Adcock production inflation exceeds selling price increases

PHARMACEUTICAL group Adcock Ingram in the six months to December increased its earnings by a mere 1 percent as South African consumers remained under financial pressure amid low economic growth and rising utility expenses.

Andy Hall, the chief executive of Adcock, said yesterday: “This set of results has been achieved in a difficult market. Our focus over this period has been on strict cost control and customer service that has resulted in the company achieving growth in both revenue and trading profit.”

Headline earnings per share increased 1 percent to 218 cents per share in 2018 to 219c per share.

The drug firm, which is one of South Africa’s leading manufacturers of generic medicines, saw its gross margin decline from 38.7 to 38.4 percent, which it said was negatively impacted by water supply challenges at the Clayville facility and poor efficiencies and throughput at the Wadeville facility.

Production inflation continued to exceed selling price increases, with utility costs having increased by 11.4 percent during the reporting period and wages by 7 percent.

“The weaker rand also impacted the weighted cost of our basket of imported raw materials and finished products which increased by 6.1 percent. On the positive side, the throughput at the Aeroton facility was excellent and the sales mix in the consumer division was good, with its major brands all in growth,“the company said.

Last year Health Minister Zweli Mkhize announced that rises of medicines and scheduled substances will only be adjusted by a maximum of 4.53 percent in 2020. The capped prices mean companies, such as Adcock cannot pass on increased input costs to consumers, constraining their profits.

However, in an attempt to protect margins, the group said that it had placed a heightened focus on driving productivity in the factories, strict cost control and expanding the group’s product portfolio, by acquisition or partnership.

Adcock reported a less than a percentage growth in gross profit as it grew from R1.38 billion at the same times last year to R1.39bn, while the trading profit grew 1 percent from R485m in 2018 to R490m. The operating profit also saw a marginal uptick of 1 percent from R456m in the previous period of 2018 to R461m.

Adcock made some changes to its dividend policy, which would now be covered by headline earnings 2 to 2.5 times from the 2 to 3 times coverage.

The group opted to pay an interim gross dividend of 100c a share from its income reserves for the period.

In a separate trading update by Bidvest, which last year increased its stake in Adcock from 43.5 percent to a controlling 51 percent stake, signalled that it expected lower earnings due to Adcock and Comair.

“The remeasurement of associates’ fair value based on Adcock Ingram and Comair share prices, which is of a capital nature, contracted since June 30, 2019, compared to material increases in the prior period,” it said.

Bidvest, the JSE-listed diversified group, holds a 27 percent stake of Comair, which operates Kulula and British Airways. As per the trading statement issued this week, Comair expects to report a loss for the six months to December 2019.

Bidvest now expected its basic earnings per share (Eps) for the six months to December 31, 2019, to be between 23 and 28 percent lower, translating into Eps of between 475c and 502.