Sigma Healthcare Limited (SIG) Earnings Call Transcript

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, including those joining us online for this hybrid meeting. This is only our second AGM as a merged entity and a lot has been achieved in that relatively short time frame, [indiscernible] great people of the [indiscernible] Nation, the traditional additional custodians of the land on which we are gathered today. We pay our respects to the elders past and present. I formally declare the 2026 Annual General Meeting of Sigma Healthcare [indiscernible] all presentations and a recording of today's meeting will be available on our site for later viewing. Voting in today's meeting will be conducted by a poll. All polls will remain open until the conclusion of [indiscernible] 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 for those in the room and those [indiscernible] in the online guide provided to shareholders and available on our website. [indiscernible] Danielle Di Pilla is an Executive Director and our Chief People Officer. [indiscernible] is a member of the Risk, Compliance and Sustainability Committee and is also a qualified pharmacist. [indiscernible] and the Risk Compliance and Sustainability Committee. Jack is a qualified pharmacist and a co-founder of the Chemist Warehouse Group. Annette Carry is Chair of the Nomination and Remuneration Committee and a member of both the Risk, Compliance and Sustainability Committee and the related party Independent Board Committee. Neville Mitchell is Chair of the Audit Committee and a member of both the Nomination and Remuneration Committee and the related party Independent Board Committee. Damien Gance is a member of the Risk Compliance and Sustainability Committee and is a qualified pharmacist. Mario Verrocchi is an Executive Director and serves in the critical role of CEO of Retail as well as being a member of the Risk, Compliance and Sustainability Committee. Mario is a qualified pharmacist [indiscernible] and Kara McGowan our Chief Legal Officer and Company Secretary. We are also joined by our senior executives who will be available to speak with shareholders at the conclusion of the meeting [indiscernible] as well as [indiscernible] from the company's auditors, PricewaterhouseCoopers and representatives of our share registrar MUFG. I would just also like to acknowledge that [indiscernible] is with us in the audience today as a co-founder of Chemist Warehouse. 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 the Vikesh. FY '26 was a defining year for Sigma and the results demonstrate both the strategic logic of bringing Sigma and Chemist Warehouse groups together and [indiscernible] with national wholesale distribution and logistics expertise to create an integrated health care business of significant scale, reach and resilience. Group revenue increased by 15.5% to $10.8 billion, whilst normalized EBIT rose 20.6% to $1.09 billion. To put that into context, the prospectus released ahead of the merger disclosed pro forma EBIT for FY '24 of $605 million demonstrating the strategic logic of the merger. Importantly, this performance was delivered with balance sheet discipline. Net debt of $663 million represents a conservative 0.57x normalized EBITDA at year-end. We also paid fully franked dividends totaling $0.04 per share for the year. Turning to our operational execution. We are clear on our strategic priorities. First, we will sustain growth in Australia through network expansion like-for-like sales growth and stronger performance across the Chemist Warehouse, Amcal and discount drugstore brands. Second, we will keep -- we will expand internationally with discipline [indiscernible] and selectively grow our own and exclusive label portfolio. Finally, we will unlock further operating leverage through integration, synergy benefits and the scale of our distribution network. These results achieved during the year speak to the execution of our strategy. We continue to grow store numbers in Australia and New Zealand. Store numbers in Ireland [indiscernible] and performance is improving. In May this year, we announced our measured entry into the United Kingdom through a joint venture with Greenlight Pharmacy. We expect to open 2 stores in London before Christmas with a further 3 planned for 2027. And we are progressively closing our physical presence in China. As publicly reported, we participated in the due diligence regarding the potential acquisition of the Boots business. As the largest pharmacy group in the United Kingdom, it was prudent for us to participate in the structured sale process. However, following a disciplined assessment we made the commercially driven decision not to proceed. A business like Boots really comes to market, so we felt obliged to have a look at it and regardless of where that may have taken [indiscernible] investment will be supported by a clear strategic rationale, disciplined execution and an appropriate return on capital. At the same time, we will continue strengthening our core domestic platform, integrating systems and processes and investing in capacity, resilience and efficiency of our supply chain. It has been only 18 months since the merger, but the Board is pleased with our operational progress, strategic execution and the [indiscernible] is fundamental to delivering our strategy [indiscernible] with a focus on integrity, transparency, accountability and disciplined decision-making. From the outset, the Board put in place robust safeguards. All Board committees are chaired by independent nonexecutive directors, clear protocols, governed conflicts and related party matters and the related party independent Board committee, which I personally chair, provides [indiscernible] continue to operate within the regulatory framework established through the merger approval process including compliance with the ACCC undertakings and reporting requirements. Related party transactions are a significant and distinctive feature of our business and have contributed to the historical growth and success of Chemist Warehouse. We intend to preserve these benefits whilst maintaining strong governance, oversight and financial rigor. From my own perspective, these governance practices are delivering as expected. From my experience chairing the IBC, I'd make the following observations: The IBC has no materiality threshold. Any related party transaction that departs from the agreed standard commercial terms offered to non-related parties requires IBC consideration and approval. All new arrangements considered post merger have been on the same [indiscernible] our franchise agreements are standardized. There are no preferential agreements in place for founders. Any property lease agreements with related parties are supported by independent valuation reports. Finally, the Board, including related party directors, is aligned and is committed to growing our business and network for the benefit of all shareholders. Achieving our stated goal of 900 Chemist Warehouse stores across Australia will require an increase in nonrelated party franchisees. Accordingly, we expect the proportion of related party transactions will decline over time as the network grows. Focusing further on ESG, FY '26 marks Sigma's first mandatary climate-related financial disclosures under AASB The Board retains our overall accountability for sustainability strategy and climate-related risks [indiscernible] risks are considered within our enterprise risk management framework and informed strategy and decision-making. I continue to receive a range of questions as to the composition of the Board and acknowledge that the majority of directors are not [indiscernible] However, what I do have to say is that the current Board is the result of a shareholder vote at the Sigma AGM in February 2025 [indiscernible] Chemist Warehouse I remain confident that the current Board brings the skills, expertise [indiscernible] as of the Board's balance and composition. Our ESG approach is also reflected in practical outcomes. During FY '26, our Australian operations diverted 5,570 tonnes of waste from landfill, which is over 80% of the waste generated. We maintained our commitment to the Australian packaging covenant [indiscernible] $7.5 million across Australia and in New Zealand in supporting the communities we serve. We remain equally focused on our people, a safe, inclusive and capable workforce is central to the [indiscernible] connection between performance and the care for our people. Looking ahead, Sigma enters FY '27 with stronger foundation. The Board's priorities are to capture the remaining integration benefits, sustained domestic momentum expand internationally in a measured way and maintain financial discipline. We will invest where returns are compelling, preserve balance sheet strength and uphold the governance standards expected a leading ASX listed health care company. On behalf of the Board, I thank Vikesh and the executive team and all Sigma team members for their commitment and professionalism throughout of the manning and successful year. I also thank our pharmacy partners, suppliers, customers and communities for their trust and our shareholders for their continued support. I also need to thank my fellow Board members for the hard work, expertise and experience that has played an important role in our achievements thus far. [indiscernible]

Michael has already outlined our financial results for the year, so I will focus on our operational performance and progress on our synergy program before providing a trading update for the current year. During the year, we made significant progress in simplifying the combined business, growing the expanding network, lifting supply chain productivity and converting greater scale into stronger returns. We also expanded our global pharmacy network, which now exceeds 950 stores. Australia remains our core market with 561 Chemist Warehouse stores at 30 June and continues to deliver above market growth. During the year, our domestic Chemist Warehouse network added 24 stores and refurbished a further 18. We also reinvigorated the Amcal and Discount Drug Stores brands, positioning them for growth in FY '27. We achieved sales growth of 16% in Chemist Warehouse, as more customers purchase more products [indiscernible] Chemist Warehouse has consistently delivered above-market growth achieving a compound annual growth rate of 11% over the last 10 years. Our international business continued to expand. Sales increased by 23%, and we added 20 stores with New Zealand leading the growth. We intensified our efforts in Ireland [indiscernible] prepared to launch in the United Kingdom. Our supply chain [indiscernible] that's 35 million more than in the prior year. [indiscernible] capability and scale provide operating leverage that will continue to flow through in earnings. Turning now to synergies. We achieved $32 million in annual synergy benefits during the year at a one-off cost of $26 million, in line with expectations. We consolidated our support centers in Preston and closed the stand-alone e-commerce distribution center to now deliver from stores. In Western Australia, we consolidated distribution centers with volume being absorbed in our Canningvale DC. And since year-end, we have also transferred South Australian volumes into Sigma's Haraka DC. This represents tangible progress [indiscernible] benefits have already been realized. We expect further benefits to flow [indiscernible] this is not just about consolidation. We have mapped the change management required to deliver our integrated technology solution. We are rationalizing technology applications and integrating them into Sigma's established SAP platform, an important enabler for faster decision-making and the next phase of synergies. Importantly, this does not affect our store system. While still at an early stage, we are slowly introducing AI capabilities across the business to support decision-making and drive further efficiencies. Turning now to the trading update. Trading this financial year [indiscernible] international markets. [indiscernible] like-for-like sales [indiscernible] with our FY '26 results presentation, some discretionary categories such as ladies fragrances, bitumens and supplements are experiencing softness as consumers adjust their buying behavior in line with cost of living pressures. Our business model, however, is very defensive and resilient. Chemist Warehouse with the breadth and depth of its discount offer provides increased opportunities through the cycle. This is seen in strong performances in other less [indiscernible] GLP-1 sales. We anticipate oral GLP-1 formulations to enter the market in the second half of 2027 financial year to further enhance accessibility for patients and sales growth for our network. Our international growth has also maintained good momentum with sales for the 3 months to September up 30.2% and like-for-like sales up 15.8%. We also continue to execute our growth strategy, strengthen our global network and drive further operational efficiencies. Importantly, our market position continues to strengthen. The global pharmacy network is approaching 1,000 stores. While the Australian Chemist Warehouse network still represents less than 10% of the country's more than 5,900 pharmacy licenses. Together with the revitalization of the Amcal and Discount Drug Stores, we remain on track to onboard 14 Chemist Warehouse stores and 42 Amcal and Discount Drug Stores in Australia, together with the further 19 stores internationally. We now enter the important Christmas trading period and our retail network [indiscernible] for the balance of the first half, we expect Chemist Warehouse branded store sales to deliver double-digit sales growth consistent with this trading update. We have a clear plan, strong momentum and significant opportunities still ahead. Our job is to keep executing our strategy and to turn that execution into sustainable value for shareholders. Thank you. And I will now hand [indiscernible]

Thank you, Vikesh. Before we move on to the remaining items of the business [indiscernible] the question was, what responsibility does Sigma Healthcare except for ensuring Chemist Warehouse stores to not cause unreasonable and ongoing noise impacts on neighboring residents? As an overarching comment [indiscernible] I think we had another question come in to why this menu today?

Yes. We have a question from Stephen Maine. Firstly, thanking you for once again running a best practice hybrid AGM unlike major companies in Australia. Next is why we actually shifted the AGM from the Sofitel to the and are we seeing a much [indiscernible]

[indiscernible] very accessible and suitable for AGM. Okay. 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 directors [indiscernible] all proxy votes were required to have been received by 2:00 p.m. on Monday, 19 October. All voting will be conducted by way of a poll. [indiscernible] as proxy in favor of all resolutions. We have numerous resolutions to go through today, so we will provide an opportunity for questions at various intervals along the way rather than after each resolution. We will [indiscernible] Notice of Meeting is consideration of Sigma's financial report, sustainability report and the directors and auditors reports for the financial year ended 30th of June 2026, which I will take as received and read. This matter does not require a resolution. The company's audit partner, Ms. Alison Miller from PwC, who was the auditor for the relevant period, is available to take any questions on the auditor's report and on the conduct of the audit. Are there any questions from the room with respect to the company's financial report, sustainability report and the directors and auditors report?

My name is [ Mike Robey ] from the Australian Shareholders Association. And may I start by thanking you and Ms. Kerry for taking the time to meet us in advance of this AGM to discuss a number of matters. And we volunteer, monitor and hold about 1.5 million proxies. I have a few questions [indiscernible] association understands and appreciates the knowledge of the founders and family on the Board. And so there's nothing like owning a slice of the company to be focused on improving its performance in our view, even though that goes against many of the independent director sort of guidelines [indiscernible] in our meeting that your skills metrics was refreshingly honest, not everybody got 10 out of 10, which is unusual for ASX [indiscernible] we're actually very fresh and honest. But we'd quite appreciate if there was an external assessment done by and a specialist in this sort of nature and a bit more granularity in that matrix. The main reason being that shareholders only get devote on a couple of things, and one of them is actually the recruitment of people to the Board. So the more kind of information that they can actually use that fact checked is quite useful. And look, just one observation. This may be completely unprofessional. But when I looked at your skills matrix, they didn't appear to be mergers and acquisitions mentioned as a key skill. And our adventures abroad, I would have thought that somebody -- having somebody on the board and you have advised, you have got people on the board that it would be useful to have that listed as a key skill because when you're going off to Ireland and England and so on to sort of build new business, it would be useful to have somebody that actually understood those markets well. And look, on the organization and Board structure, I mentioned before that I understand this is heavily loaded with founders and we're quite happy about that. However, there will come a time -- there comes a time with all [indiscernible] Board founders are rotated off for experienced and professional people outside. So that usually requires effectively a planning process in the succession planning, so start a succession process for key board and executive members. Two more questions, but if you want to do those and...

Let me deal with...

All right. sure.

So I think it's an obligation of the Board to think about succession, not only for [indiscernible] as I noted in my speech, at this point in time, we still -- we consider we're quite a new Board despite the fact Sigma and Chemist Warehouse has been around for a long time. We're only 20 months into this journey. But obviously, as we look forward, succession is obviously [indiscernible]

[indiscernible] look, this is a bit left wing, but you did actually mention softness in the cosmetics market. But we note the rapid increase in [indiscernible] these markets both after season [indiscernible] market for this K-Beauty range. And I'd have to say not an expert in this thing, but looking at sort of discount cosmetic image that Chemist Warehouse presents, have you got a plan for actually [indiscernible] cosmetic range.

Without going into the detail, Mr. [indiscernible] I think it's probably fair to say that one of the strengths of the Chemist Warehouse model is [indiscernible] identify products that consumers want. And that's an all-day everyday exercise. So rest assured that they take a pretty wide view of the landscape and working products will sell now and into the future.

And look, the last one, a question we asked last year, given that this is an integration of a highly entrepreneurial, founder-led company with a very organizationally competent distribution company effectively. We asked how the cultural integration was going. And I think you mentioned that there's a few misalignments with pay scales and some which have all been kind of addressed. But do you do a staff engagement survey, and if you do, you thought to break out the initial 2 groups to see whether, in fact, they're both equally engaged or 1 perhaps more so than the other?

So what I'd say to you is we're 2 months into integration, we're one company, not 2 [indiscernible] Our job is to preserve what -- and I think the entrepreneurial flair from the Chemist Warehouse businesses [indiscernible] like the opportunity of putting [indiscernible] into one is to pick the best out of both and make it work.

As long as the staff come on Board?

Yes.

Look, that's all I got. And I can't see how when somebody declares market that we've had such big increases in sales and profit that the share price should drop, but go figure out.

Thank you, Mr. [indiscernible]. Are there any other questions from the floor?

My name is [indiscernible] and I've got a couple of follow-ups, one to Mike's question and one to a comment made by our Chief Executive Officer's report. A follow-up to Mike's question, you mentioned that you did do a staff engagement process. What were the findings and what benefit has come out of doing those staff engagement reports. I'm all in favor of them, but I just want to know the benefits that we found from doing them.

Without staff, we don't have a business. So at any 1 point in time, we invest a lot of energy in understanding the mood of our staff, you would appreciate internally, there's a fairly large change management program [indiscernible]

[indiscernible] that our CEO mentioned. And that was to do any speech, he mentioned about early stages of artificial intelligence. What we're doing to improve the skills of our staff, our executive and our board in deeding with this new artificial intelligent [indiscernible] engagement because it will affect every single one on the planet, basically. So how are we improving the skills and the experience with all 3 [indiscernible] to person if other members have issues with artificial intelligence?

I think it's fair to say the adoption of AI is early days for us. I think we've paid a lot of attention to putting good guardrails around the safety and security of using AI [indiscernible] as an early but cautious adoption. Are there any other questions from the floor? Are there any other questions online?

No questions online on this matter.

Are there any questions on the phone?

Chair, there are no phone questions.

Okay. Thank you. That concludes our consideration of financial statements and reports. We now come to Item #3 on the Notice of Meeting to adopt the company's remuneration [indiscernible] put to shareholders for the adoption of the remuneration report. I will now put on the screen the valid available votes received from shareholders for this resolution. We now come to item [indiscernible] Directors. In accordance with Rule 3.6B of the company's constitution Listing Rule 14.5 and [indiscernible] or offer ourselves for reelection as a Director. For context, no Board members were due to stand for this election this year in accordance with our constitution, noting all Directors have been elected or reelected in the last 3 years. The listing rules require at least 1 director to stand at an AGM, and given I was next in line from the legacy segment Directors, I have put myself forward for reelection. Four new Board members were appointed at the time of the merger in February 2025, some 18 months ago, Mario and Damien have put themselves forward for reelection ahead of time to assist with smoothing the spread of directors for reelection in future years. No other nominations have been received in accordance with Rule 3.5C of the company's constitution. As this resolution relates to my reappointment, I will hand to [indiscernible], Chair of the Nomination and Remuneration Committee to lead this aspect of the meeting [indiscernible]

[indiscernible] and became Chairman of the Board in August of 2022, including following the merger. Michael is currently the Chair of the related party Independent Board Committee and a member of the Audit Committee as well as the nomination and remuneration committee. Michael's experience is set out in the Notice of Meeting. From the Board's perspective, Michael brings a wealth of industry and financial experience as well as corporate governance expertise. He's a vital leader and contributor to our Board. And he led the merger negotiations with Chemist Warehouse from a Sigma perspective. I'll now hand over to Michael to address shareholders.

Thank you, I have to say it's currently a privilege to be the Chairman I was appointed to the Board of Sigma in February 2020 and back then, Sigma was a very different company. Following the tragic and unexpected passing of our previous Chairman, Ray Gunston, I was asked by the Board to take on the role of Chair in August 2022. Since that point, I have been part of an amazing ride for Sigma. First, the company secured the Chemist Warehouse supply contract, then helping lead the Sigma Board through the complexity of the merger negotiations with Chemist Warehouse completion through to today, where we have been able to demonstrate the value we have delivered to Sigma shareholders. I believe I've made a valuable contribution to this journey, but could not have done so without the hard work and support of my our directors. I believe I have more to offer Sigma and bring my significant experience in the health care sector, along with skills in finance, M&A and governance. Our growth in integration journey Sigma and Chemist Warehouse remains work in progress [indiscernible]

[indiscernible] all directors have voted in favor of the resolution. And I now move that Michael Sammells reelected as a Director of the company. [indiscernible] are there any questions in the room in relation to this resolution?

Yes. We have a question from [indiscernible] Thanks to Michael Sammells for competently chairing the [indiscernible] transactions committee and opting for very high levels of transparency. As part of his reelection, could Michael please summarize the types of related party transactions that have been phased out since the merger and also identify areas where the size and quantum of ongoing related party deals are expected to decline over the coming years?

[indiscernible] related party transactions as a total of the pool naturally decline and good reporting surrounding.

Any other questions?

No further questions.

Any questions on the phone?