Sigma Healthcare Limited (SIG) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Sigma Healthcare Half Year Results Briefing. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Mr. Mark Hooper, CEO of Sigma Healthcare. Thank you, sir. Please go ahead.

Thanks, and good morning, everyone, and welcome to the Sigma Healthcare results presentation for the half year ending July 2020. We're obviously doing -- still doing things a little differently this year, given the ongoing issues with COVID-19. Let's hope we're doing something different when we get to the full year results. So just moving into the body of the presentation. As I said, when we did our full year results presentation, it's never a dull day at Sigma, and it certainly continued over the last 6 months. There continues to be no shortage of challenges during the first half of this year, but we have seen continued evidence of the benefit of restructuring and reinvestment programs. And we have been through a more -- sorry, and we have been through and more critically, the platform we have built for future growth. I'll talk to all of that in more detail as we go through the presentation. We've used this opening slide previously with the objective of capturing the key elements of business performance. I'll talk to these -- most of these in detail as we go through the presentation, but just a couple of key items to call out on the slide before we move on. Just on the results themselves, underlying EBITDA of $34.1 million was probably a little bit above what we were expecting. And the early signs in the second half are that the business continues to perform well. Overall, we're a net beneficiary of the impact of COVID-19 with stronger sales of personal protective equipment through CHS and MIA, which has been partly offset by a number of other factors, which I'll talk to later. Pleasingly, the core business has continued to perform well with wholesale sales, ex CW and ex Hep-C, up by 15% on last year. And I guess, importantly, that follows growth of 8.5% last year. So we're cycling quite strong growth from year-to-year. Work on Project Pivot continues to make really good progress. We've delivered another $25 million of annualized benefits during the half. And really critically, we remain confident of delivering the original target of more than $100 million by year-end. And I think when we talked to you previously, we thought some of that might slip into '22, but we're now confident we'll deliver that $100 million target by year-end. We continue to invest in the infrastructure, and that's both from a physical warehouse perspective and systems. And it's pleasing to see that these critical projects remain on time and on budget despite the challenges posed by COVID-19. And again, I'll talk to more to that in more detail later. The other thing I'd like to call out is just a great result on the people and culture outcomes. These are really easy times to not perhaps be as supportive of your customer base and of your team. But what we've seen is continued improvement in our team engagement scores. We've got some great NPS results that I'll talk through later. And just as importantly, we've seen probably the strongest safety performance we've had in the business for quite a long time. So all of those sort of really critical markers have continued to show improvement. So the next couple of slides just give you a little more detailed look at the financial performance for the first half. If we look at the first half result in detail, I realize this slide is just a little bit complicated. But what we've tried to show you here is a reconciliation between reported and underlying based on the new lease standard with the reconciliation back to the old lease standard. It's hard to get that out. But what we've decided moving forward is to move to reporting under the new lease standard, because that's what the standing -- accounting standards required; but b, that seems to be how most of the market is now looking at ongoing results for the company. So we will be moving to a reporting platform that takes into account AASB 16 moving forward. So the main part of this slide to focus on is the left-hand side, which shows the results based on that new standard. As I mentioned in my opening comments, the strength of sales in the core business is reflected in the fact that we saw 15% in non-Chemist Warehouse revenue over the last 6 months. And if you look at total sales compared to last year, notwithstanding the fact that we don't have the Chemist Warehouse contract for PBS products in for most of this first half, total revenues only down by 12.5% on last year. So a really strong performance. Included in that is hospital sales as well, which were up by 22%. So that strength in sales performance has been seen right across the business. The results also have been positively impacted by PPE sales, mainly through our CHS and MIA businesses. And I guess the other important point to note out of that is that has helped lift our EBITDA margin because it's inherently more profitable business because you're making profit margin as well as distribution margin on the way through. I'll talk to the operating cost piece more in a moment. The underlying result of 34.1% is around 8% below last year's number. I still think that's a great result given the fact that we're cycling off a half year that had essentially the full Chemist Warehouse contract in for that entire period. Just diving a little more into the picture on revenue. As I mentioned, when we were doing our full year results in March, we had the sort of early indications of what COVID-19 was doing to the business. We saw a very strong demand spike in March. But I think as the 6 months has played out, we think that's probably largely leveled out. We saw slightly weaker sales in April and May, and they've just gradually come back in June and July. So we think from an overall volume perspective, it's probably landed about where we thought. If I had to make an overall comment on pharmacy sales, I think COVID-19 has probably had a slight negative impact on performance because despite the fact, in an overall sense, we landed about where we thought we would be, there's unquestionably have been some impact on some of our customers. We have a lot of customers in airport locations. We have some in city locations. We have some in shopping centers, although we probably don't have as much exposure to that potentially as other brands. But overall, we would have probably expected slightly stronger sales if COVID-19 hadn't happened. Just as importantly, our pipeline of new business remains really strong as we head into the second half of this year. You've heard me talk before about the importance of momentum. We've now had sort of the better part of 2 years of really strong sales growth. We're carrying good momentum into the second half of this year. And I think that not only feeds through the way the team engages, it gives us a good platform for growing for the balance of this year and into 2021. All of this performance includes the uptick in nonpharmacy businesses. I guess the important point to note about that is in those sorts of businesses, it's -- the revenue piece is less important than the margin piece because, as I said earlier, it's inherently a higher-margin business. Just as pleasingly, which I touched on in my opening comment, is the improvement in Net Promoter Score. So you can see the chart in the bottom right-hand corner of the slide. So you've got 2020 in purple -- sorry, 2019, essentially in purple and 2020 in amber. You're seeing a continued improvement in Net Promoter Score. So I think since we started tracking this, we've probably seen a 50- or 60-point improvement in Net Promoter Score. So we've been through challenging times with COVID-19, bushfires and everything else, to see that continued improvement in customer perception, as I said earlier, together with an improvement in team perception, I think the 2 are absolutely linked, has been a real standout that's helped us grow our revenue platform over the last 12 to 18 months. Just touching quickly on the Chemist Warehouse FMCG contract. Again, when we were -- at the full year results, we're sort of halfway through that transition process, and we said we expected that to be fully done by June. We've completed that on schedule. It wasn't easy because we obviously had COVID-19 impacting supply chain on the way through, but that's all been completed on time. So we're now at sort of full run rate and on track for that annualized sales target of around $800 million a year. And I guess when you combine it with the strong sales growth that we've seen in other parts of our business, it now means that around 50% of our business is not relying on the PBS. So as many of you would know, it's been a longer-term target of ours to reduce our reliance on regulatory-based income. So we've now got a growing business, where less than half of it is reliant on regulatory income from the PBS. So I think that's another strong sign for the business moving forward. Just a quick look at some more detail on operating costs. Look, I know everyone would like to sort of get a better guide as to sort of the ongoing cost platform. It's still a little bit difficult while we're sort of establishing new warehouses and bringing new customers back in. So it's -- I don't think it's at the point where you could sort of use this as necessarily a clear guide for future operating cost levels because you've still got the mix of one-off and ongoing factors. I guess what I would say is we have made some really significant changes over the last 12 months to improve our cost position, not least of which is the new automated DCs we've now built across 5 states. 4 of those are actually up and running now. The last of those in Truganina will be up and running, in part, later this year; in full, towards the middle of next year. As I touched on -- as I'll touch on in a few moments, Project Pivot continues to make really good progress, and that contributes to an inherently more efficient and effective cost base moving forward. There still are a few one-off costs in the first half. There were some redundancies related to warehouse closures, particularly around Kemps Creek. There's some dual operating costs when we've moved into new warehouses, which we've captured there. Against that, we'll obviously get some cost savings from the fact that we don't have the PBS portion of the Chemist Warehouse business there anymore. And I guess the last point there is we have increased our doubtful debt provisioning by about $4.5 million for the half year. And look, we take a pretty proactive approach to managing trade credit. And I think as we think about the last 6 months, we've not seen any systemic shift in payment performance. So we're not seeing a systemic late payment pattern in any of our debtor book. But that said, there's certainly occasion where we had to extend some payment terms for customers. So if you think about customers in the sort of locations I talked about earlier, so airport locations, city locations that have been heavily impacted by foot traffic, now we have had to extend some payment terms. And I guess, we would still have a general concern about the medium-term impact on sort of a bad debt position because of COVID-19. So we think it's in that sort of context, it's prudent to provision at a higher level than we normally would. So we're pretty comfortable sort of putting that charge through, even though, as I say, there's no evidence of a systemic weakening of sort of debtor performance on the way through. Just a few slides now with some further details on our operations. The first of those gives you a more detailed picture on the progress with our retail brands. We continue to believe, pardon me, in the benefits of offering customers a broad range of brand solutions. And our customers sort of have -- sorry, our competitors have 1 or 2 brand offerings. We offer 5 or 6 different brand offerings. And as long as you can make sure that you don't compromise the efficiency of your cost base, we think that gives us a more flexible platform to offer the right solution for customers that isn't going to be a one-size-fits-all. As I noted in my opening comments, like-for-like sales were up by 9.5% in the last 6 months. And you need to remember that last year, they're up by 11.7%. So we're, again, cycling very strong growth through on last year. So that makes the performance even more impressive. And it's also worth remembering the Sigma brand portfolio sits only behind Chemist Warehouse in terms of, I guess, its percentage of consumer spend. We're about 18% to 20% of everything that's spent in retail pharmacy. So it's a critical relationship for suppliers as well. So we do have an impact in that space. Other highlights on the retail front. We've had approximately 22 new stores come on to one of the Sigma brands in the last 6 months. We've got a very strong pipeline heading into the second half of this year. The WholeLife offering, which includes a health food component as well as a pharmacy component, has been an area of particularly strong growth. It's a more unique solution for pharmacy. And I think in a world where pharmacists are looking for new ideas to try and grow their business, the WholeLife offering has really attracted quite a lot of interest for us. So we see that as growing quite strongly into the future. We've had quite a structured program supporting pharmacies for the rollout of e-scripts. That's become a more critical focus for us, particularly with the impact of COVID-19, where perhaps people kind of using telehealth services for doctors more and can't necessarily get through to pharmacy. So we had quite a structured program ready to go in anticipation of e-scripts rolling out. The fact that that accelerated meant we're in a really strong position to support our brand members and their opportunity to support their patients better within an e-script environment. We've continued to roll out our professional services support programs. And within that, there is the option of the Doctors on Demand platform in store. So that's been an area where we've seen quite strong growth over the last 6 months. One of the questions we've had in relation to the brands is the impact on online sales from COVID-19. And we have seen a very strong uptick over the last 6 months. But most of that's probably played out as a click and collect rather than Sigma actually delivering the product. So that's, again, been part of what's driven the strong like-for-like performance for our customers. Next couple of slides go through in more -- further detail on our growth areas that we've identified outside retail pharmacy. We've talked to you about most of these before. The first slides around hospitals and contract logistics. Hospitals continues to grow quite strongly over the last 6 months. And the performance of the Sigma logistics footprint during COVID-19 has been a really critical factor in making sure, not only we're able to support customers, but actually been quite a strong platform for growth. Again, we track NPS, Net Promoter Scores, within this space quite regularly. The customer feedback on Sigma's performance during COVID-19 has been absolutely fantastic, and it's actually been one of the factors that's allowed us to accelerate our growth in this space. I guess the only slight negative in the hospital space is there has been some impact of the deferral of elective surgery, but that's been more than comfortably offset by growth in other areas. The Contract Logistics business, which includes our 3PL and 4PL offering has also continued to show good growth. We've won a number of new contracts over the last 6 months. We're moving to GMP accreditation in our Kemps Creek facility. So we're building out, I guess, the platform from a regulatory perspective to make sure we can take on more opportunities moving forward. And again, I think we flagged in previous presentations, we designed our new Kemps Creek DC in New South Wales to have additional capacity to take on this work. And I'm pleased to say that over the last 6 months with the new contracts that we saw, we continue to more than comfortably fill that capacity that we've allowed for in that new DC. So we would expect to see some further growth in this moving forward as part of our -- as I say, our growth outside the Pharmacy business. The next slide covers MPS and MIA. MPS is the dose administration packing business that we acquired late in 2018. We do see plenty of opportunities in this space, particularly given government's focus on quality use of medicines in aging population that either in a community setting or an aged care setting is using more medicines. It has been a little bit negatively impacted in the last 6 months. One of the unfortunate realities of the COVID-19 crisis is that there's perhaps less willingness of people to go into aged care. So that So that just meant a falloff in numbers in that space. It's also meant, even though we've won some new business in MPS, we haven't been able to transition all of that in fully just because of some of the practicalities of being able to do that. So this is one of the areas that has been slightly negatively impacted by COVID-19. But we're still pretty positive about what we can do with this business in the medium term, as I say, particularly against the backdrop of an aging population, and I guess, a government that wants to encourage quality use of medicines, which I think dose administration aids become a key part of. On the MIA business, this has obviously been a particularly strong performer over the last 6 months. We bought this business in late 2018. I guess, was our first real push into that medical consumables and to a lesser extent, the devices space. The events of the last 6 months have driven a significant increase in PPE. In particular, some of that's going to be one-off in nature, but we do think there's a longer-term opportunity, given that the demand for PPE is likely to stay at higher levels than it was pre-COVID. So one of the really interesting things we're doing inside MIA is to make sure that not only do we capture some of the shorter-term opportunities that arise, but we build the platform to take advantage of what I mentioned in that there would be a fundamental shift to higher consumption of PPE in a whole range of environments moving forward. So we think that's a particularly interesting area of growth for us moving forward. And I guess, we'd really like to expand our footprint in that space if we possibly can. Now quickly, just looking at a regulatory update. And I guess the most critical event in the last sort of 6 months has been the conclusion of the seventh community pharmacy agreement, which most of you know, includes the remuneration arrangements for wholesalers. As part of these arrangements, the government has introduced a pricing floor to support medicine supply through the wholesaler network over the next 5 years. We've been arguing for quite some time for a pricing floor to be introduced because of the ongoing impact of PBS reform. So it's really fantastic that the government supported our request on that front. We've also been successful in getting an additional $92 million of funding through the CSO over the next agreement. And together, we think that those investments help offset some of the impacts we've seen over the past few years, where from the fifth to sixth CPA, we saw a decrease in funding. We've seen further impacts out of PBS reform. So these additional amounts of funding help offset some of those impacts for us. So it's quite a positive impact -- outcome for wholesalers. Just as pleasingly, pharmacy also received an effective increase in funding out of the seventh CPA. I think more critically, got funding certainty about the money actually being spent. I think one of the challenges for pharmacy was it got quite a significant increase in the sixth CPA, but not all the funds were expended. They've got a risk-sharing arrangement in the seventh CPA that means the money allocated will be spent. So in an uncertain environment like we are at the moment, having that certainty is certainly a big plus for pharmacy, which means it's a big plus for us because our customers have that certainty in terms of their ongoing operations. Next slide covers the specific impact of COVID-19 on trading performance. And look, I've touched on a fair bit of this already. I guess, as an overall comment, while there's been more than a few practical challenges, I think business has actually coped pretty well. I think we haven't had to rely on any external financial assistance to support the business. As I said, the overall financial results have probably been assisted by higher sales of PPE through CHS and MIA. Pharmacy sales have largely been in line with what we would have expected. And as I said in my opening comments, if anything, it's probably a slight negative on what we otherwise would have expected to achieve. In terms of some of the negatives out of COVID-19. Look, there was a drop off in -- there was a significant drop off at the heart of COVID-19 in terms of promotional activity in pharmacy, probably around that March, April, May period, in particular, which, in turn, for us, impacts merch and marketing income. So I mean the practical outcome of this, we're still incurring the cost of the infrastructure to support delivery of merch and marketing programs to our customers. We're just not getting the income to offset that. So that has impacted the first half result. As I mentioned earlier, we've also increased our provision for doubtful debts. We think that's a prudent approach in the current environment. And as I said, there's no systemic issues there. But I think to pretend there won't be any issues that come out of the COVID-19 environment, I think is probably highly unlikely. Last, but not least, there's just been a few extra operating costs we have incurred on the way through. Obviously, more cleaning, security and other sort of costs we've had. We haven't set out -- separately split out those costs just at the moment. We've just sort of taken those in the ongoing result. We'll just see where we land as to whether we think that's significant enough to pull out of the underlying earnings. The most important thing is, I guess, as we've been going through COVID-19 is to make sure we look after our team members. And ultimately, that -- so we're in a position to be able to support our customers and therefore, Australian patients. It's not been easy to navigate the work environment over the past 6 months, but we've maintained our operations in a safe manner for our team all the way through. As I say, it puts us in a strong position to make sure the Australian patients, be they in hospitals or pharmacy, ultimately get their medicines, which is a great part of being in a business like Sigma. Next few slides cover capital management. It's always been a big focus for the Sigma business and for me personally. Starting with working capital. As you'll see from the chart in the top left-hand corner, there's been a continued focus for the Sigma business over many, many years. The cash conversion cycle is now sitting around 29 days. I guess the only comment I'll make in terms of working capital movement specifically is probably around the movement in DSO. We made the comment at the full year presentation that the DSO of 31 days for the period to January '20 is probably artificially low because it -- the sales base that you used for that calculation still had a fair chunk of Chemist Warehouse sales in it. Obviously, about half of that business has now returned. So when you get through to July 2020, you got the higher debtor balance simply being reflected in the mathematics of that number where the sales base hasn't shifted significantly. So there's no there's no change in the way we're managing credit or anything on that front. It's just simply the mechanics of exiting a big customer and only getting part of that customer back between the 2 different halves. The DIO/DPO spread, which is also a key focus for us, has improved slightly in the half. It's gone up from 5 days to 11 days. It does bounce around a little bit between half year results, as I'm sure some of you have seen, but we do think there's an opportunity to further improve that, particularly on the inventory side. It's probably going to be something that gets delivered once we get the implementation of the ERP platform in place because that will give us a better forecasting base and more control over our inventory levels. Just on the return on invested capital. It's currently sitting around 6%. It's obviously well below what's been historically and down from what it was at year-end, it was about 7%. I mean it just simply reflects the fact that we're at the maximum point in terms of our investment cycle before we've got the full benefit. So it's not necessarily where we would want it to be. But as I say, by the end of the investment cycle, we will have invested about $400 million in the business. It's in a more concentrated form that you would normally do. So as I say, we're just at the low point in that cycle. The opportunity now is to leverage the improved platform we've got for improved profitability moving forward. So we'd expect to be comfortably back to double-digit returns inside 2 years and improvements from thereon. So there's a great opportunity for the business there to now extract earnings growth from a more efficient operating base, which is a neat segue into the next slide. We're now in the last stage of our investment program that's essentially been going for the last 3 to 4 years. You can see the sort of investment program in DCs here across the bottom of the slide, and I've made the comment in previous presentations. You wouldn't ideally do this in a 4- or 5-year time frame, you would stagger it over a much longer period. The one practical benefit it has given us is it's meant we've had the team that could just efficiently shift from site to site. So it's meant that across all the DCs that we've built, they've all been on time, under budget, and the ones that are up and running are delivering ahead of business case. So it's been a spectacular success from that point of view. And it's hard to overstate how fundamental this change is. We used -- 4 or 5 years ago, we had 15 DCs, they're all old DCs that didn't have a lot of automation. We've halved the number of DCs, essentially. We've got highly automated DCs with a lot of capacity and a lot of efficiency. So it just puts us in a great position, particularly when the underlying business is growing so strongly, we can take that volume on quite easily and efficiently. The technology transformation is just as significant. I'll touch on that in more detail later in the presentation, but it really is a complete reenablement of the operating platform for the Sigma business. Next slide talks in a little more detail about the sale and leaseback transaction, which we put out a release on in early August. Again, many of you know, when we originally invested in new warehouses, we made the conscious decision to own the land and buildings because at that time, we didn't have a lot of debt on the balance sheet. So we wanted to introduce some level of gearing onto the balance sheet to get a better fund of capital, but we also want to control over the design and build of the DCs. The intention was always to review the longer-term capital structure when we got close to the end of this program. And consistent with that, we announced earlier this year that we were looking to do a sale and leaseback transaction. When we first announced the deal, I think our original intention was probably to do a partial sale of the 4 main sites, so in Queensland, WA, Sydney and Melbourne. But I guess when we went through the actual tender process, it was just going to be too practically complicated to have a joint venture structure across a number of DCs. So what we ended up doing is just selling the New South Wales and Queensland sites outright. So just to be clear, we've sold the land and buildings, but we still maintain ownership over the automation that sits inside the DCs. And so as a consequence, we still maintain full ownership over the WA and Victorian sites, which gives us optionality down the track. The transaction was completed in mid-August, realized about $172 million of proceeds. It's about $80 million above the original investment in these sites. So it's a great outcome for Sigma shareholders, for us, since we have a truckload of capital losses. I've often said, I dream of running out of capital losses. So this will take $80 million out of that. So there's no tax payable on this gain. Initial lease costs around $8 million per annum. So it's an effective yield around 4.6%. So as many of you would know, you can often trade off a higher sale price by just allowing the yield to drift up because there's a financial element to these transactions. So we've got a really great price at a really good yield. So I think we've ticked both boxes on that front. So it's a -- and you can do the benchmarking against other deals in the market, right, in terms of yield and price, given that we've only held these assets for about 2 or 3 years. So it's a really great outcome for the business. I guess, just to make the point that on the lease cost, you won't actually see that in the P&L going forward because under the new lease standard, that will effectively be split across depreciation and amortization and interest costs. Just a final slide on our net debt position. Half year closed with net debt of about $179 million. We've obviously completed the sale and leaseback since. So our net debt at the end of August was sitting at about $34 million. Look, at this stage, we've still got a little bit of CapEx to do on Truganina and the ERP program. So we're probably expecting a year-end debt figure of about $70 million to $80 million. There's still a little bit of CapEx to happen on those 2 projects into the first half of next year. So I think within the current investment cycle, debt peaks probably somewhere in the middle of the first half of next year. And then after that, debt runs down relatively quickly because we have quite a big D&A charge in our results now. So that means operating profits throw off quite a bit of cash flow for us moving forward. And our CapEx program falls away quite quickly once we complete those bigger programs. Just a few slides now on the business transformation process. First up, Project Pivot. Just to remind everyone, this is the business transformation program we established 2 years ago. The original target was to generate $100 million of annualized efficiency gains by the end of January 2021. And while there has been some delays on the timing of benefits through the program, I'm pleased to say that the overall program remains on track. And as I said in my opening comments, over the past 6 months, we've probably managed to pull it back a little. We had originally thought some of them might slip into next year. We'll now have this essentially fully complete in terms of activity by the end of this year. We delivered another $25 million of annualized benefits over the last 6 months. So the total, as you can see by the very interesting chart on the right-hand side, is $87 million now. Just to let you know, we've also delivered another $4 million or $5 million of benefits in the period since the end of the half year. So we're currently sitting at about $92 million. So again, should give you a lot of confidence about delivering the $100 million of benefits. And I mean it's really interesting on these sorts of programs, right? I mean, I think, when we announced this, we got a lot of feedback from the market that companies come out and promise these sorts of things and then very rarely are they delivered. I'd like to think we've given you good visibility on the way through here, and I think it's a great credit to the business. Again, particularly in the environment we've been in over the last 6 months where there's a truckload of other things happening inside the business to be able to successfully deliver a program like this that has such great long-term benefits for the business. Next slide is just a little more detail on just the completion of what we're doing in the DC network. The last of the sites, as I touched on one of the earlier slides, is at Truganina. The current plan is to start hospitals and 3PL services from that site later this year. I think practical completion of the site is actually this week. So we've got some initial work going into that site. We had probably intended to shift there in September. I guess given everything that's happening with COVID, we've just probably deferred those plans a little to make sure it's safe to shift that business. This completes, as I said earlier, a complete rebuild of the logistics network. And if you think about it, we spent about $300 million in total, but because the shift from some of the old sites and new sites and the fact that we sale and leaseback has realized around $200 million of proceeds on the way through. We've effectively upgraded the entire network for a net cost of $100 million to the business, right? So obviously, the extra money we've made on the sale and leasebacks contributed to that. But to completely transform your network for effectively a net cost of $100 million, including all of the automation sitting inside the DCs and still keep complete ownership of 2 other sites, I think, is just a really great credit to the team. Just as critical has been the ongoing investment in technology. When we spoke to you at the full year results, I don't know if we could have picked the timing any worse, to be honest, we just kicked off the ERP project. And we're using Accenture and Mphasis to support us in that program. And I think it's fair to say there's a few nervous moments from the team when COVID-19 really kicked in because it has meant remote working all the way through. I'm really pleased to say that throughout the last 6 months, the teams involved have worked extremely well together. The business has really lent into this project. So I think it's one of the critical factors in making sure they succeed. So we're now about 1/3 of the way through the project, and we're on time and on budget. So just an absolutely fantastic effort by the team. I mean ERP projects, whenever I speak to investors, there's always a deep breath when we sort of mention anything like that because they're famous for not staying on time and on budget. We're not under any illusions about the challenges we face in managing our way through the last part of this, but to see the business -- to see the project team be able to stay on time and on budget in the current circumstance with remote working, just a real credit to everyone involved. Also, I previously flagged the implementation of a single CRM solution. We've actually deployed that out to the business. I think we're just starting to do that when we had the full year results. We're currently deploying that out to the subsidiaries. Again, the project is on schedule and comfortably within the original budget. And it comes on the back of 2 or 3 other projects to upgrade the technology footprint for the platform. So again, just to reemphasize the point, if you think about the physical rebuild of the Sigma network, you think about the technology rebuild, just gives us a much stronger platform for growth moving forward. So just a few concluding comments around outlook. Core business remains strong. The momentum we've seen in the first half has continued into August and the early part of September. That includes the actions to deliver the remainder of the Pivot benefits. As I said, we've seen another $4 million or $5 million on benefits come through in the last 6 weeks. COVID-19 is going to continue to have some sort of impact on the Sigma business for the foreseeable future. I think if you ask me for a general statement, I think we'd still say it's probably going to marginally assist than hinder financial performance moving forward, if we had to make a call on that one. We'll obviously continue to do work with our pharmacy, customers, suppliers and government to do whatever we can to provide ongoing support. I think a key part of that is our standing ready and willing to support the distribution of any COVID-19 vaccine. The CSO wholesaler network in Australia, I think, has performed really -- absolutely fantastically during the bushfires and COVID-19 crisis. And there's no reason that network shouldn't be used to make sure that the vaccines get out to people. So we're engaging with government on the opportunity to sort of be involved in that. Consistent with most other companies, given the ongoing impact of COVID-19, we're not giving any formal guidance. Obviously, we would expect the second half to be stronger than the first half because you've got the full -- you've got strong underlying growth continuing from a pharmacy perspective. You've got the full benefit of Chemist Warehouse kicking in. You've got some -- you've got the full benefit of the Pivot benefits that have been realized. So the second half will be stronger, but we're not actually giving a number as such for the full year. We'll keep our position on dividends under review. The main issue at the moment is just a lack of franking credits. We're aware that most investors don't like unfranked dividends. We will have franking credits, I would have thought, by the time we get to this time next year. Whether we're in a position to have that by the end of this year, I think, is probably unlikely, but we'll keep it under review. So that concludes the formal part of the presentation. So I'm happy to throw it open for any questions.

[Operator Instructions] Your first question today comes from the line of Megan Kirby-Lewis from Morgan Stanley.

If I could just ask for, I guess, some more detail on the Project Pivot efficiency gains just to understand better where they actually have come through on the cost lines. And then as well as a follow-up from that, I guess, given that the $100 million will be realized this year. I mean you've also got the new Chemist Warehouse contract, when do you see the business getting back to that FY '19 EBITDA level that was one of the initial targets for the project?

So in terms of the Project Pivot benefits, I think one of the areas we flagged was a restructure of the support we had behind the brands. So we've done quite a bit of restructuring there to make that a more efficient footprint. We've also done quite a bit of work on indirect procurement and general cost reduction. So they are the main areas that have contributed over the last 6 months. In terms of getting back to a level of earnings equivalent of FY '19, I think the original statement we made was we expected to be there by FY '23. It will be earlier than that because, obviously, we've had the benefit of the Chemist Warehouse business coming back in. But I think that as in all businesses, there's sort of pluses and minuses on the way through. So it would be slightly earlier than the end of FY '23, whether it pulls all the way through back to the end of FY '22, I'd probably not -- I probably wouldn't want to make any comment on that, but it'd probably be slightly earlier than the end of FY '23.

The next question comes from the line of Philip Pepe from Blue Ocean Equities.

Firstly, well done on a good result in some pretty tough conditions. Just on the strong sort of like-for-like sales growth that you're getting, I mean it's well above of the ABS reports for the sector. I know it's not apples to apples, but it still is well above that figure. How much of that is location, product offering, COVID-19? Can you give us an explanation as why you're doing so much better than the industry average?

You're talking about the like-for-like growth in the brands, Phil?

Yes, yes.

Look, I think a big part of it is just compliance to our customers using Sigma as a wholesaler, right, which comes from the strength of the underlying offering. So if you want to run a compliant brand, you would normally expect to be sort of looking for sort of 90%-plus compliance in terms of what they buy from you. They're never going to buy everything from you because there's always going to be a role for a second line wholesaler if you don't have the product. But I think as we've built the strength of the brands over the last few years, and I think we've talked about this in previous presentations where we say to our brand members, "Well, if we're going to invest in the brands, we expect you to use us as your main wholesaler." So part of the reason is we've seen a consistent uplift in the level of business that we get from our existing customers. And then the other part is, I think the programs that we've been building and rolling out to retail pharmacy have been improving the performance of the stores themselves. So I think at the full year results, we were talking about things like the Leapp program, where on average, we've seen a 50,000 uplift in GP within pharmacies that have implemented the Leapp program, right? So it's a combination of improved compliance and the benefits of the programs that we've rolled out to our pharmacies, I think, is the right way to think about it.

Excellent. And can I sneak in a second on the operating cash flow.

Phil, don't do it again.

Well, it was positive. Notably, there's a second half bite. I understand what you said about the Chemist Warehouse contract in throwing out the ratios, but do we assume the normal second half means you're uplifting operating cash flow versus the first half?

Look, I haven't sort of thought about the operating cash flow question specifically. I mean in a normal year, right, where -- I mean because the last 2 years have sort of obviously with the Chemist Warehouse fully exiting in the first half of last year and sort of half of it coming back, it's sort of -- it's a bit harder to sort of judge half-to-half performance. In a normal half-to-half performance, the second half is always slightly seasonally stronger. I guess all I was flagging in the comments there is it will be a lot -- the second half will be a lot stronger than the first half this time around given that you've got the full benefit of the Chemist Warehouse contract, you're getting the run rate of some of the Pivot benefits coming through and you've got the seasonality. In terms of cash flow, second half, I think, is normally slightly worse because -- sorry, is slightly better because January sales, it's a weaker month, and therefore, operationally, you're getting paid for strong sales months towards the end of the year and then the January sales are a little bit lower. So you would hope second half cash flow is slightly stronger as a general statement without sort of having the numbers right in front of me.

Your next question comes from the line of Gretel Janu from Crédit Suisse.

So firstly, you've completed the sale and leaseback of 2 of your DCs. How are you thinking about the opportunity for further sale and leaseback of the other assets? Is that on the horizon in the short term? Or is something down more in the medium to longer term?

Gretel, that's probably more in the medium to long term. It's interesting, right? We had no shortage of offers from people. I reckon we've had half a dozen offers for the Victoria and WA sites, because we -- because we obviously did the first part, and we went through a pretty extensive process. We've had a lot of people come and ask you if they can put in -- well, some people are just putting offers on Victoria and WA sites. One of the complications we have on those 2 sites is we actually have surplus land on those 2 sites. So it was one of the other reasons they were the 2 sites we pulled out of the sale process because you don't actually realize full value in a sale and leaseback transaction for the surplus land component because there's no ongoing income with that. So I think the way we think about it is there's the option to do something down the track. But given that debt levels at are a relatively low level, I don't think there's any -- well, there's certainly no immediate plans to do anything with that. As we sort of look at our debt structure moving forward, it's not impossible that we might do some sort of secured debt facilities of those assets to try and better match the underlying assets that we're funding. But a sale and leaseback per se, I don't think would be on the immediate horizon.

Understood. And then just with your net debt reducing, lower CapEx investment going forward, how are you thinking about the optimal capital structure and then future investment opportunities down the track?

Well, I think, from my perspective, it just puts us back in the position where we've got a lot of balance sheet strength to be able to pursue growth. I mean it's one of the -- one of the great outcomes of the process we've been through. You think about the comments I was making. So I have completely rebuilt my physical footprint. I've completely rebuilt my technology footprint. I don't have to invest significant amounts of money in the business to just keep it going. And I'm going to have to -- if I don't do any investment, then in sort of 2 years' time, I've got pretty minimal levels of debt. I'll have pretty minimal levels of debt on the way through, but I have little or no debt in 2 years. So it just puts us in a great position to be able to take on acquisitions down the track.

And in terms of future acquisitions, I'm assuming that's still in kind of the diversified away from PBS, more down the hospital space, 3PL, 4PL? Is that correct?

Sorry, what was the start of the question? I just missed that.

In terms of potential for future acquisitions.