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Edited Transcript of ASC.J earnings conference call or presentation 31-Oct-19 8:00am GMT

Full Year 2019 Ascendis Health Ltd Earnings Presentation

BRYANSTON Nov 9, 2019 (Thomson StreetEvents) -- Edited Transcript of Ascendis Health Ltd earnings conference call or presentation Thursday, October 31, 2019 at 8:00:00am GMT

TEXT version of Transcript


Corporate Participants


* Kieron Futter

Ascendis Health Limited - CFO & Executive Director

* Mark James Van Lill Sardi

Ascendis Health Limited - CEO & Executive Director




Mark James Van Lill Sardi, Ascendis Health Limited - CEO & Executive Director [1]


Good day, ladies and gentlemen. Welcome to the Ascendis Health Annual Results. I now got a couple of slides to go through upfront, but what I thought I might do is, given that I'm a full 17 days in the job, just give you some perhaps outside in background and context to perhaps where the business finds itself today and maybe just some initial thoughts on strategy how to address the future.

There are very few times that as a CEO you get the opportunity to come in unencumbered by the past, and this is one of them. So I think everyone is very much aligned to the fact that Ascendis was built on a number of well-considered acquisitions, but was built on a view in faith of the future that perhaps didn't materialize. The second thing that happened is that the way the acquisitions were structured was a good chunk of other people's money, bank debt. And then a lot of the people from whom we bought those businesses, debt. I'll come back to that a bit later because that feeds into some of the relationship dynamics that we need to address going forward.

When you get a market overlay that then turns against you and that view of the future doesn't no longer hold, a couple of things happen. One, you've already probably built an infrastructure that allows you to deal with this bigger machine. So you have to then rightsize, and Kieron will speak to that a bit later. So there'll be some one-off costs in the numbers, which will be, I suppose, a little eye-watering. But the other, perhaps -- or thing that you can't model on a spreadsheet, is what it does to the business and the people, and your suppliers and your customers. So when you're driving with a business that has too much debt, it's like driving with a handbrake on. The engine is moving, but you're kind of spinning your wheels.

And the other thing about debt is, it's indiscriminate. The good businesses and the bad businesses all get tarred with the same brush. Your ability to deploy capital in that environment becomes very challenging. So as you'll see a bit later, I talk to this fix-the-basics part of the strategy, which is fix the balance sheet. Balance sheet means financial flexibility. A better balance sheet gives you more flexibility. So perhaps that's just -- if -- where we find ourselves from a flexibility point of view.

The impact on people also can't be underestimated, and I think there is a real opportunity to re-engage with our people, our customers, our consumers, suppliers, regulators and the vendors, the people from whom we bought the businesses.

I would have to say, if I look to summarize everything that I've seen, and we've got some really good businesses, but we've got a really bad balance sheet. Beauty is there is a path to fixing that balance sheet, and we'll come to that a bit later. So after 17 days for us to say what I'm going to focus on and I'll probably have to come back with refinements, but I think at this point, it is important to try to get some shared belief around the future is bucket one, which is fix the basics, and I spoke about the balance sheet. We have the Remedica transaction, which is well advanced, which should materially assist in getting us to the place that allows the businesses to do what they need to do. I think there is also a simplification of the group's structure that can be brought to bear. We have over 100 companies and different corporate entities, which make getting decision-useful information back to the center quite challenging. So to the extent that we can streamline that, I think that will make a lot of the support staff life a lot easier.

And then the third bit under fix the basics is just engaging with our people more. I think the business needs a bit of TLC. Some of the vendors are feeling hard done by because promises were made. I think there have been some broken promises, and I think we have some outstanding talent in this business that just needs to be unleashed. So again, I'll come to that probably a little bit later. But what it speaks to is creating a culture where everyone has a reason to believe that we can get aligned around a purpose for the business. And I think our purpose is making tomorrow healthier for all our stakeholders. So that's the fix the basics category.

If we then click into the next one, which is, what I call, get more from the core. That's a combination of looking at the businesses where they're located. So what is the market dynamic in which each of these businesses operate. That's one. Two, how strong is the business in the market in which it operates. And then, three, do I have the management skill and will to drive that business in a meaningful way that aligns with the corporate culture and strategy. So that's the lens I will bring to getting more from the core. And perhaps one of the primary focus areas is going to be extracting revenue synergies. We often make a lot of bad cost synergies because they're quite frankly the easy ones to go after. Cutting is much easier than growing. And I think we've got some wonderful assets in Europe, particularly Farmalider and Sun Wave, where they've been unutilized perhaps largely because of relationship dynamics again. And I think to the extent, we can bring some of the magic that Yogish has imparted into the business in Romania, where we are #1 in nutraceuticals and top 5 in OTC. And where -- through José Luis, we can start to register more dossiers from the Spanish entity Farmalider, in various therapeutic categories. They're very strong in ibuprofen and paracetamol, but good businesses, which I think have been under-leveraged into South Africa. And then it's a question of normal things, back the winners, cut the tail and get more from our manufacturing capability.

And then if I get the first 2 right -- myself and the management team get the first 2 right, which is fix the basics and get more from the core, I can then have an equity story, I can come back to investors and lenders and say, all right, let's start to grow, which geographies? Which channels to market? Which products? And last on the list, and don't worry it is last on the list, which businesses? That's really the outside in from me on day 1. I will come back to you, obviously, with a far greater amount of detail around those, let's call it 3 strategic pillars. I'll come back to you with what I think a purpose statement should be. And I do like this making tomorrow healthier mantra, not just for the business, but for our people.

And then the last part of my job and perhaps the most important is creating the culture and capability to support that strategy. And culture is getting that belief and capability I do believe we have in the organization. And then if we can put all that together and put Ascendis Health on a good business journey, be good corporate citizens across the stakeholder base, I think then we've got a winning combination. Right, so that's the outside in for me.

The next 2 slides in the presentation deal with 2 things largely. One is what the management team and the Board have been focused on, which is fix the balance sheet and restore some governance. So you've all seen the results. There's been an eye-watering impairment charge of just over ZAR 4.2 billion put-through, Kieron will speak to that a bit later. But I think the -- what is promising for me is that we do have a path to seeing a better balance sheet and that is through the Remedica transaction. Now I know a lot of you will be sending questions, wanting to know a bit of detail around the deal. Unfortunately, we cannot give you a lot other than to say, this is a remarkable asset, remarkable assets with good management teams will always get a lot of interest from the market. We have narrowed the investor base down to 1, and we're in exclusivity right now with that investor. And we look to make more announcements in due course. That is, unfortunately, all I can say right now, but what I will tell you is that there's been a lot of interest in this business and there will remain a lot of interest in this business. So there's an asset that I believe is readily monetizable in a number of different circumstances.

The other bit on fixing the balance sheet is we sold part 1 of the Biosciences deal, the piece that had Marltons and Afrikelp, and that ZAR 460 million was redeployed to pay debt. There is another portion of that business, which has been signaled up for sale, but we haven't meaningfully progressed that at this point.

Moving on to governance, and this is probably -- I won't say it's more important than balance sheet, but well-governed companies typically get a turn of EBITDA in their rating more than perhaps those who aren't as well governed. And I think with the appointment of Andrew Marshall as Chairman, 15 years of being CEO of listed entities, no-nonsense Chairman, action-oriented Chairman. I think a lot of the actions around, certainly, rightsizing the Board, bringing Bharti on. Bharti is a very strong lead independent exec, 14 years at the IDC, a member of a number of other listed Boards. And Bharti has a real passion for this good business journey as does the rest of the Board. I think we're very lucky to have the Board that we have. And I think the Board has done a remarkable job in navigating to where we are right now through some decisive action.

And we had a lot of questions around the involvement of Coast2Coast. I don't want to be drawn into that too much because I do think the business was started with the best intentions in the world, and the view of the future just didn't materialize. But what I will say is we now have an investment committee, which is very important because the way that investors will look at Kieron and I and the management team is how we allocate capital. And an investment committee is a very important part of that rigor and discipline on how we deploy our capital and particularly deploying that capital in light of a Board-sanctioned strategy.

And then the last point, which I think really speaks to our good business journey that we've embarked upon. We've had astonishing improvement on our B-BBEE rating from Level 5 to Level 1. And the more important part of how we move from 5 to 1 is it's around people, the ownership programs under the skills development part of the codes. We've managed to absorb 100% of the candidates we put through that program. And that's phenomenal. We saw some results yesterday with unemployment sitting at 29%, and this is a very good and meaningful first step in doing what we can to remedy that. And we've wholeheartedly embraced the YES program, the government's YES program where we give 12 months work experience to newcomers to the job market to get that first rung and credibility on their CVs. So that's it from me for now. I'm going to hand over to Kieron, and I'll come back a bit later with the short-term focus and outlook.


Kieron Futter, Ascendis Health Limited - CFO & Executive Director [2]


Thank you, Mark. Before I begin with the financial review, I'd just like to express my gratitude to all the financial managers and MDs in all our different business units who have showed tremendous resilience in a tough economic climate, both in Europe and in South Africa. And a special thanks to the group finance team who had a tricky set of results to put together in light of the new IFRS standards that have come into effect as well as the additional accounting that had to be done for the discontinued operations related to Remedica and the Bioscience division disposals.

Now if I can go into the financial review. Firstly, looking at revenue growth. This is revenue growth from our continuing operations. So this is the businesses that remain behind after we remove Remedica and Biosciences. As you can see, an overall growth versus last year of 1%. The EU has reported growth of 8%, which has been boosted by the weakening rand versus the euro. On a constant currency basis, the growth is flat. And at the tale of 2 or 3 different companies where we see Sun Wave Pharma, located in Romania, growing at 22%, which has helped with the decreasing growth that we saw at Scitec and Farmalider. The EU now makes up 46% of our revenue, which is up from 43% in prior year on a like-for-like basis. On a total basis, that used to be 50% when Remedica was still included in our figures.

For the South African business, we see a decline of 4%, and that's even with the boost that we got from the acquisition of Kyron, which was acquired in March 2018. So overall, if we had to remove the effect of Kyron, we're sitting in a flat revenue growth.

If I can move on to the segment performance. These segments are in line with what we communicated last year and in our H1 results in terms of the new strategy. From a revenue perspective, we see an increase in our Consumer Health business, 5%. Medical and Pharma businesses saw a decline in revenue. They had a tough year driven by both an economic climate and cash and supply issues. And then we also see Animal Health growing by 28%, most of that being boosted by the acquisition of Kyron.

Another pillar of that strategy that we announced last year in September was an increase in marketing in the Consumer business, particularly in businesses like Sun Wave, which helped them achieve that 22% year-on-year growth and that was on a constant currency basis. However, we see, from an EBITDA perspective, that the EBITDA in our Consumer business has gone backwards by 39%. This is primarily driven by low GPs in Scitec, where we saw good volume growth, but due to increased competitor activity, a quite a substantial price erosion. We also saw an increase in whey protein cost during the year. We also expected to launch the new range of endurance products in Scitec. So a lot of marketing expense was incurred to prepare for that launch, and that launch has been delayed into the FY '20 year.

Other issues in Consumer. We saw some substantial stock write-offs in our supply chain business in South Africa in the order of about ZAR 29 million. And we have shut down our Australian operations. That was a Sports Nutrition business as well. Unfortunately, that does not qualify as a discontinued operation because we're not selling it, we're shutting it down and that contributed to ZAR 37 million EBITDA loss. That will obviously not continue into FY '20 because all operations have ceased there now.

Looking at SA Pharma. We also see -- oh, sorry, total Pharma, we see a decrease of 44%. Majority of that comes from SA, where we experienced supply issues with SAHPRA had shut down some of our Indian suppliers in H1. They're back up and running again. And on that basis, we weren't able to supply on a number of tenders and incurred some buyout penalties with our government customers.

We've also seen 6 months of losses related to the Isando factory, included in our H1 results. Just to remind the market, we announced the sale of Isando back in December -- at the end of December. That transaction has now been successfully included. So on an annualized basis, we expect an increase in EBITDA to the tune of ZAR 45 million, but that's no longer having that factory in our stable.

Medical Devices. This is probably our biggest loss across the group. So 70% down on the prior year. The large part of that came from a decrease in our gross profit, where we saw most of the products are sourced in U.S. dollars. On average, we experienced a 9% weakening of the rand against the dollar, which resulted in about a 4% loss in GP margin in the Medical Devices business.

The Department of Health, as reported last year, owed us around about ZAR 90 million, and this is particularly acute in the Gauteng province. We're happy to report that most of that money has been recovered from the government in May 2019, but it did put a strain on that business in terms of liquidity and the ability to order goods to be able to service our private and government customers.

Medical Devices business also geared up. They added a new diagnostic agency, Qiagen and that required an upfront investment in inventory as well as salespeople and technical staff to support that business going forward. Those sales have started to come through in the New Year now.

From an Animal Perspective, again, we see a 20% increase in EBITDA. The majority of that was as a result of the Kyron acquisition in March 2018.

Moving on to the income statement. Main highlight here is, obviously, the gross margin declined. We see a decline from 46% to just under 43%. As I said earlier, majority of that was due to the weakening of the rand versus both the USD and the euro. Most of the imports in our South African businesses, 85% are imported and paid for in dollars. The other thing affecting the GP percentage was the price erosion that I mentioned in Scitec, with the increased competition from mass retailers as well as online retailers, and the inventory write-offs that we experienced in Consumer.

From an expense point of view, we experienced quite a few -- quite a large number of one-off costs, which I'll go into further detail in a later slide. But those related to some of the disposals, restructurings and the high-yield bond project that we were -- that we undertook in November 2018. 2/3 of the OpEx growth across the business relates to investment in marketing, sales heads and improved distribution, particularly in areas like Sun Wave Pharma, Scitec and our South African Consumer business. We also saw an increase in costs related to the new IFRS 9 statements with expected credit losses increased over the last year of about ZAR 17 million. So EBITDA margin down to 5% for our continuing operations. On a total basis, that's about 10.3% for the total business, if we were to include Remedica and Bioscience.

Looking at the bottom half of our income statement. We saw an increase in net finance costs from ZAR 350 million to ZAR 373 million, in line with the increase in our gearing and debt levels, both in the EU and in South Africa. We have removed the capital items mainly related to the profit on the sale of the Isando factory, which was about ZAR 18 million. And from a weighted average number of shares perspective, we saw an increase of 5% and that relates to the equity issuance back in November '17, which was weighted in the -- part weighted in the '18 financial year.

Looking at our normalized headline earnings per share. We did, this year, change the definition of what we normalize. We kept what we add back in terms of acquisitions, capital raisings and restructuring costs as we believe that these are not operational costs by their nature. We've added an additional definition related to any costs related to product-related litigation, which is in line with our Pharma peers. There are no costs incurred in FY '19 or FY '18 year related to that particular definition. And we have removed the add-back of amortization that was recognized when we acquired business, the amortization of intangibles. We no longer add back, and we no longer add back the operational losses for businesses that do not qualify as discontinued operations under IFRS.

The next slide is just to give some more clarity around the discontinued operations and some of the restatements that we alerted the market to in our trading update. So last year, we announced and completed the sale of our Sports Nutrition business in South Africa. That was completed in September 2018, and we're still busy in the process of selling our direct selling business. We completed Biosciences 1 back in July 2019 and Part 2 still -- is -- remains for sale. As Mark spoke about, Remedica is at advanced stages. So that's both been removed from revenue and EBITDA, and all the results have been removed from our results and the balance sheet, obviously, held as an asset held for sale.

As I spoke about earlier, we've also removed the loss -- we removed the loss on our Isando business, although we no longer add that back to our normalized headline earnings.

Regarding restatements, there were 4 restatements made. The main one was a reclassification of our medical device equipment, which we place into hospitals. Previously, we had disclosed that as inventory, and now it is being disclosed as property, plant and equipment, and we are recognizing depreciation on that equipment. We saw an increase in tax payable related to the prior year, related to interests on loans that were incorrectly claimed, correction of certain accounting areas in our Farmalider business for about ZAR 4 million and then a correction of an incorrect adjustment related to a put-call option for the Farmalider business, so that was -- that remeasurement was added back as a headline earnings adjustment last year in era.

Speaking about the changes in accounting standards. The 2 -- the 3 standards that we saw come in this year, 2 of which affected our numbers: IFRS 9, financial instruments and IFRS 15, the new revenue standard. We saw in this year 2019, ZAR 17 million impact to our numbers in terms of expected credit losses. IFRS 15 had -- didn't have much of an impact on our numbers, although we did see that most of the work done was around our Medical Devices division, where they have lots of unique contracts with customers in that division.

And then IFRS 16, the expected right-to-use asset was calculated at about ZAR 266 million, which will come into effect in FY 2020.

The other big thing to note was obviously the impairments. Impairments, we do impairment tests every year. This year was particularly acute, triggered by the significant reduction in the group's share price and the adverse economic headwinds, which impacted the group's performance. This became a key audit matter. So a lot of time and focus was put into the impairment testing process. A couple of things to note. There was a change in the overall weighted average cost of capital discount rate, which was used in our impairment models from about 10.3% to 15.1% due to the higher cost of equity and the increased SA risk premium. As a result of all these tests, we saw impairments across the board with Scitec and SA Pharma being completely impaired. I just want to give a breakdown. So of the ZAR 4.2 billion, you see ZAR 2.6 billion related to Scitec and about ZAR 0.5 billion related to our 3 SA Pharma businesses.

Saying that, a couple of other SA-related -- SA-based businesses, Medical, Consumer Health and Animal Health also were impaired during the year. Most of that impairment was on -- was the impairment of goodwill. And then Farmalider business, we impaired both goodwill and the intangible assets.

Transaction-related and restructuring costs. We announced last September that's -- because of the large cash commitments that we've experienced -- that we had in FY 2020, we needed to review and optimize our capital structure. We prepared to launch a high-yield bond in November, which involved obtaining a credit rating and compiling information memorandum. These processes went very well. However, decision was made not to market the bond due to the adverse market conditions for potential emerging market issues post the increase in U.S. interest rates. We then appointed corporate finance advisers to provide an independent view to our Board on our optimal capital structure, and to assist us in implementing that recommendation. A number of potential solutions were considered in consultation with a lot of our stakeholders, and a refinance with our existing lenders is -- was sought to be the -- thought to be the optimal way forward. We have been engaging with our lender group since March 2019 and have their full support in the form of an interim stability agreement, which we have agreed with them, which provides an absolute waiver on all debt covenants and allows us to focus on the disposal of Remedica. We will work on the longer-term refinance process in parallel with the Remedica sale process.

So costs related to that process were about -- to the bond process, were about ZAR 32 million; to the rectification of the group capital structure, about ZAR 49 million; and the rest of the transaction and restructuring costs related to party to acquisition costs that we experienced, disposal costs for about ZAR 28 million. And then we had some retrenchment costs in Scitec and some other business to the total of ZAR 10 million. So that all came to ZAR 137 million, and we deduct the profit on disposal of Isando for ZAR 17 million, so that's a net total of ZAR 120 million.

Just wanted to call out some of the increase in costs, particularly in the head office segment. We saw an increase in costs of about 57%. However, the majority of that increase, we believe, is related to nonrecurring costs that don't qualify in terms of our normalized earnings definition. These include a payment to some of the minority shareholders that occurred when we sold the Afrikelp business for about ZAR 10 million. Also, the establishment of the EU head office structure early in FY '19 was about ZAR 12 million. And just to note that, that head office structure has been removed and will not continue into FY 2020. There were also some one-off unwinding of existing long-term incentive, which totaled about ZAR 11 million.

Cost optimization, particularly in the head office. We've identified about ZAR 32 million worth of costs, which we will be cutting out of the FY '20 figures. Two phases. First phase relates to the group marketing team located here in South Africa as well as some elements of the group procurement team. Phase 2 relates to some executive leadership. As I mentioned, based in the EU and some other supporting functions, and all those accountabilities will be absorbed by existing resources.

From a non-people perspective, we're looking at a footprint consolidation exercise, which includes warehousing and distribution across the group to reduce that fixed cost base, tighter controls around both local and international travel and then a limitation on professional fees, which haven't been included in one-off costs to critical needs only.

If I can start looking at the balance sheet, at the cash management. As a highly leveraged business, cash generation is very important to us. And those one-off costs of about ZAR 164 million relating to acquisitions, disposals and debt restructuring have negatively affected our cash utilized from continuing operations. We also saw quite a large investment in CapEx mainly driven by compliance projects in the EU with new serialization regulations that came in as well as in South Africa around some of our supply chain and dossiers and demo equipment that was reclassified in our Medical Devices business. There were deferred vendor liability payments made in H1 of the FY '19 year about ZAR 230 million for the Animal Health and the Sun Wave Pharma businesses. So we had approximately ZAR 454 million cash on our balance sheet at year-end.

From a net working capital perspective. Overall, we see a decrease in net working capital. Most of that driven by the discontinued operations accounting, Remedica, as you know, has very high net working capital levels. Around about 48% of their revenue is invested into net working capital. Once we remove Remedica, we see that the group now runs at about 26% of net working capital to revenue as we stand at the end of June 2019. There were investments in the inventory across the board, particularly in areas where they were -- we wanted to increase safety stock levels of API in Remedica during the year, the investments in the new Qiagen agency in Medical Devices was about ZAR 50 million, and then recovery of the planting season for the agribusiness also saw increase in stock levels. We have embarked in a SKU rationalization project across the company, with most of that focus being in Scitec where we are planning to reduce 300 SKUs in that business.

I mentioned that we had been carrying around about ZAR 90 million worth of debt from the Gauteng Department of Health, ZAR 70 million of that was collected in May 2019, and we're carrying about ZAR 20 million into the FY '20 year. But we do have a signed AOD for that remainder. In this process and during this liquidity issue, we have negotiated some longer payment terms with many of our European-based and our local-based suppliers.

Looking at our gearing. Our gearing has gone up from our net debt leverage ratio, up from 3.8% to 6.3%, driven by the decrease in the EBITDA results as well as an increase in debt, both in EU and SA. 65% of our debt now is held or denominated in euros and 83% of our deferred vendor liability debt is now also in euros.

As I mentioned, we have agreed the interim stability agreement with our lenders, which has provided us with an absolute waiver of all the covenants and the capital repayment holiday as at June 2019. Our average rated cost of debt still comes in at about 5.6%. And the increase in debt that we saw was a bridge loan from our lenders of about ZAR 360 million related to the Biosciences 1. Disposal was repaid back in July 2019 when that deal closed.

Looking at our upcoming cash commitments and cash obligations. So this reflects our cash obligations for the next 5 quarters, with most of them being deferred vendor liability payments. As you can see, the largest one is the Remedica, about EUR 40 million, which will be resolved as part of the ongoing sale process, or as part of the refi process. We've also been successful in deferring further 2 of the deferred vendor liabilities in the form of Sun Wave and Kyron, which will also be pushed post the Remedica sale. We're currently negotiating with Farmalider to increase our investments in Farmalider from 49% to 100%, but still require more time to perform that due diligence.

I'd also like to take you now through the operational review. So looking at the summary, we see Europe, from a revenue perspective, in rands, up 8%; South Africa flat at 1%. As I said, if we remove the impact of Kyron, which was acquired in March 2018, overall, the group came in at flat. From an EBITDA perspective, when we translate the euros into rands, we see a decrease in 33% primarily driven by Scitec where we saw decline in the EBITDA from EUR 6.4 million to EUR 0.4 million in the year. South Africa also experienced a big decline in EBITDA, down 62%. The biggest driver of that, Medical Devices business, we were down 69%. So overall, the group's EBITDA declined by 63%.

If I can delve into the different businesses. Give a couple of -- highlight a couple of areas. So looking at Farmalider, part of our Pharma segment, we saw a decline in revenue particularly driven by the implementation of the new EU serialization directive, which not only affected Farmalider at their site, but also their suppliers ability to supply goods and services to Farmalider. They have made alternative plans around manufacturing sites in China and India to increase their capacity and derisk supply.

Although Remedica is not included in our continuing operations, I wanted to give an indication of how they had performed during the year. Revenue on a constant currency basis, they were up 10% to EUR 95.4 million and EBITDA up 2%. They also experienced certain disruptions due to the EU serialization directive and some supply issues in some of the APIs during the year.

Looking forward, they have been awarded a new tender in Mexico and that business continues to grow very, very well.

Looking at SA Pharma. As I mentioned, they were negatively impacted by the factory close-downs by SAHPRA in H1 of this year, which caused massive supply issues and then related buyout penalties because we weren't able to supply certain of those tenders.

We did manage to conclude the sale of the Isando factory and all the money related to that, about ZAR 126 million has been collected. So going forward, on a normalized basis, we will no longer have ZAR 45 million worth of expenses that were related to that factory.

Medical SA, I spoke about the impact of weakening rand on GP, which is about a 4% decrease in the gross profit margin. We also had been gearing up for an increase related to the new agency that they had acquired, the Qiagen agency, which involves an investment in sales heads and training. And as I said, those sales have started to come through in Q1 of FY '20.

Scitec. Scitec is where we've seen the biggest decrease in EU from an EBITDA perspective. As I said, increase -- the volumes have been maintained, but price has gone backwards due to increased competitive activity, particularly in the online space. Scitec have entered online through Amazon, and we see strong growth in 5 key EU countries. We embarked on a head count reduction projects, so 61 FTEs were reduced in Scitec, both in the front office and the back office and the manufacturing site. We have appointed new leadership in that business and are planning to launch 2 new Scitec sub-brands in the endurance space. The team is also looking at further COGS and overhead reductions in FY '20. Sun Wave continues to be one of our stars, where we see not only a 22% increase in revenue, but a 34% increase in EBITDA on a constant currency basis. And this is driven by increase in sales head and medical marketing activities. They also successfully launched 5 products in FY '19 and are looking to launch a further 4 in FY '20.

Looking onshore at our Consumer Health business, saw that business battle in some tough economic climate. They went backwards 11%. What we did do during the year was integrate that business. So we integrated the Wellness, Skin, Supply Chain and Chempure businesses under one leader. We also took some rather large inventory write-offs, which negatively affected our EBITDA, and that's big driver of why the EBITDA was down 82%. But we do see some nice growth, particularly in the Skin business, not in South Africa, where we see some headwinds around the salon market, but overseas where our U.K. business is expanding quite well and we've invested some marketing to grow that further.

Another priority for next year for the Skin business would be to launch the new AgeWell products into the online channel.

Going over to our Animal health business. We saw some strong growth from the launch of a new range of vaccines as well as the acquisition of Kyron, which is included under our Animal Health business.

Priorities for next year would be expansion into other markets, into East Africa and Botswana and Namibia.

Again, Biosciences, just for illustration, it's not included in our continuing operations, it's part of our discontinued operations, but we saw some nice growth in that business, some recovery from the drought. Although in the KlubM5 business, there were some registration issues with some of the products. Some of the products were removed from the market. We have been successful in reregistering some of those products and they have been reintroduced in FY '20, and we've seen a relaunch of Dicorzal. That's everything from my side. If I could hand back over to Mark for the short-term focus.


Mark James Van Lill Sardi, Ascendis Health Limited - CEO & Executive Director [3]


Thanks, Kieron. So ladies and gentlemen, you've just been through a whistle-stop tour of the financials. I'm sure there'll be lots of questions in relation to each of the business units. There will be time for questions afterwards, and we will engage with a number of you one-on-one over the next 3 to 5 days. But a very complex set of financials to get to grips with, but the rigor has certainly is there.

Going back to what's important to the business right now is getting the balance sheet sorted. And we spoke earlier about Remedica, and the beauty there, as you can see from the results, this is a 30% EBITDA margin business in attractive markets. And while the market may have re-rated globally in Pharma, if you look at transactions completed and it's probably a function of multiples having re-rated, that the M&A activity in the space. Certainly, a lot more buoyant than it has been for a while. We do have a shortlisted party. We have had a number of bidders interested in this asset for obvious reasons. And there are things that I can and can't say. But what I can say is that we are in the late stages of confirmatory diligence and legal toing and froing. And then, of course, there will be the regulatory approvals that would be required. And I have to give you, unfortunately, the bland disclaimer at the end that we will make more announcements in due course.

Just to recap of what I said at the beginning. 3-pronged strategy: let's fix the basics, and that is fixing balance sheets, so money capital; fixing our relationship with suppliers, vendors, staff, customers, consumers, to the extent that I fixed one, my ability to address 2 will become a lot easier, but again, restoring this capital and making tomorrow healthier across the organization is top priority; getting Remedica done within tight time line is obviously very important. It's important for us, but it's also important for the buyer because, again, this is an asset with a lot of interest. So it's no -- time is the enemy of a deal. And I think for both sides, it's important to get it done as quickly and as efficiently as we can. With that, touching all the wood that I can, done, then it's a restructure of the balance sheet and that will happen coterminous with the completion of the sale. Focusing on revenue, expenses and the rest is what you'd expect me to say, but I do think having a plan, a plan that speaks to capital allocation, that speaks to restoring the fortunes of the business and speaks to feeding those that are in particularly the sweet spot of the return on invested capital space, that will be my job. And I will re-engage with you once we have that balance sheet stability to talk about what I see for the business. And in the interim, I will obviously highlight those businesses, which I think have particularly strong growth prospects for the business.

On that, we've had a relatively good start to the year with 13% up on the top line in the first 14 weeks. Please do not extrapolate 13 weeks because a swallow doesn't make a summer, but it is -- I'd rather take 13% than minus 13%. So I think a very good start despite a challenging macro.

And just to conclude, I will come back in relatively short order, once I have the flexibility back in the balance sheet to communicate a more detailed strategy. But again, just to reiterate my opening remarks, I do think this is a case of good business, bad balance sheet. And if we can fix the one, we can start to focus back on the things that matter. All right. I think that's it for me. Should we turn over to questions?


Questions and Answers


Kieron Futter, Ascendis Health Limited - CFO & Executive Director [1]


So we have 1 question to please discuss the quantum of penalties paid to government for nondelivery in Pharma.

So just to give a little bit of background on how that works is when you are unable to deliver a tender to -- based on order from a government department, they are then entitled to go to your competitor. And the difference between the price that they pay their competitor and the tender price is charged to you as a buyer penalty. In the year, I stand to be corrected, it was in the order of about ZAR 6 million to ZAR 7 million that we paid related to those types of penalties.

There's another question to discuss the quantum of costs to gear up for the new agency in Medical Devices and impact to the ZAR depreciation in that division.

So in order to be able to deliver products in that area, there were a number of salespeople that had to be hired. So we had the head count costs as well as the training that was required for the technical staff to support those. I need to come back to you on e-mail and the exact quantum of those costs as well as the impact of ZAR. But in the Medical Device business, approximately 95% of the goods sold are imported, most of them in U.S. dollars. And we saw, on average, weakening in the dollar versus the rand of about 9% in our business. So that has led to the 4% decline in GP that we saw.

We have another question around, will the cash for the Remedica sale be applied to debt relief? So...


Mark James Van Lill Sardi, Ascendis Health Limited - CEO & Executive Director [2]


Maybe I can jump in. So the answer is yes. And anything that was associated with the original transaction. So the vendor liabilities and the bank debt will be discharged through the sale.

It's a very clever question, the next one, which says, can you give us short-term balance sheet targets in terms of debt to EBITDA?

Problem with that is if I give you that, you can try and back-sell to the purchase price. Unfortunately, I can't do that. All I can say to you is that the -- given the size of the business and the attractiveness, it will be a material reduction in the debt on the balance sheet.


Kieron Futter, Ascendis Health Limited - CFO & Executive Director [3]


We have a question around the erosion of GP based on ZAR weakness. Can you elaborate if you did any hedging in FY 2019 and what the outcome was?

So we have a hedging policy that's been in place for the last 3 years, where all known commitments within 3 months are 100% hedged. Commitments payable between 3 and 6 months are 75% hedged, 6 and 9 months are 50% hedged and anything longer 25% hedged. And we've applied that consistently every year. That helps us eliminate any short-term volatility in the currency. It doesn't, however, help us in the long run when there is substantial decline in the rand versus the dollar. And we saw, as I said, based on average rates, about a 9% decline. The best way to hedge is obviously to get price increases from your customers. Unfortunately, in many of those businesses, it's not possible when you're on a tender. The price is fixed. You are able to apply for an adjustment after 6 months where the government does reimburse you for any substantial decrease in the rand versus the dollar. But some of the private customers, it's very difficult to get price increases related to foreign currency losses in that regard.

There's another question around wanting some more detail on OpEx and what the market can expect going forward.

So obviously, there were a lot of one-off type costs that we have normalized as part of our (inaudible) normalization. We had a figure of about ZAR 137 million. There was a further ZAR 45 million worth of costs that did not qualify in terms of the definition, which we regard as one-off. And there were some costs related to what we needed to do to improve our B-BBEE score. So to get from that 5 to the 1, it was about a ZAR 12 million investment in that regard. So I can reply an e-mail what we think a sustainable level of cost is for the business for the continuing operations.


Mark James Van Lill Sardi, Ascendis Health Limited - CEO & Executive Director [4]


Okay. I think that seems to be about it. There are 1 or 2 very clever people on the other side that are trying to get to the same answer, but a different way of asking it. So I commend you for the innovation in which you've asked some of the questions. Also note that a number of the questions come from those of you who will be meeting with one to one, so we'll have a bit more of an opportunity, I think, to talk about the future of the business then.

Ladies and gentlemen, thank you very much for your time. And I think that brings to an end this webcast. Thank you.


Kieron Futter, Ascendis Health Limited - CFO & Executive Director [5]


Thank you.