Sigma Healthcare Limited (SIG) Earnings Call Transcript & Summary

Good afternoon, everyone. My name is Michael Sammells, and as Chairman of the Board of Sigma Healthcare Limited, I would like to welcome you here to today's AGM, including those joining us online in this hybrid meeting. I wish to begin by acknowledging the Wurundjeri people of the Kulin Nation, 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 2024 Annual General Meeting of Sigma Healthcare open. All presentations and a recording of today’s meeting will be available on our website for later viewing. Voting in today's meeting will be conducted by a poll. 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. As this is a hybrid meeting, we will provide opportunities for questions from those in the room and online. For those participating online, the instructions on how to ask a question are in the details provided in the online guide, which was provided to shareholders and is on our website. Before we proceed, I would like to introduce the members of the Sigma Board and management, who are present today. Starting from your left, Annette Carey, who joined the Board in April 2023 and is a member of the Nomination and Remuneration Committee; Neville Mitchell, who joined the Board in February 2023 and became Chair of our Risk Management and Audit Committee in April 2023; Kate Spargo, who is the Chair of the Nomination and Remuneration Committee and a member of the Risk Management and Audit Committee; Chris Roberts, who is also a member of the Risk Management and Audit Committee, Chris joined the Board in October 2023 and as a nominee of our largest shareholder HMC Capital. As this was after our last AGM, Chris is putting himself up for reelection by shareholders today; Vikesh Ramsunder, our Managing Director and Chief Executive Officer, who you will hear from shortly; and Kara McGowan, who is our General Counsel and Company Secretary. We are also joined by our 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 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 re-election 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. Let me start with some high-level remarks regarding where we are at with executing our strategy. For some time now, Sigma has voiced our strategic objective of building a more sustainable and robust business with diversified earnings. We have completed our major infrastructure build and replaced our systems to provide these foundations for the business. And now, subject to approvals, we are on the cusp of delivering the most transformational transaction in our proud history that will deliver against each of our strategic objectives. We have never been more advanced. Focusing on the last 12 months, we have delivered sustained improvement and significant strategic achievements that can fundamentally transform Sigma for the long term. Most notably, we strengthened our core operating business, improved our efficiencies and expanded our growth opportunities. Vikesh will talk to this shortly. We renewed our Board and strengthened our leadership team. We secured the 5-year supply agreement with Chemist Warehouse, which will commence from July 1 this year. On December 11, 2023, we announced the Chemist Warehouse merger proposal. And in January, we completed the $400 million equity raising, which was well supported by the market. Securing the Chemist Warehouse supplier agreement was an important achievement in securing volume that will help improve utilization and returns from our technology and distribution center investments. Clearly, the proposed merger with Chemist Warehouse, which is subject to ACCC approval, provides the biggest transformational opportunity in the long and proud history of Sigma. If the merger is completed, it will create a full-service wholesaler, distributor and retail pharmacy franchisor. Whilst this model already exists in Australia and internationally, it has the potential to accelerate our strategic direction by bringing together 2 complementary businesses with complementary core strengths. Sigma has world-class distribution infrastructure and capability that is best-in-class service to pharmacies across Australia every day. Chemist Warehouse, meanwhile, has unparalleled pharmacy franchise and marketing know-how and expertise. The work completed to date has identified $60 million of potential cost synergies once the transaction is executed, creating further value for shareholders. The proposed merger remains subject to ACCC approval, a process that we are fully supporting and cooperating with. The ACCC have undertaken their marketing quarry phase and on their website have identified June 13 this year as the provisional date for the announcement of their findings, which may be a final decision or a statement of issues. Whilst timing remains unclear, we are hopeful of a positive decision in the second half of this calendar year, which will then be followed by a shareholder approval process that is expected to take around 3 months. It is this timing and completion uncertainty, combined with the unique nature of the merger transaction that led the Board to implement certain remuneration arrangements that are being voted on today. Given the size of the Chemist Warehouse Group, the proposed merger is essentially without precedent on the ASX, and hence, when we came to a range of issues to address, including remuneration, market norms, well considered don't necessarily deal with the unique nature of the merger proposal. The merger requires the skills and expertise of Sigma's key executives to unlock its potential shareholder value. Further, while the Board remains hopeful that the proposed merger will be finalized, in the event the proposed merger does not proceed, retention of key skills, expertise and corporate knowledge will be critical in driving a stand-alone Sigma to continue to diversify our business, grow our margins and identify and execute alternate strategic transactions. Having reflected on comments received from proxy advisers, I remain confident that the Board has acted in the best interest of shareholders. More details surrounding the proposed transaction, governance and reporting will be provided in prospectus documentation to be released of a shareholder approval process. Importantly, for shareholders, if the merger is not approved, Sigma remains a more attractive stand-alone investment thesis than it was prior to the completion of our 2-year turnaround. We have a state-of-the-art distribution center network with capacity for growth, strong heritage brands, a pipeline of private and exclusive label products to grow margin, sales growth through the Chemist Warehouse's volume under the new 5-year supply contract and other strategic options to diversify our earnings. This is all underpinned by a stronger balance sheet following our equity raise completed in January. The progress we have made and the strategic opportunities ahead have been recognized by investors with Sigma's share price opening today at $1.25, up 100% over the last 12 months. And finally, notwithstanding everything happening in the business, we've not lost sight of our ESG obligations. We have released our fourth sustainability report, where we outlined some of the achievements throughout the year, including facilitating the donation of $2.2 million of health products to Food Bank, reaching over 23% of solar energy consumption, diverting over 71% of our waste away from landfill, maintaining a strong health and safety focus and continuing to support diversity and inclusion within our workforce. Our attention now turns to preparing our business for the next phase of ESG maturity, including the upcoming regulatory reporting changes. Before I hand over to Vikesh, I just would like to thank my fellow Board members for their hard work, skills, experience, diligence and support as we have navigated successfully through the transformational set of decisions in relation to both the Chemist Warehouse supply agreement and merger proposal. I would also wish to thank Vikesh for his exceptional leadership and his executive team for the outstanding progress and achievements made during the year. With those comments, I thank our shareholders for your support of Sigma, and I will now hand over to Vikesh.

Thank you, Michael. And I would also like to extend my welcome to everyone in the room today and those joining online. Before I provide more specific details, I would like to start by acknowledging our team members, who have shown incredible resilience through an intense period of change. Executing our strategy has been a 2-year turnaround that has enhanced our capabilities, strengthened our core operations and solidified our balance sheet. Customer service performance metrics, set at world-class levels, and combined with the execution of our simplification strategy has delivered an improvement in both productivity and cash flow. The overall impact is starting to be seen through improvements in our financial performance and in the strategic growth opportunities that lie ahead. Today, I will provide you with an overview of our financial performance for the year, an update on our operational performance, outline progress with our retail brand strategy, discuss the regulatory environment, provide a brief current year update. Whilst I understand you may have questions relating to the Chemist Warehouse business performance, we are not in a position to provide an update today, but we'll seek to do so at our half-year results announcement in September. In late March, we announced our financial performance for the previous year. In summary, net sales came in at $3.3 billion, and excluding the merger proposal costs, we achieved earnings before interest and tax of $31.4 million and net profit after tax of $12.7 million. Including merger proposal costs, EBIT was $23.2 million and NPAT was $4.5 million, an increase of 150% on the prior year. The improvement was supported by an 11% reduction in total operating costs. Considering the improvement of the business, the Board agreed to pay a final partly franked dividend of $0.005 per share. Turning now to operational performance. Pleasingly, the reliability of our systems and operational performance has continued to be a highlight. Sigma delivered 230 million units during the year, and our Delivery in Full metric has been sustained above 99%, which is a world-class standard, along with the stock availability, which has improved to 93%. At the same time as increasing availability, we reduced our stock on hand by $103 million through better demand planning, stock management and divestment of noncore assets. We also achieved the ISO9001 quality accreditation during the year, a key milestone that validates the progress made in enhancing and standardizing our processes across the entire network. A very important outcome was the securing of the total Chemist Warehouse supply contract, which commences 1 July this year, and we are well advanced in the execution of our onboarding plans. We have negotiated with suppliers, built our stock replenishment plans and mapped our delivery routes to optimize service levels to all our customers. We have also recruited the additional team members required to deal with the anticipated 40% growth in volume. In 2023, we announced plans to discontinue the Guardian Pharmacy brand. This process is now complete, and I'd like to thank our Guardian members for their commitment to the brand and their communities over the years. Simplifying our retail strategy from 5 to 2 brands has enabled us to provide more support to the Amcal and Discount Drug Store members. The consolidation allows us to focus on brand positioning and consumer messaging to increase footfall through our stores and provide scale to deliver the economics of both a private and exclusive label strategy, which is currently subscale. We have over 250 private and exclusive label products launching this year with approximately 80% expected to launch in the second half of the year. This is an important vector for growth as it delivers differentiation and margin for our franchise brand members and for Sigma. In the medium term, we have set targets of growing the Amcal brand network to 300 and DDS to 150. As you are aware, Sigma operates in a highly regulated industry with agreements in place that govern our wholesale distribution margin and is supported by a funding pool to deliver services in the CSO deeds with government. Whilst we are currently bound by a nondisclosure agreement, I can say that we are in advanced negotiations with the government and the Department of Health on the next funding agreement. Critical for Sigma in this high inflationary environment is that we achieve an increase in funding to fairly remunerate our industry for the services we provide to government and patients. Before I hand back to Michael, I would like to provide some remarks on our progress year-to-date. The macroeconomic environment remains challenging and intensely competitive. Sigma, however, operates in a more defensive market segment that is less susceptible to fluctuations. Sales for the first quarter of our financial year support this with sales revenue up 4.9%. However, in such a competitive and regulated market, we are restricted in our ability to pass on cost increases, intensifying our focus on driving operational efficiencies and on securing a sustainable funding model with government. We anticipate this will be agreed to commence in the 2024 calendar year. Whilst we still have much work to do, progress is positive. And the actions we are taking today are a step towards reaching our medium-term EBIT margin target of 1.5% to 2.5%. Through the second half of the year, we will navigate our way through the ACCC process for our proposed merger with the Chemist Warehouse Group whilst continuing to focus on business performance improvement and service excellence. This includes the seamless transitioning of the Chemist Warehouse PBS volume from 1 July whilst maintaining high service standards for all existing customers. With the proposed merger in front of us, this is an exciting and truly transformational opportunity, if approved will help diversify our income streams and provide further opportunities for growth. Finally, I would like to personally thank the Board for their unwavering support with special thanks to Michael and Neville, who have both made significant contributions through the Chemist Warehouse merger proposal. I would also like to thank our customers who have continued to support us, and we remain committed to supporting community pharmacy. 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 1 question from a shareholder in advance of today's meeting. Whilst I am paraphrasing, the shareholder essentially questioned the validity of climate change on the environment more broadly, and therefore, why Sigma identified climate change as a risk and needs to react or respond. I don't plan to debate climate change today. Environmental factors do form part of our risk planning as it does potentially impact our ability to distribute essential medicines to patients who need them. Therefore, as a Board, we are committed to Sigma being a responsible corporate citizen and supportive of the business taking actions today that are less detrimental to the environment tomorrow.

We'll now then move to 4 items of business, which are the financial statements and reports, the remuneration report, the reelection of directors and remuneration arrangements for the Managing Director and Chief Executive Officer. All eligible proxy votes were required to have been received by 2:00 p.m. on Tuesday, May 28. 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 of the Notice of Meeting is consideration of Sigma's financial report -- director's report and auditor's report for the financial year ended 31st of January 2024, which I will take as received and read. The matter does not require 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 report?

Chair. We do have a general question from Mike Roby from Australian Shareholders Association. I congratulate Sigma on what we hope is a successful merger with the Chemist Warehouse Group. It's good to see a deal without the fat payments to brokers. My question is about non-renounceable placement of $400 million. This was a 54% increase. So shareholders who didn't have the cash to take up their entitlement were heavily diluted. Why not, like many listed companies, use our renounceable offer where retail shareholders can sell their entitlements on the market and suffer 0 dilution? Why did Sigma go non-renounceable?

And thank you for the question, Mr. Roby. When we considered the size of the equity offering, we felt that the pathway we took provided greater certainty for shareholders and shareholder value. And in fact, I think the retail by shareholders -- retail shareholders was akin to 53%, 54%, which is above the average for these types of offer. We also note some retail shareholders took up additional options. We think it was the right outcome for the organization, and I think the market support for that shows accordingly. Thanks, Gary. Are there any other questions?

Chairman, we have Leonard Levy here, who has a question for you.

Thank you, Michael. I'd like to make a couple of observations and ask a couple of questions, if I may. I'm delighted with the performance improvement. It's great. I'm delighted that the share price has doubled in the last 12 months, but I wonder if that's purely due to the merger that we're hoping to achieve. I'm also wondering why with a 40% growth in volume, how is that reflected in cash? What's our cash flow situation? We have a good financial performance. Again, I'm looking at my portfolio and thinking I get about a 1.2% return on the current share price. When are we going to see an increase in dividends? I'm a little bit old. I've been coming to these Annual General meetings now for over 60 years. And I can recall different figures to $0.005 in the past. And what we have seen is this great growth over the years. Continual expansion, continual improvement, obviously money into whatever it takes to make the company work properly. But the question still remains, when will the dividends improve?

Mr. Levy, thank you for your question. I think it's only in recent years that we've actually restored paying dividends to shareholders. I think you'll be personally aware we went for a couple of years of naught. And yes, the company has invested a lot of capital into its infrastructure. I think what you should expect on a look-forward basis is as we increased the volumes in those warehouses, particularly on the back of the Chemist Warehouse supply contract, that the profitability of the company increases accordingly, and therefore, that gives us greater capacity to share some of that with shareholders through dividends. The other part I have to say is we have not got to the position of signing off over a dividend policy for the merged co, the point in time for that style of information to shareholders with -- through the form of a prospectus to inform merger considerations on an assumption that the ACCC will clear the transaction. So that's when you can expect some more information.

Thank you. That's very good. Now, Guardian has disappeared, and you have 2 brands left. What's happened to the numbers of the 2 brands before and after Guardian disappeared or even in the last 12 months? Have the numbers increased for Amcal? Or have they gone backwards? What's happened with the numbers on these 2 franchises?

So the numbers in total will be a slight decline, which is not unexpected. I don't have the actual numbers on me. I'm not sure, Vikesh, if you want to talk about that or we can take it on notice.

So the numbers of Guardian -- sorry, numbers of Amcal pharmacy have actually increased. Around 40% of the Guardians actually converted into Amcal pharmacy. So you're now seeing a growth in Amcal pharmacies. Inherently, we still have the DDS brand that's got about 111 members at the moment. So in total, of course, we've shrunk because around 50 Guardians to 60 Guardians have become, let's just say, independent. But it was intentional so that we could start to drive greater concentration and production of private label. And to do that, you actually need more brand members, so that was really the strategic decision behind it.

Thank you, Vikesh. Okay. So that concludes our consideration of the financial statement and report. Thank you.

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 2024. 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. As I outlined earlier, in December 2023, Sigma announced a transformational merger with Chemist Warehouse. Accordingly, the Board considered it appropriate to implement remuneration arrangements to support this objective. We understand that proxy advisers and shareholders are typically not in favor of retention repayments. And as a Board, we share that view in normal circumstances. However, given the uniqueness of the transaction and the size and complexity of the Chemist Warehouse Group, the proposed merger is essentially without precedent on the ASX, so the Board decisions with regard to remuneration needs to be considered in that context. We have a particularly unique set of circumstances given the relative size of Sigma and Chemist Warehouse, of which Sigma's CEO Vikesh has been named as CEO of the merged company should it proceed, hence, his importance to Sigma and our decision-making process. We are also mindful that the proposed merger would take time to seek the requisite regulatory approvals, and if successful, a further number of years to integrate, embed and realize synergies. The Board considered it critical to ensure appropriate management of key personnel at this time and maintain management's focus on completion and integration of the proposed merger. The Board remains committed to ensuring Sigma's remuneration practices and disclosures aligned with stakeholder expectations and market practice, whilst also considering commercial sensitivities. While in the FY '24 Remuneration Report, Sigma improved its disclosure from prior years. We recognize further improvements can be made in FY '25, and we will continue to engage with key stakeholders to identify further opportunities for improvement and more granular information on measures, weightings and outcomes. With that overview, I will now open up to any questions with respect to this item.

Chair, we have a question from Mike Roby from the ASA again. The remuneration structure and quantum is in line with the ASA guidelines. While we accept the commercial and confidence nature of your NPAT target for the STI in the year, we do expect that in the subsequent year you will review what the hurdle was for the prior year. All we got was that it was passed and we're not given the target. Can you do so in the future, please?

So thank you for your question, Mr. Roby. I think you will see in our remuneration report for the year in question. The disclosures -- the detailed disclosures for our STI is materially more detailed than prior years. We have received a range of feedback from a range of stakeholders out there, and the Remuneration Committee will take that on board as we consider the format for next year's report, your specific point included.

Mike Roby has been busy. The ASA has difficulty with the discretion of the Board in the event of a successful merger or the departure of the CEO. Our view is that if a CEO does not complete the full term, then make pro rata payments for the period served if hurdles are achieved. This is not the case here where complete discretion is given to the Board on any payout. There are unusual conditions surrounding the 3-year period of this plan, but this doesn't pass the test of fairness and transparency.

Thank you for the question. I think what we're asking shareholders to do is provide the Board with the authority to use discretion. What we're not saying is that discretion would result in any payouts in full for the particular matter, I think. And I think you need to entrust the Board that it will use shareholders' funds wisely in making those decisions. So we're not making decisions here about what sort of payout would be exactly. So I think -- I don't think you should be concerned.

There's no further questions online.

Are there any questions from the floor on this item? Okay. 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. With this vote under 75%, this reflects the first strike against our remuneration report. To close this item, as I've already outlined, I remain comfortable that the arrangements we put in place given the critical nature of the transformational transaction we are now executing was the right thing to do. Have we done nothing and lost critical people in the process, shareholders would rightly be disappointed in the Board from not protecting the company and the long-term interest of shareholders. I also note that while just over 50% of our shareholders have expressed support for the numeration report, which is truly appreciated, we have received the first strike. Having said that, the Board has taken on board the feedback and concerns raised from the stakeholders through the process. We will continue to engage and take advice on how we can address the concerns we have heard.

We now come to Item 4 on the Notice of Meeting, the reelection of 2 directors. In accordance with Rule 3.6(b) of the company's constitution and being eligible, I, Michael Sammells, I'm referring myself for reelection as a director. In addition, Dr. Christopher Roberts, who was appointed by directors in October 2023, automatically retires at the next AGM following their appointment in accordance with Rule 3.3 of the company's constitution and being eligible also offering himself for reelection as a director. No other nomination has been received in accordance with Rule 3.5(c) of the company's constitution. As the next item of business relates to me, I will now stand aside and hand over to Kate Spargo as Chair of the People and Remuneration Committee to chair this part of the meeting.

Thank you, Michael, and good afternoon, everyone. It's my pleasure to chair this part of the meeting today. This next item is 4.1 relating to the reelection of Michael Sammells. Michael was appointed to the Board in February 2020 and is currently the Chair of the Sigma Healthcare Board, as you know. And he is also a member of the Nomination and Remuneration Committee. Speaking on behalf of my fellow directors, Michael became Chairman of Sigma in incredibly difficult and challenging circumstances, some of which some of you may be aware of. He's shown wonderful leadership and resilience through that time and has since played a pivotal and demanding role in advancing our current strategic direction, which has led to the proposed merger with Chemist Warehouse. I can say on behalf of all of us that I think Michael has been absolutely instrumental in achieving that deal along with the Vikesh. Michael's experience is set out in the Notice of Meeting, which you've had an opportunity to read. And I'll now hand over to Michael to address you as shareholders.

Thank you, Kate. It's been a privilege to be part of the Sigma Board since I was first appointed in February 2020. Shortly after being appointed, I was appointed as Chair of the Risk Management and Audit Committee. I have been Chair of the Board since August 2022 after being asked by the Board to become acting chair following the tragic passing away of, while in chair, Ray Gunston. I believe a long executive career in healthcare with significant time spent as a CFO with experience in all matters, finance, mergers and acquisitions and IPOs, has enabled me to add value to the Sigma Board complementing the experience of my fellow directors. During my time on the Board, we've secured the services of Vikesh as CEO, and in turn, supported him to make a large series of changes to our business that has materially improved our financial and business performance. And more recently, in my time as Chair, I have helped navigate the business through securing the Chemist Warehouse supply agreement and then the proposed merger with Chemist Warehouse, announced in December last year. It would be a privilege to be elected to continue to represent shareholders on the Sigma Board.

All directors have voted in favor of the resolution. I now move that Michael Sammells be reelected as a Director of the company.