Sigma Healthcare Limited (SIG) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Sigma Healthcare full year results briefing. [Operator Instructions] And just please be advised that today's conference is being recorded, but without further ado, I'll hand the conference over to your first speaker for today, CEO and Managing Director Mark Hooper. Thank you, and please go ahead.

Thanks. And morning, everyone, and welcome to the, Sigma Healthcare results presentation for the year ending January 2021. Nice to be able to see people face to face again, looking forward to catch up with investors over the next couple of days. With me today is Jackie Pearson, who was appointed our group CFO in October last year. We've also got Gary Woodford, who is our Corporate Affairs Manager. While the last year has clearly had its challenges for everyone, the Sigma business has had a strong 12 months while continuing to build a more sustainable platform for growth. Sales have been strong across all our businesses and continue to grow well above market, and we'll talk about that in more detail later in the presentation. We've improved our cost base both through investment in new infrastructure as well as making changes to the way we operate. As we enter the FY '22 year, we remain confident about further organic growth, and we're increasingly focused on business development opportunities to accelerate this. In terms of the format today, I'll start with some brief commentary around business performance over the last 12 months and our strategy moving forward. I'll then hand over to Jackie, who will take you through some of the financial results in more detail; as well as some commentary on other areas where she has some key accountabilities, including the ERP project. I'll then finish with some further detail around operational performance and business outlook. So I mentioned in my opening comments the Sigma business has performed extremely well over FY '21. We've seen a strong rebound in financial results, with underlying EBITDA up nearly 40% to $81.1 million and our return on invested capital back above 10%. I think, when we were talking to the market in September, we talked about hitting that 10% mark in about 12 to 18 months time, so it's really pleasing to see getting back to that number earlier than what we expected. Importantly, all of this was achieved with no additional financial support during COVID-19. So we didn't have any rental relief, no JobKeeper support, so the result is purely off the back of Sigma trading performance. Sales performance was up strongly across all businesses, remembering the prior year actually had the Chemist Warehouse contract in total for the first 6 months. So when you look at it in that context, it's a really strong outcome. We've also continued on our transformation journey, including opening the last of our new DCs in Kemps Creek in New South Wales and Truganina in Victoria, and we're well progressed on the implementation of the S/4HANA ERP platform. Not sure what that product was I just described, but it was a combination of a few things. When combined with the benefits of the gains that we've got through Project Pivot, the business is just in a much more efficient place to generate earnings growth into the future. Notwithstanding this ongoing investment, we also finished the year with a strong balance sheet. And I'm pleased to announce that the Board has reinstated the dividend, which is $0.01 fully franked for this period. And just as importantly, the Board has announced its -- a go-forward target of 70% of underlying NPAT as a target payout ratio. So this is not just a one-off. It's part of a program that we intend to have going into the future. Underpinning all of this was the continued focus on ESG issues. And pleasingly, in very challenging circumstances, both customer and team member engagement actually improved during the past 12 months, so I think that's a real testament to how the business has been run during that whole period, that both our customers and our team members feel like it's a great place to be. This is all completely consistent with our underlying strategy, where I guess the key drivers, which are shown in each of these boxes here, are drive to organic growth in the existing business. And we -- as I mentioned, we're seeing some clear evidence of that in the sales performance right throughout the business. Continuing to optimize our cost base, including taking advantage of the work done to date but, just as importantly, leveraging that into the future. And leveraging just the improvement in the general operating platform to look for further growth opportunities. As I mentioned in my earlier comments, we're also more aggressively looking at other business development activities. I think, just in terms of some of the things we've had on and balance sheet capacity, that probably hasn't been as possible over the last couple of years. We're now in a great position to be able to accelerate that to further enhance shareholder returns. That's only possible if you've got an engaged team and you've got engaged customers, so that gives us a further advantage, I think, in today's market. As I'll talk about later, we continue to see further improvement in both of those measures, so again a great platform to work with. So without any further ado, I'll hand you over to Jackie to walk you through the financial results.

Thanks, Mark. As already highlighted, FY '21 has been a strong year for the Sigma business, delivering an increase of nearly 40% on underlying EBITDA compared to the prior year. This result was underpinned by a strong sales performance, with total sales up 4.8%. For our wholesale pharmacy business, sales excluding Chemist Warehouse were up 11.4%, which is a terrific result that is well up on the average market growth of around 3% and follows an 8.5% growth for Sigma in the prior year. Pleasingly, this also includes a like-for-like wholesale sales increase of 9% across our retail brands, which is on the back of 11.7% growth in FY '20. Offsetting these gains was Chemist Warehouse sales which were 11.9% lower than last year, which did have the benefit of the full contract for the first 5 months. The result this year is in line with our expectations for the FMCG portfolio. Across our expansion businesses, we had strong medical consumables sales driven by increased demand for personal protective equipment during the height of the pandemic. Our hospitals business also performed well, recording sales increase of 15% following 26% growth last year. Offsetting this was reduced revenue in our MPS business due to the impacts of the pandemic within aged care facilities. Revenue from other parts of the business increased 11.1% on an underlying basis. This was primarily due to increased supply rebates from large-volume purchases, especially within the medical consumables space. And this also includes benefits flowing from the Pivot initiatives. And it's worth also highlighting that the reported number includes gains from the disposal of assets during the year, including the gain from the sale and leaseback transaction. Our costs on an underlying basis are 4.5% above last year but on a reported basis were 1.9% lower. This is impacted by the level of one-off costs each year to support our transformation efforts, with $18.4 million of one-off costs in FY '21 compared to $35.4 million in FY '20. Looking at each of the main categories: Our reported warehouse and delivery expenses were 2.5% below last year. This was driven by efficiency improvements that we're realizing from the investment in highly automated DCs, which has been offset by some reinvestment to support the return of the Chemist Warehouse FMCG business, which of course is then more than offset by the additional margin. There's also been an overall increase in the volume, including some significant spikes during the early stages of the pandemic, wage increases and also some additional costs included to manage our response to the pandemic such as increased cleaning costs. Our reported sales and marketing expenses were [ 3.6 ] below last year. This positive result is due to initiatives implemented as part of Project Pivot. However, for FY '21, they have been partly offset by an additional doubtful debt provisioning, which we feel is appropriate given the general uncertainty in the economic environment as a result of the pandemic. If we exclude the doubtful debt provision, then sales and marketing costs were down by almost 10%, which was due to Pivot cost efficiencies. Our reported administration expenses were 1.2% higher than last year, with the key driver for this variance being that in FY '20 there was a receipt of a large legal settlement. Excluding this amount, admin expenditure has decreased by 6.5%, which again is driven by Pivot initiatives. Our depreciation and amortization is 13.6% greater this year as we near completion of our capital investment cycle, and this also includes the impacts of the new leasing standard. And finally, we've seen a reduction in interests by 9.5%. This includes a reduction in debt interest following completion of the sale and leaseback transaction, which is then partly offset by the impacts of that new leasing standard. Looking ahead to FY '22, we expect to see organic sales increasing, albeit there may continue to be some weakness in the OTC category. Chemist Warehouse FMCG business fully transitioned back to Sigma in June last year, so FY '22 will benefit from a full year contribution of around $800 million in sales. In our expansion businesses, we expect to see some normalizing of performance following the impacts of the pandemic last year. Whilst we don't expect to see the same level of PPE sales in FY '22, this will be partly offset by an expected rebound in performance for the areas of the business that were negatively impacted by the pandemic in FY '21. In other revenue, we will see a recovery in merchandise and marketing income, but we won't have the repeat of the gain recorded in FY '21 for the sale and leaseback transaction. Our operating costs will continue to benefit from the actions taken as part of Pivot as well as from the efficiency gains from the investment to create the best DC network in the industry. Offsetting this is an expected increase in IT costs associated with the implementation of our new SAP S/4HANA ERP system, although over time we expect to offset this with improvements from an operational perspective. Finally, we expect depreciation and amortization to increase slightly, but debt interests should be below $5 million in FY '22. As Mark highlighted in his opening comments, we're pleased to announce a $0.01 fully franked final dividend for FY '21, with the key dates highlighted on the slide. With a strong earnings outlook and franking credits now available, we are targeting a dividend payout ratio of at least 70% of underlying NPAT. We retain the option of the share buyback that we are not actively buying. Our preference is to use our capital to reward shareholders through fully franked dividends whilst also retaining capacity to pursue strategic acquisitions that accelerate our growth. In terms of CapEx, we invested $77 million in FY '21, primarily across our DC upgrade program and ERP project. In FY '22, we expect CapEx to be around $55 million as we conclude these projects. Ongoing business-as-usual CapEx is then expected to be around $10 million from FY '23 onwards. We continue to focus on our return on invested capital, which on the back of earnings growth has rebounded faster than we previously outlined. FY '21 underlying ROIC was back to double digits at 10.1%, up from 7.1% at the same time last year which was impacted by the business transformation and investment cycles. We expect underlying ROIC to now remain above 10%. We finished FY '21 with a net debt position of $50.3 million, which is well down on $146 million at the same time last year. This reduction is largely due to the positive impact of the proceeds from the sale and leaseback transaction. Looking ahead into FY '22, we expect end-of-month debt to peak at around about $140 million in October of this year as we finalize the last of our major CapEx programs. With increasing free cash flow, we expect net debt to then reduce as we get closer to the end of FY '22. In December 2020, we also finalized a $250 million debt facility with Westpac, providing certainty that our operational and CapEx requirements are covered for the next 3 years. Our cash conversion cycle increased by 5 days to 31 days at year-end. This is primarily driven by an increased inventory holdings to support our growth, and we also increased certain inventory holdings in response to the pandemic. And there are also some timing impacts over the last 2 years due to the Chemist Warehouse exit and then the phased return of the FMCG portfolio and how that impacts this calculation. We expect the cash conversion cycle to return to the high 20s in FY '22. Turning now to some of our transformation programs and starting with Project Pivot. With over $100 million in efficiency gains actioned by the end of FY '21, Sigma has delivered on its original undertaking from 2019 to generate in excess of $100 million of operating efficiencies within a 2-year period. The actions taken to deliver the benefits occurred over 2 years, being the financial years '20 and '21. The benefits are then realized to the P&L over a 3-year period, being financial years '20, '21 and '22. As originally highlighted, approximately $60 million of the benefits related to the removal of the variable costs associated with the Chemist Warehouse contract. While this was achieved by late 2019, there has been some subsequent reinvestment of costs to support the return of the FMCG portfolio, which is obviously more than offset by the additional margin we earn. The remaining work streams within Project Pivot have improved Sigma's operational efficiencies by around $40 million on an ongoing basis. This benefit is reflected in a range of areas across the business, including lower costs, margin benefits and improved procurement outcomes. With the original target now achieved, Pivot has been formally closed and is now embedded as part of business-as-usual activities. Progressing our digital transformation has been another key area of focus for Sigma. This has included the implementation of Salesforce as our enterprise-wide customer relationship management application. We're also now over halfway through our SAP S/4HANA ERP implementation, which will go live in 2 releases during the last quarter of this year. Despite the challenges of the pandemic, our team has done an outstanding job to continue to deliver the project in line with expectations from both a schedule and budget perspective. In conjunction with the ERP project, we're also migrating all of our data, analytics and insights capabilities onto modern cloud, data cloud technologies, namely Microsoft Azure and Snowflake. And finally, we've also enhanced our strategy and practices in relation to cybersecurity, these digital transformation projects, combined with Project Pivot and the DC optimization program, have created a resilient and efficient operating platform to enable sustainable growth. I'll now hand you back to Mark for some more details regarding our operational performance and business outlook.

Thanks, Jackie. So this is a few slides, as Jackie said, touching on -- in a bit more detail on a few key areas of our operations. And first of all, I wanted to start and then just dive a little bit more into the sales performance. Both Jackie and I have talked a fair bit about the absolute sales performance, but I think what you see on this slide, in the top left-hand corner is, I think, some really telling comparison as to what's actually happening in the market. So you'll see the sales ex chem warehouse. And the only reason we exclude chem warehouses is because, when you got them exiting and reentering, right, it just muddies the numbers too much, but as we've both talked about, 11.4% up versus market growth of 3.1%. So that's IQVIA data. So that's 8% above market, and that comes off the back of, I think, 8% or 9% growth in the prior year, right? So it's cycling strong growth on strong growth, so it's a really fantastic performance. Within that, ethical sales or prescription sales, for the people who don't know what ethical means, were up around 12% compared to market of about 5%. And the most interesting piece of information on this slide for people is probably the OTC sales performance were up around 5%, but the market has actually gone backwards by about 3%. I mean OTC has been a much tougher space to be in the last 12 months. That's primarily due to the performance of key categories like cough and cold. I mean no one has been catching colds in the last 12 months. And whilst there are some offsets in things like sanitizers and things like that, overall OTC performance has been quite weak. I think diagou activity within pharmacy has also fallen away quite a bit now. That's not something that directly impacts us an enormous amount, but in terms of the broader market, you've seen much weaker performance. So that OTC performance is probably less than what we would have expected, but if you look at the comparison here, we're still 5% to 6% above market performance, so it's strong performance right throughout those categories. As Jackie mentioned, we onboarded chem warehouse back by June last year. Those -- I think, in truth, the sales, because March and April were a little higher because of COVID-19, are probably back close to run rate a little earlier than that, but in terms of the full range returning, it didn't actually finish until June last year. In terms of pharmacy brand performance and again another strong performance here. So like-for-like sales within our brands were up by 9%, again cycling off the back of prior year strong performance at 11.7%. I think the best of what else is happening in the market is sort of low single digits, so this is miles above what anyone else is doing. The pipeline of members is strong across the brands. And just to remind people: I mean sometimes, because we've got the sort of 5 or 6 different brands, people don't focus on the impact, but as a collective, we're sort of around that 17%, 18% of total consumer spend in pharmacies. So that's second only behind Chemist Warehouse, so it's a really significant footprint. And just a little more detail there on the voice-of-customer piece. So the Net Promoter Score improved by over 20% in the last 12 months. And I think I mentioned at the half year we just -- we had some fabulous feedback during COVID-19. I think that's where the new DCs that have the high degree of automation really came into their own. I think we -- as an example, we'd just opened Kemps Creek when COVID hit in that -- so that's a brand-new DC, and it did 80% more volume than we'd done in the old DCs in the prior year and didn't miss a beat. So I think that's fed through to what's happened with -- in terms of customer performance. We're not pretending for a moment that we've got it perfect, but I think the fact that we now track this and we have done for 2 or 3 years formally in terms of regular surveys across a range of different activities we then have with our customers means we're actively monitoring how we're going. And more critically, we're making the changes where we need to. One of the questions we always get when we do these road shows is about what capacity we've got in the network and what the -- what efficiencies we're generating from the reinvestment program that we've been through, so what we've tried to include on this next slide is the expected productivity and unit cost benefits from FY '20 to FY '24. So it's effectively picking up 2 actual years and 3 forecast years to show the ongoing benefit of the reinvestment in DCs. The orange line on this chart is productivity. So there's a 30% improvement in productivity over the 5 years. And the blue or purple line, I'm not quite sure what it is, is unit costs. So they drop by 12% over that same period. Now remember you've got EBA increases going through, so that's 12% after absorbing those EBA increases. So it's a really significant advantage for the Sigma business, and as Jackie commented, it's just symptomatic of the fact that we feel like we've now got the most efficient DC network in the pharma space. I think the other point about the unit costs part is it confirms that original thesis we had when we invested in these new DCs that you get a payback of around 4 to 5 years on your automation. So that's absolutely being borne out in what we're seeing on an actual basis despite the fact that, when we did I think all of the DCs other than Truganina, we expected to have the full CW volume through -- going through [ the shared ]. So the fact that we've lost part of that hasn't altered that underlying metric of around a 4- to 5-year payback. And just as critically, it's created capacity to absorb pharmacy wholesale volume growth. We always get the question about how much capacity do we actually have. So as a general statement, I think we'd say we've got the ability to probably double the volume that we currently do through the network. Always there's a little bit of a qualification to that, that it needs to be sort of existing business, right, because you bring new business in, in different stock ranges [ than ] it impacts exactly what you can take on, but just like-for-like business, we can probably double the capacity right across the network if we have to. So that's a really significant advantage we have as well. Just turning to the expansion businesses that have also continued to show good growth over the last 12 months. CHS and MIA in particular saw additional sales from PPE. That helped offset some of the other negative impacts from COVID-19. I think Jackie already touched on the fact that our MPS business or dose administration services had a slight decline in performance over the last 12 months because people just weren't going to aged care facilities, unfortunately. It's one of the side impacts of, and you can understand that with people being slightly reluctant to put aged relatives into that setting. So that impacted that business, but on the positive side we saw good demand for PPE, so the CHS and MIA businesses benefited in particular. Not all of that is going to be sustainable moving forward, but I think the really important part from our point of view is that it's not going to go back to what it was in terms of demand for PPE, so it gives us a chance to rebase those businesses as ones that provide a much more substantial contribution to our earnings overall. Our 3PL and 4PL businesses continue to show good growth. I think, when we spoke to you last time, we hoped we were involved in a couple of big tenders and which we would have liked to have won. We unfortunately weren't successful in doing that, but we've continued to have a good flow of sort of small to medium-sized wins across the board. And I think, when I speak to our team that looks after that, they now feel like they've established themselves as a credible player in that space. So the reason that's important is people think about us when they have those sorts of opportunities coming up, and we're certainly participating in more of those processes over the last 6 months than we have previously. So again we remain quite positive about the opportunities there. Likewise, hospitals continues to perform strongly. We've seen 15% growth again. There was some impact in that business, and I think we touched on it at the half year, from deferral in elective surgeries, but again, because I think from a logistical perspective the Sigma business performed really well during COVID, we picked up quite a bit of hospitals business that has stayed with us. That's contributed to that growth. So that was a sort of a $50 million, $60 million, $70 million business when we bought CHS 5 or 6 years ago. It's now north of $300 million. We obviously have aspirations for it to be a much bigger business, but it continues to show good growth year-on-year. Just now turning to some detail around COVID-19. I don't propose to go through everything on this slide, but it's worth highlighting some of the great work that's been done by the Sigma team just in supporting pharmacies, hospitals and aged care communities. I mean we -- all of our DCs were operating at full strength right throughout COVID. We didn't have any [ COVID issues ] within our DCs, which I think is testament to the sort of the plans we had in place and just how seriously people took it in terms of following those processes that we had in place. Like most other businesses, we had a cross-functional team that was set up so we could monitor what was a pretty rapidly changing set of circumstances. And I guess, as I noted in my opening comments, we didn't benefit from any additional government support or other financial assistance on the way through, so it's a clean set of numbers in that respect. I mean we've always been quite proud about the work that we've done on ESG. And I guess we just wanted to touch on this in the presentation itself because we do have a -- for the first time a stand-alone sustainability report that we've released. We did include quite a bit of data in our annual report, but as most of you on this call would understand, this is becoming an increasing focus for the community generally but also for investors, so we've decided to pull that out as a separate document and give it a bit more focus, a, to more adequately capture the things we're already doing; but to provide a bit of a platform for this going forward. So again this one is the famous evolving journey, but we think we've done some good stuff to date. And as I say, by pulling it out separately and providing that more specific focus, it just means we've got a better platform for progressing the work that we're doing here. And hopefully, that feeds into some investor interest as well, which I think is, hopefully, one of the advantages that come out of it as well as the benefits of the program itself. So let's finish off with a couple of slides to further expand on, I guess, why we have the confidence in where the business is right now and how we're going to deliver on the earnings that we've targeted over the next couple of years. While it has been an enormous amount of work right throughout the business over the last couple of years, we're now at the point where we've got a more sustainable business that's not only delivered very strong earnings for this year. It's well placed to continue to do that. The underlying operations platform has been upgraded. We've got brand-new DCs. There's been an enormous investment in technology, which Jackie touched on in her presentation. There's another sort of 6 months to go to sort of round all that out, right, but it is a complete replatforming of the business. That lowers our costs, gives us the platform for growth, just puts us in a really strong position. And that's contributed a lot to this year and it will help us moving forward. What that now does is it lets us leverage that opportunity; and, as I've mentioned earlier, just looking for a bit of a sharper focus on business development and M&A going forward, so trying to further optimize what is possible out of the existing business but also looking at M&A opportunities. And given that we've got the bulk of the transformation and spend out of the way and the balance sheet is now in good shape, I just think we -- again, we get lots of questions about, "What sort of acquisition could you fund?" I don't think we've ever thought about it in that context. We think the business is in good shape. If the acquisition makes sense, we will get equity market and debt market support to do it. So we're not limiting what we're looking for in terms of scale. It's more about making sure that there's the right sort of strategic fit for the overall Sigma business. One of the other questions we get quite a lot is just providing a bit more granularity about how the earnings growth plays out over the next couple of years because, in truth, we've been talking about getting to this $100 million earning target for a few years now. Well, I guess we now approach that with much more certainty for no other reason we're closer and closer to the target, but this next slide is designed to just give you a bit more detail around how that's going to happen. At a general level, the forecast growth that we've got over the next 2 years is delivered through a combination of continued organic growth in the core business; further improving the cost base both -- based both from our new DCs and the benefit of -- the ongoing benefit of the Pivot program; and last but not least, the continued growth from our expansion businesses. So the exact mix of that varies from year to year, but they're the 3 things that are doing it. So the earnings growth that we've outlined to get to the $100 million by FY '23 is really just the existing business based on existing performance levels, right? So we think, we do think there's more opportunities to be able to sort of generate earnings growth from the core business above and beyond that. And then the M&A stuff is on top of that again, right? So this is just a -- in essence a BAU target without trying to undersell the challenge of sometimes being able to manage that on a day-to-day basis. So there's a real opportunity here for us to generate some great returns from the core over the next couple of years for our shareholders, but equally we think there's a better opportunity to sort of leverage that further and to provide enhanced returns in the medium term. So just a few concluding comments on outlook. We -- as I mentioned, we've talked about this $100 million for quite a while now. It implies just above 10% earnings growth for the next couple of years. I'm sure people have sat there and done the implied CAGR [indiscernible]. It's around that 10% to 12%. We're very confident about being able to deliver that. Just as importantly, our return on invested capital is now back above 10%. I know people were understandably concerned when that slipped back into single digits, but we had invested quite a bit of money in sort of DCs which inherently [ have a least ] rate of return. So notwithstanding that, improved business performance has now driven that back above 10% a little earlier than we would have anticipated. We've always thought about the Sigma business that provides growth and a reasonable yield. The reinstatement of the dividend now means we can tick the growth box and the yield box. And as both Jackie and I have touched on, the fact that we're targeting a minimum of 70% as an ongoing payout ratio means the expectation is there to be able to continue to do that. We've clearly got the earnings growth. We've got the cash. We should have the franking credits, so that all should be fine moving forward. We're always looking for ways to accelerate this moving forward. I feel like I'm this -- you should read these presentations a little sooner than you do. So we've made this point 100 times, but we are confident about the future and look forward to updating you on that journey as we move forward. So we'll throw it open for questions. We've got one from the audience here.

Andrew Goodsall with MST. Just in a practical level trying to understand your growth versus market. I mean your numbers are extraordinarily high relative. And just is it -- I'm just trying to think through. Is it that you've just got better exposure if people are shopping more local than perhaps -- or I'm just trying to get a few sort of dot points on what it is that's been driving...

Look, I don't think it's changed since the last time we were sort of briefing the market. It's a combination of growth within our existing brands, so you see the like-for-like growth up quite strongly. So that's partly about people we've got in one of our brands using us for a higher percentage of the products that they buy but also their underlying performance being better. And just I think the wholesale sales team has just done a really great job in terms of building a pipeline of opportunities. I mean we haven't won any big groups in the last couple of years. It's always been a bit of a hard graft, but in one sense we think that's more sustainable because it can't be unpicked by losing big groups. But the team has just done an outstanding job, quite frankly, in a more structured way than we used to do it. So I think the combination of that and the higher levels of growth from what we've already got is delivering that sort of number, and we've done that. I reckon we've done that for 3 years now, so it's no accident, what's happening now. The challenge becomes your growth on growth on growth, but I think -- for the coming year, I think it would be ambitious to think we could do double digits again. I think we'd be quite confident about delivering above market again for the coming 12 months.

That's great. And just to get a sense on your hospital business as a percentage of the revenue, just to get a sense of how big and...

Look, it's around that sort of $300 million to $350 million mark, so that's around that 10% of total revenue. It -- I mean it's a lower-margin business than pharmacy, right? So I've said before you've got to look at it in that context. I think 3PL, 4PL and hospitals are best considered marginal businesses in terms of profitability, right, because they do have lower returns. And they're the sort of business where you're building on the fixed cost base you've already got to support retail pharmacy. Another question from the floor?

Yes. Sorry. Rosemary Cummins also from MST. Just going back to the [ inter sales ] and the growth above industry average. Who's losing...

Well, if you believe the market, no one is. It's [indiscernible], Rosemary. Everyone is growing at 10%.

So things don't change.

Yes, look, I don't know. It's a bit hard to work out. So I mean logically, if we were growing by that, well, it's partially off the other 2 big wholesalers. It's a bit hard to tell out EBOS' numbers because obviously it's money [ that will be led by the ] chem warehouse business going back in.

[ So did you ] notice a change in consumer -- they want to go to the branded. They're looking in [ a specific time line ] -- no, you think, nothing...

No. Look, I don't -- no, I don't think there's anything noticeable from that perspective. I do think we've done a lot to straighten ourselves up in terms of our relationship with our branded pharmacies. That's improving the level of buying that we get, so that's part of the driver. And that's I think their performance has been better over the last couple of years as well. It was just part of that like-for-like piece, but I think that's as much -- in that sense, we're more a B2B business than a B2C business from a Sigma perspective.

And in new DCs, what's actually driving the increase in profit, the lower costs? What...

Automation.

So staff...

[ Inside ], yes. I mean -- yes. I mean it's just a much lower level of staffing that's required when you've got that level of automation. I mean it's quite literally the sort of automation that's gone in the new big DCs is goods to person. So someone stands there and the product comes to them rather than having them wander around and get the product. It's as simple as that...

[ Yes, running around, yes, okay ]. And more accurate in terms of picking things like [indiscernible]...

Yes, yes, yes. So lower errors, yes, yes, yes. So -- and it's better in terms of your [ stock dating ] because it -- yes. And particularly we get to ERP, right? We'll have the benefits of that as well. So I mean -- and it's just you're future proofed from a compliance perspective. It's just there's advantages right across the board, yes. But you -- I mean the issue is you've got to be prepared to spend the capital upfront, which is where most people balk at it, right? I think we were always quite confident that we would get the return from the automation, but when we lost chem warehouse, that obviously punched a [ fair hole ] in the volume. And we thought maybe it might slip from sort of 4 to 5 years out to sort of 7, 8 years, but the experience particularly getting the FMCG volume back is it will be around that 4- to 5-year mark. So if you think about the $300 million that we've spent on new DCs, it's -- in very broad terms, about 2/3 of that has been on land and buildings. We got most of that back when we did the sale and leaseback and we sold off the other surplus land. So net-net from a cash flow perspective, we're square there, and on the automation piece, we'll get a payback over 4 to 5 years. So after a 4- or 5-year period, you've effectively completely funded a new DC network. So it's a great outcome, but I guess you've got to be brave enough to make the investment call upfront.

[ Got any calls online ]?

[Operator Instructions] But our first question comes from Philip from Blue Ocean Equities.

Firstly, well done on a good result in some pretty tough conditions. Obviously the strong like-for-likes [ are being commented on ], but just curious to see which categories have done well because we're all stuck at home. So nobody got sick, so cold and flu would be down. And as you've pointed out, diagou was down, so was there a particular category that was strong? And did the [ CSO 7 ] have a material impact once that kicked in?

Look, I don't know, like in terms of individual categories, if there's anything that sort of stands out. I mean prescription drug performance is obviously stronger than OTC, I think, is the best way to think about that, right? It was market growth for ethical products was sort of 5% to 6% versus OTC going backwards by 3%. So I think, in that sense, that was the standout within the pharmacy environment. The seventh CPA sort of impacted the second half. So it will have given us a slight positive impact but nothing material in this set of results. I don't know. Jackie, have you got any view on that?

[ Nothing material ].

Yes. So look, I don't -- yes, look. Within OTC, Phil, as I said earlier, I think export categories were probably down because diagou volume was down. Cough and cold was down. There's been patches where beauty has been down. I mean it's bounced again whenever wants to look beautiful going out. It depends which month you're looking at -- or if they're in for Zoom calls. I was surprised when I saw the market data on OTC, to be honest. I had assumed it was broadly probably flat or low growth, but when -- we've seen some pretty consistent IQVIA data now that says it's been down on last year for quite a while now. So now you'll be cycling through a bit of that. So it will be interesting to see what plays out over the next few months, but I think we're assuming sort of flat to low growth will return sometime in the second half. But we're not assuming a sort of a massive rebound in OTC part of our outlook.

Sure. And I guess second question is -- I'm sorry. [ It's going to say that ]. Your view on the vaccine going forward. [ Rather ] pharmacists are likely to play and whether that's positive on selling other products [ for people in there ].

I mean pharmacy has to be involved in the rollout of the vaccines, right? I mean you can't pump 50 million vaccines into people and only ask doctors all to do it. You can see the stress they're already under doing the Pfizer piece, right? So pharmacy has established themselves as a credible and safe provider of the flu vaccine. It's a very logical role for them to play in the AstraZeneca, rollout of the AstraZeneca or AstraZeneca [ top ] vaccines, where you don't have the temperature requirements basically. And whilst we're not directly involved in the rollout of that, we obviously would have liked to have been, but the government has made the decision to award that to DHL and Linfox. It -- I think overall it's probably going to have a positive impact on pharmacy trading just because of foot traffic going through. Now whether that's material enough to make a difference, I don't know, but it certainly doesn't hurt to have a reason for people to be able to go to pharmacy to improve the opportunity [ for extra sales ] within that environment.

Okay, we have another question from the phones. I'll go to Gretel Janu from Crédit Suisse.

Just firstly, on the sales side. Look, clearly the last 12 months wasn't a normal year. So just in terms of market growth expectations in the next 12 months for each of the different categories. I know you just mentioned OTC [ before ], but for ethical and then on the retail side as well, that would be helpful.

I think we're thinking about ethical probably going around sort of 3% to 4%. And I think -- OTC, when we started the year, probably modest growth around that sort of 1% to 2%, but it might be a bit flatter than that overall. I mean, as you saw from our numbers, we've been actually able to grow sort of 5% to 6% above market. So I mean we would hope to be able to continue to do that but the OTC market probably -- as a general statement, probably flat for the whole year, I think.

Okay, great. That's very helpful. And then just in terms of cash performance a little weak in this period. I guess, how confident are you that it will turn around and improve in the next 12 months?

Don't forget the big part of that year-to-year is the fact that -- with Chemist Warehouse exit, but I'll hand you over to Jackie for that one.

Yes. Look, I think we are quite confident that we'll be able to return that cash conversion cycle back to the high 20s. I think, in terms of the result that you've seen for FY '21, there has been quite an investment in stock. And as Mark has indicated, there is also the anomaly of Chemist Warehouse exiting in the prior year and phased return back in, in FY '21 as well. I think we'll continue to have quite a focus, though, in terms of our inventory holdings and, I guess, have quite a heavy focus in terms of making sure that we're meeting the needs of our customer base. And that has included holding some additional inventory for some of our specific customers who have effectively reserved that inventory in order to make sure that there's no supply impacts whilst we continue to obviously work our way through the pandemic. So expect to see the improvement, albeit there may be some additional inventory build throughout the year as we progress the last of our 2 big transformation programs, namely as we go live from an ERP perspective and as we continue to finalize the last of the DC optimization program.

I mean the inventory point is an interesting one, Gretel. I mean, when the panic started, trying to guess what stock you should be holding was almost impossible, all right? I mean I can remember right at the start of COVID-19 thinking should I be out there buying face masks or -- and the problem is you could load up on something and then not be sure that you could sell it, but I think, as the year's gone on and because we had strong sales growth, our inclination has been to hold more stock than less, right? I mean you just -- if there's a spike in demand, you just can't get it quickly enough. So for core lines that turn quickly, we've just chosen to hold a bit more stock than we would normally. And we've got a few arrangements. I mean Jackie just sort of passively referred one. We've had a few hospitals that had prepurchased stock, but when -- so they've paid us for the stock, but we're holding it, all right, so they've got certainty of being able to get access. So there's a raft of things that are contributing to a higher stockholding that you see reflected in the numbers at the moment but, we think, from a business perspective are the right things to do in the current environment. Now if things normalize, that will just naturally run down over time. So I don't think the original guidance we gave last time we spoke, which is sort of something in the mid- to high 20s in the cash conversion cycle, is something that we don't think we'll get back to, but I think right at the moment we're comfortable holding a bit more stock. And as I say, you've got a couple of anomalies in there where people have actually prepaid for stock that we're holding that we're still showing as part of that.

Understood. And then final question, just on the digital transformation and particularly the ERP program. Like how much of an earnings benefit will this bring? And is that already factored into that $100 million of EBITDA target that you do have?

So in terms of the ERP implementation, we haven't factored in any substantial efficiency gains as a result of that implementation. There's a small consideration in terms of our cash conversion cycle. It will actually help in terms of some of the processes that sit behind that, but outside of that, there hasn't been additional benefits factored into that $100 million target going forward. The program itself is expected to go live in the last quarter of this year. It goes live across 2 releases, being our Sigma business first, followed by our subsidiary businesses. And we'll spend time next year then. Once we've matured the system and worked with it, we will then spend some time having a look at where there's some upside opportunity in terms of our outlook, where we do expect to be able to achieve some efficiency gains and particularly to offset some of the additional costs that come from running a big state-of-the-art ERP like the SAP S/4HANA implementation that we're putting in.

So I think, [ Gretel ], I mean, clearly we expect to get some efficiency benefits of a new ERP program, but we -- rather than trying to get some bulls*** numbers to pop into the guidance -- it's a technical term. We've taken the view we know there should be a return from that. We have included the additional costs that come with running a platform like S/4HANA's within the guidance, but we haven't factored in the operational efficiencies that we think we should get out of that. And I guess, as Jackie is alluding to, when we get to the point where we've got this thing implemented, we can then have a more meaningful go at trying to extract those efficiencies across the business. Because quite frankly, trying to do that before we've installed the thing, no one is going to take it seriously. We need to get it in, get it in properly, understand what it's done to the business and then look for the opportunities, but that's all on top of any guidance we've given here.

Your next question comes from Ross Curran from Macquarie.