Sigma Healthcare Limited (SIG) Earnings Call Transcript & Summary

Ladies and gentlemen, my name is Michael Sammells, and as Chairman of the Board of Sigma Healthcare Limited, I would like to welcome you to today's AGM meeting. Could I respectfully request if you have phones on you, could you either have them turned off or held to silent for the duration of the meeting? Thank you. I wish to begin by acknowledging the Wurundjeri people of the Kulin Nations, the traditional custodians of the land on where we are gathered today. We pay our respects to their elders, past, present and emerging. I formally declare the 2023 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. I will just start by saying that it's nice to be able to again hold an in-person meeting. Voting in today's meeting will be conducted by a poll. All polls 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'd like to introduce the members of the Sigma Board and management who are present today, starting from your left, David Manuel, who is also a member of the People and Remuneration Committee and a member of the Risk Management and Audit Committee. Dave has advised that he will retire from the Sigma Board at the conclusion of today's meeting. On behalf of the entire Board and management, I thank David for his 13 years of commitment and dedication to Sigma. Annette Carey, who joined the Board in April and is a member of the Nomination and Remuneration Committee; Neville Mitchell, who joined the Board in February this year and became Chair of our Risk Management and Audit Committee. Kate Spargo, who is a member of the Risk Management and Audit Committee and a member of the People and Remuneration Committee; Christine Bartlett, who is Chair of the Nomination and Remuneration Committee; Vikesh Ramsunder, our Managing Director and Chief Executive Officer, who joined us in February last year; and Kara McGowan, who is our General Counsel and Company Secretary. We are also joined by senior executives who will be available to chat with shareholders at the conclusion of the meeting 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 6 items of business today, as outlined in the Notice of Meeting, being the Chairman and CEO addresses, the financial statements and reports, the remuneration report, the reelection of directors, the remuneration arrangements for the Managing Director and Chief Executive Officer; and amendment of Rule 3.6 of the company's constitution regarding the reelection of directors. 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 would like to first -- I would like to start by first acknowledging our former Chairman, Ray Gunston, who suddenly passed away in July last year. Ray was a significant contributor to Sigma since joining the Board in July 2010. He was a mentor to many people, had an incredible work ethic, strong values and genuinely cared for people. Ray has left a strong legacy and is truly missed. I want to thank my fellow board members and management for the way we collectively navigated our way through this tragedy. A special mention to Kate Spargo for stepping in as Interim Chair of Risk Management and Audit Committee. Let me now turn to the last 12 months, which has been 1 of significant challenge, transformation, renewal and progress for the Sigma business. Clearly, our performance was materially impacted by the ERP implementation that went live in August 2021 and did not go to plan with the impact continuing into FY '23. This impacted the trust of our customers in Sigma, which ultimately impacted our own people and financial performance. Pleasingly, we made great progress during the year in some critical areas that are key for our sustained success moving forward, including our new CEO commenced in February to bring a new lens to our operations. You will hear from Vikesh shortly. Our ERP challenges were addressed as a priority with the system stabilized in the first half of the year. With ERP stabilized, our core operational performance reached previously unattained levels on key customer metrics such as delivery in full and delivery on time. We announced our renewed strategy, which I will discuss in more detail shortly. We renewed our leadership team and recruited new team members with the skill set required to execute our strategy. We reviewed and updated our governance practices and renewed our Board, adding 2 new directors, who you will hear from shortly. We concluded our distribution center infrastructure renewal program with the opening of our new Hobart DC and the doubling of the size of our Truganina DC in Victoria. We materially reduced net debt and improved operating cash flow, and we returned to profit as promised after cleaning up legacy issues, disposing of some noncore assets and simplifying our business model to provide a clean runway for the future years ahead. Whilst we have come so far, we recognize that we have much ground to make up. With our operational performance now on track this enables us to consistently deliver improved service that our customers can trust and rely upon. In turn, this enables us to start the process of winning back the trust and confidence of our customers, which is our major focus for the year ahead. Turning now to our strategy. At our half year results announcement in September '22, Vikesh announced the key pillars of our revised strategy, which were endorsed by the Board. This included grow scale and profitable market share in the wholesale business, where significant capital has been invested; divest noncore assets and continue to simplify the business; consolidate and build our franchise brand network; diversify our streams of income through expanded product offerings via health, beauty and wellness categories. Clearly, pharmaceutical wholesaling is a core operation and currently contributes over 90% of our group revenue. It is, however, a high-volume, low-margin business but is 1 we have invested around $400 million over the last 6 years to renew our distribution center network automation and capacity. As a result, we now have a tremendous opportunity to leverage this investment by delivering enhanced customer service growing profitable volume and achieving sustainable returns for shareholders. Divesting noncore assets is an important step in simplifying our business, sharpening our focus on our core and releasing underutilized cash. We announced in March that we have sold our interest in whole life and ceased our Cura business. And we are in the process of selling our hospital distribution business, which is still pending ACCC approval. These collectively free up cash without negatively impacting profitability. Consolidating and building our franchise brand network is a foundational step that comes with some disruption but will ultimately support our wholesale business as well as our strategy of diversifying our streams of income. As we methodically work our way through these strategic drivers, each contributes to our ability to enhance our business model, improve our balance sheet, support the pursuit of other vectors for growth and ultimately enhance shareholder returns. Turning now to sustainability. We are very cognizant of the important role that businesses such as Sigma play in contributing to a sustainable society. We have this year released our third sustainability report, which you can access via our website. For Sigma, our focus is on the specific areas where we can make a meaningful contribution to society. The core of Sigma's business actually underpins the government's national medicines policy, ensuring equitable, affordable and timely medicines across all Australia. In fact, we deliver over $120 million PBS medicines and over 230 million units overall across the year, and our own people are critical to delivering this. The health and safety of our team members is critical to ensure we can continue to support the community. Pleasingly, our safety focus has resulted in our lost time injury frequency rate declining 31% to 1.83 for the year. We've also made progress in ensuring our distribution centers' network operate sustainably. For the year, solar generation powered 19% of our energy consumption, and we've set a target to increase this further in the coming year as we pursue a pathway towards carbon neutrality. We have been a signatory to the Australian packaging covenant for 8 years to influence packaging and have delivered -- and diverted 71% of our waste from landfill across 10 major sites. Through our subscription through PrintReleaf, we've also reforested over 1,700 standard trees to offset our paper consumption. And from a governance perspective, we are committed to operating our business in an ethical and transparent way which is guiding our operations and reporting. Before I hand over to Vikesh, I would like to acknowledge the contribution from our team members. It has been an extremely demanding year on our people, and I'm incredibly proud of their resilience and tenacity. I also need to call out the leadership of Vikesh, who commenced whilst ERP issues were impacting the business. By year-end, the business is stable, routinely delivering service to our customers at levels not seen before at Sigma while simplifying the business, delivering operational efficiency and returning the business to profit. I extend the thanks to our loyal customers. We are aware of our challenges have -- we are aware our challenges have tested your patience and loyalty, but because of the work completed, we now have in place the network, systems and people needed to deliver the service standards you expect. We are now focused on growing the business. With that, I'll now hand over to Vikesh.

Thank you, Michael, and I would also like to extend my welcome to everyone here today. I will take this opportunity to speak to you around the following topics: an overview of our financial performance for the year, provide an update on our operational performance, outline our retail brand strategy, and provide a brief current year update. Starting with our financial performance. Net sales for the year were $3.7 billion, which was up 6.2% on the prior year. The growth mainly reflected increased sales to key customers and sales of rapid antigen tests after overcoming the impact of our ERP disruptions. Pleasingly, the business returned to profit this year, and we achieved earnings before interest and tax of $19.3 million and net profit after tax of $1.8 million, up from a net loss of $7.2 million in the prior year. The profit was achieved after absorbing costs relating to inventory write-downs and disposing of noncore assets. Clearly, a $1.8 million profit is not satisfactory. And I have set very clear direction and plans on how we can continue to improve this profit position. The balance sheet has also been strengthened with net debt end of the year at $67 million, down from $149 million in the previous year. And for shareholders, the Board agreed to pay a final dividend of $0.05 per share. We also took the opportunity to outline a clear dividend policy moving forward. The improvement in our operational performance has been one of the highlights for the year. Our operations were beset by many challenges from the start of the year, and Michael has already discussed the ERP challenges, which drove much of this. So to see Sigma's delivery in full metric, which is a critical measure for customer satisfaction, rebound from 75% in February last year to a sustained 98% and above since June was a strong turnaround considering we still delivered over 230 million units in the year to pharmacies. We also finalized the business renewal program by completing the extension of our Victorian DC and moving into a new facility in Tasmania. I now have great confidence in the sustainability of our operations to meet high levels of customer service and absorb growth opportunities. At our half year results in September, we outlined a revised strategy to focus on supporting 2 brands moving forward, Amcal and Discount Drug Stores. The first step in this strategy is to merge Guardian and the Amcal brand. The rationale for moving to 2 brands is the following: firstly, it removes the complexity of managing promotional and marketing strategies for 5 brands. Secondly, consolidation provides scale to deliver the economics of a private and exclusive label strategy. Thirdly, it allows us to focus on our brand positioning and consumer messaging to increase footfall through our stores. There are also pharmacists who do not want to belong to a brand; and for those stores, we have launched our price save offer to grow our wholesale volume. At a broader economic level, there continues to be inflationary pressures on costs of operating. Sigma operates in a highly regulated market with low margins and a restrictive ability to pass on cost increases. With that said, we also operate in more defensive categories, less impacted by swings in spending patterns of consumers. In line with this, our sales into pharmacies year-to-date is up 5.3%, benefiting from the improvement in operational performance. I also reaffirm our EBIT guidance of $26 million to $31 million for the full year. In the recent May federal budget, the government announced a policy change to facilitate 60-day dispensing on over 300 medicines. This is a significant change in policy that will impact the funding for pharmacies and most likely decrease foot traffic into stores. The knock-on effect on Sigma is too early to assess, but we will continue to support our customers and work on initiatives to drive efficiency across the supply chain. This policy will be phased in over the next year, starting from September allowing us to manage the potential impact. Before handing back to Michael, I would like to leave you with some thoughts from my 15 months at Sigma. Firstly, I am really pleased with the progress achieved but not satisfied, as I can see the opportunities that lie ahead for us. I'm very grateful and proud of the efforts by our team members this year considering the very challenging circumstances. Secondly, having attended industry forums early last year and again this year, I've experienced a positive momentum swing in attitudes towards Sigma. It is now up to us to keep delivering and winning back the trust and confidence of customers and suppliers. Finally, Sigma has a long and proud history that spans over 110 years supporting community pharmacy in Australia. Amcal is also one of the oldest, most trusted and recognized pharmacy brands in the country. We have spare capacity in world-class distribution facilities and in a changing retail landscape, where logistics and supply chain capability are becoming even more important. We are well positioned to leverage our assets and focus on growing the business. Thank you. And I will now hand back to Michael.

Thank you, Vikesh. Before we move on to the remaining items of business, we did receive some questions from shareholders in advance of today's meeting that I will address now. Firstly, we received questions regarding why we are having a face-to-face meeting, which is also being streamed to shareholders. A recording of today's meeting will also be available on our website. We will review meeting arrangements again in advance of next year's AGM. We received a question asking why the external auditor fees have increased. This is the result of the implementation of the ERP system, which completely changed all routine processes and procedures within the business, which created additional work for the auditors, whilst the system was being stabilized. We also received a couple of questions in relation to the remuneration levels of Board and executives, and these are answered during the course of the meeting today. We will now move on to the next 5 items of business, which are the financial statements and reports, the remuneration report, the reelection of directors, remuneration arrangements for the Managing Director and Chief Executive Officer; the amendment of Rule 3.6 of the company's constitution. All eligible proxy votes were required to have been received by 11:00 a.m. on Tuesday, May 15. 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. 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 31st of January 2023, which I take as received and read. This matter does not require a resolution. The company's audit partner, Ms. Xenia Delaney 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 the company's reports? If you have any questions, could I ask you to go to the microphone in the center of the room.

Our first questions is posed by [ Leonard Leady ].

Mr. Chairman, firstly, let me congratulate your team and Vikesh in particular, at getting a little bit of a turnaround back into the business. My background goes back to the heady days when dollar shares were dollar shares, dividends ranged between $0.28 and $0.32 on a regular basis. The state of the situation over the years, from my perspective, is that we continue to expand. We continue to take on great new items of business. We continue to dispose of the ones we don't want, but in the end, the dividend is pathetic. Now I appreciate that the Board does its very best to forecast the situation of the future, but we're not seeing tangible results in the hands of the shareholders. So a couple of questions. The first one, which has been partly addressed by Vikesh, is the ability to supply 60 days' supply to certain items on the passing of the relevant bills in Parliament. Do we have that capacity? And are we ready? The second question is what are we doing, if anything, about providing some thought towards the ownership of pharmacies by people other than pharmacists. Let me rest there for a moment. Have some replies.

And thank you for your question. The first thing I have to say is we've come off quite a challenging period of time. And I think what you're hearing today through the presentation and what Vikesh has said is we are very focused over taking advantage of the capital that's been invested to grow this company and ultimately create greater shareholder value. So I can assure you of that commitment from the Board. And whilst I understand history, I can't solve history. But we can only attend to things on a look-forward basis, and we are heavily focused over maximizing the returns for shareholders, which includes a steady, reliable dividend stream. And I think you've seen us during the course of the year advertise a new dividend policy of 50% to 60% of net profit after tax. On your second question as to 60-day supply medicines, I think it's probably fair to say that that's a new change for the sector. We do understand that, that has implications for pharmacists across the country in running their business. And in our network, we are very focused on helping and supporting them. And from a wholesale distributor perspective, I think there is still some time to go to understand truly how that impacts the operations other than to say that the refreshing of our DCs' networks and technology in there makes us well prepared to deal with whatever comes our way. On the matter of who's allowed to own a pharmacy, to be honest, I'm happy to leave that in the hands of the regulators at this point in time. But we're really focused over supporting our network and brands.

The last question was pertinent because, as we know, a particular chain took its business away from Sigma. And that may or may not have impinged on the bottom line. I'm not quite clear. Nevertheless, if business goes open, the ownership goes open and let's just say it's the supermarkets that move in, in a big way, do we see any risk in them doing as another group has done before and starting to barter for such supply prices that, in fact, will lose further business? I'm asking if these matters have been considered by the Board.

What I would say to you is that the Board understands very clearly that we live in a environment of change. From time to time, regulations will change. And I think our job is to make sure that we have a business model that's ready to adapt. We are dealing in a line of products a pharmacy that are essential to consumers in Australia and society. So we accept from time to time, business models may change, but I think with the leadership in our facilities, what you have is a business model that is flexible enough to cope with whatever changes are coming in front of us.

Now one final question, please. Over the last 5 years, could you give me an indication, please, of the actual number of pharmacies that Sigma company supplies. What was it 5 years ago, 4 years ago, 3 years ago, 2 years ago, 1 year ago and today, what are the numbers that this company supplies?

I don't have those numbers at hand. I'm happy to take that on notice, and the team can get back to you. I don't have those numbers on hand myself. Do we have any other questions? If not, 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 31st of January 2023. The Corporations Act requires an advisory nonbinding resolution to be put to shareholders for the adoption of the remuneration report. Let me make a few introductory comments before I open this item. The Board is very sensitive to having a remuneration framework that represents an appropriate balance between recruiting and retaining the right executive leadership for Sigma, being cognizant of shareholder experiences at all times. In the remuneration report, you will see where we have made decisions on performance pay for last year and made some changes to the CEO's remuneration arrangements, reflecting what we believe to be the right balance. This remuneration approach and framework is consistent with the decision to issue performance rights to executives under the executive equity grant plan, which we will discuss further when we reach item 5 of business. With that overview, I am now open to any questions with respect to this item. Are there any questions? And if so, would you make your way to the microphone, please. Okay. If there are no questions, 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. And we thank you for your support. We now come to item 4 on the Notice of Meeting, the reelection of 4 directors. Christine Bartlett and Kate Spargo 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 as directors. Neville Mitchell and Annette Carey, who were both appointed by directors in February and April 2023, respectively, automatically retire at the next AGM following their appointment in accordance with Rule 3.3 of the company's constitution and being eligible, also offering themselves for reelection as directors. No other nominations have been received in accordance with Rule 3.5(c) of the company's constitution. The next item is Item 4.1 relating to the reelection of Christine Bartlett. Christine was appointed to the Board in March 2016 and is the Chair of the Nomination and Remuneration Committee. Christine's experience is set out in the Notice of Meeting, and I will now hand over to Christine to address shareholders.

Excellent. Thank you, Michael, and good morning, everyone. It's been an absolute privilege to serve on the Sigma Board since March 2016. The reasons I'm putting myself forward for reelection are: firstly, I've seen firsthand the value Sigma delivers in our community as an essential service, providing certainty of supply of PBS pharmaceuticals, which can be lifesaving in times of flood, fires and more recently, a pandemic. I'm proud to be a small part of that and to have the opportunity to work with my colleagues to ensure we continue to be a strong, reliable partner. Secondly, since standing for reelection 2 years ago, I've continued to be the Chair of the Nom and Rem Committee. And some of the key activities for that committee that I've been heavily involved in are, firstly, working very closely initially with Ray Gunston, and then the whole Board on the recruitment of Vikesh as our CEO. My own personal experience of moving and working overseas was invaluable in assisting Sigma to navigate the recruitment and moving of our CEO from South Africa to Melbourne. The appointment of the CEO is one of the most important decisions a Board makes. We are very happy with that decision and the progress Vikesh has made with the business over the last 15 months. Secondly, working very closely with Beth Knight, who's here in the front of the room today, and Beth is our Chief People Officer at Sigma, so working with Beth, our advisers and the committee to strike what I think is a very good balance in our remuneration structure to ensure we retain our executive talent during what has been a very challenging time for the business. And this talent is going to be absolutely key to our future growth. And lastly, working with Michael more recently on the recruitment of Annette Carey and Neville Mitchell, who you'll hear from shortly. So what do I think I can bring to the Board going forward? I certainly believe I am a better Sigma director today than when I first joined the Board in 2016. The corporate knowledge I've developed over the last 7 years is invaluable. I look forward to bringing my Sigma corporate knowledge to future Board discussions. My executive career has predominantly been business-to-business focused, delivering technology, property and financial services. Since 2015, I've been a full-time NED in the listed, unlisted government and not-for-profit sectors. While it has been a challenging year at Sigma, I'm excited about the future. We have a solid base on which to grow the business both organically and inorganically. I've thoroughly enjoyed the last 7 years working with the Sigma Board and management, and I look forward with your support to continuing. Thank you very much.