GuruFocus -
- Revenue: $1.8 billion, up 9.4% from the prior period.
- Normalized Revenue Growth: Up 17.3% after removing nonrecurring revenue.
- Gross Profit: Increased by $9.7 million or 8.8%.
- Normalized EBIT: $18 million, up 20%.
- Normalized NPAT: $13.7 million, up over 300%.
- Operating Costs: Up $3.3 million or 2.4% when normalized for one-off impacts.
- Inventory Investment: Increased by $151 million.
- Operating Cash Flow: Negative $107 million for the six months.
- CapEx: $2.1 million.
- Amcal and Discount Drugstore Brands: Like-for-like sales up 13%.
- Store Network: 208 Amcal pharmacies and 105 DDS pharmacies.
- New Amcal Franchisees: Eight new contracts post half-year results.
- Private and Exclusive Label Sales: Up 16%.
- Wholesale Volume: Grew 9% to 123 million units.
- Available Wholesale Capacity: 35% without major capital expenditure.
- Interim Dividend: $0.005 per share, unfranked, to be paid on October 17.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Sigma Healthcare Ltd (SIGGF) reported a 17% increase in normalized revenue for the half-year, driven by the successful onboarding of the new Chemist Warehouse supply contract.
- Normalized EBIT rose by 20% to $18 million, and normalized NPAT surged by over 300% to $13.7 million.
- The company has retained 35% available wholesale capacity to support future growth without major capital expenditure.
- Sigma Healthcare Ltd (SIGGF) maintained high levels of customer service, with on-time delivery metrics above 99% and stock availability improving to around 95%.
- The company has been included in the ASX200 Index, reflecting its positive growth trajectory.
- Operating cash flow was negative $107 million for the six months, primarily due to significant inventory build to support the Chemist Warehouse contract.
- Gross margin percentage slightly decreased from 6.6% to 6.5%, driven by a higher proportion of low-margin PBS medicines sold.
- The company incurred $11.2 million in one-off costs related to the Chemist Warehouse merger proposal and new supply onboarding.
- Sales and marketing costs increased by $3.6 million, partly due to nonrecurring benefits in the prior period and increased paper costs.
- The company faces ongoing pressure on margins due to government efforts to reduce the price of medicines, impacting the fees earned by wholesalers.
A: (Mark Conway, CFO) The $2.8 million reflects costs associated with recruiting 300 people in a tight labor market, including training efforts where additional employees were needed to backfill during training. There were also minor project management costs. We do not expect any residual onboarding costs in the second half as the contract is now running smoothly.
Q: What has been the impact of the 60-day dispensing rule on wholesalers and retailers?
A: (Vikesh Ramsunder, CEO) From a wholesale perspective, the impact has not been material. The uptake in retail has also not been significant, and we have not seen a material impact from the 60-day dispensing rule.
Q: Do you still expect the Chemist Warehouse transaction to complete in the second half of this year?
A: (Vikesh Ramsunder, CEO) The completion is dependent on the ACCC's approval or rejection. If approved, several steps remain before finalization, so the timing is subject to the regulators.
Q: What do you expect for industry negotiations with the government for the next funding agreement? What is the potential upside in FY25?
A: (Vikesh Ramsunder, CEO) We aim to negotiate an improved CSO and margin outcome with the government. Enhanced financial support from the government is needed to maintain high service levels and secure the supply of medicines to pharmacies.
Q: What are Sigma's best estimates of one-off costs associated with the Chemist Warehouse merger that will be incurred in the second half? And do you expect to see any further one-off costs past FY25?
A: (Vikesh Ramsunder, CEO) It is difficult to provide a precise estimate as it depends on the duration of the regulatory process. We do expect some more costs in the second half of this year, but the level of certainty for future costs is unclear.
Q: Could you please discuss gross margin in the first five months of the period before Chemist Warehouse volumes arrived and how GM will evolve over the second half and into FY26?
A: (Vikesh Ramsunder, CEO) Margin remains under pressure due to government efforts to reduce medicine prices. We are offsetting this by growing our private label and exclusive brands. Negotiations with the government for improved CSO funding will also help mitigate margin compression.
Q: Can you please explain the lower CSO revenue due to the fixed funding pool in more detail?
A: (Mark Conway, CFO) The CSO funding pool is fixed, and with strong PBS volumes, the per-unit CSO revenue effectively decreases. This is a key point in our negotiations with the government for the next funding agreement.
Q: Could you talk through the margin differential between private label, generic versus branded existing product?
A: (Vikesh Ramsunder, CEO) The margin prices are set by the government and are the same for private label, generic, and branded products. However, we do receive revenue and rebates from generic manufacturers.
Q: How long before the Chemist Warehouse contract can be serviced at full efficiency? Is this months or years?
A: (Vikesh Ramsunder, CEO) We have started well and expect to achieve full efficiency within this financial year. We anticipate seeing more benefits as we stabilize the volume.
Q: What impact, if any, on comparative gross margins from COVID-related sales in the prior year period?
A: (Vikesh Ramsunder, CEO) Margins were higher during COVID due to related product sales. The current margin compression is partly due to the absence of these COVID-related products in our wholesale business.
Q: Any comments on the current competitive landscape and how well you have been retaining independent customers?
A: (Vikesh Ramsunder, CEO) We felt more pressure on independent customers in the first half, particularly second-line customers. However, the loss has stabilized, and we are now focused on growing our business moving forward.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.