and that they really wanted to make in Africa is also good. But I want to see all those nice sentiments when someone says, here is an order for ZAR 50 million. Here is an order for ZAR 100 million. So I’ve got no doubt it will happen, but also it’s – I don’t want to say we’ll do it in 2028 or 2027, we want to know it’s going to be now.

[Sibongakonke N., Investor Relations Manager]

Okay. I think we'll move on to questions from the online viewers. The first one is going to come from Anuja Joshi from Standard Bank Securities. A couple of questions. So I'll go through them one by one. Can you please share further details on capacity utilization of your South African sterile facility? What is the proportion of capacity that will be dedicated for Serum vaccines versus incident?

[Stephen Saad, Chief Executive Officer]

So if you look at our total capacity, we tell you, we have at least ZAR 8 billion, and we've got ZAR 4 billion. So on a total basis in steriles, you can roughly say they're doing probably just a little bit under 50% of the capacity. If I have to tell you is what is the breakdown between France and South Africa and of course, it all depends on the contracts and the contract values and how much they pay per unit. But if you want a rough rule of thumb that we work with internally, it's maybe 60% France, 40% or so South Africa. The insulins -- so the question was, what is the utilization within each one. So I think France has got high utilization through these contracts than the South African facility. The South African facility will depend on the -- I can't give you a sense on Gavi and all that. But my best guess would be sort of 50 million to 150 million doses. So it's really a very wide guess on Gavi and Serum we could get to.

The insulins are -- they are bulkier. They're big. So you get -- if you take, for example, a COVID vaccine, I'll just go back to those with [Serum], if you take in a vial for JNJ, you get 5 doses. If you're in Pfizer, you've got 10 doses out of it. For interim, you can just get one. So it is a much higher conversion rate per unit. So it will be 5x or 10x the price that you would charge per conversion on a Pfizer or JNJ. So it takes up a lot more capacity from that perspective. So that gives -- that could give you a sense on the Gqeberha. I think that we are working to fill both sites in the medium term, short to medium term. It's very hard for me to call how much we're going to get out of Gavi. But if we got sort of ZAR 100 million and we look at the sort of insulins that we're doing, you're probably less than 50% there, maybe 35% or somewhere between 30% and 40% and the French site over 50%, maybe 60% to 70%.

[Sibongakonke N., Investor Relations Manager]

Okay.

[Stephen Saad, Chief Executive Officer]

I'm just trying to work that in my head.

[Sibongakonke N., Investor Relations Manager]

Thank you, Stephen. The next question is, how frequently can we expect nonrevenue-generating tech transfers over the next 3 years in manufacturing?

[Stephen Saad, Chief Executive Officer]

Nongenerating, all tech transfers tend to be non-revenue-generating. So what is a tech transfer? Tech transfer comes, you put your site down and you put tech, you put product in. And they pay you often for that tech transfer. When does it become cost and when doesn't it become costly? It becomes costly. It's not costly. If you've got 4 lines, you're only working on one and you use the second one. Yes, there's cost, but there's no cost to your revenue. In our French site, we've got 3 lines. And if you take one down, invariably, you're losing revenue, which you could have made something else. So that's when it becomes cost. And I said very clearly in this set of results, where in H1, in France, which is where the heparin number comes from was low. In H2, it was very high because we effectively had 4 months or 5 months rather versus 6 months. So that is when a nongenerating tech transfer. So they never generate revenue besides maybe covering your costs, but they can be impactful on your income statement.

[Sibongakonke N., Investor Relations Manager]

Thank you, Stephen.

[Stephen Saad, Chief Executive Officer]

And it becomes harder as you get fuller, of course. If you're sitting with 1 out of 4, it's cool. But if you're sitting with 4 out of 4 lines full or 3.5 and you take one line down, it's cost.

[Sibongakonke N., Investor Relations Manager]

Okay. I think we only have time for one last question. Can you share an update on the progress of in-house production of anesthetics and associated savings?

[Stephen Saad, Chief Executive Officer]

Yes, we can. So the anesthetics fell into 3 baskets. For us, it's 3 of our different facilities. The German facility made the creams and ointments, and those have been transferred, those with the emulsion have been transferred. In the French facility, we're taking on what's called Blow Fill and Seal. You get the plastic, you blow it, you put the product in the liquid and then it sells. That's called Blow Fill. That's coming online, Sean?

[Sean Capazorio, Chief Financial Officer]

Probably in 2024.

[Stephen Saad, Chief Executive Officer]

2024. And in the South African facility, we have brought on some of the vials and ampules into our facility. We have delayed one of the anesthetic products, that's a big anesthetic product to do the tech transfers into Gqeberha that we are talking about. I would say we are probably just over halfway through in terms of capturing that value of the anesthetics bad. I think we gave a value of ZAR 800 million. We're probably just over halfway through. And the decisions often made are rather suspended anesthetics because I know we can get them tomorrow. We've got a third party, but gee, is nice to get these tech transfers and through the other products.

[Sibongakonke N., Investor Relations Manager]

Thank you, Stephen. That's all we have time for today. For those joining us online, this is where the today's program ends. And for those who are joining us for the fireside chat, we're going to have a short break and commence at 10:15 today.

[Stephen Saad, Chief Executive Officer]

Yes.

[Sibongakonke N., Investor Relations Manager]

Yes. At the same venue. Thank you.

[Stephen Saad, Chief Executive Officer]

Thank you so much. Thank you everyone. We appreciate it you being here. Thank you.

[Sean Capazorio, Chief Financial Officer]

Thank you.