Ascendis CEO: Supporting correlation between fitness and profits
Self-serving talk about all those deals being done on the course is just plain nonsense. With few exceptions I've found an inverse correlation between successful business leaders and their golf handicaps. A better case might be made for a positive correlation with the leader's general level of fitness. Ascendis CEO: Supporting correlation between fitness and profits You don't have to be a fitness fanatics like Adrian Gore (Discovery), Ivan Glasenberg (Glencore) or Des Sacco (Assore) to be a successful entrepreneur, although for them it certainly seems to help. But those who look after their physical condition usually perform far better for investors than Brett Kebble-lookalikes. On this score. Ascendis's CEO Karsten Wellner falls very definitely into the correct camp. He went to the wrong address so needed to run around half a kilometre to get to the CNBC Africa studio for this interview. Even after that exertion, his breath was so even it wouldn't have blown out a candle. Not surprising as he spends his spare time competing in Iron Man competitions. Well names, Mr Wellner. – AH
ALEC HOGG: Ascendis Health listed on the JSE close to a year ago. Today, the group released full-year revenue operating profit and headlines earnings growth per share, which is well ahead of expectations. Karsten Wellner, the Chief Executive of Ascendis Health is with us in the studio. You haven't run out of breath. You went to the wrong studio. You're fit, though. Do you do a lot of exercise?
KARSTEN WELLNER: Yes, I do. Working in a Wellness company and with my name – Wellner – I somehow have to do something…
ALEC HOGG: I didn't see the Wellner connection with the Wellness Company. Adrian Gore is the same. He's a bit of a runner. Is that how you keep yourself fit?
KARSTEN WELLNER: No, I did Iron Man and I cycle. Some people say cycling is the new golf nowadays in South Africa. It's nice, socializing.
ALEC HOGG: At the 19th hole – always there. Karsten, we're here to talk about your numbers. Before you listed in November last year, what did you forecast and what have you delivered?
KARSTEN WELLNER: Yes, when we went to the listing last year, we had our pre-listing statement, which was drawn up in September, so it's a year ago. A year ago, we over-delivered. We delivered the sales numbers and we over-delivered on the profit. We had forecasted an operating profit and a PAT, which we over-delivered by probably five to six percent – quite exciting. If you look at the total numbers, the growth numbers are extraordinary – 277 percent EBITDA growth, PAT growth even further.
ALEC HOGG: But then you did make many acquisitions, so it's to be expected.
KARSTEN WELLNER: Yes, we are an acquisitive business. One part of our strategy is acquisitions. However, even if you take all acquisitions out and you just look at our underlying business, which we owned one year ago at 30th June 2013, that business had a top-line….sales growth of 15.2 percent, which shows the strong growth action. We've always been talking about our defensible brand strategy being in the high LSM sector, and that actually, was proven. Woolworths released their results a week ago. I think they showed thirteen percent top-line growth.
ALEC HOGG: You saw my notes. I said here 'you're the healthcare sector equivalent of Woolworths, not Shoprite'.
KARSTEN WELLNER: Exactly. Sometimes we call it the 'Woolworths Halo Effect' because our consumers are very resilient to economic downturns, and most of our businesses are in the high LSM. In the Pharma side, we have generic as well, which go more to the low LSM markets (|State hospitals and private hospitals), so from that side we have a nice, diversified portfolio of our business. I think that helps in difficult times where a consumer is a little bit stressed in South Africa these days. Because of our diversified portfolio, we're not really dependent on a single exit price increase of the Department of Health, or on consumer sentiments.
ALEC HOGG: Forty-one percent is in consumer brands. There's another company that's been in the news in this sector, which is very big in consumer brands as well – Adcock Ingram. Do you think, from where you're sitting, that that's a business that can be turned around? You know the feel. You know the market. You know their brand. Do you think Joffe's bitten off more than he can chew there?
KARSTEN WELLNER: Of course, I shouldn't make comments about competitors.
ALEC HOGG: No, you should. We're having a good chat here between the two of us.
KARSTEN WELLNER: I think they have fantastic brands and the combination of good brands and Joffe with his expertise in the vertical integration of business and extracting synergies out of supply chains, I expect they should be able to turn the business around. In the end, I don't know.
ALEC HOGG: Is there a deal for the two of you?
KARSTEN WELLNER: Yes, we have contacted them, but they are currently very busy with restructuring of the business. We'd recently done an acquisition, called Arctic Health, which are some dossiers, and that's exactly what we're looking at. We want to acquire brands or dossiers (the classical Pharma model), acquire these ones and slot them in to extract more vertical synergies.
ALEC HOGG: They're not much bigger than you are now. You're a R4bn company.
KARSTEN WELLNER: We're R4bn these days, yes. To over-analyse with last year's numbers of R2.2bn…
ALEC HOGG: Adcock's nine.
KARSTEN WELLNER: We are getting there, but we don't really see Adcock or Aspen as an example for us, because we are more diversified. Our business model actually looks at Wellness products, Pharma products, and medical devices/products, but because of the diversification we have a hedge regarding dependency on single exit price increases or dependency on just, imported, raw materials.
ALEC HOGG: You haven't mentioned VETS…54 percent in the animal healthcare sector, I presume.
KARSTEN WELLNER: Yes, we had two big acquisitions done in 2013: Marlton's Pet and Vet business, and Effektor, the market leader for many years in home and garden. In the upcoming years, we aim to achieve 20 percent with our pet and vet business and agricultural business.
ALEC HOGG: Is that because the people who own pets are in that Woolies' market that you spoke about before, and they're quite happy to pay for your products?
KARSTEN WELLNER: Yes, it's also high LSM market because people who have pets spend a lot on their pets, and you find this all over the world, whichever market you look at.
ALEC HOGG: So what are your margins like compared to the other margins?
KARSTEN WELLNER: They are similar, although they're not extraordinary because we go to the retailers and of course, we have to look at consumer spending power etcetera, so you can't overdo it. In the Effektor business (in the home and garden business), the margins are a little better than they are in the pet and vet business. Overall, we are aiming – and you've seen the numbers; we're on 17 percent EBITDA margin for our business – to keep it at that level and maybe even go further, to 20 percent.
ALEC HOGG: Very juicy, but then FirstRand is showing that if you have a good business, you can do it. Karsten, just to close off with, we had the Board of Healthcare Funders Chief Executive in here a couple of weeks ago. He was complaining about hospital prices and there's a big war coming on there. He says that the private hospitals are in trouble because they're going to fight them with government. What impact would that have on your business if they were to achieve what they're trying to do?
KARSTEN WELLNER: As we mentioned, 20 Phyto-vet division, 40 percent consumer, 40 percent Pharma-vet. Forty percent Pharma-vet: we aim to have 20 Pharma and 20 medical devices. Medical devices are mostly imported in South Africa (95 percent), so there is margin pressure but everyone has margin pressure in the market. It's not as though some medical devices are produced locally. Ninety-five percent are imported. It puts pressure on margins, so it will level playing fields. However, we did a very nice acquisition recently, called Respiratory Care. I think we talked about it some time ago on Power Lunch. Respiratory Care Africa business will actually be complementary to Surgical Innovations and they can offer so-called turnkey solutions.
ALEC HOGG: But that's not my question. The question is if the private hospitals in South Africa have their margins coming under pressure, will it affect you?
KARSTEN WELLNER: it would put pressure on us, but because we can offer turnkey solutions, we can extract synergies out of economies of scale and that's where I was leading.
ALEC HOGG: You sound like an MBA dictionary, now. The point is it not a problem for you if that happens?
KARSTEN WELLNER: No. We have to address it. It's the same as it was with the camps regulations. We had to address the camps regulations and we will have a market consolidation, and companies who have done their homework will emerge stronger. It's the same with medical devices. There is margin pressure all over the world. If you are in the business of medical devices and Pharma…all over the world…whatever market you look at today, there's margin pressure and all the companies have to address that.
ALEC HOGG: Well, so far, so very good.