Sigma Healthcare Limited (SIG) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Sigma Healthcare Limited Annual General Meeting. I would now like to hand the conference over to Mr. Ray Gunston, Chairman. Please go ahead.

Good morning, ladies and gentlemen. My name is Ray Gunston, and as Chairman of the Board of Sigma Healthcare Limited, I would like to welcome you to today's AGM meeting, which is being held online. I wish to begin by acknowledging the Wurundjeri people of the Kulin Nations, the traditional custodians of the land on which the Board is gathered today. I also acknowledge the traditional custodians of the various lands on which you all work today and the Aboriginal and Torres Strait Islander people participating in this meeting. We pay our respects to their elders, past, present and emerging. I formally declare the 2022 Annual General Meeting of Sigma Healthcare open. All presentations and a recording of today's event will be available on our website for later viewing. Online participation constitutes shareholders being present at the Annual General Meeting for all purposes. Details about online shareholder participation have been set out in the notice of meeting and online virtual meeting guide, which has been made available to you. Both documents are also available to view and download at the bottom of your screen. I will just start by saying that whilst I understand that an in-person meeting would have been preferable for many, a virtual meeting allowed us to plan the AGM with greater certainty and reduce risk through the challenges of the pandemic. I recognize that some shareholders may have to leave before the end of the meeting, and therefore, encourage you to submit any written questions online now. Voting in today's virtual meeting will be conducted by a poll via the virtual meeting platform. All polls will remain open until the conclusion of today's meeting. As we move through the items of business, I will respond to questions from shareholders and proxies. Before we proceed, I would like to introduce the members of the Sigma Board and management who are present today: David Manuel, who is also a member of the People and Remuneration Committee and a member of the Risk Management and Audit Committee, and due to COVID-related travel risk, he's online from Perth. Mr. Manuel is up for reelection today; Christine Bartlett, who is the Chair of the People and Remuneration Committee; Michael Sammells, who is the Chair of our Risk Management and Audit Committee, and he's also up for reelection today; Kate Spargo, who is a member of the Risk Management and Audit Committee and a member of the People and Remuneration Committee. We are also joined today by Vikesh Ramsunder, our new Managing Director and Chief Executive Officer, who joined us in February this year; Josephine De Martino, who became our Interim Chief Financial Officer in April this year, and Jeff Sells, who was Interim CFO until April; Kara McGowan, who was appointed General Counsel and Company Secretary in October last year; Gary Woodford, our Head of Corporate Affairs as well as representatives from the company's auditors, Deloitte, and our share registrars, Link Market Services. Turning to the order of business. We have 5 items of business today, as outlined in our Notice of Meeting, being the Chairman and CEO addresses, the financial statements and reports, the remuneration report, the reelection of directors and the remuneration arrangements for the Managing Director and Chief Executive Officer. The first item of business is effectively an overview of the past 12 months and a general business update, which I will cover now before introducing Vikesh. I will start with some overarching comments. This last year, the effects of the pandemic have continued to be felt around the world. From a Sigma perspective, we navigated the COVID-19 challenges in the first 6 months to deliver good sales growth and momentum, resulting in business growth above the market average. However, in the second half, we experienced significant disruptions to the business following the necessary implementation of our Enterprise Resource Management or ERP system, which regrettably impacted our operations, our customers and suppliers. It's been a demanding year on our people, and I am incredibly proud of their resilience and tenacity. The Board is also highly aware that our issues have and continued to disrupt our loyal customers. And we are working with management to address these as soon as possible to enable the benefits of our infrastructure investment to flow to our customers. We've been able to stabilize the system issues that were impacting us. But we know we have significant work yet to do on converting that to effective customer service, which will then allow us to progress towards optimizing the world-class infrastructure that we do now have available to drive the business forward. These efforts and work are designed to provide sustainable returns and growth for our shareholders, who we thank for their patience through this investment phase. With those introductory comments, I will now focus on financial and operational performance, distribution center investment program, our sustainability report and strategy. Let me first recap our financial performance for the year ended January 31, 2022, which, as I outlined earlier, have been a year of two distinct halves. The drivers of our overall financial performance for the year have been varied in their source and timing. For the full year, Sigma has delivered revenue up 1.3% to $3.4 billion and a statutory net loss after tax of $7.2 million. This is clearly not acceptable, and we are taking immediate action to deliver a sustainable turnaround. The result delivered flowed from a number of factors. Firstly, with the good sales growth momentum in the first 6 months, our revenue for the half was up 5.5%, with our wholesale and pharmacy businesses continuing to achieve above-average market growth. Secondly, in the second half, we unfortunately encountered unexpected process issues following our ERP implementation, which impacted our operations and those of our customers and extended into Sigma's overall financial performance through service disruption and therefore, reduce sales to our pharmacy customers. Additional labor and inventory costs as we dealt with the transition of operating processes. We incurred dual operating costs as we transitioned operations to our new DC in Truganina in Victoria as well as one-off costs related to the closure of our Rowville DC or distribution center. And we have had a higher and new software as a service or SaaS accounting expense or a SaaS as it's known, of $31.8 million related to ERP. The positive aspect of the majority of these impacts is that they do not repeat in the year ahead. However, whilst the ERP system is largely stabilized, we have significant work to do over the year ahead to improve our service to customers, rebuild their trust and confidence in Sigma and then optimize our operational capability. Thirdly, our adjacent businesses performed well overall despite ongoing difficulties due to the pandemic. The standout performer was Medical Industries Australia or MIA, our medical consumables business. MIA benefited from a government policy change late in the year that endorsed the use of rapid antigen tests for the detection of COVID-19. This led to a strong finish to the financial year '22, which has continued into the early months of the current year before demand is expected to level out. Our Sigma Hospital business achieved growth of 5.6% and accounts for around 10% share of the $3 billion national hospital market. Our contract logistics business has achieved growth of 5.8% over the last 12 months, managing 30,000 pallets of medicines nationally for customers with scope for expansion. Meanwhile, MPS Connect, which provides medication management services, experienced a disrupted year due to COVID-19 restrictions, limiting access to aged care facilities. Our return on capital or ROIC has always been a focus for Sigma. So to deliver 0.4% is extremely disappointing. This calculation, however, does reflect our transition from underlying reporting to statutory reporting. It is a low point in the cycle as we near completion of significant investment programs and take action to drive optimization, efficiency and capital utilization across our network. Sigma's net debt at January 31 was $149 million. And finally, we declared a $0.01 per share fully franked final dividend, bringing total dividends for the year to $0.02 per share. We are now in the final stages of our 5-year investment program, which will conclude this year. We have commenced work to double the size of our owned DC in Truganina in Victoria to match the size of our Kemps Creek DC in New South Wales and provide capacity for business growth. We are also fitting out a new leased Hobart DC as a result of outgrowing our current facility. This will be operational in October this year. Conclusion of this investment cycle will result in a world-class DC network to service our customers Australia-wide. Our 2021/'22 sustainability report has just been released and is available on our website. It provides an overview of Sigma's approach, performance and initiatives across key environmental, social and governance matters that are important to our business and our stakeholders. Our wider Sigma sustainability program includes a plan to 2030 with key goals under each focus area, including environmental, social and governance. We are striving to reduce our impact on the environment, further invest in health and wellbeing for our team and the communities we serve, and to ensure we operate our business in an ethical and transparent way. While we are progressing with our sustainability journey, the Board, management and our team members are committed to driving towards our sustainability targets and goals. Importantly, we are making measured progress in operating sustainably, simplifying and reorganizing our business, strengthening our core and making Sigma easier to do business with. Turning now to strategy. We had articulated for some time that our strategy was focused on optimizing our core wholesaling business and moving into adjacent opportunities that diversified our earnings. In that context, during the year, Sigma entered a well-documented process to consider a potential merger with Australian Pharmaceutical Industries, or API. It was very important to participate to make a fully informed decision on whether a transaction with API made financial, operation and or strategic sense. Ultimately, our decision to withdraw was informed by a combination of completing due diligence and competitive bidding process. Combining the wholesale volume of API and Sigma would have clearly leverage quickly Sigma's core infrastructure investment. However, it is not the only way to achieve that objective. What is clear is that we will have the opportunity to grow our business from a base of industry-leading restructure -- infrastructure. Our immediate focus is to optimize our existing operations, better leverage our core infrastructure and capabilities and longer term to consider opportunities in the M&A space to complement and support that. This will be led by Vikesh, who brings extensive industry experience, a fresh perspective and a growth mindset to Sigma. Before I hand over to Vikesh, I would like to acknowledge and thank each of our Sigma team members who have been incredibly resilient during an exceptionally challenging period. I would also like to thank and acknowledge the efforts of our pharmacy and health care customers who have continued to provide frontline support to communities around Australia. Their compassion and dedication to health care is outstanding. Thank you also to my fellow directors who have provided support to me and the Sigma business. Finally, I would like to say how delighted the Board is to have Vikesh in the CEO seat of this company. Having only arrived in January of this year, after all of the challenges of COVID impacted travel and recruitment processes, Vikesh in his early days here has been able to bring a new set of leadership skills and broad industry experience to Sigma that have already had the impacts of sharpening the business focus on our customers, simplifying the business operations, clearly diagnosing core issues and challenges with the ERP and implementing a clear set of actions primarily around change management in that regard, and refreshing our strategic focus around our core business. I will now hand over to Vikesh to say a few words before I return to run through the items of business.

Thank you, Ray. I would also like to take this opportunity to welcome our shareholders joining us here today. Ray has provided you with the overview of the past year. And as I am new to Sigma, I will provide you with some insights into my background and experience, feedback from my first 3 months at Sigma and a short business update on our year-to-date performance for FY '23. I commenced with Sigma as CEO on February 1, 2022. Prior to that, I was the CEO of the Clicks Group, which is the largest listed health and beauty retailer in Southern Africa with a market cap of $7 billion. The group has in its stable South Africa's largest pharmaceutical wholesaler, UPD of which I was Managing Director from 2010 until 2015. I worked to the company for 28 years, having started on the shop floor and working my way up across all facets of the business. In a very short time, if you were to ask my team about me, they would tell you these 4 things: I value simplicity and focus on doing the basics really well; I measure everything that matters to our customers; I am action-orientated and outcomes focused and hold my people accountable; I am committed to delivering returns to shareholders. This is what informs my ways of working and decision-making. From my experience, I know that success begins with servicing the customer exceptionally well. This will be core to moving Sigma forward and where our work must begin. I have been at Sigma for 3 months and have formed a clear understanding of our challenges and the work we need to do to improve our performance. I have the opportunity to speak to our customers and shareholders recently during our results roadshow and at the Pharmacy Guild Conference in March. I've also visited many customers across the network as well as teams within our DCs. Firstly, as Ray has already outlined, we have clearly had ERP implementation challenges, which have impacted service delivery. I know what truly matters to our customers is for Sigma to have stock available to consistently deliver on time and in full. This is now my #1 priority and into the future. We have certainly started to make progress in this area, but there is much work to be done to ensure consistent execution daily. Sigma has a long history of wholesaling at its core. We need to return the Sigma wholesale business to 1 that is again trusted to deliver on time and in full. Secondly, the Sigma business is more complex than it needs to be. I am very focused on creating a simplified business model and eliminating the complexity within our structures and processes, so it is easier for customers and suppliers to do business with us. Thirdly, from my experience, I can confidently say we have world-class infrastructure that we can utilize better. This presents us with an opportunity to leverage these strategic assets and enhance our shareholder returns. I will turn my attention in the coming months to work out how we best achieve this. Finally, Sigma is a 110-year-old company with a proud history and strong retail brands. This provides a solid foundation for sustainable recovery. I will now provide you with a business update. At our full year results announcement, I indicated to the market that we will not be providing guidance for FY '23, but expect to return to profit. Trading in the first 3 months of the year supports this. Whilst core wholesale sales to pharmacies have continued to be impacted by ERP issues, sales of rapid antigen tests in the first 3 months remain resilient. We also continue to see good sales growth in our hospitals and third-party logistics businesses, which have not been as impacted by ERP issues. Our delivery in full, in-stock and delivery on time measures, which are critical for pharmacy customer satisfaction are progressively returning to levels previously seen before the ERP implementation at all sites except Victoria. I, however, recognize, there's still significant work to be done to provide these levels of service consistency -- consistently, sorry, across our network. The transition in January from our Rowville DC to new Truganina DC in Victoria has proven to be a significant challenge. There is an entire new team at a new DC dealing with new processes and systems. This situation is challenging in its own right but has been exacerbated by skilled labor shortages. Performance has improved here. However, operational execution remains well below our other facilities, so we have increased resourcing and training to fast-track business improvement. As a business, we are currently not operating at our optimum. So process improvements and change management will continue for the remainder of the year. I have set 3 objectives for the balance of this year: Getting the basics right and putting the customers' needs at the center of everything we do; simplifying the corporate structure to ensure accountability and excellence in execution; and producing clear, consistent and transparent reporting to elevate decision-making. The opportunity for Sigma is to better utilize and leverage the investments already made. We can then drive operational efficiencies, facilitate growth and improve shareholder returns. I'm currently working with my executive team and the Board to clearly define the strategy and direction for the business, which I look forward to sharing with you at our next results presentation in September. Finally, I would like to finish by thanking our customers, our team members, the Board and shareholders for your ongoing support as we work through what is an incredibly challenging and demanding period for everyone. Thank you for listening, and I will now hand back to Ray. Thank you.

Thank you, Vikesh. Before we move on to the remaining items of business, we did receive 2 questions from shareholders in advance of today's meeting, both of which related to Sigma's share price performance. Clearly, we have had some challenges and the share price is not where any of us would like it to be. The Board needed to make hard decisions on investment and transformation in recent years to build world-class infrastructure with the ERP to be the last major step and a necessary step to complete this, but which ran into implementation issues. As I outlined in my speech, we are very driven to move forward under the holistic industry experience and leadership of Vikesh to address these issues to optimize and leverage these investments that have been made so as to deliver superior customer service and hence, drive shareholder value. Are there any further questions that have been submitted online with respect to the general business?

Thank you, Chair. We have received a question from Frank Thompson, representing the Australian Shareholder Association. There were problems with the implementation of the new computer system, SAP. Of particular concern was the flow-through to customer service with loss of some business. Please quantify this loss. Has the loss now been recovered? And what is the ongoing effect of what must have been a loss of customer confidence in Sigma?

Thanks for your question, Mr. Thompson. I think largely, we've answered this in our presentation. If I was just to say, add a little bit more to that, was that, in our results presentation, we did show that not only in terms of the interruptions to our business that occurred through SAP, but also through moving to the new DC in Truganina and other transformation, our costs have been around $30 million. As we've indicated then and also indicate now, clearly, they are not cost that we expect to occur this year at that sort of level. And so along with what Vikesh has outlined to you in terms of the steps that we're taking going forward, we will seek to rebuild that customer confidence and we have, fortunately, a large number of loyal customers that have let down, but we will seek to recover those.

Thank you. We've also received a second question from Mr. Frank Thompson from the Australian Shareholders Association. Over the past 5 years, 3 of these years have seen significant negative TSR, the share price at a 5-year low. Sigma is facing a strong competitor with the acquisition of API by Wesfarmers. Whilst appreciating that over the past 4 years, the whole distribution has been overhauled, and a new system is now online. Please explain how Sigma will now deal with this new competitive environment and turnaround in the short and long term, this extremely poor performance.

Thanks again, Mr. Thompson. Again, I think I have already answered that question in the leading, but we do and continue. We have always operated in a competitive environment. We've taken the difficult decisions as you outlined in your question, and the challenges ahead of us, which we're taking with a great deal of enthusiasm to strengthen our business and to grow the business into the future. Are there any other questions?

No further questions at this stage.

Thank you. We will provide further opportunity for general questions at the end of the formal business. We will now move on to the next 4 items of business, which are the financial statements and reports; the remuneration report; the reelection of 3 directors being Mr. Michael Sammells, Mr. David Manuel and Mr. Vikesh Ramsunder; and then we'll cover the remuneration arrangements for the Managing Director and Chief Executive Officer. All eligible proxy votes are required to have been received by 11:00 a.m. on Tuesday, 10th of May 2022. If you have not already voted, you may lodge your vote today via the virtual meeting platform administered by Link. All voting will be conducted by way of a poll. I will be voting any undirected proxies appointing the Chairman as proxy in favor of all resolutions. Again, if there are any questions during the course of business, please submit your question using the Ask the Question button at the bottom of your screen, and we will endeavor to respond were appropriate. Item 2 on the Notice of Meeting is consideration of Sigma's financial report, directors' report and auditor's report for the financial year ended January 31, 2022, which I will take as received and read. This matter does not require a resolution. The company's audit partner, Andrew Reid, from Deloitte, is available to take any questions on the auditor's report and on the conduct of the audit. Are there any questions with respect to company's reports?

No questions.

Thank you. That concludes our consideration of the financial statement and report. We now come to item #3 on the Notice of Meeting to adopt the company's remuneration report for the year ended January 31, 2022. The Corporations Act requires an advisory nonbinding resolution to be put to shareholders for the adoption of the remuneration report. The remuneration report provides the detail. However, our key objectives of our remuneration strategy, as outlined on this slide, is to attract, retain, motivate and reward employees in return for achieving high performance and creating sustained shareholder value. Alignment with shareholder value is driven by our executive remuneration structure that comprises a fixed salary component and an at-risk component made up of both short-term and long-term incentives. I will now open this item up to questions from shareholders. Are there any questions with respect to this item?

No questions, Chair.

That concludes our consideration of the remuneration report. I will now put on the screen the valid available votes received from shareholders for this resolution. We thank you for your support. We now come to item #4 on the Notice of Meeting, the reelection of 3 directors: David Manuel and Michael Sammells, are both retiring by rotation in accordance with Rule 3.6 of the company's constitution and being eligible are also offering themselves for reelection of directors. Vikesh Ramsunder, who was appointed CEO and a director in March 2022, must retire in accordance with Rule 3.3A of the company's constitution and being eligible offers himself for reelection as a director of the company. No other dominations have been received in accordance with Rule 3.5C of the company's constitution. Next is Item 4.1 relating to the reelection of David Manuel. David was appointed to the Board in October 2009 and is a member of both the People and Remuneration Committee and the Risk and Audit Committee. David's background and experience is set out in the Notice of Meeting. I will now hand over to David to address shareholders ahead of the vote.

Thanks, Ray. Thank you for the opportunity to again present myself for reelection to the Sigma Healthcare Board of Directors. Having served on the Board since late 2009, it's been a great privilege and honor to represent shareholders and stakeholders alike, including my pharmacy colleagues and fellow customers. As a long-term shareholder and wholesale customer, mainly pharmacy owner and Amcal branch member for over 35 years, I remain of the view that the knowledge and experience I've accumulated is beneficial to my role as a Nonexecutive Director. I also continue to be an active industry participant through various roles including 15 years as a branch committee member for the Pharmacy Guild for the Australia WA branch. In addition to various directorships of private and not-for-profit companies, it is through these activities that are enabled to bring a unique perspective and industry insights to our Board considerations. The issue of my independence arising from my status as a customer and in more recent years, my tenure has been raised by a minority of proxy advisers. As an Amcal branch member, my Community Pharmacy interest received identical trading terms to my fellow Amcal branch members, I have never sought nor received any preferential terms or privileges from Sigma. On the contrary, the insights and observations arising from these activities provide the Board and management with an objective barometer for customer service levels and key deliverables to the fundamental of the Sigma operations. I thank you once again for the opportunity to represent the interest of shareholders and stakeholders alike. And should I be reelected today, then I will continue to advocate independently and without self-interest for greater shareholder returns, improved outcomes for suppliers and customers as well as the societal benefits that flow to the general public from a profitable and resilient Sigma business. Thank you, Chair.

Thanks, David. All directors have voted in favor of the resolution. I now move that David Manuel be reelected as a Director of the company. Are there any questions with respect to this item?

No questions.