Hey, and thank you for standing by. Welcome to Sigma Healthcare half year results briefing. At this time, all participants are in the listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you may submit your questions via the Ask a Question tab on the top right on the webcast. Please be advised that today's conference is being recorded. I would now like to hand the call over to Vikesh Ramsunder, CEO and Managing Director. Thank you. Please go ahead.
Welcome to our results presentation for the six months ending July 2023. I am Vikesh Ramsunder, the Chief Executive of Sigma Healthcare. Before I begin, I wish to acknowledge the Wurundjeri people of the Kulin Nation, and acknowledge them as the Traditional Custodians of the land on which we meet today. I pay my respects to the Elders, past, present, and emerging. I am joined here today by Gary Woodford, our Head of Corporate Affairs, and currently our interim CFO. You are welcome to submit your questions using the tab at the top right corner of the screen, and Gary and I will answer them at the end of the presentation. In terms of today's presentation, I will start with an overview and highlights from our first half. Gary will then provide more detail on our financial performance.
I will then provide an update on operational performance, outline progress against our strategy, and finish with the outlook for the year. Starting with an overview. We have made significant progress during the last 6 months in improving our operational and financial performance, and delivering against our strategy. Our focus on improving operational performance began over 18 months ago, and momentum has continued to build on the back of a stable ERP system. It has enabled delivery in full, which is an important customer metric, we've exceeded 99% every month since November last year. Our focus on stock management has seen stock availability improve to 93% to better meet the needs of our customers. The validation of our operational improvement was delivered through success in securing the Chemist Warehouse supply contract.
This is the largest supply contract in the wholesale industry, and is anticipated to deliver AUD 3 billion in revenue in the first full year of implementation. I will provide you with more detail on this later in the presentation. With our national network upgraded, we are now largely ex-CapEx and have started to extract efficiencies from our investments. Operating costs are down 21% on the first half, and productivity through our logistics network has improved by 10%. Now that we have operations running more efficiently, increased throughput volume is essential to enhance earnings. We have also made progress in simplifying our organization and completed the sale of our hospitals business in July this year. The disposal frees up capacity and capital that can be better allocated in more earnings-accretive areas.
Finally, on our financial performance, net sales of AUD 1.7 billion were down 8.4%, mainly impacted by the disposal of the hospital business and non-repeating sales of rapid antigen tests in the prior year. Importantly, like-for-like sales were up 7.5% to AUD 1.5 billion for the half. Pleasingly, our profit performance continues to improve. EBIT for the half was AUD 22.4 million, up over 300%, and NPAT was AUD 11.2 million, up from a loss in the first half last year. Considering the improved performance of the business, the Board has approved an interim fully franked dividend of AUD 0.005 per share. With that overview, I'll now hand over to Gary to present the financial performance in more detail.
Thanks, Vikesh. Welcome, everyone, and thank you for joining us today. I will now take you through some more detail on our financial performance for the last six months. Sales for the period were AUD 11.7 billion, down 8.4% on the same period last year, influenced by two factors. Firstly, elevated sales of rapid antigen tests during the first half last year, which did not repeat this year. And secondly, lower sales in the current period due to the disposal of our hospital distribution business. Pleasingly, wholesale sales on a like-to-like basis were up 7.5% to AUD 1.5 billion for the half, reflecting good underlying growth.
The lower sales of RATs flowed through to gross profit, which was down 16.2% to AUD 110 million for the period, partly offset by the stock adjustment, reducing from AUD 29 million last year. Significant work has been done on improving our inventory management, with our inventory position-provision balance remaining broadly flat since FY 2023, even after now fully providing for RATs. Other revenue for the half was up 6.1% to AUD 53.5 million. This was bolstered by the inclusion of a AUD 9.2 million gross profit on sale of our hospital assets, partly offset by discontinued operations. Reduction in operating costs is a major highlight for this half, down AUD 34 million or 21%, and I'll unpack this in more detail shortly.
Importantly, reported net profit after tax has significantly improved to AUD 11.2 million, up from a loss of AUD 1.5 million in the prior year. Turning now to operating costs, where we have made significant progress. With our operations and customer service levels now consistently performing at a high level, we've begun to remove costs and extract the efficiencies from our investments. This has resulted in our operating costs reducing by AUD 34 million, or 21% on first half last year. Great progress has been made in warehouse and logistics, with costs down 12.7% to AUD 70.4 million. The largest movement was a reduction in labor costs, which were down AUD 10 million, benefiting from a 10% productivity improvement within our DCs, with some benefits also achieved from the disposal of non-core assets.
Sales and marketing costs were down 30.8% to AUD 18.6 million. This reflects a AUD 3 million reduction in labor costs following a restructure during the year, and a AUD 2.9 million reduction in trade debtor impairment. Meanwhile, administration costs were also down 7.3% to AUD 38 million, reflecting a reduction in software as a service expense. Whilst good progress has already been made, there is more to achieve, and we remain laser focused on ensuring we continue to extract operating efficiencies moving forward. Meanwhile, our balance sheet remains strong. Inventory management continues to be a major focus, supported by a new inventory management module that was implemented in the first half.
The benefits of this are now being seen, with our inventory holding down from AUD 325 million this time last year to AUD 256 million this year, a significant release of cash for the business. Importantly, our stock availability for customers has actually improved, and our days of inventory held has remained around 31 days at period end, helping to further reduce inventory write-off risks. Trade payables were down 21% for the period, largely reflecting the progressive reduction in inventory and the wind down of the hospitals business. Turning to cash flow, there were significant swings caused by timing differences in each half. Operating cash flow in the first half of last year benefited from the cash inflow from sales of RAT tests, which had been paid for in the second half of 2022.
The movement also reflects the impact of inventory management and supplier payment issues that were experienced in the prior year following our SAP implementation. With business and SAP processes now streamlined, we have improved the performance of paying our suppliers on time. Our cash outflows from investing have reduced by AUD 14 million, reflecting the completion of the Truganina DC extension, which became operational in February this year, providing 3PL growth options. Our financing cash outflow has also reduced significantly, reflecting the repayment of our Tranche B debt facility in the prior year. Overall, our cash conversion cycle has improved from 27 days the first half last year to 25 days for this current period. Turning now to net debt. We have maintained a concentrated effort on reducing our debt to an optimized level.
This has resulted in net debt reducing from AUD 149 million eighteen months ago to AUD 82 million now, which is a pleasing result. Net debt is down slightly from AUD 85.7 million in July last year to AUD 82.2 million in the current period, and we will continue to focus on reducing our debt position in the second half. Finally, to CapEx. Our major CapEx program that has spanned the last six years is now complete. We have a new national network of world-class facilities to support our operations and underpin our growth, and we are now largely ex CapEx. Ongoing maintenance CapEx is expected to remain between AUD 5 million-AUD 10 million. With that, I'll now hand back to Vikesh.
Thank you, Gary. I will now provide you more detail on our business performance for the first half. Starting with our IT infrastructure. The significant challenges encountered early in the ERP implementation are long gone, with our system uptime now running at 100%, which is better than the levels achieved prior to our ERP implementation. This stability and capability is creating the opportunities for continuous improvement. It is supporting our progress in standardizing many of our processes, and ultimately in achieving the ISO 9001 quality accreditation, which we expect to occur in October this year. During the year, we also implemented an enhanced supply planning solution for our team to improve inventory management. The results of this implementation can be seen in our inventory levels, reducing, while at the same time improving stock availability for customers.
We also upgraded our B2B solution, called Sigma Connect, providing a better user experience for our pharmacy customers in ordering from Sigma. In the background, we have been preparing to launch our new hyper local omni-channel offering via Amcal and DDS stores. This solution will provide the digital connection between Sigma, our pharmacies, and the end consumer, to help drive engagement and sales. Our key focus now for the IT team is to reduce the cost of operating and enabling efficiencies across the business. As I've previously outlined, a major focus for management over the last 18 months has been to simplify and streamline our operations. This has resulted in the disposal of some non-core assets, improved customer service levels, and a sharper focus from our teams on driving growth in wholesale, retail, and third-party logistics.
Across each function of the business, we are currently strengthening our team's capabilities to enhance margin and grow the business. I will now go into each of these vectors in more details. Starting with our core wholesaling business. In the first half of this year, Sigma has picked, packed, and delivered over 113 million units to pharmacies across the country. Both delivery in full and dispatch on time metrics have been over 99% since November last year, and we remain very focused on maintaining this level of performance into the future. Inventory management has also improved through streamlined receiving and replenishment processes, and better demand forecasting with the implementation of a new planning tool. There are additional improvements we expect to extract in the years ahead as our team members become more proficient in using the new tools.
Pleasingly, we are also starting to achieve some of the efficiencies from our infrastructure investments. Logistics costs for the half are down 13%, which is from a combination of lower fuel costs achieved through route optimization, that has resulted in 1.7 million fewer kilometers traveled on an annualized basis, and 10% productivity improvements as we enhanced our processes. This focus on improving our work practices and efficiencies underpins the leverage we are targeting from more volume moving through the fixed cost infrastructure. Importantly, through all the changes that we are driving, the health and safety of our team members remain a top priority. Our lost time injury frequency rate of 1.15 is well within industry benchmarks. With the ERP system stable and the operations functioning well, intense focus has now shifted to executing excellence within our retail operations.
We outlined, as part of our strategy last year, the intention to focus on supporting two key brands, Amcal and Discount Drug Stores. We currently have 220 Amcal members and 117 DDS members, a strong foundational base from which to grow. The DDS brand was once again recognized by the public in the Canstar Blue survey, coming in second overall for customer satisfaction in the pharmacy sector. An important foundational process in uplifting our support for brand members is moving to a category management retail structure. New team members have been employed from January this year, and we expect to start seeing benefits in the months to come. We have also started building updated store planograms and introduced new space management tools to enhance macro space optimization in stores.
We continue to simplify our pricing structures to improve transparency, consistency, and competitiveness for our customers. To enhance margin and enable differentiation, we are accelerating the execution of our private and exclusive label strategy that I will turn to now. Private and exclusive label is an essential part of our long-term strategy to drive a point of difference, both sales and enhance margin. This takes time, but pleasingly, we are making good progress. As I outlined earlier, Sigma's wholesale operations distributed over 130 million units in the first half of this year, but very little of that volume was of our own product. We have assembled a team of product specialists with the skill set required to execute our strategy.
The team have already developed a pipeline of over 300 products, of which 250 are expected to be launched during FY 2025. The packaging and design work is well advanced, and we have strengthened our supply partnerships to improve availability for our customers. The development is being made across all the key categories of medicines, health and wellbeing, and beauty and gifting, focusing on trends and innovation to maintain a strong product portfolio moving forward. In addition, with our improved demand planning tools, we are much better placed to manage the risk of inventory write-offs. Turning to our third-party logistics business. The number of 3PL customers has grown by 40% in the first half, albeit some of these are on shorter contract terms. The 3PL business has increased its contribution in earnings by 27% compared to the first half last year.
This has been achieved through a combination of improved capacity utilization and an increase in the number of units shipped during the half. Sigma currently has over 33,000 pallets under management, and over the last 6 months, we have shipped over 16 million units for our 3PL customers. The existing infrastructure has been optimized, and we now offer 3PL services in 6 states across Australia, providing improved availability and flexibility to meet customer needs and speed to market. 3PL remains a core part of our growth strategy and a driver of margin enhancement. Turning now to the Chemist Warehouse contract, which was announced to the ASX in June this year. The services under the contract commenced from 1 July 2024, and will deliver to Sigma AUD 3 billion in revenue in the first full year of the contract.
The agreement brings significant volume that we will leverage our existing infrastructure and drive organic growth. As part of the agreement, Chemist Warehouse agreed to acquire 127 million shares in Sigma from 1 July 2024, further aligning them to the future success of our company. While major terms of the agreement remain confidential in nature, this is a very good outcome for our business and supports the material infrastructure investments that took place over the past six years. With the terms of the contract now finalized, our focus has shifted to working on steps required to effectively execute the new volume. Operationally, we currently supply Chemist Warehouse FMCG products, so are already delivering to their pharmacies. Our team are now mapping out the most effective and efficient way to also service the medicines under the supply contract.
We have begun discussions with suppliers concerning volume and trading terms, particularly as we start to build our inventory levels. From a financing perspective, we are also progressing our analysis and negotiations on how to best fund the working capital requirements, including assessing the sale and leaseback of our two owned distribution centers in Victoria and Western Australia. From a timing perspective, peak borrowing is anticipated in October next year, and I will provide the market with an update of our implementation plans at our next results presentation. Turning now to our strategy. We have made good progress executing against the four key strategic pillars we outlined this time last year. The major focus for our strategy was to grow scale and profitable market share in our wholesale business. As is well known, we have world-class infrastructure, which is underutilized.
The announcement in June that we secured the contract to supply Chemist Warehouse is a significant step in better leveraging this infrastructure. Importantly, even after absorbing the CW volume, we continue to have excess capacity to grow scale and profitable market share into the future. As outlined earlier, we have divested several non-core assets to simplify and streamline our operations. This included the disposal of our hospital supply business, which was finalized in July. There are a few non-core assets that remain. Some of these are under due diligence as part of a new supply contract with Chemist Warehouse, and others will be divested at the appropriate financial return.
Earlier in the presentation, I highlighted the work being done on our retail strategy, and as we switch to a growth focus, we will be concentrating on expanding to 300 Amcal and 150 DDS pharmacies over the medium term. Private and exclusive label is progressing well, and we are continuously searching for margin-enhancing opportunities to diversify our earnings over the long term. Turning now to our outlook. I remain confident in our ability to deliver excellent operational service levels to our customers. With our wholesale operations performing strongly, our focus is firmly directed at executing our retail strategy and adding value to our franchise brand members. The regulatory change to implement 60-day dispensing of medicines commenced from 1 September 2023, and we have seen very little change in demand for the impacted products thus far.
We continue to engage with governments via the NPSA to ensure a commercially viable industry under the 8CPA agreement, which has been brought forward by 12 months. A key focus for the remainder of this year and into next year is preparation for the onboarding of Chemist Warehouse. Chemist Warehouse is currently a customer, and we are planning to seamlessly transition the additional volume in the new year. Importantly, we expect no service disruption to the rest of our customer base. Finally, the pharmaceutical wholesale sector remains fiercely competitive. BIn the second half, we will continue to invest in our retail and private label strategy, divest non-core assets, and prepare the business to onboard the Chemist Warehouse volume. But we remain confident in our ability to meet our existing EBIT guidance of AUD 26 million-AUD 31 million for the full year.
I also want to take this opportunity to thank our people for their contribution towards the progress that we are making across the organization. Thank you for listening, and we will now go through your questions.
Thanks, Vikesh. Now, first question is from Ross Curran, Macquarie. Can you please help us understand the inventory that you expect to build over the next year in anticipation of the CW contract? How much additional inventory do you expect is required?
I mean, considering the anticipated volume that we're gonna get from the new contract, we would start to build some inventory from April next year. And I think once we've fully completed the inventory build, I expect that to be about AUD 150 million of additional inventory. That's in our current modeling.
Then there's a few questions of similar vein, so Ross Curran, David Stanton as well. So how, how are you gonna fund the inventory build-up? Is it through existing working capital, or will you need to do... look at other funding options?
I mean, we're currently looking at various options. I mean, as you can understand, we've just currently agreed and signed the final long-term contract at the end of August. And we're looking at various options. And the first one, of course, is to work with our suppliers, yeah? To see if we can get improved terms, focus on making inventory more efficient. We're also looking at, you know, working capital and debt funding through banks, et cetera. So we are working on various scenarios at the moment, and we have signed. The peak borrowing is anticipated in October next year.
Another question from Ross Curran: How should we think about the contract acquisition cost of the Chemist Warehouse contract? Should it be amortized over the life of the contract, or should we be treating it as a one-off significant item? So I'll take that one. Yeah, so the one-off costs for the CW contract will be amortized over the life of the contract in line with typical accounting standards. So that'll be over the 5-year term of the contract. Question from Dave Turner: What is the impact of the 60-day dispensing rules on wholesalers? What is the potential margin decline?
I think we gave it a... When we modeled it on wholesalers in total, it was around AUD 21 million. Governments have made good on some of that by increasing the CSO pool. It's not material, certainly for Sigma, considering our market share currently. But this is all part of the negotiation with governments when it comes up to the 8CPA, that we can, you know, not... Our margin should not be compressed because of this implementation.
Question from Andrew Goodsall: What is your view on the underlying growth outlook for the PBS over the next 12 months?
I expect PBS to be in low single-digit growth. That would be the outlook.
Again, from Andrew Goodsall: In the revenue mix, did you gain or lose pharmacy market share?
We lost 0.2% pharmacy market share, which we did anticipate, because our key focus was to ensure that we drive profitable market share growth.
We had flagged that earlier on when we were talking about self-destruction of our-
Yeah
Of our business. So that's in line with that, and we're actually seeing the last six months have been a return to stronger trends. So, Philip Pepe: How large are the one-off costs expected in the second half 2024?
There's various costs that are coming in. Of course, we're subsidizing the work being done to engage with government. We continue to invest in private label and exclusives. We are disposing some of the assets in the second half, so I think there's various aspects that will affect the costs in the second half.
Question from Liane Harrison: Congratulations on the OpEx cost out. What can we expect re OpEx in FY 2024? Can Sigma continue this rate of OpEx cost reduction, and which initiatives does Sigma expect to deliver material cost savings?
Well, I think I can't imagine that we will continue to reduce at this quantum. But as a way of working, and being a low-margin business, we are always looking for opportunities. I would certainly think that we can become more efficient. And by the way, the Chemist Warehouse contract really helps that. We're largely a fixed cost business, so volume's our friend. And the more volume we get, the more efficient we become. So certainly, we will continue looking for every opportunity we can to operate the organization in a far more efficient way.
Some of the significant cost out this year came from non-repeating items from last year. So we had the closure of Rowville and dual operating costs into Truganina, so they don't repeat, obviously. So you expect we'll still focus on cost out, but it will be at a slightly slower rate than we've achieved this half. Question from Mathieu Chevrier: Can you give us a sense of the magnitude of the one-off costs you've budgeted for in the second half of 2024? I think we've already covered that one, Mathieu.
Yeah.
Andrew Goodsall: Significant reduction in sales and marketing is noted. Does this impact retail pharmacy retention or gain, and what is the strategy to increase customer switching to Sigma?
Well, as I've said in my outlook, it's a very competitive market at the moment. The key is to add value to members, as much around how much more discounts we can provide to members, et cetera. Therefore, ensuring that we strengthen our retail capability, which we are now doing, will certainly keep our customers more sticky. We can also try and negotiate, I guess, stronger propositions with suppliers for our customers. And therefore, that's the intention, certainly in the immediate term.
Question from Mathieu Chevrier: Impact of 60-Day Dispensing, is it included in your guidance? I'd say yes, because we're not currently seeing much impact.
Yeah.
So yes.
Yes.
It is in there. Question from Phil Pepe: Is the current first half, second half seasonality, excluding RATs, any different to prior years? It shouldn't be any different, Phil. There's, there's been some elevation in COVID antivirals, but, really, the seasonality is not a major factor for our business at the moment. I think it looks like there's no more questions, so I'll hand it back to you, Vikesh.
Well, thank you, Gary. So there appears to be no further questions. So thank you from Gary and myself, and we look forward to meeting you individually in our roadshows next week. Thank you and goodbye.
That does conclude today's conference call. Thank you for participating. You may now disconnect your lines.